• First and foremost the private investor may expect a high probability of default on the commercial hard money mortgage loan. He will have to forgo payments during the time in which it takes him to collect his money. His cash flow will suffer. His collection attempts will be expensive.
  
• Secondly the private mortgage investor may expect the commercial property owner to cease communication with him and begin "hiding" from his calls as soon as he can't make a payment on time. Frequently investors will not have their calls returned once the property owner wants to avoid making the agreed to monthly mortgage payment.
  
• Third the private mortgage investor may expect the homeowner or commercial property owner to continue to make bad descisions similar to the decisions made that created the initial property and or financial mismanagement. The private investor does not expect a phone call informing him exactly what has transpired. The private investor knows the defaulted mortgagor will try to avoid stating anything that can be used as an admission that foreclosure should begin. This is already painfully obvious in most cases.
  
• Even if the client or homeowner is not guilty of "over extending", "hanging on to the property at all costs", and not paying others, - even if they are truly "victims" themselves of some type of calamity or a series of terrible problems.. the private investor or commercial hard money investor knows that the borrower will often default on payments, hide, delay the foreclosure process and in some cases make a claim or file a lawsuit against the lender of commercial hard money, with hope they can rid themselves of the commercial hard money mortgage with help of litigious lawyers..
  
• The commercial or residential, hard money investor does not expect the owner to list the property for sale in a cooperative way, or to list it a price that will sell in a short time. He expects a problem with regard to the property in terms of the owner "hanging on" in an effort to either sell very high, or borrow more money and try to balance the budget of the property again.. He is aware the owner will be likely working with realtors listing the property too high, mortgage companies promising to help with another refinance .. (often contingent on very difficult things to obtain- such as new or better appraisals, sufficient income which generally has been a problem, a short or reduced payoff from other creditors, some of which may have secured liens or priority liens such as taxes) and to also be working with one if not two to three or more attorneys. The attorneys will work to prevent the private mortgage investor or commercial hard money lender from recovering his money immediately and instead work to delay the process of foreclosure in order to return the invesors money to him.
  
• The private investor or commercial hard money lender, knows that the attorney will likely rely upon various forms of bankruptcy protection from the courts. Even in cases where a previous bankruptcy has been filed, it is possible for the owner of commercial real estate to file both for the business as well as personally. Other owners or spouses, may also elect to make a bankruptcy claim. Even the tenant of the property might attempt to make a claim, and it could be the owner himself as the director of the company that is the tenant, simply refusing to pay rent to the investor. It is very likely that an attorney will find a way to file a bankruptcy and potential variations of the same protection again under the corporate or partner/wifes name. That will slow down the investors ability to collect the money on the private money mortgage. Bankruptcy courts are carefull to watch for abuse, but cannot deny additional individuals or entitys their rights. Hard money lending is perilous at best for any investor.
  
