FAQs for Borrowers
Private money, or hard money financing, is non-conventional financing. The funds are not coming from a federally insured source, as in a bank or credit union. Instead, a private money lender is usually an entity or individual not regulated by the federal government, which allows for increased flexibility and common-sense underwriting to accommodate a borrower’s specific financing needs.
Wise investors look at the big picture when analyzing the feasibility of a real estate investment and may consider private money as a tool to accomplish their goal. However, often the cost of missing a great investment opportunity far outweighs the cost of private money.
Private money works best for short-term, bridge financing opportunities when value is created or where time is of the essence in funding a transaction, along with a viable exit strategy as in a refinance with conventional financing or sale of the property.
Private money is not the optimal financing source for every real estate investment. However, if private money will allow you to quickly pursue an excellent investment opportunity where the added value exceeds the cost, private money should be considered.
Here are four scenarios where private money financing makes sense:
- Timing: When timing is critical to accomplish your goal.
- For example, a buyer was purchasing a property, and all contingencies were removed, and the conventional lender could not meet the deadline to close. The consequence of not closing the transaction was the loss of the buyer’s non-refundable deposit, which exceeded the cost of using private money financing; therefore, using private money to fund quickly made sense.
- Added Value: When there is an opportunity to purchase a property at a below-market price or a potential to create value well above the initial cost.
- For example, a buyer purchased an apartment where all the units were rented at below-market rents. With some slight renovations after the acquisition, the rents could be increased substantially, creating value that far exceeds the cost of using private money financing.
- Streamlined Loan Process Desired: When a borrower does not want to go through the bureaucratic process of obtaining a conventional loan, which requires extensive paperwork and intrusive due diligence by the lender.
- For example, a borrower owns numerous properties with multiple entities where a conventional lender requires extensive amounts of information, creating an administrative hassle for the borrower. Therefore, the borrower would rather pay the higher cost of private money than go through the stress of getting a conventional loan.
- In lieu of Bringing on a Partner: When a borrower has a choice to either give up equity ownership to additional partners to get conventional financing or obtain private money financing.
- For example, to qualify for a conventional loan, the borrower needed to have excess cash reserves, which the borrower did not have. Therefore, the borrower could bring in a partner taking equity ownership in the property or go with private money financing that was less expensive than giving up ownership equity.
Don’t eliminate a great investment or refinance opportunity because the financing costs may be higher than you are used to paying because private money financing is usually a bridge loan. The higher cost is only for a short period of time.
If you have the chance to acquire or refinance an asset where timing is critical, there is value created, and conventional financing is not feasible. Consider private money financing as a way to accomplish your goal.
The right real estate financing can make the difference between a good project and a great one. In today’s economic environment obtaining the right loan with the best lender can be a challenge.
You can speed up the loan process by asking the right questions upfront when searching for the right lender.
Before contacting a lender, the first thing you need to do is write out your specific loan request and the purpose of the loan. If it is a bridge loan, know ahead of time, the exit strategy, or how the loan will be repaid.
For assistance in getting your loan, you can always utilize an experienced mortgage broker who will guide you through the process to find the best lender for your specific request.
Here are questions to ask the lender when searching for a commercial real estate loan:
- Are you dealing with a direct lender or a mortgage broker? Often brokers pose as lenders, so know if you are dealing with a direct lender or a mortgage broker.
- What loan programs do they offer? e.g., bridge loans, construction loans, land loans, permanent loans.
- What is the lender’s preferred loan type?
- What’s the minimum and maximum loan amount to anyone borrower? What is their preferred loan amount size?
- What are the loan fees and closing costs?
- What are the upfront deposits to start the loan process? Refundable or nonrefundable?
- What are the prepayment penalty options?
- What are the interest rates? Fixed rates/variable rate options?
- Are there interest-only options? What are the amortization terms, loan term?
- Can the rate be locked? And if so, how long of a lock, and is there any additional cost?
- Is the loan recourse? And is nonrecourse an option?
- Are impounds required for insurance and taxes?
- What is the specific financial information required? e.g., financial statements, tax returns, bank statements.
