Exit Strategies for Commercial Lending Involving Hard Money Loans

Commercial lending involving hard money loans provides fast and easy financing for real estate developers, investors and contractors. But In order to obtain a loan, you need an exit strategy—how you’re going to get out and pay the lender back.

Hard money loans require an exit strategy as part of the application process. As a real estate investor, it’s always best to have multiple options at your disposal. As you know, the market can be canny and changing investment strategies mid-stream is not uncommon. The most frequent way that borrower’s exit in today’s commercial lending market is by selling the property. This is particularly true in fix and flip loans where money is needed for the next investment and profits are taken quickly. If the property is a rental unit or commercial property, borrowers can refinance the property with a traditional long-term loan assuming steady cash flow from rent and an increased property value is evident.

If the inability to qualify for a loan from a traditional commercial lending institution was the reason you originally obtained a loan from a hard money lender, you may be able to fix some of the credit issues while paying interest on the hard money loan and before payoff is due. This can be accomplished by taking steps to increase your credit, making timely payments on your present loan, and minimizing your debt ratio. Hard money loans can run anywhere from 3 months to several years, so take into account the length of time you need to address these issues.

If you are not eligible for a traditional loan due to credit issues, finances, or employment history which cannot be resolved in a few years, a subprime loan may be your answer. These types of loans do not have the same requirements and offer a good exit strategy that will still offer longer terms and lower rates, though not as beneficial as a conventional loan. If this is not an option, some hard money lenders involved in commercial lending will offer to extend the loan past the originally agreed upon terms. If not feasible, you may be able to refinance with a different private money lender.

Be Honest with Yourself and Your Lender

If this is your first rendezvous into the world of commercial lending, make sure that your game plan is well-thought out and all the moving parts have been analyzed. Having a solid business plan in place with a detailed scope of work and numbers that show why you’re requesting a particular loan amount should be included. Perform due diligence when selecting your prospective property or site, know the neighborhood and research comparable sales in the market. If working with sub-contractors, have detailed and itemized contractor estimates.

It’s not only important, it’s mandatory to have an exit strategy in place in order to secure a hard money loan.

This may seem overwhelming to a first-time fix and flipper or real estate investor, but it is achievable.

Consider finding a mentor that’s been through this journey many times.

Many investors are happy to share their knowledge with you. At Level 4 Funding, we are also here to answer any questions you might have. Don’t hesitate to contact us. “There is no stupid question! Except, possibly, a question not asked.”—Christer Romson.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.