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COMMERCIAL BANKER DISCUSSES TYPICAL LOAN SCENARIOS FOR PRIVATE MONEY DEALS

By: Jeff Rauth

Commercial real estate, private money loans also know as hard money and or bridge loans are becoming more prevalent as borrowers enjoy less red tape, quicker closings and more “common sense” underwriting than conventional financing provides. Typically though, borrowers still relay on this type of financing as an option when conventional sources are not available.

The increased speed and flexible underwriting comes at a steep price with interest only rates often in the teens, 3- 6 points being the norm and loan terms being relatively short at 12 – 36 months.

Why would owners pay such high fees/rates? In short, because it makes sense for them based on their current situation. Below are examples of transactions where it made sense for our borrowers or go the hard money route.

Grand Rapids. Small office building that was previously used as the owners business headquarters. The owner wanted to move his business out and convert the property into a multi-tenant building (investment property). To accomplish this he needed to create common areas, alter the entrance and add an elevator to the property. He needed a substantial amount of cash to make these improvements happen.

The problem was four fold: Personal credit was in the 400’s, the owner had virtually no liquidity, the owner had no development experience and the year to date, profit & loss and balance sheet showed that his business was losing money. These issues eliminated any type of conventional financing.

The owner knew that the property would be a cash cow, and drastically improve his overall financial position, if he could get the money needed to complete the project. For the lender the deal made sense as well, due primarily to the low loan to value (High equity).

In addition, the exit strategy was simple, after the building was renovated and leased out, the property would stand on its own and qualify for conventional finance base off the new cash flow.

Metro Detroit. Local business that owned six retail buildings and had its loan “called” (forced balloon) prematurely by its bank. The loan was called primarily because the business had lost money for three years in a row. The bank was nervous the borrower would go out of business. The business was forced to seek alternative financing.

Besides the above, multiple conflicting partners further complicated the matter and made conventional financing that much more difficult to obtain.

However, the properties where in solid condition and had much equity. The borrowers where able to leverage the equity and refinance their existing mortgage and roll in other business debt into the private money loan.

The result was increased cash flow enabling the business to regain profitability – even though their rate was much higher than the previous mortgage.

Cleveland. A real estate investor was in the process of purchasing a 40,000 square foot mixed use building. The seller became frustrated and began to doubt the buyer’s ability to purchase the building as the conventional lender became cautious and dragged the process out. To the buyers shock, the lender pulled out, two weeks before the scheduled close.

The primary issue for the conventional lender was that although the current net operating income could support the proposed loan, the historical (average of the last 3 years) net operating income could not meet the traditional banks Debt Coverage Ratio’s.

The buyer, fearing that he would lose the property and money he had already put into the deal, used private money to meet the closing schedule. The exit strategy to pay off the private money loan was to simply continue to document the current net operating income and refinance the debt into a conventional loan one year out.

These are typically private money scenarios, others include foreclosures, distressed properties, recent bankruptcies, lack of existing cash flow, partnership buy outs, land contract refinances, “need for speed,”etc.

Common positive traits that make the loans financeable include loan to values less than 60% and clear “exit strategies” on how the borrower is going to pay back the private money lender.

Yes, hard money is expensive, but can be a viable option given the right (Or wrong) set of circumstances.

MONEY IS IMPORTANT - WHETHER YOU AGREE OR NOT

By:
Cheriyan Thankachen

When I talk to people about having multiple income streams, they say why are you so money minded. Having multiple sources of income is a topic which is definitely important, to be known and the need understood. How many times we have heard people say the following things:
1. Money, isn't everything.
2. You should be satisfied with whatever money you.
3. Don't be so money minded.
4. I don't care about money.
5. Money is not important.
and more phrases.

Well, with due importance to their thoughts, money might not be important for them. But, I surely bet, money is important to their milkman, money is important to their landlord, money is important to their banks if they have taken loans, money is important to the person who holds their mortgage, it is important when you go to a hospital. I can go along giving more examples. You may not need money but, almost every individual who is connected to you needs money. As a matter of fact, money is important to any individual living in a civilized city. Please do not try to cheat yourself by knowingly denying its importance. Nothing can take the place of money in the area where it is required. Therefore, to argue that it is not important is just illogical and meaningless.

The simple truth of you getting up in the morning and going to work is because money is important. I come across individuals saying, "It’s all about satisfaction and not money". I fully agree if you are doing social service else you will show your displeasure immediately. If satisfaction is important – employers will hire only satisfied employees and not give money. Some people say money is not important just because they are unable to earn money or they say someone with more money is lucky. Luck does play a role in your financial success, it is never sufficient in and off itself. Some even go ahead and say too much money is bad.

Money is important – it is neither good nor bad. It depends on what you do with it. There are no free rides in the world, money is an effect which is always earned with effort and hard work. So, next time you get an opportunity to earn, go ahead and create another income stream.

ONLINE MONEY TRANSFERS

By:
Seth Miller

The latest trend in money transfers is the Online Money Transfers. Under this, the money is transferred online from one account to another. There are various ways of doing an online money transfer.

Most banks offer this method. If you have signed up for the Internet user ID and password for your account, you can transfer money online from your account to the account of another person. However, most banks allow money to be transferred only to another account with the same bank due to security reasons. It is a safe and convenient method if the user takes care not to misplace his password.

The other form of online money transfer is using your email account. Companies like PayPal provide facilities for online transfer of money. This is quite an ingenious way of transferring money. Paypal requires you to create an account using your email ID. Once your account is created, you can fund it using either your credit card or your bank account. The funds in your account can be instantly transferred to another Paypal account. Money can be withdrawn from the PayPal account of the receiver either online, to the linked bank account or a check can be requested.

Banks and a lot of governments encourage online money transfers as well. In such cases there is no physical money changing hands. This helps the economy of a nation, as the government does not have to spend money on printing and maintaining currency notes. This type of money transfer is especially beneficial for long distance or international transfer of money across different countries. Companies such as Western Union, which have traditionally been in the money transfer business, also offer online money transfers.

Recently credit card companies such as Visa and MasterCard have also introduced online money transfer services which allow the quick transfer of money from one credit or debit card account to another.