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MAY 2, 2012 – MAY 15, 2012 Hard-money loan: What is it, what’s the key to underwriting?

ver wonder what the different than er to fund a loan to a borrower on vacancy, management fees, magic formula is to get a a commercial with less than perfect credit, etc., if these items are not avail- hard-money loan fund- hard-money financials, etc. Since a lender is able. This information is com- ed?E There is quite a bit of mis- lender. A focusing primarily on the prop- piled and utilized along with a conception about how a hard- conventional erty, typically it can close and reasonable to money lender (private lender, lender focus- fund a loan in as little as a week determine the ’s value. bridge lender, etc.) underwrites es heavily on or two. Second, on the comparable its commercial loans. Many the borrow- Some hard-money lenders approach to valuation, a hard- believe that there is a magic for- er’s credit rely on an appraiser similar to money lender will look at recent mula hard-money lenders use in (traditionally a bank. Many lenders rely on sales of similar property type order to determine which loans above a 700 internal underwriting of a prop- in a very close proximity to to fund. Unfortunately there is Glen Weinberg FICO), a bor- erty to determine a property the subject. These sales typically no magic formula since each Chief operating rower’s debt- value. This value is determined will include distressed sales, transaction is unique. In this officer, Fairview to-income by one of two valuation meth- which in many cases reduce the article I will discuss the basics of Commercial Lending, ratio, the ods (the income approach or Denver valuation of the property. The hard-money underwriting and borrower’s the sales comparable approach). typical lender also will look at how this differs from a conven- overall net Hard-money lenders rarely use current listings to get a feel for tional lender. Before beginning, worth, and finally the value of the cost approach to valuing a the market and the property it is important to note that there the property. The value is deter- property since they are more valuation (i.e., if the property are very big differences in how a mined by an appraiser chosen concerned with what a property next door to the subject is listed hard-money lender underwrites by the bank. The appraisal is would sell for today as opposed and it is comparable to the sub- versus a conventional lender traditionally done by a member to what a property could be ject.) This listing will be a good (bank, credit union, etc.). of the (or rebuilt for. Since a hard-money basis for determining the cur- In order to fully discuss the MAI) who focuses on commer- lender is relying so heavily on rent market value of the prop- differences in underwriting cial . These appraisals the property’s valuation, it is erty. Ultimately the hard-money guidelines, it is important to take anywhere from two to five typically conservative in its use lender is trying to evaluate what define what a hard-money loan weeks historically. of each of these methods. is (these loans are commonly Most conventional lenders First, on the income approach the property would sell for in a referred to as bridge loans, pri- are looking for “plain vanilla” a hard-money lender will look reasonably quick time frame. vate loans, etc.). A hard-money that are currently at both the current along Based on the two methods loan in its simplest terms is a income producing. Many lend- with what the current market above, the hard-money lender is loan backed by a hard asset. Tra- ers are focusing on Class A and rents are. If there are shorter- able to determine what it feels is ditionally this asset is real estate B properties with little interest term tenants with leases above the true quick sale market value (either residential or commer- in properties that do not meet market, then the leases are typi- of the property. The hard-mon- cial). The lender focuses heav- these criteria. Many conven- cally discounted to what is con- ey lender almost always will err ily, if not solely, on the value of tional lenders have rigid guide- sidered a quick -up rate on on the conservative side on its the asset. So the next question lines that a loan must fit into in a property. This methodology valuation since at the end of the is how is a hard-money loan order to get funded. Substantial can be used in the reverse as day it is relying on the property different than a conventional deviation from these guidelines well. I have funded transactions for its repayment. mortgage? is typically not allowed. where the leases were substan- Conventional loan under- Prior to beginning a conven- Hard-money lending is radi- tially below market for various writing has been substantially tional loan, a lender will request cally different than convention- legitimate reasons. When the more rigid since the last reces- a plethora of documents includ- al lending. Hard-money lenders property was evaluated on its sion. Fortunately, a hard-money ing personal and corporate tax are typically privately funded, income, the property value was lender has the ability to think returns, income statements, which allows greater flexibil- substantially less than the mar- outside the box in underwriting leases, prior appraisals, envi- ity on funding loans. A hard- ket value. A hard-money lender a loan. This allows the hard- ronmental assessment (typi- money lender focuses heavily typically is able to develop a money lender to fund many cally a phase one is required (in many cases almost solely) on pro forma of what the current deals that are not fundable by for most lenders) and countless the value of the hard asset that market is to ascertain the true traditional lending sources and other documents. A convention- will be secured by the mortgage. market value of the property. provide borrowers alternative al lender underwrites radically This allows a hard-money lend- The lender makes assumptions avenues to capital.s