Disadvantages of Hard Money Commercial Loans

Hard money commercial loans have several disadvantages.  Interest rates, fees and terms are better for regular conventional commercial loans. However, not every commercial loan will fall under conventional terms; sometimes hard money loans are the only way to finance a property.

Interest Rates

Hard money loans are offered significantly higher rates than their conventional loan counterparts. A borrower can expect a hard money commercial loan to have rates between 12 to 15%, in the first year of the loan. As the loan progresses, the rates tends to increase, sometimes as much as 24%. Conventional rates range between 5-10%. The hard money commercial loan will require a significantly higher monthly loan payment, compared to that of a conventional loan.

Loan Fees

Another disadvantage of the hard money commercial loan is the cost of the loan. Most hard money lenders charge origination fees between 2-10% of the loan amount. On a $500,000 hard money loan, the fees can be as much as $50,000.  

Hard money commercial lenders charge "upfront" fees that cover the cost of the lender's legal team, due diligence and third party reports. Typically, these fees are absorbed by the larger conventional commercial lenders, but the hard money commercial lender collects them at the time of application or commitment. Upfront fees are charged as a flat rate, or as a percentage of the loan amount.  In some cases, upfront fees can be just as expensive as the origination fee.

Loan Term

Regardless of amortization, most commercial hard money loans have a term of one to three years. This can be significantly less than conventional commercial loans, which usually have terms of at least five or ten years.  

A short loan term can be problematic for commercial loan borrowers with construction delays. It can also be detrimental to the new business owner, or for business owners that have not managed to stabilize their businesses in that short period of time.

Property Value

Hard money commercial loans loan to values are 50-60% of value. This can be as much as 30% less than conventional loans for the same property. In addition, hard money lenders often use a "quick sale" value. The value can be described as the value at which the property will sell to an all-cash buyer with an exposure and marketing time of six months or less. The quick sale value of commercial property can be as much as 20% less than the actual appraised value of the property.