With any real estate transaction there can be risks and rewards, including when you work with a lender to secure the financing on your deal. With bridge loans, there can be slightly more risk involved, since the main objective is to essentially have two loans out on two properties at once. However, for developers who know their market and are confident in their development plans, the rewards can outweigh the risks and provide a means for paving a smooth path to getting their next deal lined up and ready to go.
What is a Bridge Loan?
Are you seeking funds to get you from one project to another? A bridge loan is probably what you’re looking for. These are ideal for developers who have multiple projects in progress and are waiting for the sale of one project to come through so that they can purchase - or begin work on - their next project. These loans aren’t without their risks, however.
What Are the Risks?
While it may be convenient to take out a bridge loan, knowing you can start your next project before your existing project has been sold and you’re back to having liquid funds, there can also be a couple of risks for developers. After all, it means that there are two loans that need to be paid back - and one of them, the new bridge loan, is typically tied to the equity of the existing project. That means that the existing project is being used as collateral on the new loan - if the loan can’t be paid off in time (because the earlier project doesn’t sell quickly enough), then the developer could run the risk of losing both properties to the bank. They also can run the risk of losing a bit of money on their original project, as they will owe fees to the loan originator, as well as pay back that loan which could cut into their profit margins.
What Are the Rewards?
On the flip side, the rewards are pretty obvious. If there’s a development deal that’s just too good to pass up, but a developer doesn’t have the funds at the moment to purchase the property and begin the work, they can take out this loan to get them from point A to point B. By taking out this loan they’ll be able to purchase the property without worrying about losing the deal, and begin work on the renovation without worrying about an extended timeline - all while they wait for their original property to sell. And once that property sells, their obligation to the loan originator will be fulfilled.
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