Hedge funds, mortgage pools, private equity firms and even wealthy individual investors all make private commercial mortgage loans against income producing real estate. While these loans are not inexpensive, they can be a valuable resource to a property owner or commercial real estate investor who needs to close a deal fast or has credit or documentation issues.
Private lenders can close loans fast and with much less bureaucratic red tape and paperwork than institutions require. Securing a private loan can sometimes be the difference between HULT PRIVATE CAPITAL making a huge profit and losing large amounts of money.
Almost all successful real estate investors have at least one reliable source of short-term private capital available to them so they can jump on opportunities when they pop-up or get them out of trouble when cash becomes tight. The key to getting a loan from a hedge fund or other private commercial mortgage lender, is knowing exactly what these savvy investors look for in a deal.
When evaluating a loan application for private funding there are several key factors that hedge fund managers, private equity executives and other lenders look for before they agree to fund a deal.
- Exit Strategy
Private commercial mortgage lenders are, first and foremost, opportunistic investors. Before they will even consider getting into a deal they will demand to know how they are going to be able to get out. A borrower’s exit strategy must be well thought out and must be realistic. Be prepared to demonstrate the viability of the exit. If you are planning on refinancing into a permanent, conventional loan it will help to have lenders already lined up. If you are planning to sell the deal, you will need to have a well researched marketing plan. To get a loan closed, it is imperative that you prove to the lender that they will get their money back, with interest and on time.
Hedge funds do not exist to make you money; they exist to make themselves money. Loan-to-value (LTV) ratios in the private money industry are much lower than you will find in institutional lending. The best you can expect from a private lender is 65% LTV, and that is only for properties with sufficient cash-flow. For loans on underperforming assets LTV ratios will be around 50%-60%. Protective equity must be present or private lenders will simply not be interested. Attempting to talk a private lender into relaxing their LTV requirements is a fool’s errand.
Further, it is important to note that private lenders base their valuations on their own assessment of what a building is worth. They are not required to accept or rely on any third party opinions or appraisals. The guy with the check book is the guy who gets to assign value, borrowers can take-it or leave it.