Summary:

Often constrained by the rigidity of banks’ underwriting and lengthy approval processes, real estate borrowers find a liberating escape in alternative lending sources, such as private or hard money loans.  This subset of the lending business, designed for non-bankable loan transactions, not only provides financial solutions but also empowers borrowers, showing them that there is an alternative to the traditional banking system and giving them a sense of control over their financial situation.

When institutional lenders exit the market during economic contractions, such as a recession or regulatory tightening, private money loans emerge as a highly sought-after solution.  These periods, characterized by a shrinking economy and reduced credit availability, underscore the unique benefits of private money lending, such as faster approvals and property equity-driven transactions, making them particularly valuable.

Article:

Here is a partial list of situations where private loan transactions will benefit borrowers.

• Fast approval, with possible 2— to 4-day funding for bank declines and fallouts, provides borrowers with a quick and efficient solution, relieving them of the stress of a lengthy approval process and instilling a sense of ease and comfort.
• Debt consolidation for consumers, businesses, or a combination of both: In most cases, the loan can be used for debt consolidation, lowering the Borrower’s monthly payment obligations.  The funding should enable borrowers to improve their credit and secure long-term bank loans.  Additionally, when the loan is a second lien, the average interest rate between the first and second lien should be calculated to show a net effective rate.

Marginal to poor creditworthiness, where a Borrower is not bankable, and approval of a loan request is primarily property equity-driven.

Private money loans are not confined to traditional properties.  They can be utilized for various properties, including churches, synagogues, restaurants, bars, automotive repair shops, body repair shops, gas stations, and other single-purpose or limited-use properties.  This flexibility in property types makes private money loans a versatile financing solution for a wide range of real estate needs, providing borrowers with a sense of adaptability in their financial strategies.

Limited-document loans could be the answer for borrowers who prefer a streamlined process.  These loans typically require a loan application, credit report, and 3 to 6 months of bank statements, with the primary goal of demonstrating the ability to meet outstanding loan payments and other debt obligations.

Post-COVID fresh start.  Borrowers may need to catch up and give themselves breathing room for accrued and differing payments, which is referred to as a fresh start loan.

Payoff loans coming due or past due: Refinance and pay off existing first, second, and third lien position loans that may be due.  Sometimes, refinancing the second mortgage and providing cash out is the appropriate answer to the loan request.  Loans are available for both owner-occupied and non-owner-occupied residential and commercial properties.

Cash-out refinances are based on the equity in an existing real estate property.  Cash-out loan proceeds can be used for most business and consumer purposes.  The Federal Government and some states, such as California, require a special license to engage in consumer-purpose lending.

Junior lien or second-position loans on both owner and non-owner-occupied dwellings for business purposes

Construction completion, rebuilding, or upgrading properties in poor or marginal condition: The loan is usually necessary because the collateral property or the Borrower needs to meet bank underwriting guidelines in its distressed or partially completed state.  The lender will consider both the as-is and as-completed values when approving the loan.

A Borrower may own and operate a cash-based small business with limited financial strength.  A lender will require 3 to 6 months of personal and business bank statements.  The Borrower must still demonstrate their ability to make the required payments.

Borrowers can leverage the equity they have developed in their existing real estate over time to borrow additional funds.  This strategy can be used to purchase other investment properties or to invest in a business enterprise, providing borrowers with a way to leverage their existing assets to generate additional income.

Purchase a property with a cash down payment, sweat equity, and seller’s agreement to carry back a subordinated junior lien.  The property seller would require the Borrower to sign a promissory note and a deed of trust, which would include details such as the interest rate, payment schedule, and due dates.  The subordinate second is recorded concurrently with the first trust deed, but with a recording number that follows the first.

An inherited property is one where family members and successor trustees, who are also beneficiaries, require funds to distribute to the beneficiaries, pay the state’s legal costs, or repair the property for future rental purposes.  Another option is to fix it and sell it on the open market.

Loan on unimproved raw land.  Lending on raw land can be a complex process.  Is the land part of an existing subdivision referred to as an infill lot, a commercially or industrially zoned parcel within a subdivision, or a larger parcel held for future development?  The Borrower may need to use the property as collateral to raise funds for future entitlements, including engineering, architectural, and various reports, as well as fees to develop a fully entitled parcel ready for construction.  The Borrower would pay off the loan as part of the construction loan.

