What if I said you could get a loan to buy a self-storage facility in three to six weeks, start to finish, even if you have credit issues, with more flexible terms than you could get from a bank? If you don’t know much about nonconforming loans, you might say I’m crazy—crazy like a fox, that is.
Nonconforming loans are simply those made by nonbank lenders. Because they’re regulated mostly at the state level, they don’t have to comply with the federal regulations banks do and, therefore, don’t have to meet bank criteria. Lenders of nonconforming loans are also known as nonbank, nontraditional and, sometimes, hard-money lenders. Their key advantage is they’re everything your bank wants to be but can’t, with speed being a pivotal difference.
“When you are acquiring a piece of real estate, speed is critical in many cases,” explains Gary Bechtel, president of Money360 Inc., a nationwide direct lender. “We can react faster than a traditional lender and fund typically in three to five weeks. A traditional lender usually takes two to three months on average.”
Another key difference is they embrace the kinds of borrowers most lenders reject. Bad credit? No tax returns? Property issues? No problem. Though their loan structure may appear traditional, nonconforming lenders have the luxury of using a different set of criteria on which to act, according to Noah Grayson, president and founder of South End Capital Corp., a national nonconforming lender.
His company’s rates start in the 5 percent range, with fixed-rate loans up to 30 years and financing up to 80 percent of a property’s value, which sounds a lot like what a bank offers. “The difference is we’ll do that for borrowers with credit down to 600 without tax returns,” he says. “We’re looking just at the cash flow and value of the property, while a bank will require a lot more documentation. We are a lot more streamlined.”
Bechtel adds that nonconforming lenders can be more flexible and creative in their loan structures. “Traditional lenders are generally bound to more conservative underwriting standards, have more stringent guidelines and are more restricted within the confines of their institution. We can go higher on loan-to-value (LTV), offer more flexibility on prepayment and future advances than traditional lenders are able.”
Borrowers may also enjoy the more efficient application process. Grayson’s firm uses a service-minded user interface and automation to simplify the procedure. “People have the expectation that they are going to be put through the wringer for any type of loan; but nonconforming loans offer competitive terms with an easy process,” he says.
Generally speaking, interest rates for nonconforming self-storage loans aren’t as competitive as the rates you’d get from a bank. “A traditional lender, like a life-insurance company or a CMBS [commercial mortgage-backed securities] lender, is going to be more competitive than a nonbank lender from a rate standpoint,” Bechtel says. “We are getting paid for speed and flexibility. The pricing differential is going to be all over the board, but there is generally going to be 150 to 250 basis points (1.5 percent to 2.5 percent) difference in pricing to what a traditional lender would charge compared to a mid-market nonbank lender.
“For example, if a bank charges 2.5 percent to 3 percent over the 30-day LIBOR rate, we are going to charge 4.5 percent to 5 percent over the same index. Other nonbank lenders might be in the 3.5 percent to 4 percent range over, and others might be in the 6 percent to 8 percent range over. It just depends.”
Loan Uses and Types
Nonconforming loans generally provide financing for acquisitions, refinancing or rehabilitation. They can also be used as bridge financing and even hard money for emergencies. One thing they don’t usually do is provide financing for ground-up construction.
Bridge loans. A bridge loan is short-term financing. It provides a one- to five-year “bridge” that is generally replaced by a permanent loan of five to 25 years. Bridge loans allow borrowers to acquire, refinance, stabilize, rehabilitate or lease-up a property.
While construction loans are generally full-recourse, bridge loans are nonrecourse, which is advantageous because the borrower doesn’t have a contingent liability on his balance sheet. “It frees up their borrowing capacity with that financial institution, so they can go out and either buy or build another property,” Bechtel says. “Occasionally, we see self-storage owners use a bridge loan to build climate-controlled units or canopy storage as they expand.”
In some cases, the borrower wants to take out his construction lender when the property still has low occupancy. He can get a bridge loan to lease the property until it stabilizes, and then sell the property or get long-term financing.
Hard money. Hard money is a loan that’s secured by the asset only. This is generally because the borrower’s income is insufficient to carry the loan, or his credit is inadequate or has black marks against it such as a bankruptcy, foreclosure or default.