- Does the lender have a minimum net worth requirement?
- Is there a minimum liquidity requirement?
- Is there a minimum credit score required?
- What type of past credit issues will hinder the approval process? e.g., bankruptcy, foreclosure.
- What type of borrower real estate experience is required? e.g., existing property ownership, property management, development experience, construction.
- What is the best way the lender communicates with the client? e.g., email, phone, texting.
- What type of properties do they loan on? And what property types do they prefer? e.g., multi-family, office, retail, industrial, residential, mobile homes, land improved, land unimproved.
- What is the geographical lending area?
- Does the lender underwrite to global cash flow or only the individual property cash flow?
- What is the maximum loan to value ratio for the specific product type?
- What is the maximum loan to cost ratio when dealing with construction? Is the land accounted for at cost or market value when calculating the loan to cost ratio?
- What are the preleasing requirements for construction loans?
- What debt-service-coverage ratio do they require for the different product types?
- If it is an income property, does it have to be seasoned, and if so, how long?
- What types of third-party reports do you need, and what do they cost?
- Do you get copies of all the third-party reports?
- What is the lender’s approval process?
- Who approves the loan? e.g., a committee? A specific credit officer?
- What is the timing from application to funding?
- Do they require a specific title company and escrow?
- Does the lender service their loans?
- Do they require annual updated financial information on the borrowing entities and guarantors?
It doesn’t matter if you are looking for your first commercial real estate loan or an experienced real estate investor, asking these questions can help guide you faster to the right lender for your specific real estate transaction.
As a direct lender, we can help you with smaller bridge loans through Fidelis, and if the loan request does not fit Fidelis, we can help you find the right lender for your deal.
- The western United States, however, southern California with a focus on San Diego County is our primary lending area.
- We don’t charge upfront fees; we only get paid when we perform.
- We are a Limited Partnership and a direct portfolio lender. We do not have any outside investors or lenders who are involved in our underwriting or fund management decisions. We are beholden to no one but our borrowers and our Partners; it must be a win-win, or we are not interested.
- You deal with the decision-maker directly.
- We quote a loan rate and terms usually on the day of inquiry and can close a loan within several days of the loan request.
- We can creatively structure a loan in “out of the box” situations to accomplish a borrower’s goal. We typically do our own in-house appraisals saving the borrower upfront costs.
- We do not charge interest on undisbursed funds.
- We employ transparent pricing. Our loan quote is our commitment, there are no bait and switch tactics .
- Our pricing is competitive, fair for private money financing in San Diego.
- Pertinent property information (e.g., purchase agreement, location, tenants, rent roll, bldg. sq.ft., age, land area, cost, improvement budget, operating statement, etc.)
- Physical property inspection
- Digital photos, if available
- Personal Financial Statement with real estate schedule (or 1003 loan application)
- Borrower’s real estate investment/development experience
- Borrower Credit Score (if not available, we will order the report)
- If the borrower is a corporation, LLC or partnership, all the necessary entity documents are required.
- Yes, we do make 2nd Trust Deeds on a limited basis.
- Target is no more than 15% of the loan portfolio will be in 2nd trust deeds.
- The 1st trust deed loan must be of a size that Fidelis would fund if it were to initially have made the loan.
- The overall LTV ratio including the 1st trust deed loan commitment and the 2nd trust deed is similar to the maximum LTV ratio for a 1st trust deed.
- If the property is a rental property all the debt (including the 1st & 2nd) must be serviced by the net operating income with an acceptable debt service coverage ratio.
- The 2nd Trust Deed loan term must be less than the maturity date of the note secured by the 1st Trust Deed.
- A line of credit is a loan facility that allows the borrower to use the loan commitment up to three times during the loan term (usually 12 months) without paying additional loan fees beyond the initial cost for the loan commitment. Each loan disbursement within the line of credit is individually underwritten and secured accordingly using our typical loan underwriting guidelines.
- A line of credit is best used for a borrower who is purchasing and selling multiple properties in a short period of time.
