Real estate investors looking at underperforming properties may be tempted to believe that financing is off the table. They assume they will need to bring the full cash price to closing. It is a reasonable assumption if an investor’s only experience with financing is traditional lending. But things are completely different for investors who know how hard money works.
The Priorities Are Different
The differences between traditional and hard money lenders are many and varied. But from the standpoint of an underperforming property, the main difference is found in lender priorities. The two types of lenders prioritize different things.
A conventional bank prioritizes standardized assets. They look for fully leased, multi-family apartment complexes. They are happy to lend on fully occupied retail centers and turnkey commercial spaces. They are confident in funding properties with years of flawless financial statements attached.
A hard money lender’s priorities are different. If a real estate investor were to contact Actium Lending to get a hard money loan in Utah, the firm would prioritize a combination of asset value, investor liquidity, and the investor’s exit plan.
Underperforming Assets Primed for Hard Money
Both real estate investors and hard money lenders have a thing for underperforming properties. Why? Because they can generally be had for reasonable prices. With acquisition and a bit of stabilization work, an underperforming property can turn into a real gem.
It’s really about potential. As private bridge lenders, hard money firms specialize in short-term financing solutions to help investors obtain properties with inherent collateral value but some sort of operational or situational friction that scares traditional lenders away. Below are just a few examples.
1. High-Vacancy Assets
A big one for many hard money lenders is the high-vacancy asset. It might be an office building that sits largely vacant because its long-term anchor tenant built a brand-new facility and moved out. It might be a retail center that lost its anchors or a multi-family apartment unit with too many vacant apartments.
2. Mismanaged Assets
Some properties underperform because they are systemically mismanaged. The properties themselves are not suffering physical defects or subject to poor locations. Instead, their biggest challenges are below-market rents, neglected tenant relationships, poor expense control, and a lack of cosmetic upkeep.
3. Lease Transitions and Expirations
A property may be considered underperforming if it is facing a significant number of imminent lease expirations. Without guarantees from tenants willing to stay or new tenants lined up to take vacated space, a property could experience a significant reduction in cash flow.
4. Time-sensitive or Distressed Seller Conditions
There are times when an underperforming property is in dire straits because of conditions separate from the building itself. A prime example is the distressed property put on the market by a seller who is looking to dump it and get his loan paid off before he runs into legal problems. Another example would be property owned by an estate or a partnership that’s on its way to dissolution.
Why Hard Money Lenders Like These Deals
Where traditional lenders look at underperforming properties with fear, hard money lenders see potential. That’s why they are more willing to lend. Hard money lenders help investors turn underperforming properties into profit-makers while protecting their own capital. Here’s what they see:
- Opportunities to lend with an LTV structure to protect equity
- Opportunities to lend based on property value rather than income
- Opportunities to help investors get to closing quickly
A hard money loan in Utah represents one of the most effective ways for investors to acquire underperforming properties. It’s really a matter of finding the right funding partner.