Getting a loan to buy commercial property can be challenging, especially if the property is unoccupied. Conventional banks have certain conditions for commercial lending, including minimum credit scores, occupancy requirements, and disclosure of both business and personal finances. A traditional commercial real estate loan also almost always requires an appraisal, which adds time and cost to the purchasing process.
Commercial hard money lenders have fewer requirements and much more flexibility to finance real estate purchases that have profit potential for. They also offer the benefit of more flexible appraisal requirements that allow you to move more quickly and save money.
Why Some Commercial Hard Money Lenders Do Require Appraisals
Hard money lenders are equity-driven, which is what allows them to make loans that conventional lenders are more likely to decline for various reasons. Some commercial hard money lenders want an appraisal to get a full understanding of the value of the property before they make a decision. This is important information because if you default on the loan, the lender has the option to take control of the property and sell it to recoup the outstanding amount on the loan.
On the plus side, if you’re purchasing a commercial property that needs improvements, hard money lenders will evaluate the after-repair value to determine the maximum loan amount they are willing to offer. This is good news for commercial flippers because you can often borrow more than the property is currently worth.
Why Some Commercial Hard Money Lenders Do Not Require Appraisals
Hard money lenders that have in-house underwriting and manage their own funds have the freedom to offer loans with flexibility on the appraisal requirement, at times waiving it completely.
Private lenders may use a broker price opinion (BPO), which is not an appraisal but a real estate professional’s opinion on the value of the property. This approach is much faster and less expensive than a full appraisal while still giving lenders the information they need to offer financing. Lenders may also use restricted appraisals, which are more expensive than BPOs but still much quicker than a full-blown 100+ page appraisal. Whether they prefer a BPO or a restricted appraisal, working with a hard money lender can significantly accelerate the speed of closing a commercial loan.
Lenders that have local experience have a better understanding of the regional market and are better able to provide accurate valuations without the expense and time required for an appraisal. Consider these factors when choosing a hard money lender.
It’s also important to note that even if a lender does not require an appraisal, you may still choose to have one done to get a better understanding of the valuation of the property before you decide to invest.
Requirements You Can Avoid When You Choose a Hard Money Lender
Although an appraisal is required for many types of real estate loans, hard money lenders have much more freedom than conventional lenders when it comes to investing in commercial real estate. Some of the requirements you can avoid by using alternative financing include:
Credit History
Hard money lenders base their decisions on equity, not your credit history or credit score. If you have bad credit, you can still get a loan for a commercial property.
Tax Returns
Hard money lenders understand that not every investor has traditional tax returns that show steady proof of income. If you are self-employed or have irregular income, or simply write everything off, a hard money lender may be your best bet.
Paperwork
Conventional lenders bury you in paperwork. Hard money lenders need only some basic information to get started. If you have already gathered all of the information you need to apply for a conventional loan, you are more than prepared to start the hard money loan approval process.
In addition to providing a less onerous loan approval process, hard money lenders can act fast so you can close quickly, sometimes in as few as five days. The faster your appraisal is available, the faster your lender can move. In a competitive market, these details matter.
Pro Tips for Fast Commercial Lending
If you plan to build a portfolio of investment properties, you’ll need the ability to move quickly. In addition to being more competitive as a buyer, you’ll also be able to operate more efficiently. Time is money, after all.
Build relationships with realtors.
Let local realtors know if you’re looking for commercial property to purchase. They often have information before a property is listed and can connect you with sellers when opportunities arise. A friendly local realtor can also help you estimate the value of prospective properties, the most impactful improvements and associated costs, and the potential rental income from long-term tenants.
Build relationships with lenders.
It’s always a good idea to have a strong relationship with your local bank, but they won’t necessarily be able to meet all of your needs. Get to know a hard money lender you trust. Look for a lender with a local presence so they understand your market and the values of various types of real estate. Building these relationships in advance will save you time when the right deal comes your way.
Hard Money Commercial Loans with Socotra Capital
Socotra Capital is a commercial hard money lender licensed in most states, including California, Colorado, Texas, and Georgia, where ample commercial real estate opportunities are currently available. To protect both borrowers and investors, we typically require some form of valuation, but we can offer much more flexibility than conventional lenders. For example, we sometimes get appraisals after closing or have appraisals assigned to us. We also often accept restricted appraisals or BPOs, which allow us to close even more quickly.
Whether you flip or buy and hold, investing in commercial real estate is just one way to generate income. For more ideas, read How to Grow a Passive Income Portfolio in Today's Market.
