So, you’re ready to acquire raw land and you need a loan. The only problem is funding. Obtaining a bank loan to finance your purchase has been impossible because traditional financing institutions consider your acquisition to be too risky to invest in – too much can go wrong during the construction process. That’s when direct private lending steps in to supply the funding you need.
Borrowers may consider using direct private loans to fund a bridge loan. Employing a bridge loan secures the financing you need to take advantage of the opportunity without stalling your plans or putting the deal at risk.
Landing a bridge loan
Obtaining a bridge loan is often much easier than securing financing from a bank or conventional lender because direct private lender’s requirements are often more flexible than those of traditional financing institutions. These loans are backed by collateral, often the property itself, rather than the borrower’s creditworthiness, which opens the opportunity to a wider pool of candidates.
The terms of the loan will vary, but oftentimes the loan-to-value ratio will be up to 60 percent. That means if the land you are acquiring is worth $100,000, the lender could provide up to $60,000 in funding with the property as the guarantor for the loan. However, because these are private lenders extending funding to borrowers at their own discretion, you may even be able to obtain the full purchase price of the property.
While bridge loans are generally more accessible than bank loans, the repayment period tends to be shorter and interest rates are often higher. Despite the higher interest rates, there are often no prepayment penalties, so if you are able you can pay off the loan before too much interest accrues. If you’re prepared to pay the loan off quickly, hard money is a great option for acquiring real estate.
Purchasing land with hard money
Why is hard money useful for buying undeveloped or raw land? Banks often won’t lend on properties like these because they are considered risky investments. What if the project never comes to fruition, or something unexpected rears its head and halts development in its tracks?
Private lenders don’t have their hands tied in the same manner, so when they look at undeveloped land they are able to see the future value of the property, just as you do. So, on one hand, hard money fills a gap in conventional lending. However, hard money’s uses for real estate acquisition don’t end there. They can also be used as bridge loans while you work to secure more traditional financing.
“A bridge loan is often flexible, and so are the lenders who offer them,” said Kevin Wolfer, CEO of nationwide direct private lender firm Kennedy Funding. “They don’t simply have to be used for the acquisition of the property – they can be used to boost a conventional lender’s confidence in a long-term project.”
For example, hard money can be used to acquire land and begin your development project, offering a bank enough security and promise to lend to you at a later stage. This makes bridge loans an attractive option for borrowers who need money quickly and require a flexible lender.
While hard money is more expensive than conventional loans in terms of interest rates, it represents an opportunity to be approved quickly and easily, without having to jump through hoops, wait weeks or months for an approval, or face denials from a lender too hesitant to touch unimproved land. When aiming to secure property for a new development or project, hard money is the most attractive option out there for short-term financing.
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