- For example: $500,000 Line of Credit (LOC) 3 points, 12 month term, no prepayment penalty. Borrower would pay the loan fee on the $500,000 commitment at closing (whether fully disbursed or not at loan closing) and could use the $500,000 commitment up to three times during the 12 month period. The only additional cost would be $395 for each additional property secured by the LOC through a loan modification and the typical title insurance and recording fees for each trust deed recorded.
- If the borrower utilized the line of credit to its full potential it could effectively reduce the loan fee to 1pt. Since the borrower paid 3 points on the full loan commitment at closing and the commitment could be used two more times beyond the initial loan commitment with no points, thereby reducing the overall fee to 1 pt.
A borrower that has real equity in other properties and is short on cash can use that equity like cash for a down payment to purchase another property or refinance a property. For example in the case of a refinance if the leverage was too high on the individual property for a straight refinance, the additional real equity from another property or properties cross collateralized may be used like a cash pay down to satisfy the underwriting guidelines.
- Yes and No.
- Yes, there are situations when a borrower has bad credit, and we will make the loan. However, there must be a story and legitimate reason to be acceptable.
- No, if the borrower is chronically delinquent on mortgages and does not pay their routine debt obligations on time.
- We only want borrowers who are administratively responsible for following through on satisfying their debt obligations in a timely manner.
- If the borrower does have bad credit, we will look beyond the credit score and find out why the borrower’s circumstances have led to bad credit.
- Bad credit will not negate a good loan to a good borrower on a good real estate investment.
Yes, the Fund has established a loan loss reserve with a target of 2% of total loan commitments to further enhance the Fund’s investors’ security. The allowance is increased by provisions for losses charged against income and is reduced by charge-offs, net of recoveries. A charge-off is determined by the General Partner and recorded when a loan is deemed uncollectible. Any allocations to the loan loss reserve are accounted for monthly in the expenses and are allocated pro-rata to the investor’s capital accounts. The loan loss reserve is deemed equity in the Fund and accessed at the sole discretion of the General Partner. Limited Partners have no rights to funds allocated to the loan loss reserve upon withdrawal of capital from the Fund.
- No, we typically do not charge upfront fees for the lender. However, an upfront deposit may be required on larger, more complicated loans where a significant amount of due diligence is required. This fee would go towards the loan closing costs if funded, and if the lender elected not to fund the loan, the deposit would be returned to the borrower. Generally, any upfront fees are to pay anticipated third-party fees such as title, legal, environmental, appraisals, etc.
- Our interest rates are determined by a combination of economic conditions, market competition, the riskiness of the investment, and the value of service (speed) provided to our client.
- Bridge loan
- Rehab loan
- Line of Credit (limited basis)
- Construction loan
- 2nd Trust Deed loan
- 1-2 Year Term (interest only)
- Interest only, interest charged only on amount disbursed
- 12-24 month term.
- High 8% interest rate range.
- Max 60%-65% LTV on commercial properties and 70% on residential properties
- No prepayment penalty
- Loan Processing & Servicing Fee $900 – $1995 depending on the term of the loan
- Loan Document Fee of $900 for one property plus $150 for each additional trust deed
- All other closing costs charged by third parties, i.e., title, escrow, appraisal etc.
- We utilize three basic guidelines for determining the loan amount depending on the loan type and property circumstances:
1) Loan to Value Ratio in the maximum 60% -75% range (depending on the property type)
2) Loan amount is calculated by taking either the actual or projected Net Operating Income (NOI) and applying a (Debt Service Coverage Ratio) DSCR min. 1.05-1.10:1 using The Loan Company start rate & 30 year amortization.
3) Loan To Property Cost at a maximum in the 70-80% range (depending on property type and the added value)
Specific scenarios on how the above guidelines are applied:
- Suppose the purpose of the loan is to purchase or refinance a property where the exit strategy is to sell the property in the short term (usually within 6 months or less) with no real added value. In that case, the loan to value ratio will drive the loan amount.
- If the purpose of the loan is to purchase or refinance a property where the intention is to hold the property as a rental or investment property long term with no real added value, the net operating income (DSCR) will drive the loan amount.
