Commercial bridge loans fill a much needed void in the commercial real estate lending market. To best illustrate how these hard money mortgage loan fill this void, I thought I’d use various commercial real estate lending need scenarios and compare the two types of loans, commercial bridge loans and traditional or conventional commercial real estate loans. Below are these real world commercial loan example scenarios.
- An investor relatively new to the multi-family market wants to purchase an apartment complex in his area. He’s done his due-diligence and feels confident the multi-family complex he has chosen will be a winner. The repairs aren’t too extensive, the area is growing so there should be a good source of renters in the area and the seller is motivated offering a nice below market price. He approaches his bank with his loan request. Initially the bank thinks he qualifies as he has 35% to put down for a conventional commercial real estate loan. Unfortunately after reviewing his financials and the passage of 2 weeks they discover he’s new to the industry and has only been in business about a year with no real history. Result? Turned down. After his initial disappointment, he learns about commercial bridge financing and approaches a bridge lender. After only 2 business days, the bridge lender gives him a preliminary approval so he can make the seller comfortable that he can come through with his financing to purchase the multi-family property.
- Another investor is also interested in purchasing some apartments. These apartments aren’t in near as good condition but the investor has a lot of experience in renovations, has a nice down payment and believes the price is attractive even with the needed repairs. The seller is motivated so when the investor makes his offer while a little lower than the seller would like, he accepts the investor’s offer. Excited about his new found opportunity, the investor goes to the bank he has worked with for many years. Initially, his bank thinks the investor qualifies for a commercial real estate loan. His paperwork is in order so they order an appraisal. Three weeks later, the appraisal comes in to the bank’s underwriting department. Upon review by their underwriter, the bank issues a decline for the investor’s loan. The reason? The apartments aren’t “stable enough to meet their underwriting guidelines”. The investor is very upset with the bank he has had a relationship with for many years and wonders why he bothered. He mentions his problem to his attorney who suggests he consider a commercial bridge loan one of his other clients secured recently. The investor takes his attorney’s advice and approaches a commercial bridge lender. While the cost of the bridge loan is a good bit above what in theory he could have gotten with his bank, the numbers still make sense. The bridge lender even loans the investor off the renovated value of the apartments lowering the cash the investor needs to put down providing him with a good cash cushion for unforeseen repair costs. The investor knows after the apartments are finished and mostly rented out, he can refinance with a bank for a lower rate.
The above are just two of many scenarios where commercial bridge loan programs make great economic sense for commercial real estate investors.
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