You Are Closing on A Property and The Bank Backs out – Now What?
Imagine being a real estate investor working on the biggest deal of your life. Everything is going swimmingly as you approach closing. But a couple of days before, the bank backed out. Now what? If this is not just a fictional scenario to you, perhaps you already know the answer: rescue capital.
A person without any experience in commercial real estate might not even consider the possibility of a bank backing out of a deal. But according to Salt Lake City’s Actium Partners, it happens all the time. Banks back out for a variety of reasons. But companies like Actium step in with rescue capital.
Rescue Capital Is Hard Money
So, what is rescue capital? It is hard money packaged as a loan to help a borrower meet financial obligations after another lender has backed out of the deal. Rescue capital is critical to real estate investors whose business opportunities can move at lightning speed. Investors cannot afford to move slowly, or they risk losing out.
That is exactly the risk an investor faces when a bank jumps ship. It would not be such a big deal if a bank approved an acquisition loan but then backed out several months before closing. However, that’s not how commercial real estate deals typically happen – especially when investors are involved.
Investment deals are done in days or weeks, not months. An investor putting an offer on commercial property is usually expected to close in no more than a week. So when a bank backs out, an investor has just days to come up with a solution. That is where rescue capital comes in.
It Delivers as Promised
The whole point of rescue capital is explained in the name itself. Rescue capital is funding that comes in and saves the day. It rescues a deal on the verge of collapse. No wonder it is so valuable to real estate investors. Likewise, hard money lenders capable of providing rescue capital are equally valuable.
Rescue capital delivers as promised. When a deal is on the verge of collapse because financing either cannot be arranged or falls through at the last minute, rescue capital packaged as a hard money loan saves the day.
It Is Short Term Funding
Hard money and rescue capital do have their own unique characteristics. At the top of the list is the short-term nature of such lending. If it helps, think of rescue capital as similar to emergency first aid provided by an EMT.
The EMT essentially rescues someone experiencing a life-threatening injury or illness. But that person does not render long term care. Rather, the EMT provides short term aid. Long-term care is the hospital’s responsibility.
Likewise, rescue capital is a short-term solution to an immediate need. Ditto for all types of hard money and bridge loans. A typical hard money lender does not like to offer terms beyond 24 months. There are rare circumstances when a lender will go longer, but 24 months or less is the norm.
In a rescue capital situation, a real estate investor would use a hard money loan to save a deal and get to closing. Shortly after closing, he would begin working on long-term financing. A long-term loan from a traditional lender would be used to pay off the short-term rescue loan.
In commercial real estate investing, speed is everything. Unfortunately, banks backing out of deals at the last minute disrupt timelines and lead to lost deals. The best way to save those deals is with rescue capital from a hard money lender.
Understanding the Risks of Traditional Lending
Traditional banks are often the first choice for funding real estate investments. However, their rigorous requirements and long processing times can be a major hindrance. They assess risks conservatively and may back out if any element of the deal changes or appears risky.
This conservative approach, while safeguarding the banks, can be a significant obstacle for real estate investors needing swift action.
The Impact of Sudden Withdrawal
When a bank withdraws from a deal, it can leave the investor in a precarious position. Not only does this jeopardize the deal, but it also affects the investor’s reputation. In the fast-paced world of real estate, reliability and the ability to close deals quickly are crucial for success. A bank’s last-minute withdrawal can have long-lasting impacts beyond the immediate financial strain.
The Benefits of Rescue Capital in Real Estate
Flexibility and Speed
Rescue capital lenders, unlike traditional banks, offer greater flexibility. They focus more on the asset’s value and the deal’s potential rather than the borrower’s credit history. This focus allows for quicker decision-making and processing, which is essential in time-sensitive real estate transactions.
Building Investor Confidence
With the backing of rescue capital, real estate investors can operate with greater confidence. Knowing that there’s a reliable financial backup plan enables them to make bolder offers and close deals faster.
This confidence can be particularly advantageous in competitive real estate markets where speed and decisiveness are key.
The Role of Hard Money in Rescue Capital
Hard money loans are asset-based loans where the property itself serves as collateral. These loans usually have higher interest rates and shorter terms than traditional loans but offer the advantage of speed.
Hard money lenders are typically more concerned with the property’s value and the investment’s potential rather than the borrower’s creditworthiness.
Ideal Situations for Hard Money Use
Hard money is particularly useful in situations like property flipping, where the investor plans to renovate and sell the property quickly. It is also beneficial for investors looking to purchase a property at auction or those needing to act swiftly to secure a lucrative deal.
Strategies for Navigating Rescue Capital and Hard Money
Evaluating Lenders and Terms
When seeking rescue capital or hard money loans, investors should diligently research and compare lenders. It’s important to understand the terms, interest rates, fees, and the lender’s track record in the industry. Selecting the right lender can make a significant difference in the success of the deal.
Exit Strategy and Long-Term Planning
Since rescue capital and hard money are short-term solutions, having a solid exit strategy is crucial. Investors should plan for refinancing with a long-term loan or have a clear strategy for selling the property to repay the loan within its term. This planning helps avoid financial strain or loss of the property due to inability to meet the loan’s terms.
Conclusion
A Vital Tool for Real Estate Success
In conclusion, rescue capital and hard money loans are invaluable tools for real estate investors. They offer a solution to the unpredictability and limitations of traditional bank financing. By understanding and effectively utilizing these financial resources, investors can navigate the challenges of the real estate market and capitalize on opportunities with speed and confidence.
