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Explaining hard money loans for commercial real estate

On Behalf of | Sep 7, 2016 | Commercial Real Estate |

Commercial real estate investors who want to invest in California properties may have heard of hard money loans. These loans differ from traditional commercial real estate loans in several ways, and they should be used only as a last resort when investors are having financing issues regarding the targeted properties.

Banks and traditional lenders typically do not offer hard money loans. These loans are normally made by private financing groups, have large upfront costs and very high interest rates. They are short-term, lasting between one to three years.

While traditional commercial real estate lenders look at the value of the property as of the date of the acquisition, hard money loans instead look to the amount the property could sell for several months into the future. This means the loan amount will typically be somewhere between 50 to 70 percent of the property’s appraised value. Hard money loans can allow investors to get through a difficult financing situation, but once they do, it is best to start looking for traditional funding sources so that the hard money loans can be refinanced. The loans typically close in 10 days or less.

Investors who are having difficulty obtaining financing for commercial properties may want to view hard money loans as their very last resort. They might benefit by consulting with a real estate attorney who may be aware of alternative funding sources that carry less risk, lower upfront costs and better interest rates. An attorney might also help with conducting the zoning and title research for the property and then with the negotiation of the financing and acquisition documents.