Experienced Kansas City Construction Law Firm

Hard money loans as a last resort

On Behalf of | Sep 9, 2016 | Commercial Real Estate

Commercial real estate developers in Missouri know that financing may determine whether or not pursuing a project is worthwhile. Unlike financing for residential real estate, commercial real estate financing is often more flexible and may move much faster. One type of financing that should only be used as a matter of last resort is a hard money loan.

Hard money loans differ from traditional financing in several ways. They are primarily offered by financial groups rather than banks and other traditional lenders. Since these loans are considered to be high risk, they normally will carry substantial costs that are payable up front. The interest rates for hard money loans are sky-high, and the maturity is usually one to three years.

Hard money loans are not subject to the same credit qualifying standards as are traditional loans from banks. They are based not on the appraised value of a property, but rather on what the property might sell for a few months in the future. Normally, the loan amount will only be one-half to 70 percent of the property’s appraised value. Developers who take out this type of a loan should immediately start looking at ways to refinance it.

The development of commercial property can be fast-paced. Depending upon the location and financial factors, attractive pieces of property can sell quickly, and this is why some developers are compelled to take out these types of loans. However, in their haste they sometimes neglect to adequately review the loan documentation, which is why having the assistance of experienced real estate legal counsel can be important.