Hard Money Loans and Acceptable Exit Strategies

!: Hard Money Loans and Acceptable Exit Strategies

The best cliche I ever heard for hard money was, "always remember, it is hard money, not stupid money." This applies to both the borrower and the lender. This type of financing serves a purpose. Yes, the rates are high and the lender could charge more than 10 points. Still, the borrower chooses to pay the premium because the overall transaction just makes good business sense. Often, the borrower gains far more than what the loan actually costs. These gains make the loan "smart money" for the client.

In this unique lending space, the lender must lend wisely as well. If your lender is genuine and is in the business of lending fast money on "make sense" deals, he will always look for an exit strategy. An exit strategy is simply the borrower's game plan for retiring the debt. True, some hard money lenders are "loan-to-own" lenders. These types really don't care about the borrower's ability to pay back the loan because they hope the borrower defaults which results in them taking ownership of the property.

For all other hard money lenders, the borrower must have a clear, logical and reasonable exit strategy. Many loans of this nature never happen because the borrower cannot prove that there is a high probability of the debt being retired in 90 or 180 days (bridge loans are typically 12-24 months and exit strategies are not scrutinized as closely). For hard money deals, the following are acceptable exit strategies:

1. An approval letter from a conventional financing from an acceptable lender (SBA loans can take 4-5 months and hard money is often used in the interim)

2. A certain, verifiable business transaction that will enable the borrower to retire the debt

Unfortunately, the potential sale of the property or an approval by a less-than-reputable lender are not acceptable exit strategies. In hard money, the exit must be certain. Anything left to chance or the whim of another lender will be rejected.

Commercial loans in the niche space of lending do move fast and almost always generates more money for the borrower than what it costs. The key to a successful transaction is being able to retire the debt quickly and move into a more conventional, less expensive debt structure. Without a timely and likely exit, the benefits soon diminish.