When it comes to obtaining commercial acquisition loans, distressed properties remain a persistent problem for real estate investors. As a result of the financial crisis, many property owners did not have the necessary funds to invest in property maintenance or improvements over the past few years. This has led to a surplus of distressed properties in the market, which can be a golden opportunity for investors. However, the reticence of banks and other institutional lenders to finance acquisition loans for distressed properties has made it difficult for investors without sufficient capital of their own to take advantage of these deals. That’s where bridge loans and hard money lenders come in.

There are myriad situations in which bridge loans can be beneficial to investors. One common circumstance is an investor who wants to purchase a distressed property and then make renovations and improvements to it so that it can be resold at a profit. Another common situation is when an investor purchases a vacant or partially vacant tenanted property with the intent to reposition it and lease it up so that it is producing a steady flow of income. At this point, the property can either be resold at a property or held onto as a long-term source of cash flow.

Banks and other institutional lenders will often do no more than input a property’s performance metrics into their computer system and then inform the borrower that they can’t approve the loan because there is insufficient debt-service coverage or loan-to-value (LTV) rate (as they are only willing to consider the current value, not the future value). Because hard money lenders consider factors that are beyond the bank’s scope, they are more willing to provide bridge financing on properties that banks perceive to be problematic.

Bridge loans fill a specific need in the commercial lending market because the private lenders who offer them are willing to determine the loan amount based on the property’s future value and can close the loans quickly. They realize that although the current LTV rate for the asset may be high, it will decrease in time as the borrower uses the additional funds to improve the property, at which time the borrower will be able to refinance and pay off the bridge loan. Therefore, although banks and other institutional lenders consider these types of loans to be high risk, they are actually not speculative financing, but simply financing that is based on a projected value backed by a strategic plan to fully realize that value.

If you’re in need of a bridge loan, contact Montegra at 303-377-4181 for more information about our hard money loan program.