Ryan Walsh, Author at Scotsman Guide

Find Ways to Adapt

Ryan Walsh — Sun, 01 Oct 2023 08:00:00 +0000

As we near the end of 2023, the global economy finds itself on the precipice of change. With the possibility of at least one more quarter-point rate hike from the Federal Reserve, and the looming possibility of a short and shallow U.S. recession, economists and mortgage professionals alike are bracing themselves for another 12 months of turbulence.

While the future remains murky, there are still issues that may shape the economic landscape going forward and offer opportunities for commercial mortgage originators. When confronted with an environment characterized by rate hikes and economic turbulence, it becomes essential for professionals in this field to adapt and strategize effectively. Remaining well-informed about economic trends, policy decisions and real estate market dynamics is crucial.

Changing landscape

Rising interest rates have presented major issues for the commercial real estate industry. Affordability concerns, decreased property valuations and headwinds for new developments have contributed to a more challenging investment landscape.

Shifting preferences toward alternative investment options, and strains on cash flow and financing efforts, have further compounded the challenges faced by real estate investors in a higher interest rate environment. It is crucial for originators and their clients to carefully analyze market conditions, evaluate the potential impact of interest rate fluctuations, and adapt their strategies to mitigate risks and maximize returns in the current climate.

The commercial real estate industry relies on lending services to keep the market moving. Traditional lending institutions such as banks and credit unions play a vital role in providing individuals and businesses with the necessary capital to purchase properties for both residential and commercial purposes. But due to the recent and drastic increase in interest rates, the landscape of commercial mortgage lending is undergoing a transformative shift, especially for traditional lenders.

When interest rates rise, it becomes more expensive for individuals and businesses to finance real estate purchases. The expected result is that the demand for properties should decrease, leading to a decline in property valuations and creating a buyer’s market across the board.

While this scenario has occurred in some areas of the country, buyers may be more hesitant to invest in real estate, which can also contribute to a slowdown in the market and put downward pressure on property prices. This situation can present challenges for existing real estate owners, who may have trouble selling their properties at desired prices or face declines in the values of their investment portfolios.

Real consequences

Higher interest rates have had a significant impact on new real estate development projects as well. Developers often rely on financing from banks and other sources to fund their projects.

As interest rates increase, borrowing costs for developers rise, making it more expensive to secure financing. This has resulted in a slowdown in new construction, fewer new projects being initiated and a potential decrease in the housing supply. A decline in real estate development activity can further exacerbate the issue of housing affordability and limit investment opportunities.

In a rising interest rate environment, some investors may opt to shift their money away from real estate and toward alternative options. Higher interest rates can make other investment vehicles (such as fixed-income securities, bonds or money market funds) more appealing due to their comparatively lower risk and potentially higher returns. This shift in investor preferences, especially when private money is involved, is reducing real estate activity and leading to a slowdown across many markets.

Foreclosures are also on the rise. Borrowers with variable-rate mortgages are experiencing an increase in their monthly payments. This can put pressure on cash flow, particularly if rental income remains stagnant or does not keep pace with the rising costs to borrow. Investors are reassessing their business strategies, but for some it may be too late if they can’t get the increased rent to mitigate the impact of a higher interest rate on their cash flow.

One of the key factors that influence future economic expectations is the likelihood of further rate hikes. Central banks around the world, concerned about inflationary pressures, are expected to continue tightening their monetary policy. This could lead to increased borrowing costs for individuals and businesses alike, with potential impacts to consumption and investment activities.

While rate hikes may help curb inflation, they also pose risks to economic growth and financial stability. The possibility of a minor recession remains a topic of discussion among economists. While recessions are a natural part of economic cycles, their timing and severity are uncertain. The concerns stem from factors such as geopolitical tensions, trade disputes and structural vulnerabilities within certain business sectors. But it’s important to note that economic forecasts are not infallible, and the resilience and adaptability of economies can often defy expectations.

Potential solutions

Next year promises to be filled with many of the same uncertainties, challenges and opportunities. The prospect of further rate increases and the potential for a recession are ongoing concerns. Whether or not rate hikes and economic turbulence continue, it remains essential for commercial mortgage originators to adapt and strategize.

Understanding current economic trends, policy decisions and market dynamics will be crucial. Follow reputable sources of financial news, attend industry conferences and engage with professional networks to gain insights. By staying ahead of the curve, originators can anticipate changes in interest rates, lending policies and market conditions. This knowledge equips them to make informed decisions and adapt their strategies accordingly.