- If the purpose of the loan is to purchase or refinance a property where the intention is either to hold or sell the property with real value added, e.g., remodel, construction, entitlements, zoning etc. then the Loan to Cost ratio will also drive the loan amount along with DSCR if held long term and LTV ratio if held short term.
- Construction loan – Ground up construction – 70-75% LTC with a max. 60-65% LTV ratio on the improved value. If the intention is to hold the property as a rental or investment property longer term the DSCR will also drive the maximum loan amount.
- Rehab loans / (fix & flip residential properties) – If it is a purchase, the initial disbursement maximum will be 75% of the purchase price with a maximum loan commitment of 65% of the after repair value (ARV). The holdback for improvements will be calculated by taking the maximum of 80% of the total cost (purchase price plus capital improvements not including closing & financing costs) less the initial disbursement investment. Therefore, the maximum loan commitment is either 80% of the total cost or 65% of the ARV, whichever is lower.
Example (fix and flip loan): The purchase price is $400,000. Capital improvement budget is$40,000 for a total cost of $440,000. After repair value (ARV) is $520,000. The maximum loan commitment is 80% of the total cost or 65% of ARV, whichever is lower. Therefore, the maximum loan amount is 65% of $525,000 or $341,000, 77% of the total cost.
- There is no exact formula in determining the loan size, and on occasion, certain circumstances will support deviating from the guidelines. In general, the above guidelines are followed in determining the loan amount for each loan request.
- Yes. Brokers find Fidelis to be an excellent source for smaller, short-term, bridge real estate investment loans in San Diego County. Uniquely, Fidelis offers short-term bridge loans with quick decisions, competitive rates, and flexibility, making it convenient not only for the borrower but the broker as well. In addition, we accommodate borrowers’ unique loan requests, allowing brokers to close more deals. We emphasize long-term relationships with our brokers and expect to do repeat business with brokers of mutual integrity. We don’t require our brokers to go through an extensive approval process to work with us. However, we only deal with brokers who maintain the same high standards of integrity and honesty as we do. It is our experience that once brokers realize the benefits we have to offer as a lender, we not only close their transactions successfully, but we gain a long-term relationship.
- No, Fidelis does not service their loans. We have decided to focus on originating, underwriting, and making secure loans rather than trying to be an expert in loan servicing. Therefore, Fidelis has delegated servicing loans to a third-party local loan servicing company, Del Toro Loan Servicing. Partnering with an expert third-party loan servicing company makes the process flexible, seamless, and hassle-free for the borrower. In addition, working with an established, recognized loan servicing provider with a track record of success can help keep the loan servicing consistent and predictable.
- Yes, on most occasions. However, this requirement can be waived on an exception basis where there is a legitimate reason that would prohibit the loan closing. To offset the lack of a personal guarantee, the loan must include a borrower and sponsors who; are financially strong with excellent credit, have an abundance of equity in the collateral, have excellent character through past experience or evidence from a trustworthy referral.
- No and Yes. No, we usually do not require an appraisal on smaller single-family investment properties; these valuations are done in-house at no cost to the borrower. However, we do require an appraisal on commercial and special purpose properties and larger single-family investment properties. In those instances, the borrower will need to pay for the appraisal.
- Fidelis Private Fund, LP is a Limited Partnership comprised of numerous limited partners that provide the capital to fund the loans. Fidelis also utilizes a small line of credit to manage cash flow. As a result, Fidelis maintains sufficient liquidity to meet both Limited Partner and borrower demand.
- Yes, if a loan request is not a bridge/construction loan and not a fit for Fidelis, we broker the loan to the lender that best fits the borrower’s request.
- Both commercial and residential loans.
- Yes. On a purchase, the existing third party escrow can be used for closing the loan. On a refinance, we will open escrow with a separate third-party escrow.
- Yes. ALTA Title Policy will be issued along with associated required endorsements applicable to the type of loan funded.
