A commercial real estate deal can look like an absolute home run on paper. The purchase price is attractive, the property is in a high-growth location, and the estimated ROI looks hard to beat. Yet when presented to a hard money lender, the answer is ‘no’.

Here is the million-dollar question: why do real estate deals that look so good initially fall apart when presented to private lenders?

There is no single answer. But clues are found in the way hard money lenders do business. Where conventional lenders make approval and underwriting decisions based on things like credit scores and balance statements, private lenders are interested in asset value and equity. A Utah hard money lender (actiumlending.com/hard-money-loans/utah), like Actium Lending, might look at a loan application and not see the same positives the investor sees.

3 Things That Spell Trouble for Lenders

To be clear, hard money rejections are normally reserved for novice investors who do not understand how things work. Once an investor gets a few transactions under his belt, he tends to be more than capable of packaging deals lenders are happy to take on. Time and experience pay off in this regard.

According to Actium Lending, the three most common reasons for deals being rejected are:

1. Insufficient Equity

It is not uncommon for novice investors to assume that built-in equity eliminates the need for a down payment. A good example is purchasing a property priced well below market value. Maybe it’s a distressed property the current owner is trying to unload. But because the investor is getting it for such a good price, he might assume he doesn’t need to bring a down payment.

Reality says otherwise. Hard money lenders require direct cash equity. They require investors to bring a down payment to the table – and for a very good reason: requiring that investors put some skin in the game significantly reduces the lender’s risk. Borrowers are expected to contribute meaningful capital to ensure continual alignment throughout the loan term.

2. Unrealistic Exit Strategy

Lenders typically structure Utah hard money loans as interest-only loans. They are also very short. Terms rarely go over 24 months. To accommodate both loan structure and short terms, lenders require a reasonable exit strategy. They want to know the borrower’s plan for repaying the loan at its maturity date.

One of the more common exit strategies for hard money loans structured as bridge funding is to secure a traditional refinance package after closing. The borrower goes to his bank and is able to refinance because he now has a stable property. It is a reasonable exit strategy that works well most of the time.

Without a reasonable strategy, the lender’s risk is too high. So if there is no rock-solid plan in place to repay the loan when due, the deal will be rejected.

3. Lack of Cash Reserves

Hard money lenders are not interested in being landlords. So they expect that borrowers will be capable of servicing their debts after closing. A borrower with no reserves could exhaust his cash by making the necessary down payment. But then what will he use to make monthly interest payments and cover property holding costs?

Not the Norm, But It Does Happen

Hard money loans in Utah are responsible for driving commercial property transactions in the state. Loan rejections are not the norm primarily because there are so many experienced investors who continually come back to the same partners for future financing. Yet rejections still do happen from time to time. If you are a new investor in Utah, you now know why.