• The private money investor or commercial hard money lender, knows that the clock is ticking and that equity is being "eaten up" by time. The payments are becoming further past due, and the late fees, and legal fees are mounting. The taxes on the property and individual are mounting. The property is likely not being properly maintained because of financial distress. Clients sometimes deleberately ruin or refuse to take care of a property they cannot keep.
• The private money investor or commercial hard money lender, knows that the bankruptcy court has the power to make rulings that change the protection of the first position mortgage lien they hold. In recent New York City corporate bankruptcies, large well known banks have had first mortgage lien's taken away and place second to high interest rate hard money lender loans. It is unbelievable but a judge can and will make decisions that are within his power to make. It is not uncommon for a bankruptcy judge to remove a first postion lien, and place it second to another. This can happen when the corportation or owner of commercial property seeks petitions the court to allow another refinance. Sometimes the new investor/lender is willing to pay creditors throught the new loan refinance only if he is granted a priority lien on the property or properties.. He may even insist upon a blanket lien on any remaining properties. The judge may grant first position priority lien to that creditor or another private money mortgage lender for the benefit of the creditors. This will then risk the previously assumed safe position of the first mortgage lien holder. Therefore a mortgage is not truly guaranteed at all or in totality, and is subject to risk in a bankruptcy or foreclosure action.
• The private money investoror commercial hard money lender, knows that if another default occurs or forclosure occurs, it may not be suffiicient to repay the first lien holder and then his. It could result in a loss. If the foreclosure sells low, then the priority lien holder gets paid first. The balance in order of lien priority. That is why some lenders will not rely simply on equity alone. Repayment must appear likely for many investors.
• The private mortgage investor or commercial hard money lender, knows that he has a certain amount of money now, and that at the end of a long and difficult process, he might not profit but in fact may lose out to the complexities of bankruptcy law and a forced short sale of the property. Therefore to offset that risk, the private mortgage or commercial hard money lender, seeks a higher return on his investment, sufficient to make a profit on the transactions that do work out. That can offset those that may not. The commercial hard money lender or private investor truly takes a tremendous risk, but often profits. Commercial Hard Money Lenders do not usually last more than 10 years before changing their programs. Private investors may have risk in the lending process but often are less regulated and can make riskier loans. They do not have investors to answer to, or do not fear the scrutiny of the "OTC" which regulates FDIC insured banks. Many savings bank, portfolio commercial hard money lenders, fear the regulations of the OTC which is directly responsible for avoiding a Savings and Loan crisis similar to the one in the 1990's.. Commercial Hard Money or asset based lenders such as the former "Greenpoint" Saving Bank eventually stop making bad credit commecial hard money loans. Many similar banks are encouraged not to risk their liquidity or the safety of the depositers money.
  

Why would a private money investor be willing to enter into a risky or stressful business transaction on a commercial hard money loan? A private investor or commecial / hard money mortgage lender, will seek an appropriate risk/reward ratio. In other words the rate charged may be high, but it will need to be worth the investment. Private mortgage investors generally get wiser and more controlling as years go on. They become familiar with legal proceedings and are ready to navigate the waters of a complex hard money deal. They are not required to be helpful with ongoing borrower problems. They are there to provide a one time financial solution which may only be temporary relief to a troubled situation. They may simply stop foreclosure or assist in the completion of a construction project or assist in obtaining a building permit on unimproved land, or buyout. In return they expect a larger profit than would be expected on a low risk loan. The industry standard is 12-14% with 4-6 points. The industry standard is also 60-65% of a somewhat low appraised value. Investor's utilize conservative real estate appraisal firms to assure they are adequately protected. Hard Money appraisals often are critiqued by clients as they are more reflective of a "Quick sale" value. Quick sale appraised value usually represent's an amount the property could easily sell for in two to four weeks. Some commercial hard money or bridge loans go up to 75% but may be either 13-14.5% with 5-6 points, or require a sale lease back to guarantee control of the property if it appears the payments cannot be made. Some non-institutional private investors are predatory. They may want to enter into a sale / lease-back hoping or expecting the owner will not qualify for financing within the short time they have to re-purchase the property. They may hope to keep the property at a discounted rate. Do not expect them to give you more time to repay the loan on a buy back agreement. They may already see the property as theirs before you even close the deal. Be careful and find out if they have a history of similar bad deals.

The solution a private investor or commercial hard money lender provides is seldom long term. A desperate client will sign anything to avoid foreclosure or short sale, only to end up with the same problem. This is not a smart move. The commercial hard money borrower might find themselves with double the mortgage payment only thirty days from closing without sufficient cash reserves to afford it. It pays to consider a sale, instead of using large amounts of equity during the refinancing of the property.

Solutions that work in Commercial Hard Money Lending.
For commercial hard money mortgage loan programs to make sense they should help the borrower become more liquid. A commercial Hard Money loan should not simply raise their costs to be repaid withing a very short time period from the time of the problem. That is a presciption for disaster. Commercial Hard Money Mortgage Loan programs that do work require careful attention to detail.

A commercial hard money loan must rely upon the assets for adequate repayment in the event of a sale. However as discussed earlier, a commercial hard money loan must also be made to reasonable client, and not be likely to go into immediate default. To assure this does not occur a private investor of private mortgage loans, will often insist upon the following.

1) A valid MAI commercial appraisal on a property valued below $1,000,000 and a second written opinion of value on a property valued over $1,000,000.

