One of the most unnerving parts of obtaining a hard money loan is determining a fire sale value of the real estate being used as collateral in the loan. Typically a Letter of Intent indicates that a loan is offered by the hard money lender, pending the outcome of due diligence in the amount not to exceed a specific LTV of our opinion of the appraised value.
 
How can you know what your property value will considered to be?

Street value of real property is the value that the property will sell for today, not the appraised value. If you have a recent written appraisal, you can use that as a starting point for valueing your property. By simply reducing it by a reasonable percentage, you might assume what the property would sell for in a quick sale scenario.

To get a better idea of its street value, contact a respected local commercial real estate agent.  Ask what you could expect to get for your property if you needed to sell it with the next 3-4 months. Ask to see what has sold recently in your area that is similar to your property. If there are no similar properties close by, look farther away and look at closer properties that are not similar.

Now is not the time to be choosy; now is the time to be pragmatic because that is what the hard money lender’s appraiser is going to be. Make a reasonable determination of what your property will fetch and you will have less concerns over whether your loan request could be funded. There is no sense in paying a down payment for the costs of due diligence if the money is merely squandered to learn that your property’s quick sale value is insufficient to support your loan request. A little due diligence on your part will strengthen your transaction and give you quality information regarding your position.

An executive summary is a 1-4 paragraph explanation of what’s on your mind, what you are going to do, what you need others to do and/or what market conditions have to occur to make the whole idea a success.

Every hard money loan, business loan, proposition, etc. has an idea or scenario on which it plays, and a plan to make it happen.

Here’s what to write in your executive summary for a hard money real estate loan:

Describe the real estate you own and its current value. If you are buying, describe what you will buy, what it’s worth and state what you will pay for it.

Tell how the value has been established.

Tell how much you need to borrow from the lender and where the balance of the cost to close will come from. JMG Capital Partners and most other hard money lenders will lend up to 65% of the purchase price on commercial real estate.

For loans in this category you will be required to put up a minimum of 20% cash or other equity in your project. The balance can come from another loan, such as a seller carry back loan.

Describe what you will do with the property, how you will make money by owning it, and how you will make the monthly payments on the loan you are requesting.

Describe your exit strategy. A hard money commercial loan is a bridge loan. You will have 1-3 years to refinance it with a conventional loan.

All of these transactions can be structured into Equity financing in the event they are development projects.  Equity in most cases will allow for a longer term on repayment and also a lower rate of return.

While we are currently leaning more and more to equity based transactions there is still a need for Hard Money or Commercial loans in today’s market. We can typically structure loans in excess of 80% LTV.  One thing you MUST understand that loans of this type are typically collateral intensive and sometimes based on personal assets. 

LTV means ‘loan to value’. When seeking hard money or commercial bridge loans, you will consistently read that the loan will be based on a percentage of loan-to-value.

How do you determine the value of the property you wish to collateralize? The first thing to note is that hard money lenders require that they send their own appraisers to assess the value of the property. Do not waste your money on an appraisal; you will pay for it twice.

To estimate the value of property, use the selling price (the actual price you will pay for the property) if you are requesting a loan for a purchase. Very few people buy commercial or investment property at the appraised value - everyone is looking for a ‘good deal.’ Therefore, for the purpose of a hard money loan, the actual value of real estate is the ’street price’, the price the property will sell for today. If you are refinancing a property, get a realtor to provide you with an estimate using ‘comps’ or comparative properties in your area with the prices they sold for recently. If no recent sales are available, you can still get a rough idea from a realtor as to what to expect your property would sell for on the open market today. Also please do not include the value of the business, the furnishings or other properties other than the buildings and improvements to the real estate.

As the holidays season approaches savvy investors and companies begin preparing for there year end books, all the while staring a new administration in the face and tensions are on the rise.

As other companies are removing debt by returning investments and returns to investors, those receiving the funds are scrambling to place those funds by year end. Regardless of the profit, the main concern for any investor is the potential for steep capital gains taxes. Needless to say they don’t only fear the tax man, but a new administration that has clearly stated their intent to raise tax brackets substantially for people making over $250,000.00 per year.

With this said, facing the grim reality of putting those earning into the stock markets or other common shelters is like playing Russian roulette. Every major global market is in complete turmoil, so all private and institutional Investment avenues are screaming for Equity or Asset backed transactions to place there monies before year end.

This market; for the observant start-up company or smart potential borrower is perfect. They should begin to quickly market there product or proposals to any investment avenue possible. There are few times when a borrower becomes in control, and that’s at year end or in the times of major market meltdown. For those of you who might not be aware, these are both happening right now…

Don’t get overly excited though. Just because its “go time” for these groups, doesn’t mean they will take unnecessary risk. So take the time to develop your funding request as these opportunities only come once a year.

In most cases, investors are looking for safe equity backed transactions they can participate in on a minimal level. These forms of transactions typically include Regulation D Private Offerings. These offerings are structured as share or unit sales of temporary equity stakes in your company until the funds have been repaid, along with the earnings over a 3-5 year time frame. 

There are 3 different rules a transaction of this type will fall under.
They are as follows:

• Rule 504 is for raises under $1,000,000.00
• Rule 505 is for raises under $5,000,000.00
• Rule 506 is for raises in excess of $5,000,000.00

Each of these rules includes different stipulations regarding the amount of sophisticated Non-Accredited investors allowed to participate in that particular funding request.

While seeking out a dealer/broker is an option, it isnt necessary as these are Private Offerings and can be structured by anyone with knowledge of this form of funding. Additionally most DB’s will charge excessive sums of up front marketing fee’s to attempt in placing your project. Occasionally, as is the case with JMG Capital Partners, LLC the only fees associated with this form of capital is the drafting expenses that can range from $10,000.00 - $30,000.00 depending on the size of the PPM and amount needed.

Despite being a highly successful form of funding, rarely will you find groups offering these services for a success fees. Frequently when a firm offers these services under this payment structure, they will work hard to place these funds, as that is the way they are compensated. So, in a nut shell if you get paid they get paid and vice versa.