Speed and certainty are the twin engines of successful commercial property transactions. Yet investors can find themselves stranded in the final stages of closing, thanks to an all-too-common scenario: the bank’s credit committee demanding last-minute changes.
Knowing why this sort of thing happens makes it clear that traditional lending is not the best option for commercial real estate transactions. More importantly, investors need to know how to safeguard funding so they do not have trouble in a fast-moving market. In competitive environments like Utah, hard money loans are the solution.
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Bank Credit Committees: The Hidden Risks
A loan officer is the first person a real estate investor deals with. The loan officer reviews the package, sets the terms, and provides a term sheet. To the investor, it can seem like funding is virtually guaranteed. That is not necessarily the case.
In traditional banking, a loan officer is little more than an intermediary. Final approval decisions rest almost entirely with the bank’s internal credit committee. Interestingly, a committee rarely interacts with the borrower or steps foot on the property he is hoping to acquire. Instead, they analyze the proposed deal through corporate metrics and broad economic portfolios. Some consider macro-level risk exposure as well.
What this means to the borrower is a high risk of late-stage disruptions. Banks can demand changes in the final weeks – or even days before closing is scheduled. What might they seek to change?
- LTVs – A committee choosing to reduce its risk exposure might demand a lower LTV ratio. It is pretty common to slash LTVs just before closing.
- Conditions and Requirements – Committees sometimes demand extra personal guarantees, additional liquidity reserves, or updated appraisals. These new conditions and requirements can kill a deal.
- Terms – Demanding changes in terms is also pretty common. Committees look at everything from interest rate cushions to debt service coverage ratio floors and escrow holdbacks.
- Approval Decisions – A worst-case scenario is a committee reneging on an earlier approval. The deal stops cold because the committee rescinded the bank’s offer.
When these types of things happen on a time-sensitive deal, an investor risks losing his earnest money deposit. He is also likely to forfeit purchase options and damage his reputation with local sellers. In a hot market like Utah, that just will not do.
Hard Money Eliminates the Uncertainty
Because certainty of execution is so important to commercial real estate deals, investors cannot afford to deal with lenders who might leave them hanging out in the cold at the very last minute. Enter hard money. As an asset-backed lending model, hard money eliminates uncertainty in nearly every deal.
Actium Lending is a Salt Lake City firm that provides hard money loans throughout Utah. They say that, unlike institutional banks with multi-tiered governance, hard money lenders are direct lenders operating with simplified, streamlined decision-making structures. The benefits are hard to beat:
- Borrowers have direct access to decision-makers.
- Terms are consistent and fixed from day one.
- LTVs are static from day one.
- Underwriting is simpler and faster.
- Document requirements are minimal.
It all adds up to fast approvals and closing schedules without the need to constantly feed new documents to the lender. Actium says it’s entirely possible to get from loan application to funding in a single business day if circumstances require doing so. On average, hard money loans are funded and closed in a few days.
When certainty of execution is a high priority, real estate investors cannot afford to deal with traditional banks. Their systems and procedures simply aren’t designed to accommodate a fast-moving real estate deal. Fortunately, hard money is.
