Commercial Question -- Hard Money Lenders???

Question

Good morning my BiggerPockets community! I have a client that is pursuing a potential commercial acquisition. He's looking to finance MOST of the deal through conventional financing, but may need some extra cash options for a small amount.

Is there such thing as hard money lenders on the commercial side? I know on the residential side it's common among flippers and rehabbers investors. Perhaps residential hard money lenders also will consider commercial deals? Thanks for the advice! Appreciate it!

Ann Bellamy · Answer

haha!  I don't follow, analyze or shift through any macroeconomical trends at all.  I simply went through the last downturn.

The average real estate cycle is 14 years, peak to peak and trough to trough.  I read that from some source I respected, but it's so long ago I no longer remember what the source was.  That's the average, so it can be change by outside forces such as abnormally low or high interest rates, etc.

The following behaviors were exhibited at the last peak:

• Lenders were lending 125% of appraised value - I haven't seen this yet
• Everyone and their brother was buying a house, you could sell anything for crazy money - that's happening now
• People thought prices would never come down - that's happening now where I am
• New construction was hot hot hot - that's happening now
• Downpayment requirements went down and LTVs went up - that's happening now
• There was very little inventory to buy - that's happening now

Are any of these hard and fast indicators?  No, of course not.  But they are enough for me to be cautious and think we are nearing the peak. Of course I could read this 5 years from now and be made a fool of.  That's ok with me.

Ann Bellamy · Answer

There are lots of hard money lenders, including many of us local to you, who will do commercial.  The problem is not residential/commercial.  The problem is that you appear to be looking for 2nd position downpayment funding.  Most of the hard money lenders who used to do those got wiped out in the last downturn.

And given that we are (in my opinion) nearing another peak, you'll need to find a lender who doesn't perceive this as way too risky.  That would probably be a private person - someone you know, or get to know, who will participate in the deal.

Stephanie P. · Answer

Hey Larry.

Here are demographics and economic factors we're watching that could translate to a housing slow down.

• The largest group of borrowers, baby boomers, are aging out.  They want to down size and most aren't looking to buy new homes.
• Many members of the next largest group, millennials, have tremendous amounts of student loan debt keeping them out altogether or making them push off the purchase of a home.  Essentially, many of them are being forced to live in their Mom and Dad's basement
• Wage stagnation is real.  While it's great that unemployment has gone down, average wages have gone down more than 1% meaning people might have a job, but those entry level jobs don't really pay much
• Inventory for home purchases are significantly depressed
• Depressed inventory is creating higher prices (the old supply and demand)
• Increasing interest rates are also hitting people's debt ratios, so where they were able to buy a property last year with a 50% debt ratio, that same property has gone up in value and there has also been about a .5% to .75% increase in the interest rate.  That little bit can put home ownership out of reach
• While business has been brisk of late, it could slow as the fed tightens interest rates once or twice more as they have indicated. While the interest rate tightening does virtually nothing to the mortgage rates, it makes everything else; cars, credit cards, installment debt, more expensive and again, hurts already fragile debt ratios.

Hope this gives you some food for thought.

Stephanie

Jeff Kehl · Answer

@Jessica Tomlinson like with a lot of things, the exact same concept can be found in commercial but it's called something different. Look into Bridge or Mezzanine Financing. Generally they are only going to loan at much higher dollar amounts though. If it is just a small amount they're probably better off looking for a private loan.

Joel Owens · Answer

Sounds like the purchaser may need to bring in an equity partner to bridge the gap.

Anything other than first position debt is extremely expensive. The lender bakes in the risk of so many loans defaulting and they lose all money lent or partial of it.

If buyer is looking for slightly higher interest than first position then they do not know the debt markets and that is dreaming. They would need to find family or friends for that or get the equity partner ,etc.

No legal advice given

Alex Bekeza · Answer

@Jessica Tomlinson  I've sent you a private message to get a little more detail.  Hopefully we can not have to resort to hard money on this one.

Aaron Beauchamp · Answer

Yes, Hard Money is available on the commercial side. Hard money needs a 6 to 12 month exit plan though if he is using it for acquisition how is he going to get out of the loan?

Sunny Nyemah · Answer

For instance, we had an NN net lease offered by AA rated tenant who wanted to do a sale leaseback. The Cap rate was good; at 10%, and the properties were all newly developed. However, we needed to dig deeper to understand the motivation of the seller. Was the company struggling for cash flow or was there something else we are missing? We have just submitted an LOI, and hoping to proceed on the deal.

Sunny Nyemah · Answer

Yes, you have to be mindful of indicators. But you also have to make informed investing decision. Do not drift away from the fundamentals of analyzing your acquisition; be it commercial or residential.

Stephanie P. · Answer

All of those factors influence US Commercial. We've built a company around the emerging non-qm market.

You're right, it's all about the deal.  We always tell folks that are looking for fix and flip money, "You have to buy it right" meaning you better be getting 50% of the ARV if you want to have room for renovations and fees or renovations and ltv for end financing.

Your statement that "the buyer should be able to withstand the chaos and take off" is interesting.  I'm finding many buyers that are able to withstand the upswing are adding on to portfolios because there some really aggressive loan programs out there for qualified borrowers with outstanding rates, while others, that may have more tenuous finances are hesitant.  Fortunately, lenders are beginning to find new loan products to entice those hesitant buyers off the fence; 12 month bank statements for income, no income verification for non owner properties, relaxed credit standards.  All of that shapes up well for my emerging market, but if not kept in check, could trigger a significant correction in the housing market.

Commercial Question -- Hard Money Lenders???

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