How Hard Money Enhances Due Diligence in Commercial Real Estate

Between the time an investor signs a contract on a new piece of property and the scheduled closing date, it is expected that the investor will conduct due diligence. Anything that delays due diligence ultimately delays closing. And delaying closing could mean swamping the deal. Fortunately, financing does not have to be a due diligence problem. As long as an investor works with a hard money firm, that portion of the due diligence phase should be seamless.

The point of due diligence is to investigate every aspect of the deal to make sure everyone’s rights and responsibilities are protected. During this stage, an investor is looking at all the properties’ physical, legal, and financial implications. This includes arranging financing – at least in a preliminary sense.

Traditional vs. Private Lending

Real estate investors can pursue either traditional or private lending. Traditional lending involves commercial lenders like banks and credit unions. Although private lending can take many forms, it almost always takes the form of hard money or a bridge loan when commercial real estate is involved.

An investor’s funding choice makes a difference. With traditional lending, an investor could get preliminary approval well within the due diligence window, which is normally about 30 days. Funding doesn’t become a problem as long as the lender follows through on its preliminary commitment. But should the bank change its mind, the entire deal could be jeopardized.

Private lending is different in the sense that lenders rarely need more than a couple of weeks to get from approval to funding. And approval can usually be done in a day or two. That is how things work at Salt Lake City’s Actium Partners.

Actium says most of their loans are funded within a few days of application. Some might go a week or two under extenuating circumstances. And in certain emergency situations, Actium can even approve and fund within 24 hours. Here’s the point – rarely does private lending get in the way of completing due diligence within the prescribed time frame.

When Funding Is Delayed

Funding might be delayed because a lender wants documentation of due diligence. Perhaps the bank wants a copy of environmental reports and financial statements. The loan will not be approved without them.

Financial statements can be furnished in a matter of hours. As for environmental reports, it may take some time for the investor to produce them. For every day that goes by without those reports, another day ticks off the due diligence calendar. That only delays approval. Delayed approval ultimately leads to delayed funding.

Private lenders can do things differently. They can offer preliminary approval based on the value of the property being acquired. That property acts as collateral on the loan. Then, even if it takes a couple of weeks to complete due diligence, the lender is still ready to fund as soon as the green light is given. There is no delay while the lender completes a lengthy and intense underwriting process.

Private Lending Moves Things Along

The long and short of it is that private lending enhances due diligence in commercial real estate transactions by keeping things moving along. Obtaining a hard money loan is unlikely to delay either due diligence or closing. In fact, that’s why so many property investors prefer hard money.

Due diligence is a necessary part of commercial real estate transactions. It protects both buyer and seller. But taking too much time to complete it can jeopardize a deal. The last thing an investor wants is slow financing that prevents due diligence from being completed in a timely manner.