Commercial Financing With Bridge Loan – The Basics

Conventional commercial financing isn’t particularly easy to come by if the borrower has a poor credit history or if the property is not stabilized. Also it is time consuming to secure commercial financing when the borrower is short on time to close a transaction. However, if you see a real estate opportunity that is certain to pay dividends, do know that you have an option when it comes to looking for financing, and this comes in the form of commercial financing with bridge loans.

What is a Bridge Loan?

A bridge loan, as the name implies, serves as a bridge to a more permanent financing option by allowing the borrower to build/repair his or her credit history or stabilizes the property. However, an inappropriate credit history is not the only reason that a borrower might seek a bridge loan, as there are numerous instances when commercial financing with bridge loans is sought when time is of the essence.

Bridge lenders, who are generally private lenders, essentially consider the value of the property and its viability, as opposed to going through the borrower’s financial history. Therefore, what basically secures the loan is the value of the property. General repayment periods for bridge financings are in between six and 18 months, although this can also be extended to around three to five years in some cases. The funds acquired through a bridge loan are also commonly referred to as ‘hard money or ‘private money’ loan.

What You Should Expect:

When you seek a bridge loan, expect the lenders to inquire about the reason for applying for this type of financing and exit strategy as opposed to conventional financing. As mentioned above, your reason could either be expedited clearance of funds, or to build a good credit history. Bridge capital providers would also evaluate the investment thoroughly, and this would include aspects like the collateral, cash flow, solid repayment options, the location and condition of the property you wish to invest in, etc.

While you can comfortably expect to get 60% to 65% financing for your income producing multiple tenant commercial real estate investment through a bridge loan and 50% for vacant property, but this figure could also go up to 80% depending on type of the property and cash flow it generates. However, lenders would require more equity for special purpose or single purpose properties such as gas stations, assisted living properties or Auto dealership properties. This loan to value is essentially in place so that the lender can be protected in case the borrower defaults on the given loan.

The minimum loan amount for commercial bridge loans and lender fees varies for each lender. Apart from investing in commercial real estate, these funds can also be used toward foreclosure or bankruptcy bail out, partner buyouts, rehabilitating existing properties, for discounted mortgage buybacks, etc.

All types of commercial properties would be financed through bridge loans however; income producing apartment/multi-family buildings, shopping centers/retail strips, office buildings and industrial buildings are the favorite types. There are lenders and capital providers that specialize in special or single use type properties such as assisted living, Mobile Home Park, Adult day care, car wash and so on.

Non Performing Loans Vs REO Bank Owned Property – How Do They Differ?

To make real estate investing work for you, you must always take into consideration economic conditions that dictate which type of real estate investment is the best choice at any given time. Do you know your basics? What are Bank Owned REO Properties or non performing loans? What is the difference between the two? It is quite simple really.

Both non-performing loans and Bank Owned REO Properties are the unfortunate children of economic fall down. As economic crisis takes swing so does losing homes as struggling homeowners cannot keep up with loans and mortgages.

An adaptation of the well know children rhyme “First comes a non performing loan then a foreclosure” does well to illustrate the progression of distressed property handling and the major difference between the two concepts. Whereas they undoubtedly trod the same road, the difference in how far along the road each is.

Say a homeowner cannot afford to pay a loan anymore. First month the bank lets it slide. The second month, they mail the letter. The third the gavel comes down – the property has been declared a non-performing loan. For all intents and purposes non-performing real estate loan is a property loan that has defaulted or is in danger of defaulting when homeowner cannot make payments any longer. With some exceptions, three months is all a homeowner has to turn over the dough before his loan is declared non-performing. And current economic conditions being as they are, non-performing loans are sprouting like mushrooms after rain. Financial corporations specializing in non performing loans will help with purchasing a loan that best fits individual financial portfolios. By liquidating involved assets they can realistically provide a good value. But not a 50% discounted price. Not with complementary property repairs. Not bulk. And certainly not without tons of paperwork and fees. None of the things Banks Owned REO can and will do to move the sale along.

Bank owned REO property, on the other hand, is the next step in the distressed property timeline. No payment on a property loan will sooner or later result in “walking the plank”, in other words the dreaded foreclosure. Foreclosure unceremoniously plunks down distressed property to the auction table. Properties that cannot be auctioned off it end up as Bank Owned REO Properties. With current economy banks have a veritable tsunami of real estate properties coming their way. Wildly scrambling to regains at least some money and clear the books, banks sell Bank Owned REO Properties like tomatoes on local market, at a discount, liens and other expenses on the home removed.

While both are viable options for a real estate investor, everyone wants to buy where a deal is better. And in real estate, affordable, bulk, plenty and flexible of Bank Owned REO is a far better than a sometimes, costly, and rigamarole non-performing loan.

And who wouldn’t go for a deal that will brings maximum profit on a minimum investment, fast.

Home Equity Cash Out For Business Investment

Many small businesses are struggling to find business loans. In this economic environment even the successful businesses may miss out on very lucrative opportunities. Because there are so many businesses failing everyday, clued up businessmen will make the most of available expansion opportunities if only they could raise the funds to invest. One man’s loss could be another man’s gain.

Many small business owners considered the bank manager to be their best friend in good times. Now those bank managers do not want to know their proposals or their hands are tied by head offices. A confident businessman with equity in his home may be able to refinance home mortgage loan and cash out some of the equity. With record low interest rates, they may not see that much increase in their monthly payments, although the mortgage increased.

Tapping into home equity for business use may be a tricky proposition to make to one’s partner. Many people are attached to their home and they do not want to take risks with it. This is understandable. However, many business oriented families do not see much difference in home equity or business capital. They are comfortable with moving money from one to other as and when required.

Banks do not make their refinance home mortgage loan decisions based on where the money will be used. Their qualification requirements based on income level, equity left in home, credit score and affordability of monthly payments. However, refinance mortgage applicants who will use the funds for business purposes should word their reason for the loan carefully. Since many refinance mortgage loan underwriters are not equipped to see business side of things, there may be too many questions.

Cashing out home equity instead of keep looking for business loan may be worth a serious consideration as long as homeowners know what they are doing. Business loans are difficult to get and expensive. In addition, there are no business loans for short leases, goodwill payments and for purchasing a failed business at current environment. One good use of funds could be that the business owner may use the money to purchase a cut price business premises. This would mean moving the money from residential property to commercial property.

This article does not suggest adventures with family home. It simply points out an option that may be available to small business owners with equity in their home. In today’s economy people may find that there may not be another option for small businesses in need of capital.