The Mechanics of Hard Money Commercial Construction Loans
Hard money commercial construction loans are often used to buy residential properties to quickly renovate and ultimately sell at a profit. Often, these kinds of deals have to be made very quickly, and a traditional bank loan can take too long to process once properties needing renovation hit the market. Hard money commercial construction loans fill in this gap. These loans are often made through private companies who have relationships with investors willing to lend hard money. Because hard money loans are much riskier than traditional bank loans, the terms of hard money loans are more severe, and in the event of default, collections take place more quickly. Hard money lenders are also more unwilling to work with their borrowers, since these lenders prefer to take the property and sell it themselves to recoup some of their investment.
The Terms of Hard Money Commercial Constructions Loans
Commercial loans, whether obtained through a bank or through a hard money lender, often have similar components. The first component of any loan is a Note. The Note is signed by the borrowing entity, and contains the terms of the loan. For example, if a borrower set up a limited liability company called Quick Flip, LLC to flip a property, Quick Flip, LLC would be the entity who borrows the hard money funds, as well as the purchaser of the to-be-flipped property. The Note will generally state that should the loan go into default, the borrower – Quick Flip, LLC, will be responsible to pay.
The Note contains the term of the loan, the interest rate, any fees associated with the loan, as well as remedies in the event that the loan goes into default. Hard money lenders may take a 10% origination fee right off the top of the loan, as well as higher interest rates from the start than a traditional commercial loan. Commercial loans in Maryland often contain confessed judgment clauses, which allow for quicker collections, and hard money commercial construction loans often have very high default interest rates and late fees, so that if the borrower goes into default, it would be liable for these amounts.
Next, commercial loans are often collateralized by the property purchased with the loan. In Maryland, the borrower executes a Deed of Trust which provides that in the event of default, the lender can foreclose on the property.
Commercial loans also often contain personal guarantees. These guarantees are typically executed by the owners of the entity that is taking the loan, and allow the lender to pursue the guarantors jointly and severally for all amounts due under the Note, and to pursue the personal assets of the guarantors, such as their wages or bank accounts. Sometimes, the lender will require an Indemnity Deed of Trust, which secures the loan by the guarantor’s personal home.
Remedies Upon Default
If hard money commercial construction loans go into default, the lender has several avenues from which it can recover its loan. The lender will often sue the borrower and the guarantors with a confessed judgment lawsuit, and also simultaneously start foreclosure proceedings on the property. The lender will include in the lawsuit the default rate of interest, which can often be a large chunk of the amounts it wishes to recover. The lender will also include attorneys’ fees, late fees, and any other fees provided by the Note and guarantees. If the borrower signed an indemnity deed of trust, the lender can also initiate foreclosure on the guarantor’s personal home.
Options For Dealing With Default
With traditional commercial loans, lenders may entertain several options for dealing with loans that are in, or may be, in default. A loan modification changes the terms of the loan, such as the principal amount owed, interest rate, or payment schedule. Loan modifications are typically negotiated before the loan has gone into default, and the bank may require additional assurances for the modification, such as added guarantors. Forbearance agreements usually require the borrower to admit to the terms of the loan and meet certain considerations, and in consideration, the lender agrees to forbear from exercising its rights under the loan documents. Short sales occur when a property that is collateral to a loan is sold for less than the amount owed on the loan, and these require the consent of the lender.
With hard money commercial construction loans, due to the very short terms of these loans, lenders often do not entertain any of these options, as a lender’s goal is to earn a quick profit from the deal, and lenders often prefer to foreclose on a property rather than conduct a short sale. Also, due to the quick terms of hard money commercial construction loans, lenders are often uninterested in modifying these loans for longer terms.
Steiner Law Group Can Help
Steiner Law Group helps borrowers negotiate better terms for hard money loans before the deal is consummated, and also represents borrowers who are facing collections. We have successfully negotiated short sales with lenders who were previously unwilling to entertain them, negotiated payment plans and stopped various collections.
If you have questions about hard money commercial construction loans, please schedule a consultation by calling (410) 670-7060 and sign up for our newsletter Fresh Chapter.