Unfortunately the arena of hard money commercial loans is rough and filled with aggressive lenders and a few that are complete con artists. Most borrowers come to these lenders in vulnerable positions needing cash quickly and are often in much emotional stress. It goes without saying that a borrower can worsen their situation by picking the wrong hard money commercial lender.
Here is how the typical commercial loan process works. The lender will normally ask to see 2 or 3 years worth of tax returns, personal financial statements and year to date financials. They will also take a look at the borrower credit to 1. Get an idea of their score, and 2. Get a better idea what their personal debts are and monthly payments.
Most importantly the lender will start doing research on the subject property, neighboring properties, comparable recent sales and trend of the market, etc. They'll try to confirm the value that the borrower mentioned. Most commercial hard money lenders will not go beyond 60% loan to value, and that 60% loan to value on a discounted value. If the lender doesn't ask to see these documents or doesn't seem to be doing some research be careful.
Now assuming that the lender likes the deal and wants to move forward they will issue some type of Letter of Intent. It might be called a Term Sheet. It will specify the basic terms - rate, points, prepays or exits fees, duration of loan, etc all the major points will be itemized. Also, the borrower will be expected to sign the Letter of Intent as well as send in a deposit.
The only point of the deposit should be to cover the third party report costs i. e. pay for the appraisal, or for the lender to fly out and personally take a look at the property. Sometimes they will want an environmental report done as well or title to be paid for etc.
If the lender is asking for more money upfront, than say $4,000 to $6,000 to just cover the 3rd party reports the borrower should be very careful. This is where many borrowers get hurt, the lender asks for say 1% of the loan amount and many borrowers unwittingly send it in. Nothing else really happens with the loan but the lender calls the borrower pretending that they're still working on it, giving status and reassuring the borrower that it looks fine, etc. After a month the borrower receives the call that “unfortunately they just can't do the deal, because value came in too low, or the market shifted or there's environmental issues or _ fill in the blank. And no there is none of the deposit left it has all been spent on third party reports.
Be careful and be as patient as you can be. Do your home work and be thorough. Keep in mind that the commercial mortgage industry is unregulated and tends to attract aggressive people.
Jeff Rauth is President of Commercial Finance Advisors, Inc out of Birmingham, Michigan. He specializes in Commercial Real Estate Loans between $400,000 - $5,000,000. Offers unique loan programs such as Commercial Second Mortgages, Commercial 30 Year Fixed and 90% non SBA financing, Commercial Equity Lines. 248 885-8797 or at hard money commercial loans or Commercial Loan Brokers - Commercial Loan Refinance