There are many names for short term private money loans.  Some are familiar, like hard money loans, bridge loans, or private money loans.  One name that is not used often but makes sense is “rescue capital”.  Rescue capital is an appropriate name for a loan that a borrower needs when their lender promises to fund their acquisition loan – and then backs out at the last minute. With the unsettled state of the financial market and its rapidly rising interest rate environment, having a lender back out at the very last minute is unfortunately becoming more and more common.  It is important for real estate investors to understand that there basically is no such thing as an enforceable commitment to fund a loan.  All Term Sheets and/or Commitment Letters always have some escape clauses built in.  Banks are notorious for assuring their clients that they have approved their property acquisition loan and then, at the very last minute, telling them that they are so sorry, but they have just discovered a problem and now are not willing to fund this loan.  This leaves their borrower up the creek without a paddle.  Their financing contingency probably has expired, and the borrower/buyer now stands to lose 100% of their earnest money deposit.  Because of the way that loan commitment letters are written there is always some way for a lender to back out of a deal.  This is morally indefensible, but legally it is something that works and puts a buyer/borrower in an untenable position.

At Montegra Capital, we see this scenario often.  We just closed a loan for a borrower whose bank lender – 10 days before the closing date – informed their client that their appraisal office didn’t like the rental schedule in the office building that was the subject of their commitment letter.  The bank had been working with their client for over three months on this prospective loan and pulled the plug just days from closing.  Because of the very short time frame needed for a “rescue loan”, using a private money lender is typically the best solution for the buyer/borrower. Because of the regulations imposed by state and federal regulators, institutional lenders like banks can’t underwrite and close a loan in less than two weeks.  Reputable private money lenders can move fast – assuming they are “direct lenders” – that is – that they have the money under their control and do not have to go out and find the funds needed for a loan.   Private money lenders can make quick decisions followed by rapid closings.  In cases like these, the term “rescue capital” is accurate.  This rapid close private money loan saves the real estate investor’s earnest money and saves the deal.  However, it is important that the real estate investor has done enough due diligence to make sure the private lending firm they are using is a legitimate firm and one that has a reputation for keeping its commitments.  There are firms that prey on unsophisticated borrowers and will keep the underwriting deposits but not fund the loan at closing.  Checking the reputation of a private money lending firm with attorneys, CPAs, bankers and Realtors in the community is the best way to make sure the real estate investor is working with a reputable firm and will not get an unpleasant surprise at the closing.

If you have questions about a bridge loan request, contact Montegra today at 303-377-4181.