For some mortgage brokers, this change can seem quite daunting. The reality is that these shifts are usually the best time to grow your business for the future, as it’s all about capturing market share right now. Sales are currently down in terms of volume, but they won’t stay that way forever.

Originators need to get their names in front of customers now more than ever. Instead of pulling back on marketing expenses, try doubling or tripling your lead-generation efforts and budget. Get creative and find ways to be in front of people. If originators aren’t brainstorming for at least an hour a week about how to connect with new or existing customers, they aren’t putting enough effort into marketing.

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Many potential investors are sitting on the sidelines or waiting for good deals. If the name of their originator is not the first thing an investor thinks of when they’re ready to get back in the game, then these originators have done themselves a disservice. This is the time to reengage any contacts from the past. Follow-ups, check-ins, and genuine care for past clients or potential customers can keep the pulse of your business going.

When COVID-19 struck, real estate agents and originators had to change and find new ways to meet their clients’ needs. Something similar is happening today. Even as liquidity in the market shrinks, there still are deals being funded. Make sure you’re the one funding them. ●

The post Find Ways to Adapt appeared first on Scotsman Guide.

Do Not Fear Hard Money

Ryan Walsh — Wed, 01 Feb 2023 10:00:00 +0000

The evolution of private mortgage lending in the past 15 years has certainly changed the landscape for real estate investors. The truth is that this world is very much like the Wild West. Hard money, also known as private money, simply doesn’t have the same rules as conventional lending.

Some states do require licenses for this type of lending, but even those do not have strict guidelines, like they do for conventional bank loans on owner-occupied properties. Once you enter the hard money investment world, the rules are almost purely dictated by the lender.

Many new investors, or people unfamiliar with hard money, think the term is given its name because it is difficult funding to get. There has been a push in the industry to change the hard money terminology, and to assuage the false assumption that these funds are overly expensive and locked behind mountains of paperwork. This marketing move to private money vocabulary won’t make much of a difference to seasoned investors and mortgage brokers, but it may be of use to newer borrowers and originators.

Hard money benefits

Due to the hard money moniker, many clients believe that they need to have a well-developed paper resume to obtain funding, and that the funding is very expensive. In reality, it is significantly easier to receive a hard money loan than a conventional bank loan. You don’t need an extensive resume and “expensive” is a relative term.

Compared to the 17% mortgage rates of the 1980s, hard money today at 12% is cheap. Of course, compared to the 7% consumer mortgage rates of today, 12% for hard money may seem expensive. But there are benefits to hard money that a conventional bank lender just can’t provide.

A bank can’t close in two weeks or, in some cases, as quickly as 24 hours. If your client wants renovation funds from a conventional bank, it can take a long time. These lenders need months to process and verify paperwork. Hard money lenders have operations that may be able to get you the funds required in one day. So, while you do pay a higher interest rate, a hard money lender operates at a much faster speed than the conventional bank lending model.

How it works

Every hard money lender is different and their parameters are determined by their source of funding. Many hard money lenders are brokers who either refer clients to investors who can fund the deal, or they underwrite and present the package to a bank, which accepts or declines the loan.

These are often referred to as secondary market funds. Sometimes banks will offer a portion of the financing to a brokerage, which deploys the capital for them, but they still have requirements that must be met. Clients are still getting bank or hedge fund money in the end, but these lenders only trust a broker to properly underwrite commercial real estate deals for them.

True private capital in hard money lending also can be found. With these lenders, the person you are speaking to is the person who will fund the deal with their own money. Friends and family are the ones backing these deals, so there are no approvals or paperwork involved outside of the partners who speak to you directly. For the borrower, the main difference between the two types of hard money lenders is in the paperwork requirements.

In hard money deals, funding is provided using a physical asset as collateral. This can be a home, a car, a watch or anything else that physically exists. This makes the lending process different than a conventional bank loan or an unsecured business loan. Hard money lenders in real estate are experts in underwriting the asset itself and determining its value to protect their money, rather than underwriting and determining the risk of the client. This is how hard money can provide faster and easier funding, because it uses the asset as the primary piece of collateral.

Because true private lenders do their own underwriting and approvals, they can give clients an answer in the first five minutes of a meeting. Tax returns aren’t required and credit isn’t important, although better credit does help to secure more funds. These private lenders don’t require many of the documents that other hard money lenders ask for because they are simply underwriting the real estate asset and making sure the client can successfully perform on the project.

