In today’s environment many options exist, though here are some common bridge loan exit strategies that Montegra typically deals with.

The Borrower Refinances the Property

Hard money lenders typically deal with loans that traditional banks will not fund.  In many cases this is because a property’s rent roll is not stabilized. So, a hard money loan can be a great choice while making improvement and stabilizing rent.  After rents are stabilized, borrowers can refinance the property with a traditional lender at a lower interest rate. This is the second most common way in which borrowers pay off Montegra’s loans.

The Borrower Sells the Property

This option has already been discussed in some detail.  This is probably the most common way in which Montegra’s borrowers pay off their loans with us.  A dose of cold hard realism is advisable as you plan to take out a private capital loan and then pay it off in a set time frame.

The Borrower Pays-Off the Loan after Getting Additional Cash

Borrowers often get additional capital from selling other properties or from other business deals.  In this event these funds may be used to pay off a hard money loan.  Alternatively, borrowers often pay down principal on the hard money loan and talk to bank lenders about giving you more favorable terms.  Also, borrowers return to their traditional banker who may well be more receptive to finance your property when the amount needed is smaller than the original request.

The Borrower Receives a Principal Discount on a Loan

Another scenario, which is becoming more common in today’s market, is for a borrower to ask their bank (which holds their commercial real estate loan) if the bank would discount the amount of principal due them if the borrower pays off this loan ahead of its due date.  Banks, which are under pressure from the Federal Reserve regulatory agencies (such as the FDIC and OCC) need to lower the amount of their capital that has been put into commercial real estate loans.  It is always worth talking to them about this possibility.  If this scenario works it is “found money” for the property owner. The catch in this strategy is that when a bank bites the bullet and offers a discount, they want to get the loan paid off in a very short time frame.  This is an example of where setting up a relationship with a hard money lender in advance could produce real results when “time is of the essence”.

Finally…

One practical way to think about exit scenarios and the project schedules is to work backwards.  So, think about the final investment exit strategy, understand your current situation, and then fill in the gaps. This is a great way to keep projects on track and spot any obstacles that could throw a real estate investment off track early on.  Another benefit of working backwards is one can set a simple reminder in the calendar to begin talking to banks, buyers, etc. More to come about bridge loan exit strategy and other exit strategies in future blogs.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.