What are Real Estate Bridge Loans Used for?
A real estate bridge loan is a short-term loan that is used to “bridge” two events. For example, a real estate investor might purchase a property with a bridge loan, but their end goal is to refinance the property with a longer-term loan. A bride loan is used to “bridge” the two events.
What are some examples of when bridge loans are needed?
In the example above, a borrower purchased the property with the end goal of holding the property. So why use a bridge loan? Why not just purchase the property with a long-term, or permanent loan? The answer comes down to speed. When an investor puts an offer on a property to purchase, they typically must close in a short period of time. Being able to close in short period of time is attractive to the seller, and key to having your offer accepted, especially in tight markets. Also, a quick close is the best way to get a reduced price for the property. A “quick close” is typically a deal that closes inside of 30 days. However, long-term loans generally take between 30 and 60 days to close. Investors will use a bridge loan to make the quick purchase and then refinance once they own the property and are not under a tight time constraint.
Another use of bridge loan is when an investor buys a property that needs to be “stabilized” before they can refinance or sell. The property could either be vacant or in need or repairs, or sometimes both. In the case of a vacant property that does not require repairs, a straight bridge loan (based only on the purchase, without a construction holdback) is the best option for the borrow. However, if the property is in need of repai必利勁 rs, then a bridge loan with a construction holdback is needed.
How do bridge loans with construction holdbacks work?
A bridge loan with a construction holdback is designed to meet the needs of real estate investors looking to complete a “value add” deal. A value-add deal is when an investor buys a property that is in need of repairs, and their intention is to repair the property and then sell it, or refinance once the property is stabilized. Bridge loans with construction holdbacks require financing in two stages. The first stage is the initial advance of the loan that is given to the investor at closing. The initial advance of the loan is based on the As Is value of the property, or current value. The second stage is the financing needed for the rehab of the property. The rehab component of the loan is based on the After Repaired Value, or future value, of the property. They deals will require an appraisal with both the As Is value of the property and the After Repaired Value of the property. The After Repaired Value is based on future value of the property after the repairs are completed. For the appraiser to estimate the after repaired value of a property, they must review the repair budget and future specifications of the property. At Source Realty Capital, we typically only give bridge loans with construction holdbacks to borrowers with prior deal experience since these deals are fairly complex.
Please check out our website for more information on our bridge loan programs.
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