Real Estate Investor · Los Angeles, CA · Member since 2010 · 123 posts · 8 votes
I'm interested in learning as much as possible about the details of bridge loans. I'd like to offer this type of loan in the near future, but I want to know as much as possible. Does anyone have extensive knowledge?
While I wouldn't call my knowledge of bridge loans extensive, I'll happily tell you what I know as this a great topic. Not to mention, there are a lot of people who have a misconception of what a bridge loan is that could use some clarity.
For those who don't know, a bridge loan is interim financing, that most often, bridges the gap of an immediate need for money while the borrower waits for either the sale of a property or more permanent financing to step in.
Where borrowers most often fail to understand how bridge financing works is in situations where they have a need for money, but do not have the exit strategy lined up yet. In these cases, this is more of what I like to call a bridge to nowhere, and 99 times out of 100, there is zero hope of securing a bridge loan.
This is in large part due to there is usually a pressing need for the loan. A big advantage of bridge lenders is their capacity to close quickly, and by quickly, I mean 5-20 days. In order for that to happen the lender needs to drastically reduce the traditional underwriting/DD process.
This can only happen if the bridge lender is supremely comfortable with the strength of the purchase contract, commitment from the takeout lender, etc. Of course, traditional underwriting requirements such as property type, LTV, income,loan amount, etc. also play a role in the decision making process.
While a bridge lender typically also requires docs that are the same as used by more conventional lenders, they are often times more willing to use documents that have either been ordered by the takeout lender or buyer or were prepared for them. An appraisal is a prime example of this.
As far as terms go,I don't see bridge lenders offering terms all that different from hard money lender. If anything, bridge lenders are more likely to enforce a PPP than a hard money lender, but like anything in lending, there are exceptions to the rule.
While I wouldn't call my knowledge of bridge loans extensive, I'll happily tell you what I know as this a great topic. Not to mention, there are a lot of people who have a misconception of what a bridge loan is that could use some clarity.
For those who don't know, a bridge loan is interim financing, that most often, bridges the gap of an immediate need for money while the borrower waits for either the sale of a property or more permanent financing to step in.
Where borrowers most often fail to understand how bridge financing works is in situations where they have a need for money, but do not have the exit strategy lined up yet. In these cases, this is more of what I like to call a bridge to nowhere, and 99 times out of 100, there is zero hope of securing a bridge loan.
This is in large part due to there is usually a pressing need for the loan. A big advantage of bridge lenders is their capacity to close quickly, and by quickly, I mean 5-20 days. In order for that to happen the lender needs to drastically reduce the traditional underwriting/DD process.
This can only happen if the bridge lender is supremely comfortable with the strength of the purchase contract, commitment from the takeout lender, etc. Of course, traditional underwriting requirements such as property type, LTV, income,loan amount, etc. also play a role in the decision making process.
While a bridge lender typically also requires docs that are the same as used by more conventional lenders, they are often times more willing to use documents that have either been ordered by the takeout lender or buyer or were prepared for them. An appraisal is a prime example of this.
As far as terms go,I don't see bridge lenders offering terms all that different from hard money lender. If anything, bridge lenders are more likely to enforce a PPP than a hard money lender, but like anything in lending, there are exceptions to the rule.
Matthew, the other thing you will need to know about is usury laws. For CA, unless you have a loan brokers license, you may not charge in excess of 10% per annum and most bridge loans/transactional funders exceed that by a long shot.
So be careful not to violate usury laws.
Here is a link to a website (I have no affiliation with) so that you can refer to state usury laws:
http://www.usurylaw.com
Darryl that is a lot of information. Thanks. I too am interested in Bridge loans. More specifically in providing them.
Originally posted by Will Barnard:
Matthew, the other thing you will need to know about is usury laws. For CA, unless you have a loan brokers license, you may not charge in excess of 10% per annum and most bridge loans/transactional funders exceed that by a long shot.
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Will, I believe you can also get around CA usury law by going through any real estate broker, or having a real estate broker's license, not just a "loan brokers license"
To my understanding there are 3 ways to avoid usury in California. One is a lenders license through the ca dept of corporations. Two is to get a brokers license though either the DRE or dept of corp. The third is a bit more complex but basically is to not offer a loan at all. You can fund with complex lawyerly contracts that, for lack of a better word, are pseudo joint venture agreements.
@Matty - That is true, however you must follow some protocol, they licensed party MUST "arrange the transaction" not just have their licnesed referenced in the transaction. As such, as a funder using this third party, you would have to compensate them from your fees.
@Chris - Very true, many transactional funders have gone this route these days to cirumvent usury. The only problem I see (and of course I am not a lawyer) is that there is no case law that I kbnow of, so it could be argued that the contrfats were nothing more than an attempt to cirumvent usury (and in CA, you can get sued for looking the wrong way!).
SO for me, I would just make sure I had a very good relationship with the borrowing party and that the deal ws solid so that all parties made out, thus avoiding such potential problems.
This is a very interesting topic and only brings up more questions. Are these type of loans available for residential deals or are they mostly for commercial deals? Other than the likelihood of a PPP on bridge loans, what are other differences between this type of loan and a HML?
They are available for both types of properties, but I'm inclined to say that there are more bridge lenders for commercial properties than residential.
What is driving the desire to learn more about bridge loans? That may help folks give you better information since this is a pretty broad category and could include numbers of different product types.
@Will: Thanks. I also remember you mentioning that exact thing - "Using a Real Estate Broker you can get around CA Usary laws" - at one of Rosie's meetings. I just wanted to clarify for Matthew.
@Bryan: Thanks for that article link to the Primer on Bridge Loans
How does one go about finding large funds that deal with bridge loans-is there a directory or should I do a search under portfolio or hedge fund lenders?