Buying and selling commercial real estate takes time and commitment. While lenders and real estate agents keep track of the contingencies during a negotiation, the real estate market may offer that next perfect commercial property. What happens to sellers who find their next purchase but might have assets tied to the property they are selling? Is it possible to move to a new property before selling the previous one?
Yes. A bridge loan, or a short-term loan that offers working capital while long-term financing or property sales get finalized, might be the way to get to the closing table. This type of loan can also be referred to as interim financing, gap financing, or a swing loan.
In fast-moving markets, bridge loans give the borrower the leverage and capital they need to make their purchase offer stand above the competition. This type of financing provides cash flow, offers short-term flexibility, and allows the borrower to “bridge” the gap between the property on sale and the property lined up for purchase.
The Nuts and Bolts of Bridge Loans
Lenders usually roll two mortgages together to make a bridge loan viable. Other bridge loans pay off the first mortgage entirely and transfer this debt onto the bridge loan. Although some bridge loans carry monthly payments, many bridge loans only require borrowers to pay the interest while expecting a full payment of the premium upon the sale of the original property. They are short-term, usually in terms of a year, and carry higher interest rates compared with traditional long-term loans. They are usually backed by real estate collateral, much like a conventional mortgage.
Advantages of Bridge Loans
As mentioned above, bridge loans give borrowers more autonomy within a real estate market. They can utilize a bridge loan to make a down payment or an outright purchase of their next property. Business owners sometimes use bridge loans to provide them with additional capital, allowing them to take care of payroll, rents/mortgages, utilities, or maintenance while they attempt to sell their property or business.
Bridge loans offer sellers flexibility to keep their foot in the real estate market. In the healthiest and fastest markets, buyers need to offer at or above market rate offers. Bridge loans free up capital to give them the buying power they need. Offers contingent upon the sale of another property will never be selected over a straightforward offer. Bridge loans allow borrowers to remove this contingency and make them a more viable candidate in competitive negotiations.
Bridge loans also offer more freedom in how they get paid back. Borrowers often get a choice between monthly payments or a larger payment at the end of the loan term. Long-term financing, meanwhile, never offers this type of flexibility. Many borrowers opt to pay the interest only and pay back the premium when they sell their property. This keeps their total capital higher, giving them additional freedoms that traditional borrowers might not.
Bridge Loans also get approved and funded much faster than conventional loans. If that perfect property appears on the market, borrowers can get the financing they need to make a timely offer.
Disadvantages of Bridge Loans
The increased flexibility and short-term nature of bridge loans result in higher interest rates and more risk-taking. Due to the fact that bridge loans usually don’t last longer than a year, you can expect to pay higher interest rates. Based on a borrower’s credit score, rates may vary from prime rate to 2% above the prime rate.
Those who apply for bridge loans will need excellent credit scores and equity. Most lenders will not finance a bridge loan unless the borrower has at least 80% of the equity in their home or enough cash to span the difference.
Bridge loans also carry risk based on the fact that they usually cannot be paid off until the borrower’s property sells. If a market downturn occurs, buyer competition stagnates, or the seller overvalues the property’s market value, it might lead to difficulties in paying off the loan. A bridge loan’s success often fluctuates based on the sale of the initial property. Sellers may have to lower their property’s asking price in order to facilitate a sale in a reasonable time. If a buyer pull out of a home sale at the last minute, the borrower may have to move forward with their own contract. They may have to pay the sale themselves while they wait for their property to attract another buyer.
Is a bridge loan the right choice for you? Do you want to search for that next commercial investment while your property is on sale? Contact the experts at Hunt Mortgage Group to discover all your options as you move forward with your commercial purchase.