Hard money can often be funded in a week to 10 days, though there are some drawbacks. Because these loans are much riskier than other products, lenders won’t give you as high of an LTV ratio. Expect 50 percent to 60 percent, not 80 percent to 90 percent. Interest rates are also higher than more traditional financing, usually in the 14 percent to 16 percent interest-rate range, explains Grayson, whose company provides hard-money financing ranging from 7 percent to 12 percent.
“There is a stigma out there that hard-money lenders can be predatory, and they want you to default on your loan so they can take your asset; but that is an antiquated perspective,” says Grayson. “Hard-money lenders are solving your problem. We are giving you short-term financing to get you into a better situation. We want to know how you are going to get out of our loan, and we don’t want to own your property.”
Hard-money loans are short-term, generally 12 to 24 months. The borrower’s exit strategy is key to using this type of financing effectively, according to Grayson. Are you selling your property? Refinancing? How are you getting out of the loan? In some cases, a lender may offer an exit path. “In our case, since we also provide long-term, permanent financing, we want to be able to transition you out of our short-term loan into a lower-rate, long-term program with us,” Grayson says.
Less frequently, hard-money lenders may provide more expensive construction financing for borrowers who can’t get a loan through traditional sources; but typically, hard money is for borrowers looking to buy a property or who already own one. It isn’t for projection-based loans like ground-up construction.
Know Your Lender
When pursuing a nonconfoming loan, conduct research and get to know potential lenders. These lenders may have limitations, so it’s critical to ask questions relevant to your situation, such as whether they can fund your entire loan.
“There are a number of nonbank and hard-money lenders that do not have the capacity to do a million-dollar loan,” says Bechtel. “You have to pick the right lender. You need to make sure the lender you are going with has the capacity to fund the entire loan off of their balance sheet or warehouse lines vs. you possibly having to go out and syndicate or participate with other lenders.”
When vetting lenders, Grayson suggests these tips:
- Use Google. It’s your friend.
- Make sure there’s plenty of realistic media coverage.
- Confirm the company actually lends in your state. Check your state’s website to locate deeds recorded to the lender. Also, check with your attorney general’s office to see if any complaints have been filed against the lender.
- Third-party reviews are crucial. Trustpilot shows reviews by real customers. Websites such as LendVer.com, FitSmallBusiness.com and Business.com research and review business and commercial lenders, which can’t pay to be on these sites. Any lender making loans on a reasonable scale should have third-party endorsements.
- Though some lenders don’t want to disclose proprietary information, you can ask for documentation that shows they’re direct lenders.
- Don’t be afraid to ask questions to ensure a lender is real. Be suspicious of websites that look fishy. Be wary if you can’t identify a real person associated with the lender, or a website has obvious formatting or grammatical errors.
- Beware of upfront fees. It’s OK to pay an appraisal or reasonable due-diligence fee, but not thousands of dollars for miscellaneous charges.
Make Yourself Attractive
Though nonconforming lenders are often more flexible with borrowers, they still have preferences. If you’re a match for the following criteria, you might be a good candidate.
- This isn’t your first rodeo. Experience is critical. “Our ideal borrower is someone who has experience in this asset class who owns multiple properties within the same market that they are looking for us to finance a property in. I don’t want to be somebody’s first project,” Bechtel says.
- You aren’t perfect, or your property isn’t. Perhaps you have less-than-perfect credit, you don’t qualify for bank financing, you can’t document your income, or your property is in a secondary or tertiary market. “Anyone who doesn’t qualify for a bank loan is our potential customer,” Grayson says.
- You have your ducks in a row. Ensure you’ve done your homework and can provide all of the information the lender is going to need to assess the project, Bechtel says. “Have a good loan package, historical operating expenses, projections, information about the borrower from a resume and financial standpoint; and make sure you have all your information in an organized fashion, so we can determine quickly if it is something we can finance or not and at what level.”
Nonconforming lenders can be important source of capital for self-storage borrowers. With nonconforming financing, you can get quality short-term, permanent long-term, and even emergency hard-money loans for your facility at affordable terms. You have options!
Katherine D’Agostino is the founder of Self-Storage Ninjas, a feasibility-analysis firm delivering unbiased reports resulting in facilities with high occupancy and the highest possible returns. She offers a free, weekly newsletter that provides insider techniques, ready-to-use calculators, downloadable spreadsheets and data sources. For more information, visit www.selfstorageninjas.com.