Hard Money Commercial Loans – Best Alternative

Hard money commercial loans should only be considered after the borrower has done an extensive amount of research with other sources such as banks and conventional lenders. Borrowers should submit their file to at least 10 of these traditional sources (or have an experienced broker run the file) before they consider hard money.Why? Hard money is very expensive. Market rates are currently 15% interest only with 6 points on the front of the loan. And the term is normally short at 12 – 36 months.The alternatives for the borrower however, are always more expensive than taking a hard money loan. In general, the borrower has three outcomes:
1. Take on a partner
2. Lose the property
3. Lose the business and or a combination of 2 and 3.If your property has 50% equity that you stand to lose through foreclosure vs. paying a hard money commercial lender 6% to carry you for 2 or 3 more years, the choice is obvious. But it’s a choice that the borrower has to face up to, and accept their current situation for what it is – and make the best decision for them based on their current options.Taking on a partner can often be the worst move for the borrower. Rushing in and taking on a new partner just because they have cash, can result in additional legal issues besides just foreclosure. In addition, as in the example above, it can be much more expensive than as the borrower will often have to give up a large percentage of their business and or equity in their property.Hard money lenders take a lot of slack in the business as being overly greedy or aggressive, but borrowers should realize how much risk they actually take on with these loans. Foreclosure is an all too often outcome for many of these deals. The typical cost to go through the foreclosure process for the lender, general falls within 20% of the total value of the property. And that process only gives the lender control over the property; it has not been liquidated. The lender still has to go through the process to sell it to get there capital back. As you know, the process to sell can take 6 – 24 months or longer. Keep in mind as well, that the lender often borrows their own capital through a warehouse line or the like that they have monthly payments on, which put additional pressure on them. It’s no cake walk for them either.In short, this risk is why the rates and fees are as high as they are. So yes hard money commercial loans are expensive but they normally are the most viable option that borrower has.

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