Most income-producing commercial or residential investment property is allowed including but not limited to the following:
Apartment Retail Centers Resorts Auto Body Repair Multi-family Mobile Home Parks Restaurants Industrial Self Storage Facilities Hospitality Hotel/Motel Mixed-Use Owner Occupied – Commercial Office Buildings Liquor Stores/ Taverns Convenience Stores Special Purpose Properties SFR – Non-owner occupied Only New Residential Development Gas Stations Conversions Warehouse Pawn Shops Car Wash Medical Office Research & Development 1-4 residential Units/Non Owner Occupied Single Tenant properties Improved Land – income producing
Property types NOT allowed as security for a loan (without additional approved cross collateral)
- Vacant unimproved land.
- Owner-occupied residential property. This includes single-family residences or any property where the owner occupies the property or a portion of the property as a personal dwelling. For example, an apartment complex where the owner lives in one of the units as his primary residence would be considered an owner occupied residence and a prohibited property for Fidelis to lend on
- Leasehold interest properties, except where there is a long term lease in place and some sort of acceptable cross collateral and exit strategy
- Three common reasons a borrower may come to Fidelis for a loan:
- Timing – The Fund can close a loan in a matter of days, and often borrowers don’t have weeks and months to wait to acquire or refinance a property.
- Added value – Often, properties are purchased or refinanced where the property is in transition, and there is a considerable amount of either inherent or future added value in the property that conventional lenders don’t recognize.
- Ease of Doing Business – Cumbersome underwriting and extensive documentation requirements of conventional lenders often prohibits a borrower from either wanting a traditional loan or qualifying for the loan.
- Three common reasons a borrower may come to Fidelis for a loan:
Yes and No. On an exception basis, Fidelis may provide a small line of credit of $500,000 or less with a limited term of 12 months or less.
- You deal directly with the decision-maker who approves the loan.
- We respond quickly with immediate due diligence.
- Minimal borrower information is required.
- We are local and typically do not need a full appraisal on the property.
- We have excellent relationships with escrow and title companies
- We wire funds directly to the title company, which coordinates with escrow to fund the loan.
- EASY: The process is easy and pleasant and you avoid the hassles associated with getting a conventional loan
- QUICK: The loan closes more quickly.
- SERVICE : We provide personal customer service from origination, processing, closing, funding and servicing the loan through payoff.
- QUALITY: A wise borrower understands the opportunity cost of using private money. A wise borrower looks at the big picture and compares the overall profit potential using private money against the cost of not getting the deal done at all. Using private money can often eliminate obtaining a partner that would normally cost more than the additional financing costs of a private lender.
- Fidelis charges a loan origination/extension/assumption fee and a loan documentation/modification fee.
- The loan fees range from 1% to 2% depending on whether it is a new loan, modification, extension or an assumption and whether or not there is a prepayment penalty..
- The loan Processing fee ranges from $995 to $1,995 for new loans, and the loan modification/extension fee on existing loans is $385, with all fees charged at closing. The fees are subject to change for more complicated transactions with higher assessed risk.
- Loan documentation fee ranges from $900 to $1,200.
- Other fees charged are third-party costs, collected by Fidelis (not paid to Fidelis) and remitted on behalf of the borrower. Some examples are escrow fees, title insurance, tax service fees, recording fees, legal fees, wire fees, and appraisals, if applicable.
The sequence of steps, from the time a loan request is received to the time the loan is closed, the loan proceeds are disbursed, and the loan amount is placed on the Fidelis’s books as an asset.
We complete a loan processing check list that includes, but is not limited to, the following:
- Order a property profile
- Complete a real estate due diligence (i.e. property inspection and valuation analysis)
- Open escrow (if escrow is not already open)
- Order preliminary title report (if not already ordered)
- Follow up on items requested from borrower (financial statements & credit report etc.)
- Conduct an environmental site assessment through the online website Geo Tracker. Review borrower financial and credit information along with property due diligence information.
- Obtain property insurance
- Submit loan package to attorney to prepare loan documents
- Loan documents are prepared
- Loan documents are signed and notarized through escrow
- Funds are wired directly to the Title Company
- Trust Deed is recorded at the County Clerk’s Office
- Loan is funded to the borrower
- Loan servicing is set up with our third-party loan servicer – Del Toro Loan Servicing
No, Fidelis does not charge prepayment penalties.