Asset-based lending gives real estate investors a way to access quick, flexible capital by focusing on the value of the property instead of the borrower’s full financial picture.

What Is Asset-Based Lending in Real Estate?

In commercial real estate lending, banks and private lenders (such as Montegra Capital) typically operate under different lending guidelines. Banks normally fund what are called credit-based or cash flow-based loans. Private lenders normally fund asset-based loans. These two lending guidelines are very different.

Because they are regulated by the FDIC and the OCC, banks are required to place primary emphasis on the credit history and cash flow of their borrowers. Frequently, using these guidelines makes loan underwriting quite complicated. Because private lenders on commercial real estate properties are not regulated by governmental agencies, private lenders typically use an asset-based underwriting standard.

In simplest terms, this means that the private lender will lend a lower amount of funds than a bank based on the appraised value of the real estate collateral property. The ratio of loan to value is abbreviated by the initials LTV. This type of financing is especially useful for investors who need to move quickly on opportunities or don’t fit strict bank guidelines.

When Does Asset-Based Lending Make Sense?

The benefits of bank commercial real estate loans are that banks typically charge lower interest rates than private lenders (say 7 to 7.5% vs. 9.5 to 10.5%—or even higher), and banks will lend a higher LTV (say 80%) compared with private hard money lenders, which lend between 65% to 70% LTV. More money and lower interest rates.

The benefits of a hard money private capital loan are getting immediate decisions, more flexible loan structures, and more rapid loan closings.

Pros and Cons of Asset-Based Lending

Credit and cash flow lending requires banks to look at what is called “the global financial picture” of a potential borrower. This means understanding all the assets the potential borrower owns. If the borrower owns 15 other parcels of real estate, banks need to review and value all of them. Banks also look at all the bank balances of accounts connected to a prospective borrower. In many cases, these two underwriting tasks take a long time and make lending decisions complicated and uncertain.

An asset-based lender, although taking a quick overview of the personal financial statement of their prospective borrowers, normally places almost all their underwriting decisions on having a conservative LTV—the amount of loan funded to the appraised value of the real estate collateral. The value of the real estate collateral can be obtained quickly by appraisal, normally within two or three weeks at most.

Having just one item to review instead of multiple items allows the hard money lender to close quickly—sometimes in as little as one week if the borrower already has an appraisal. This compares with a month or even more to obtain a bank real estate loan. The ability to close quickly may make the difference for the seller between one offer and another.

A Real-World Example

Let’s create a hypothetical purchase scenario and compare the two underwriting standards. Buyer X decides to purchase a small retail center for $5,000,000. The seller is motivated to sell because they can free up capital to purchase another good real estate property. There is urgency for the seller to know, first of all, that the sale will go through (i.e., eliminate the loan contingency in the offer), and the timing of when the sale will close and when they will get their capital out is critical.

Buyer X makes their offer with a contingency that they obtain a bank loan in the amount of 80% of the purchase on terms satisfactory to them. Because they have had experience in working with banks, they ask for a loan approval contingency of 45 days. That means that for 45 days they have the right to get their earnest money deposit back if the bank doesn’t approve the loan.

Buyer Y decides to use a private bridge lender (like Montegra). After an initial discussion (which only takes one day), the private bridge lender agrees to lend 65% of the purchase price, contingent only on appraisal confirmation of value. Because there was an already existing appraisal done within the past year, the private lender agrees to use this appraisal (something a bank could not do) and offers to close their new loan within 10 days of getting the loan application.

They submit an offer to the seller to close in 10 days, and their only contingency is obtaining good title.

Which offer will the seller accept? Obviously Buyer Y.

The buyer must provide $750,000 in additional cash, but after their offer is accepted, they will own the property. Upon taking title, they can then apply for a new bank loan, hold the property for just a few months, and get a cash-out loan for the same 80% the bank would have been willing to lend if they had 45 days to do their cumbersome underwriting. The buyer pays a slightly higher interest rate for 2 or 3 months but gets the property, while the buyer needing bank financing loses it.

How Hard Money Lenders Help Real Estate Investors

Montegra has been funding this type of hard money bridge loan for over 50 years. We are based in Denver and locally owned. Unlike banks, which are now almost entirely owned by large conglomerates of bank holding companies, Montegra (i.e., Bob and Kim) makes all decisions in-house and can provide a yes or no decision (needing only value confirmation) within one to two days instead of months.

We can close as quickly as 7 days if the borrower has appropriate documentation.

If your goal is to own real estate and get bargain deals because you are able to close quickly and decisively, then Montegra’s hard money bridge lending program may be a good option for you to consider.

With decades of experience, flexible terms, and fast closings, Montegra is a trusted resource for Colorado real estate investors. Apply online or contact us today.