Commercial Real Estate: Private Money vs. Banks

Today, more real estate investors are feeling the harsh restrictions associated with applying for commercial real estate loans. Because many banks are still skittish to loan on commercial transactions, commercial property investors are looking for alternative funding sources.

Hard money lenders, also known as private lenders, are a booming source of capital for many commercial real estate transactions. These privately funded mortgages offer more flexible terms and typically close faster than traditional loans.

Traditional banks are required to carry FDIC insurance. This involves the State Insurance Commission, as well as more rules and red tape. Banks are not flexible with loans and terms, in addition to requiring abundant documentation and paperwork for loans.

As private entities, private lenders include groups of individuals or a single, wealthy investor. These individuals are not required to follow banking industry regulations. While they still must abide by anti-fraud laws, they don’t have to report lending activity to heavily regulated government agencies.

Since private investors are not subject to government regulations, they can afford to be more flexible for loans. They often require substantially less paperwork than traditional banks and can close a loan within 30 to 90 days, a substantial improvement over banks required 90 to 180 days.

While conventional loans are based on government benchmark standards, private lenders don’t sell their loans to government institutions, which means their rates are generally higher to reflect this greater risk. While conventional loans are between three to 10 years, private loans are designed for short-term use only – typically one to five years.

Private lenders generally focus on the equity in the property, not solely on the borrower’s credit. This is why hard money loans are generally more straightforward and require far less documentation than traditional bank loans.

While most banks will not lend more than 75-percent Loan-to-Value, many private lenders will help loan on properties that offer 50- to 65-percent Loan-to-Value. This can make raw land loans, under performing or even vacant properties exceptionally difficult to qualify for traditional bank financing.

Better Than Loans is a hard money lender that specializes in offering fast loan funding for commercial building loans, apartment building loans and bridge loans. These loans vary from $50,000 to upwards of $25 million, allowing real estate investors to see a property’s full potential and income value.