How Conventional Financing Can Be an Exit Plan for Hard Money
Taking out a hard money loan requires coming up with an exit strategy you present to the lender prior to loan approval. An exit strategy is simply a formal plan for repaying your loan at the end of its term. Oftentimes, conventional financing is the exit strategy a real estate investor will bring to the table.
But wait. If conventional financing is possible, why take out a hard money loan and all? And of conventional financing is off the table because the property being obtained is too risky, why would a bank turn around and refinance it at a later date?
A Pretty Common Strategy
Actium Lending is a well-known hard money lender based in Salt Lake City, Utah. They write loans in Utah, Idaho, and Colorado. According to the Actium team, conventional financing is a pretty common strategy among real estate investors. Let us look at a quick example from Actium’s files.
Actium was approached by a client looking to purchase a multi-family apartment unit. He requested a hard-money loan with a reasonable term. His exit strategy was to go back to his bank and arrange conventional financing a few months after the deal closed. Actium along went with it because the client’s plan was pretty solid.
Failing to Fund the Acquisition
A bank failing to fund an initial acquisition is about as common as investors turning to conventional financing as an exit strategy. So why would a bank refinance after the sale but not fund the original acquisition? It comes down to a single word: stability.
A conventional lender’s risk aversion forces underwriters to be very conservative with their approvals. A multi-family rental unit would be considered stable if the property were in good condition and generating a steady stream of rental payments. But in this particular case, Actium’s client had a bit of work to do on the property. It wasn’t yet considered stable, so the bank was reluctant.
Hard-money lenders are not as concerned about stability as their conventional counterparts. What matters most to a hard money lender is asset value. And in the case of the multi-family rental, Actium could see the value they were after. It was enough to get the client approved.
Refinancing After the Fact
A hard-money loan helped the client obtain a very desirable property. Once he became the new owner, he set about making the improvements and ensuring all the units were filled. The property began generating the kinds of rents the client believed he could get.
With the work done and rental income flowing in, the property was considered stable. That allowed the client’s bank to take a second look. Satisfied that everything was in order, the bank refinanced at an attractive rate and with a longer term. The client was able to repay Actium on schedule.
Speed Is Another Factor
Not every case Actium deals with involves unstable properties. Sometimes the big thing is speed. Actium frequently works with clients who are under the gun. If they cannot get to closing quickly, they risk losing very lucrative deals.
Conventional lenders need at least 30-60 days. Actium needs less than a week to fund and close. So an investor might arrange a hard money loan for initial acquisition because it can be done quickly. After acquisition, when the investor has more time, he can apply for conventional financing to pay off his hard money loan.
Conventional financing is a common exit strategy in hard money. Though going to a bank to refinance sounds counterproductive, it is reality, nonetheless.