Retail strips, community centers, and industrial or other properties requiring upgrades or repositioning often face distress due to COVID-19 shutdowns and resulting vacancies, as tenants cannot afford rent.

• Fix-and-flip loans enable high-frequency purchasers to acquire distressed properties, rehabilitate them with the expectation of resale, and generate a quick profit.  Borrowers need both experience and some of their capital at risk.
• Litigation settlements: A loan to buy out a business partner, pay off a pesky family Member, an ex-spouse, a judgment lien, or a partition suit.
• Pay off civil judgments and liens, including arrearage in property taxes, association dues, and federal and state tax liens.
• Sale of existing promissory notes and deeds of trust to third-party investors: The sale typically occurs at a discount, regardless of whether the promissory note is performing or non-performing.A deal will free up cash.
• Hypothecation or pledge of a promissory note and deed of trust: A Borrower who owns a promissory note and deed will assign them to a third-party investor as collateral for a new loan.
• Cross-collateralization of more than one property:
• Cross-collateralize multiple properties to meet lender equity requirements.  The Borrower would sign one promissory note but have recorded liens that encumber two or more properties.
• Small mobile homes or trailer parks: properties that don’t meet the underwriting standards of institutional lenders.
• Airbnb-type rental income properties: Financials and History are necessary to prove the ability to make payments.
• New ground-up construction or completion of a partially completed project: Most requests result from borrowers needing to fund additional money to complete the task when their capital or existing construction loan proceeds are depleted.
• Collateral combines real and personal property, such as a motel, restaurant, car wash, or gas station with mini-markets.  The valuation and decision to make the loan must be based solely on the real property.  A trust deed is recorded to encumber the real property, and a UCC-1 financing statement will be filed with the Secretary of State to encumber the personal property.
• A long-term lease on commercial property has or is expected to expire soon.  The lease expiration could result in a vacancy and a disruption to rental income.  If the master tenant vacates the property, it will disrupt other smaller in-line tenants, as the master tenant is responsible for the primary draw of foot traffic to the center.  Banks typically do not make this type of loan.  He usually serves as a bridge until the owner secures a long-term lease with a creditworthy tenant and returns the center to a stabilized state.
• Credit approval is subject to a highly sophisticated lease analysis that considers multiple tenants with varying rent lease terms, including length, lease rate, and lease provisions.  Some tenants are on long-term leases, and some are on month-to-month tenancies.  Lease documents may include go-dark provisions for the anchor tenant or provide for lease cancellation in the event of excess vacancy or loss of an anchor tenant.
• Some properties require mutual property access easements for ingress/egress or complex usage rights, such as reciprocal parking agreements.  Many properties, including churches and retail shopping centers, sign contracts with multiple property owners to use the entry/exit of the property or the parking in specific ways or at certain times.
• Foreign nationals, both with and without a Social Security number, need loans.  The Borrower must have a US bank account(s).  The Borrower must have a process agent service arranged during loan processing.
• A substandard condition or notice of property noncompliance is recordedinn public records bythea building departmen,t, notifying the public that the property is out of conformance or in disrepairwith respect tor building and zoning codes   The bridge loan, funded by private lenders, will provide the necessary funds to make substantial improvements and modifications, bringing the property up to acceptable building, safety, and zoning standards.  Institutional lenders will not make these loans.
• Non-conforming property that does not comply with current zoning and building standards.  As a result, strict limitations exist on repairing or replacing structures damaged by destructive acts such as fire, flood, windstorm, vandalism, or earthquake.  The property may not be rebuilt to an acceptable level after the harmful event occurs.
• Earthquake seismic retrofit.  Many older properties require upgrades, such as engineered reinforced steel frames bolted into the existing structure and walls shored up with steel support fasteners to withstand earthquakes.
• Tenant improvements.  Commercial building owners must provide funds to install interior or exterior improvements to satisfy the requirements of both the owners and prospective tenants for leasehold improvements.
• Cannabis-related properties, manufacturing, and retail facilities: Some states have legalized lending in cannabis-related operations, and others have not.