Writing a Real Estate Private Money Bridge Loan Request
A short narrative or request summary of the real estate loan deal is important to lenders when deciding if they should fund a bridge loan. As such, it is important to be concise and articulate all the key facts in the most effective way possible. Provide details about the property and its current condition, any potential opportunities or risks associated with the project, and how the money will be used.
It is important to disclose all issues or potential issues on both the borrower and property side at the beginning in order to maintain transparency. If a lender discovers an issue during due diligence that was not disclosed initially, they may perceive it as an attempt by the borrower to conceal the issue and could potentially deny the loan.
The borrower should draft the request as they have a comprehensive understanding of their own background, situation, financials, and the profitability of the deal or the reasons for seeking the loan. The loan broker should provide editing and guidance regarding specific lender requirements and how to address them in the request.
Sections to Include
Loan Purpose
Borrower Background & Experience
Owner Occupied Properties
Challenges with the property, borrower, or transaction
Preliminary Financials
Requested Loan Amount
Purchase Price / As-Is Value
Current NOI
Proposed Renovations & Cost
Target Rents and NOI
Timeline and Exit Strategy
Consult the guide provided below for information on each section of a loan request summary. For smaller properties or less complex deals, a one to two page request is typically sufficient. Depending on the size of the property, loan, or complexity of the challenge and plan for profitability, the request may require additional pages.
Loan Purpose
It is essential to be explicit when writing a request for a real estate private money loan. Start by outlining the exact purpose of the loan, whether it is for buying a property, renovating it, or taking out cash for other investments. If the loan is for purchasing a property, explain the potential investment opportunities and the advantages of buying it. If it is for renovation, list the planned improvements and how they will boost the value of the property. If the goal is to take out cash, explain how it will be used.
Borrower Background & Experience
Give a clear picture of their background and experience.
Outline the borrower's credit history, and if applicable, describe any credit or income challenges they have faced and how they have been overcome. Explain what has changed in their situation to make them now merit a loan.
Emphasize the borrower's experience in real estate investing or property management if this is an investment property loan. Show their successful projects or any prior experience in renovating or managing investment properties. Highlight their record of success.
Owner Occupied Properties
When applying for a real estate private money loan for an owner-occupied property, display the business's financial stability, potential, and repayment plan.
Include information about the business's history, sector, and any remarkable achievements or milestones. Provide the business website and any social media or customer reviews. Mention the kind of property they are looking to buy or improve and how it fits with the business objectives.
Highlight the business's income and assets. Explain how the business's income and cash flow will be used to cover the monthly loan payments. Include financial projections, if available, to prove the feasibility of the repayment strategy.
In order to provide legal protection, it is often recommended that the property be held in a separate LLC from the business entity. Identify the legal entity that will own the business and the one for the property. It is also beneficial for the lender to be aware of the ownership of each entity.
State the Challenges
Describe the obstacles that prevent the loan from being approved by a conventional lender or bank. Explain how the obstacles will be addressed during the bridge loan period to enable a transition to long-term financing by the end of the bridge loan term.
Preliminary Financials
Provide a thorough overview of the borrower's preliminary financials, including their personal financial situation and the financial potential of the real estate project.
Requested Loan Amount
Provide the requested loan amount and explain why this specific amount is necessary. The loan amount should be based on a thorough assessment of the project or investment property's needs and the costs involved.
Purchase Price / As-Is Value
For purchases, include the purchase price and any seller concessions such as seller paid closing costs, or a seller second lien.
State the as-is value, which represents the current worth of the property in its current condition.
Current & Proposed NOI (Investment Properties)
For investment properties, it is important to include a separate spreadsheet document containing current and proposed net operating income (NOI), including the last 12-months actual (T-12) and a 2-year proposed pro forma (property financials spreadsheet template download).
The loan request summary in this section should include an analysis of the current and future Net Operating Income (NOI) as shown in the pro forma spreadsheet.
Explain any differences in the past or future numbers.
Address factors like property demand, features, vacancy rate, location, expenses, and market conditions.
Provide an explanation for any changes in rental rates or income.
Proposed Renovations & Cost
If renovations are planned, provide information about the proposed renovations for the property, including a breakdown of the estimated costs and a timeline for completion. Specify when the property will be available for leasing or use.
When the lender is not providing funds for renovation, such as in a purchase transaction, explain the source of funds for renovation.
Timeline and Exit Strategy
It is important to establish a clear timeline and exit strategy. Private bridge lenders require confidence that the short-term loan can be repaid through a refinance or, in certain instances, a sale.
Address in the timeline when the issues hindering the loan's consideration by a bank or long term lender will be addressed.
Consider any necessary adjustments to stabilized NOI seasoning requirements for an exit loan.
The pro forma or financial plan should demonstrate a DSCR of 1.2 to 1.35 or higher by the end of the bridge loan, taking into account long-term financing rates.
Bonus: provide any supporting documents or pre-approval letters obtained from potential long-term lenders.
A well-thought out exit strategy holds significance for both borrowers and lenders. Through clear communication of the timeline and exit strategy, lenders gain a better understanding of the repayment plan and enhance their confidence in funding.