Changing the name

These “hard” real estate assets give hard money its name, but this etymology has mostly been lost. So, what about the push to change the industry nomenclature of “hard money” to “private money”? The short answer is that it doesn’t matter to some industry veterans.

At this point, private money is mostly a marketing term. For years, true private lenders have used the “private” terminology because they exclusively use personal money, or funds from friends and family, with no bank or hedge fund money. This has served to separate these lenders from others that receive their funds from banks, or those that simply sell the notes and never provide their own funds.

From the real estate investor perspective, it often doesn’t matter if the lenders that focus on providing project funds label themselves as hard money or private money. It is the process of getting the loan that matters, and this process differs for every lender. A seasoned investor wouldn’t even care if it was called “Monopoly money,” because they know what they need and where to find it.

For newer borrowers, the naming change could make this funding avenue more approachable and appealing. Using the “hard money” moniker could potentially cause a lender to miss out on leads that believe hard money is not as good as private money. For lenders just starting out, “private money” may be the safer bet. But with either choice of name, the most important thing is the education and service provided to the client.

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For established private lenders, much of their business is by referral and comes from experts who are already in the field, so it doesn’t matter what the industry as a whole calls its products. Although the push to use “private money” may seem like it removes a marketing advantage for established lenders that use “hard money” in their company name, it won’t have a deep impact.

The naming change is aimed at investors who are new to the industry. Veterans of the business will always know what “hard money” is and where to seek it. And if changing the term to “private money” makes it less intimidating for new clients looking for loans, this change will help seasoned professionals as well. ●

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Shifting Markets Offer a Sense of Apprehension

Ryan Walsh — Sat, 29 Jan 2022 00:33:55 +0000

It was a wild and unexpected ride for the real estate industry in 2021, with mortgage lenders and brokers on both the residential and commercial sides of the business experiencing strong demand in nearly every category. And this year is looking to be just as crazy for market participants — but with a twist.

From one perspective, the mortgage industry is in the midst of an unprecedented shift. For the first time in many years, lenders are migrating their marketing and business models away from sales of single-family homes and the refinancing of mortgages in the residential sector to focus their resources on commercial properties. They are looking to lend on office space, multifamily housing and other commercial investment properties. This shift is due to the perfect storm of low interest rates, low inventory and high prices.

This shift began last year when commercial real estate assets were selling amid skyrocketing prices. Data research firm Real Capital Analytics reported that U.S. commercial real estate saw a year-over-year price increase of nearly 16% in October 2021, the largest such jump in the history of the company’s index. In the first 10 months of 2021, investors purchased $523.8 billion of commercial assets, up 70% from the same period in 2020. And according to research site Apartment Guide, one-bedroom apartments experienced a yearly rent-price increase of 21% in November 2021.

At the same time, residential home prices are showing signs of evening out after reaching year-over-year increases of about 26% in May 2021. By October of last year, annualized price increases had fallen to about 13%, according to Redfin.

Housing-market changes

For decades, the model for residential mortgage lenders has been to focus their marketing efforts on people between the ages of 30 and 40 who are looking to buy their first homes. This model worked great when interested homebuyers enjoyed medium or low interest rates, and there was a decent selection of reasonably priced homes to choose from in desirable areas.

What happens, however, when these same young adults are no longer interested in buying but instead are choosing to rent? Since the onset of the COVID-19 pandemic, the consumers who have served as the target audience for residential mortgage lenders are choosing to rent because limited inventory has meant that they can’t find their dream home — and they don’t want to overpay for a home that isn’t.

Some industry observers say that one reason for high home prices and a lack of inventory is the growing number of pension funds, investment firms and Wall Street banks that are snapping up available homes. According to Redfin, more than 18% of all U.S. homes sold in third-quarter 2021 were purchased by investors. The result is that banks are hedging their bets that renter households are going to grow exponentially compared to new homeowners. These lenders believe that their new clients will be investors and landlords who are qualified to buy high-priced homes with low-rate loans and turn them into rentals.

Looking for alternatives

With for-sale supplies of residential properties sinking to (or near) all-time lows across the nation, there simply aren’t enough prospective deals for residential lenders to sustain their personnel and overhead costs while keeping up with lower sales volumes. The logical business move is for real estate companies, banks and other lenders to shift their focus to the growing commercial-purpose space for rental housing.

It’s possible that a major price war will emerge as lenders race to provide the least expensive capital and the highest levels of leverage. Now is the best time to borrow money while there are lenders are competing for business. Any investor who has a good credit score and experience with previous rental properties is miles ahead of the game right now and will have banks competing for their business.

