As we all know from reading the papers and listening to the news, conventional banks are not lending. They are certainly not lending to marginal borrowers, and they are not lending to the most pristine borrowers.
This has created a great opportunity for those that have the ability to lend, whether they are mortgage banks or individuals with funds. Bridge money lending. As discussed below, Bridge Lending is a fantastic opportunity that has been made even better by the fact that banks are holding on to the money that has been given to them by the government instead of lending it.
The types of deals that have typically gone searching for bridge money have involved borrowers that may not have had great credit, or deals that required more done before a traditional bank would get involved. That is not the case now!
Today, there are many great deals with great borrowers that need to go this route because the traditional sources have dried up.
There-in lies the opportunity !!!
What is Bridge Money (aka Hard Money)?
As the name suggest, bridge loans are made to take a property owner, a builder, an investor or a borrower who needs money for a non-real estate purposes from one part of the process to the next. This type of loan, as discussed above, has always filled a certain niche in the mortgage lending market
An example would be the owner of a commercial property or residential property that needs to do some type of rehab work before the property is ready to be occupied or sold. The property as-is would not qualify for a traditional loan, but once rehabbed it would.
How Is The Lender Of Bridge Money Protected Or Secured?
When you lend bridge money, you will be secured by a 1st mortgage that is filed on the property that you are lending on. In addition, if the borrower has other property with substantial equity, you can demand that you get a 1st or 2nd mortgage on it to provide you with additional collateral.
One of the keys of bridge lending, is that the loan amount will only be 50% -60% of the quick sale value of the property. This is determined by an appraisal that is done prior to any loan amount being discussed. A quick sale is not the appraisal amount, but an amount less than that which will get the property sold in 90 days in the event a loan ever had to be foreclosed on.
As an example, a borrower has a property that they need to borrow against.
An appraisal is done and it comes back at $ 1,000,000.
At 50% -60% LTV (loan to value) that would mean a loan amount of $ 500,000 to $ 600,000. Right? No!
You would cut the $ 1,000,000 appraised value to a number that would get that property sold within 90 days.
In other words, it would be somewhere in the neighborhood of $ 700,000. At 50% -60% LTV, this means that you would offer the borrower $ 350,000- $ 420,000.
As a bridge loan lender, you need to feel comfortable with your collateral !!!
What Is The Going Rate?
The going rate for bridge money loans is not an exact science. Typically, the greater the risk is, the higher the rate that will be charged. In the current environment, regardless of the fact that overall interest rates have been coming down, bridge loans will be in the 12% -15% range.
If there is enough equity in the property, many times the 1st years interest expense can be built into the loan.
While this type of lending may not be appropriate for everyone, for an investor that understands the process and the risks that are involved, it is a great opportunity.