A hard money loan is designed to solve a short term financing problem. It may help an Arizona investor buy quickly, complete renovations or move forward when a traditional bank cannot meet the deadline. The loan still has to be repaid, often through a large final payment.
That is why the exit strategy should be decided before closing. Most borrowers plan to sell the property or refinance into longer term financing. Both routes can work, but each depends on timing, property value and changing conditions.
What Is a Hard Money Loan Exit Strategy?
An exit strategy is the plan for paying off the full loan balance. Monthly interest payments may not reduce the principal, particularly when the loan is interest only. The remaining balance can become due through a balloon payment at the end of the term.
The Consumer Financial Protection Bureau defines a balloon payment as a large payment due at the end of a loan. If the borrower cannot make it, selling or refinancing may be necessary. Waiting until the last moment can leave too little time to complete either option.
Selling the Property
Selling is the usual exit for a fix and flip project. The investor completes the repairs, lists the property and uses the closing proceeds to repay the lender.
This plan depends on more than the expected after repair value. The property must be finished on time, priced realistically and attractive to buyers. The budget should allow for agent commissions, title expenses, seller concessions, taxes and additional interest if the home takes longer to sell.
Build extra time into the schedule. A buyer can cancel, an inspection can uncover another repair, or an appraisal can come in below the contract price. A profit estimate with no room for delay is not a dependable exit strategy.
Refinancing Into a Longer Term Loan
An investor who intends to keep the property may refinance the hard money loan. The new loan pays off the balance and replaces it with financing better suited to a rental or long term hold.
Refinancing is not automatic. The borrower and property must qualify under the new lender’s rules. Credit, income, property condition, rental income, ownership history and the appraisal may all affect approval.
Start talking with the proposed refinance lender early. Brad Loans advises borrowers whose exit is not a sale to make contact at least six months before the all due date. That leaves time to prepare documents and consider another option if the expected refinance is unavailable.
Know the Payoff Amount
The principal balance is only part of the payoff. Ask the loan servicing company for a payoff statement that includes accrued interest, servicing charges and any other amount due through the planned closing date.
Confirm whether the loan has a prepayment penalty, extension fee or release price connected to additional collateral. Brad Loans states that its programs have no prepayment penalty, but every borrower should rely on the signed documents for the terms of a specific transaction.
Prepare a Backup Plan
An exit strategy includes a second route. An investor planning to sell may also explore refinance qualifications. Someone planning to refinance should know whether the property could be sold quickly enough to repay the balance.
Extensions should not be treated as guaranteed. A lender may choose not to extend, and an extension may involve additional cost. Track the maturity date from the beginning and review progress throughout the project.
Check the Numbers Throughout the Loan
Update the exit plan when the repair budget, completion date or expected value changes. Review the remaining loan cost, likely sale proceeds and time required to close.
If the project falls behind, act early. Reducing the scope, changing contractors, adjusting the resale price or beginning the refinance process sooner may preserve options that disappear near maturity.
Plan Your Arizona Hard Money Loan With Brad Loans
Brad Loans by eMortgage provides hard money loans for Arizona investors, property buyers and qualifying owner occupants, including purchase, refinance and fix and flip financing. The team can review the property, proposed repayment plan and available loan structure before you commit. Call 602-999-9499 to discuss your transaction and build a practical exit strategy from the start.
References
Consumer Financial Protection Bureau: Balloon Payments
Arizona Department of Insurance and Financial Institutions: Mortgage Lending