Many lenders will tell their broker partners that the outlook is good for the commercial space in 2022, but it’s likely that we are entering uncharted territory. This is the first time that many lenders have experienced such a massive and decisive business shift from residential to commercial lending. With the market as hot as it was in 2021, banks are finding that this is the correct business shift, but it’s still too soon to tell if this new model will continue to be profitable.

Spot warning signs

In the recent past, loans that could have gone sour have been saved by market prices that rose by 25% in less than a year. This also has allowed borderline deals to become good deals and for good deals to become home runs. Even vacant retail stores can be sold for a profit right now. But what will a cooling or bear market for real estate mean for those who have piled into the commercial space so quickly? No one knows, but we will quickly find out whether the infrastructure for commercial mortgage lenders is a house of cards.

The current “let the good times roll” vibe has the potential to come to a screeching halt. With low interest rates and high amounts of leverage, the current market has the potential to end badly for banks and private lenders that have been trying to fill a quota rather than make a smart investment. If lending institutions have been overleveraging their clients, it will quickly become apparent when a downturn arrives and defaults begin to occur.

Without enough money coming in due to lower interest rates and the simultaneous over-leveraging of assets, lenders of all types may have to take massive, unsustainable losses on investment properties that can no longer perform. If the market starts to cool, keep an eye out for more mergers and acquisitions as some companies begin to buy out other lenders. This may be the first indicator that overhead costs can’t be paid and that these lenders are getting out while they still can.

In the early days of 2022, the real estate market is looking new, exciting and heavily dependent on home-price increases staying steady or increasing rapidly to remain on its profitable trajectory. If the current pace continues, expect to see more rental homes popping up. On a more dour note, if the housing market turns into one that favors buyers, mortgage brokers and their clients can expect to see interest rates rise quickly and high-leverage loan offerings to start deteriorating.

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The extent to how high interest rates go — and how low leverage goes — will be dependent on how quickly the markets turn. If it is a slow, healthy shift back into a buyer’s market, the mortgage industry is likely to see a nice balance of commercial and residential lending by the end of 2022.

If it is a sharp shift to a buyer’s market, however, we may see a less severe version of the 2008 recession if banks turn out to be over-leveraged. It is best for mortgage professionals to stay vigilant. ●

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Playing Catch-up

Ryan Walsh — Tue, 31 Aug 2021 17:00:00 +0000

It is no secret that the U.S. housing market has been on fire. Despite the COVID-19 pandemic and ensuing recession, already record home prices rose year over year by double digits on a national basis this past summer. This also is true of homes sold to investors that intend to rent or flip properties for a profit.

Commercial mortgage lenders, however, have remained cautious. Even aggressive, asset-based private lenders that look most closely at the value of a property have been reluctant to approve high-leverage loans on homes that have recently seen huge increases in prices. Consequently, commercial mortgage brokers may wonder why lenders aren’t providing loans to help them and their investor clients catch up to the blazing market.

When the pandemic first appeared in March 2020, lenders feared the housing market would see a significant downturn. Anyone with money in a project faced several unsettling possibilities. Is the market going to go down? How long will distressed properties be tied up in foreclosure given the federal moratoriums and health mandates? Will an investor be able to carry the property for an extended period and pay both principal and interest if the home can’t be sold or rented within a reasonable time?

Everyone held their breath to see if another Great Recession-like crash was about to happen. Fortunately, so far, the opposite has occurred. Not only has the housing market avoided a downturn, it has rarely been stronger. Even investors that made bad bets on properties have been saved by a market on fire, with over-budget projects breaking even or turning a profit as values climbed.

Projects that ran into money problems and still needed renovations could be resold to other investors. Effectively, the past year has bailed out numerous investors in tight spots and has yielded unexpected profits to almost everyone involved in the single-family housing market. So, again, why aren’t lenders matching this hot market while things are going so well?

Every lender is different and some are definitely comfortable making high-leverage loans in a market with rapidly rising prices. The majority of commercial mortgage lenders, however, remain in a defensive posture. In general, lender confidence in this market does not match the rapidly rising sales prices seen around the nation. To explain their hesitancy to accept these new values, it is worth looking at some of the major areas that factor into a lender’s thinking when establishing a loan size.

In general, lender confidence in this market does not match the rapidly rising sales prices seen around the nation.