2) A clear exit strategy must be in place for the commercial hard money loan to be paid off. The owner must agree to sell, or refinance within a certain time frame. A cooperative borrower must be willing to sell the property and not delay the process if the loan cannot be repaid. Often a reasonable time frame is a minium of 12 months, which should be sufficient to obtain more favorable interest rates, since the foreclosure action or credit problem may have occurred more than 12 months ago.

3) The Private Mortgage Lender should not make a larger more expensive loan to a borrower until it has verifiable proof of income, or a strong indication that the income is sufficient, thereby evidencing that the client can afford to repay the loan. If the client/borrower cannot afford the new loan, the private investor can and must insure that there is a plan to repay the debt. This can be done, by creating an interest reserve. Lending an additinal amount of money to place into an escrow subsidy account, to make full or partial payments for the anticipated duration of the loan. If the loan is needed for at least one year, than the reserve should not stop in six months. Then credit will be damaged close to the time the refinance is needed.That will impede a low cost refiance and push the property owner into a rush sale, another hard money loan, or bankruptcy. All of these options are not optimum!

Therefore judgment must be used in structuring a commercial hard money mortgage loan. A private investor should be prudent in a situaltion like this.

What does a private investor do when the risk is too high on a commercial hard money mortgage?

The private investor will in some cases only agree to buy the commercial property, with no strings attached. They insist upon outright ownership to avoid the above pitfalls. They then will either A) Keep the property and give the owner some working capital to move, which is often resulting in a loss to the owner. B) Keep the property and allow the owner to pay rent for a certain amount of time. C) Offer a sale lease back. Most commercial hard money clients prefer option C believing it will be easy to repurchase the property. Sadly that is rarely the case.

The sale - lease back plan is inherrently dangerous to the owner of the commercial property, if they are not savy real estate investors and if they are not willing to make a loan "exit strategy" and keep to it.. When a commercial hard money loan is granted and the borrower avoids complying with the exit strategy, it often results in loss to borrowers in terms of what price they receive for a commercial property sold quickly, and what it actually is worth.

A commercial hard money lender may insist upon a sale-leaseback on high risk transactions, or they will often simply "refuse to do the deal". The only thing potentially more dangerous to a borrower, than a sale/lease back between client and private money investor is a sale/lease back with the addition of a blanket loan on other properties, equally affecting them if the payment's are not made on time or there is a default. This increases the stakes and makes selling a property or refinancing more of a priority.

Commercial Hard Money - Time to Restructure Debt

Experienced commercial real estate owners will often agree to terms such as these when they are attempting to avoid foreclosure. They will often benefit, if it keeps them from selling to quickly or too cheaply on a large property. If they have more than one property it may be possible to liquidate additional property and reduce the loan amount on the others significantly by repaying part of the commercial hard money mortgage balance. . That improves the "Loan to Value" ratio and equity position on the remaining properties. Therefore it is often easier to sell them and recover the debts, or refinance them with better loan terms.

While the information here at Commercial-Hard-Money.com will attempt to enlighten and provide multiple platforms for current information, the most important points concerning commercial hard money loans will include understanding whether the loan will be more beneficial to both parties than harmful, and whether the commercial hard money mortgage loan is structured as well as it can be - to minimize risk inherrent in commercial hard money.. A Quick Overview of Commercial Hard Money Loans and Commercial Hard Money Lenders may be found in the articles within this site.

This article is meant to give insight to those looking to become more familiar with commercial hard money lending or for use by savy investors and property owners. It is not to be construed as advice which should be done only by professionals assisting on a specific problem. This article is *not to be considered advice homeowners.

*Emergency Assistance For Homeowners is Available at Local Fair Housing Offices.
Homeowners should seek counseling through a Housing office in their state and city. A qualified fair housing agent may be able to assist a residential homeowner with obtaining a reasonable "work-out" plan that allows for an easier repayment of the arrears over time. This can help a homeowner avoid an unneccessary increase to the rate and payment at a time of financial distress. Homeowners are discouraged from entering into sale/lease back deals with investors. They are often one sided deals and result in loss of property. Homeowners should work closely with a housing counselor who is uniquely qualified to assist and does not profit from advice.