What can Bridge financing be used for?
What can Bridge financing be used for?
When the cash flow from a sale of an asset is expected after the cash outlay for the purchase of one, bridge financing can cover the gap in cash flow. It is short term, backed by real property. In this economic climate, permanent commercial finance can be difficult to find and a bridge loan can give the borrower time to secure the best possible long term financing solution or sell the collateral.
Source: Property 118.com, published May 29 2012
Bridge financing has quite distinct and individual features offering some very useful advantages over other types of secured funding.
The terms are flexible from one month upwards, which allows you to structure the loan to your requirements, and can often be arranged quickly with an agreement possible within 2 hours and the funds available in one or two weeks if the circumstances fit.
You can often borrow more where the bridging company will lend against the open market value as opposed to the purchase price or value which ever is the lower in the case of other loans. Credit scoring is not usually an issue and additional funds can be released if there is other security available. Lending is more often based on the security offered and so credit scoring is not usually or less of an issue.
These advantages can be used for the following purposes:
When vendors are caught up in a broken chain and need to sell quickly they sometimes get desperate. Vendors in this position may well be motivated to accept a substantially reduced offer to complete the sale of their property. Reasons could be to ensure they don’t lose their opportunity to purchase their dream home, because they need to move far away for work or because they are in a desperate financial position. This is where bridge financing can be a property investors best friend as it allows them to snap up a bargain by negotiating on a similar basis to a cash buyer.
In a recent example it was possible to assist a client purchasing at auction just five days before the auction sale. Our preferred bridge loan provider was able to provide a decision in principle on day one, instructed the valuation on day two and provided an offer of advance by day four. The client was able to attend the auction in the comfort of knowing that the supporting finance had been arranged and went on to make a successful bid for the property. Moreover, this particular bridge loan provider was able to secure additional funds for the required refurbishment work.
Post auction financing
Occasionally, property investors will go to auction with the intention of bidding on a several properties but with no intention, or enough cash, to buy them all. However, sometimes they get lucky and purchase more properties than initially planned. If the price is right, who can resist an absolute bargain? As many auction houses these days are imposing 14 or 21 day completion terms it is vital that funding is arranged quickly. So long as investors don’t go too mad, the availability of bridge financing does allow them to comfortably spend twice the amount of cash they had set aside if absolute bargains present themselves.
Purchase of Below Market value
Some Bridge loan providers will support initiatives to purchase at below market value using the when improved open market value as a basis for their lending calculation. The key to putting in place successful bridging solutions lies in the exit strategy. Having a guaranteed exit route provides the lender with a closed bridge situation which will reduce lender risk and result in a lower interest rate.
We are witnessing an increasing demand from developers whereby the principal funder has decided to not extend the facility, or look for immediate repayment. Quite often bridge financing will provide the solution especially where the bridge loan term is not extensive.
We were able to assist a client who had almost completed a development of six residential flats. His principal lender would not extend credit facilities. A short-term bridge loan was arranged and the client was able to complete the development within two months of draw down.
Land with Planning Permission
Bridge lenders will consider a wide variety of propositions and will often accommodate non-mainstream requests. Some are not ‘policy’ driven and will assess propositions based on their merits. Land with planning permission is considered by some bridge lenders as a good proposition and will offer short –term development finance incorporating draw down facilities as and when the build value increases.
Another popular target for property developers is unmortgageable properties where there may be structural issues or a lack of basic facilities such as kitchens or bathrooms. Bridge lenders will provide up to 75% gross of the purchase price and up to 100% of the renovation costs.