Remaining skeptical

Underwriting a deal involves many factors but, in the end, it boils down to accurately assessing the value of a project in the current market. In today’s market, record-high prices have combined with record-low inventory. To establish a value on a property, the typical investor will use the closest comparable property and expects that their lender will use the same information to approve the highest possible loan amount. But this isn’t what’s happening.

When home prices shoot up, lenders have a tendency to err on the side of caution. It takes time for lenders to trust the market’s new price point. Lenders are always worried about a price correction following periods of rapid price increases. This attitude can be viewed as a seasoning period for lenders that are looking for clues on the market’s true value. There is no hard formula, but given how sharply values have increased since June 2020, do not expect commercial mortgage lenders to use the latest comparable prices unless these properties can hold their current values until the start of next year.

The faster a price grows, the longer that a lender will typically need to confidently move to the new price point. For example, starting in 2012, home-price growth gradually accelerated, but lenders still felt confident in using the sales prices of comparable properties to determine value. In 2017, for instance, home prices rose by about 6%. This spike caused the typical lender to temporarily look back for a few months, but any delays were hardly noticed as the market began to steadily gain value again for the next three years.

The recent surge in prices reached a level unseen since 2006. The run-up doesn’t necessarily mean that the market is headed for a crash, but lenders are naturally going to be cautious. When home prices rise quickly and reach new heights, lenders typically prefer to use comparable sales of similar properties anywhere from six months to a year earlier. Lenders become defensive in extreme buyer or seller markets, and they stay conservative with underwriting until the market reveals where it is headed.

Recouping properties

Aside from closely watching the course of home prices, lenders also are concerned about foreclosure trends. During the COVID-19 crisis, the federal government and several states placed moratoriums on evictions and foreclosures. Since each locality has tended to implement its own rules during the pandemic, the foreclosure process has largely been outside of a lender’s control and it remains in flux. This has made it difficult for lenders to estimate the cost to recover an asset, if need be.

When foreclosing on a property, lenders also need to account for legal fees, taxes and carrying costs that go into a typical foreclosure. Early this past summer, it was still unclear how long foreclosure proceedings would take in many cities and whether the residents of these properties could be evicted so the properties could be resold. There also is a backlog of foreclosures that dates back to 2020, further complicating the calculation.

Additionally, on behalf of their clients, attorneys can use pandemic-era laws that forestall evictions or foreclosures, so foreclosure cases that were once considered routine aren’t likely to be so easily resolved. In response, many commercial mortgage lenders are tightening their requirements on borrowers by demanding higher credit scores, more experience and higher reserves than in pre-COVID days. Borrowers with lower credit scores will likely need to put in significantly more equity or show other mitigating factors. Otherwise, lenders need assurances that they can weather a multiyear foreclosure process without losing money, should the process go sideways.

Although much of the country has reopened, and some foreclosures and tenant evictions are being allowed again, lenders will need to see foreclosures and evictions moving through the system for at least six months before believing the process is returning to pre-pandemic norms. With so many municipalities adopting their own policies, there are too many unknowns. Also, even though progress has been made with vaccines, the health crisis has yet to end and there remains a possibility of more lockdowns. Lenders are factoring all of these issues into their calculations when assessing a deal.

The faster a price grows, the longer that a lender will typically need to confidently move to the new price point.

Hidden costs

Lastly, lenders also are troubled by rising costs for construction materials. Typically, homes sold to investors need substantial renovations, so lenders must factor any spikes in construction costs into the overall project cost. Lumber costs rose by 180% from June 2020 to April 2021. Although lumber is by far the fastest-increasing material cost, almost all materials used in renovations or new construction have increased by at least 20% in the past year. Whether vendors are inflating prices to make additional profits or there is a legitimate material shortage as a result of supply problems caused by the pandemic, the fact is that the typical home renovation costs more than it did a year ago.

So, a renovation budget that normally would cost $40,000 now is closer to $50,000. Mortgage brokers and investors, however, often are not accounting for these added costs when they approach lenders. Prior to COVID-19, lenders would normally account for a 10% variable in renovation costs due to unexpected events, but now that variable is about 20%.

Even projects that have gone smoothly are winding up 10% to 20% over budget due to rising building-material costs. Until these costs show signs of slowing down, lenders need to account for this additional expense in their maximum loan size. As a result, your investor clients may have to contribute more equity toward the overall project costs.

