Commercial Real Estate Tips: Private Money vs. Banks

It is far harder for real estate investors to obtain a loan today than it was several years ago. While this is mostly related to the real estate market crash of 2008, harsh government lending standards have made it almost impossible for commercial loan funding. Many commercial real estate investors are turning to private money lenders as an alternative to conventional financing.

Known as hard money lenders, private lenders are a substantial source of capital for commercial real estate investors. Offering more flexible terms, private lenders offer faster closings on properties. In fact, a traditional bank takes between 90 to 180 days to close a commercial loan, while private lenders can often close the same loan in 30 to 90 days.

Traditional banks are required to carry FDIC and other government-related insurance. This is closely monitored by the State Insurance Commission, which in turn involves government rules, restrictions and abundant red tape.

However, since private lenders are private entities, typically made up of a single wealthy investor or a group of investors, they are not subject to the banking industries regulations. While private lenders are still required to abide by anti-fraud laws, they are not subject to chartering or government licensing.

With less government regulation, private lenders can focus on flexible loan criteria. Traditional banks often have interest rates that are based on a government index. Since private lenders don’t sell loans to government enterprises, they often charge slightly higher rates to make up for this investment risk. Conventional commercial loans have terms between three to 10 years, while private loans are designed for short-term use, maturing in one to five years.

Traditional banks’ underwriting processes are garnished with full documentation requirements. Private lenders lend not based on the borrower’s credit but on the property itself. This allows for more relaxed loan rules, which results in less documentation and paperwork.

Even the strongest banks generally won’t lend more than 75-percent Loan-to-Value. Private lenders can afford to lend on higher risk properties, such as those that are vacant, underperforming or even raw land. Many private lenders will accept Loan-to-Value ratios between 50- to 65-percent.

My Hard Money Lenders is a compilation of private lenders across the nation. With easy to use search results by state, commercial real estate investors can easily locate a hard money lender in their area. These direct lenders focus on fast money lending for commercial building loans, apartment building loans and bridge loans.