CLOSE first, THEN optimize the financing
In today's white-hot real estate market, it's like the shootout at the OK Corral. Move first and faster than the next guy, or you're dust.
As the Manager of a Private Mortgage Fund which makes Bridge and Mezzanine loans on commercial and investment real estate, I continually come in contact with individuals (in some cases potential borrowers, and in other cases potential Fund Investors) who are SHOCKED that anyone would EVER borrow at rates of 12% or 14%! It's an interesting initial visceral reaction that usually dissipates when the individual "does the numbers" and quickly realizes that there is a huge difference between borrowing at a hefty rate for only 10 or 12 months vs., say, five or ten years. Further comprehension usually follows as the individual ponders the various factors that typically motivate Borrowers to seek a Bridge Loan such as an upcoming time-of-the-essence closing where a bank has yet to produce a commitment letter for one reason or another yet the deal MUST close within, say, 10 days. Another typical reason is an individual having an opportunity to buy a property at a time when the individual's liquidity is limited, their cash flow is weak, or their credit scores are less than perfect, but they see a compelling upside strategy and have a clear plan and budget outlined to achieve it. We often provide Private Money for situations that, once stabilized, will easily qualify for bank financing.
Use the right tool at the right time:
Bridge loans are NOT intended to be utilized for a long period of time, and, of course, no one uses them as long-term permanent financing. The Bridge lender must be smart, nimble and FAST. The staff, legal counsel and appraisers of a private lender need to operate like a SWAT team; analyzing, underwriting, drafting loan documents and closing the loan in very short order. The underlying quid pro quo for Private Money MUST be: "we're expensive but we're fast and dependable". Expensive for a few months is also entirely different than expensive for 10 years. The fact is, that in today's fast-moving real estate world, speed and certainty of execution are priority #1. It's hard enough to find a property worth buying. Many sellers will not permit a mortgage contingency, and of course, the market is swimming with 1031 tax-free exchange buyers who can buy all-cash or put down a significant down payment. Clearly, an all-cash buyer or a buyer armed with a financing commitment will usually be chosen over a buyer who insists on a conventional mortgage contingency. Often the strategy must be: Find a worthwhile asset, tie it up, CLOSE on the asset with temporary, fast, dependable financing, and THEN put the perfect, low-rate financing in place once you control the asset and have the luxury of time to get it just right.
First hit the target, then worry about getting a Bull’s Eye:
We sometimes see perfectionist buyers determined to “win” on buying an asset, fiddling around with various LIBOR-based, low-rate bank financing alternatives, wondering which will save them more money, while their competition is either paying all cash or has a Bridge loan lined up so they can go to contract without a financing contingency (two metaphors that come to mind are: “winning the battle but losing the war”, and “playing the violin while Rome is burning”). Sometimes these “low-rate obsessed” buyers end up with a beautiful commitment for a nice low rate and nothing to buy with it. It’s obviously important to know when the urgency to have a FAST and FIRM loan commitment outweighs anything else.
In a hot, competitive seller’s market, cash is the very best thing – the NEXT best thing is a lightning fast Bridge loan commitment, which can allow you to bid without needing a financing contingency.
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