While it does appear that the country is slowly returning to pre-pandemic norms, expect many commercial mortgage lenders to take some time before their behind-the-scenes processes match the current market prices. Wait for material costs to stabilize, for foreclosure and eviction courts to no longer be behind schedule, and for home-price growth to cool off to a more steady level. When these things happen, lenders will begin to catch up with the market. ●

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Mine the Hard Money Landscape

Ryan Walsh — Sat, 14 Sep 2019 16:38:21 +0000

Commercial mortgage brokers have many choices when searching for the right loan fit. The default choice may be to seek conventional financing.

Hard money is another option, but navigating this world sometimes scares even the most experienced mortgage brokers and investors. Although exploring options within the hard money realm may seem daunting, hard money loans hold clear advantages over conventional financing, under certain scenarios.

Closing loans quickly

Speed is the greatest advantage of hard money. It can take months to get a conventional loan approved. Even when the investor has a prior relationship with the lender, a conventional lender will tend to start the approval process from the beginning each time the property requires a loan.

Hard money lenders move much more quickly. The borrower can receive funding within a time frame of 24 hours to four weeks. This speed varies by each hard money lender, and it depends on how they evaluate the property and the borrower. An asset-based lender will primarily approve a loan based on the property’s resale value, and often does little investigation into the borrower’s history.

A borrower, for example, may need $100,000 to fix a property that has an after-repair value of $500,000. An asset-based lender can close quickly on that loan, knowing that the property will likely sell for more than $100,000 regardless of what the borrower does with the property.

Other hard money lenders, however, will evaluate the borrower’s credit history and experience, and will follow similar processes as conventional loans. In most cases, however, these lenders are not as strict in their evaluations as conventional lenders, and the loan can typically be completed within four weeks.

Room for flexibility

Hard money lenders also tend to have room to be creative, and can design loans to fit specific properties more easily than conventional lenders. The use of cross-collateral is one example. Cross-collateral allows the borrower to use equity from a property they already own for a downpayment on the purchase of another property.

Many hard money lenders will not finance the entire property purchase and will require a downpayment to ensure that the borrower holds some skin in the game. Typically, the downpayment will be at least 20 percent of the purchase price. This presents a considerable hurdle for an investor, particularly as the loan size rises.

To help investors clear the hurdle of a downpayment, hard money lenders will often place a lien on the borrower’s second property and will accept that equity as cash toward a downpayment. If there is enough equity in the property used as cross-collateral, a commercial hard money loan can be structured so the monthly payments are rolled into the combined loan balance. The borrower can conceivably withhold any payments until the investment property is sold.

The hard money lender also tends to be more invested in the property itself and will often work with their borrowers to gather information on the local property market. A conventional lender’s primary goal, conversely, is to ensure that the borrower will pay back the money regardless of what happens to the property.

An asset-based lender’s primary goal is to determine if the money will be paid back regardless of what happens to the borrower. This protects the borrower from entering into a financial disaster. The lender simply won’t provide the funds if the borrower is asking for more money than the lender is comfortable lending for that specific property.

Hard money costs

Hard money loans cost significantly more than conventional loans. Although hard money loan prices will vary from state to state and lender to lender, on average, the interest rate on a hard money loan ranges from 10 percent to 18 percent, whereas the interest rate on a conventional loan is about 5 percent to 9 percent.

Hard money financing also can be structured as a so-called “balloon loan,” which can reduce the monthly payment. Balloon loans are typically interest-only loans in which the principal is paid in a lump sum by the end of the loan term. Balloon loans are common in commercial real estate, where property owners often are not trying to pay off the loan balance. Interest-only loans are useful for home flippers, who typically purchase homes, renovate them and then resell them within a calendar year.

Let’s assume, for example, a fix-and-flip borrower received a 12 percent interest-only loan for $100,000 and a 12-month term. This means the borrower would pay 1 percent per month for 12 months, or $1,000 per month for 12 months.

If the borrower stays in the loan for 12 months, they would pay the full 12 percent of $12,000. If the borrower is able to fix, flip and sell the house within six months — the average time it takes to complete a home flip — then the payback is only 6 percent, or $6,000. An interest-only loan, in this case, reduces the borrowing costs and encourages home flippers to be faster and more efficient with their projects.

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Commercial banks and conventional lenders tend to not have an appetite for deals that need to close quickly. Similarly, conventional lenders also tend to shy away from short-term loans and loans for investment properties, where the borrower could sell or refinance the property within a few months. Conventional lenders also are wary of offering certain loan products, such as construction-only loans. In these cases, savvy investors and commercial mortgage brokers should consider mining the territory of hard money.

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