In this episode, bridge loan mechanics for a developer needing $50K land down payment before construction loan draw get dissected. The proposed 10-20% return over six weeks ($5K-$10K profit) came with extreme underwriting requirements—bridge lending’s high failure rate among lenders stems from inadequate downside protection when deals collapse.
Key Takeaways:
- Capital goes to title company only Never fund bridge loans directly to borrower accounts—inject capital exclusively into escrow at title companies or directly to invoices to maintain control and prevent misappropriation.
- Comprehensive collateral documentation required Two years tax returns, management-prepared balance sheets, personal financial statements, corporate entity equity breakdown, personal guarantees from all partners, and liens on corporate entities are non-negotiable for protecting downside scenarios.
- Early and final maturity dates with escalating fees Six-week initial timeline with defined penalty structure before final maturity date creates pressure points—understanding what assets exist to pursue when timelines extend determines actual risk exposure.
Banks avoid bridge loans because underlying collateral is absent—being the only capital provider when sophisticated operators decline should trigger maximum caution and premium pricing.
(Podcast transcript below)
Welcome to get serious. Excited to go over a little bit of a different topic today. Chatting about bridge loans. It’s something that gets brought up to us here and there. Within the land space, it’s less typical to see requests for bridge loans generally.
and kind of the name implies is that there’s going to be some type of real estate deal. For example, if somebody wants to close on a piece of land that they then want to start constructing on it, they may have ideally already lined up a construction lender for the actual
building part or maybe they were anticipating entitling a project as well. So that could be another example. But first they need to close on the land or at least cover a down payment on the property. And then if they’re not able to supply that liquidity themselves, they could reach out to another lender to see, can you quote unquote bridge?
providing this initial tranche of capital before certain hurdles are addressed, whether it’s entitlements or just really a time delay for the ability to draw from either the takeout lender or a construction lender on the other side. So there’s a couple of different scenarios that I just…
melded all together there. But I think you get the idea. And this is really where creative financing comes in. And you can find ways to create bridges out of a number of different scenarios. Can be very high risk loans, right? Because, you know, first, you always have to be wondering, okay, why is somebody requesting bridge loan if they don’t, you know, maybe they don’t have that much liquidity to
work with in the first place, you always have to ask that and what their history is, previous track record, and who that takeout lender or construction lender might be, are they effectively guaranteed to supply that capital at such and such timeline? What is the downside?
risk of that timeline changing or getting extended or even getting canceled and are you going to be left holding the bag with effectively no collateral too because that’s the thing with bridge loans is you’re not necessarily buying the underlying asset or having or even having it available as collateral. So you really have to be relying on the
underlying, Lendee’s business or personal assets to be set up for collateral. So, that can imply a lot of risk, when, that’s all you really have to go off of from, a risk management perspective. So again, I realized probably a lot of this is, you know, a little outside of your day to day to day.
but, you know, th it is a pretty common mechanism throughout the real estate industry. know, especially for, commercial, real estate or, you know, larger developments or again, where entitlement work might be needed is just trying to creatively finance your way through different steps that might, entail a whole bunch of different lenders.
being involved there. So that is the basic game plan. So where it comes to how we might participate is, for example, this, and we have successfully handled bridge loans before. It’s just, we set ourselves up as institutional lenders. So I think a lot of folks who might come to us for maybe what might be perceived as a smaller request, 30 to 50.
Maybe on the lower end some of us for like well over a half million or a million two million bucks For loans like these sometimes even higher closer like five million For a bridge loan of like four to six weeks, which you know could be really interesting if you have that amount of capital to devote into a Deal here it’s just again making sure that you’re more protected on the back end for that downside scenario because my
or business partner and deals in private credit and sees the really, really nasty downside situations more commonly than a lot of us might see is just like, there’s so many lenders who lose their shirts on bridge loans because they might ask for much more aggressive terms, but they don’t underwrite the deal properly. then…
all a sudden and the protective mechanisms they thought they might’ve had in place just fall apart and all of sudden you’re out of money really quickly and could be out of business or bankrupt. So it is a high risk business to be involved in. So that’s why we take our protection mechanisms very seriously. So again, to jump back to this particular scenario and just give you an idea of how we would consider one and how we might work through it.
this individual reached out who was representing a developer. They wanted to purchase a piece of land to build a spec home. Construction loan was already approved, but they needed a land down payment prior. And again, I don’t have like the full details. don’t know why they needed it prior, why they couldn’t just delay the…
purchased the land to be closer to when they could get the construction loan. don’t know if there was any entitlements needed, anything like that. But supposedly they had a lot of the docs and letters of intent from the construction lender and so forth. But basically they were like, we need 50 K for six weeks. And, you know, upon the first draw of the already approved construction loan, you know, that will exit you out of the deal. So.
I was really batting this around and it’s like, okay, how do you price these out properly to make it worth the risk? Um, so I was really coming in at between, you know, five to 10 K on top of our principle over a six week period. Um, you know, it’s fairly expensive debt, uh, but it’s also like, we have to balance that as the opportunity cost and the risk involved in this deal demands. My partner is closer to 10 K. So.
Uh, and we always had wiggle room, right? Because nothing was set in writing. It’s just like, Oh, here’s our initial problem, you know, proposal, but until we actually see everything underlying the, the deal and, you know, underwriting the actual developer, um, you know, our pricing is not set in stone. So we have to be able to have some flex depending on the underlying risk there, but that’s generally what I was thinking about, you know, could it be a 10 to 20 %?
net return on our principal over roughly six week period. But if it went beyond that, there would be another final maturity date that would penalize the fee owed even more before we would more aggressively pursue receipt of our funds with a personal guarantee, for instance. So the initial groundwork seemed okay. Yeah, but this is interesting to the developers. Then I’m like, okay, well,
great. Now here is where things get more rigorous. Here’s what we would actually request for us to do this deal. So we requested, okay, the land purchase contract, the LOI from the construction lender. Also, you know, proof of that construction loan approval. I’m not sure whether that would be within the LOI. know some of those are written differently, so I’d rather just cover my basis. Even if it is a redundant request.
any existing title work or reports on the underlying lots. And then for the actual lending, would fund the cost directly. This might be the most important part is that you never want to just supply the capital directly to the lendy. Since they’re purchasing a property, it’s for down payment of land. I’m only going to be injecting my capital into the escrow account at the title company.
I get you that you don’t want to trust, you know, no matter how reputable some of these folks are with just injecting directly into their account, you want to be funding. Okay. Various invoices or, you know, specific uses of, of, of the funds. That’s just best practices to do. Maybe probably the most important, thing to take away if, you know, everything else has gone over your head from, from this podcast that that’s the key point to keep in mind. And that.
also have a lien on the corporate entity of the developer. I would need a personal guarantee, also called a PG, or a performance guarantee that means the same thing from the developer and then also any partners that have equity within that corporate entity as well. We would define early and final maturity dates with associated fees.
Basically, you know, if they didn’t pay by six weeks, you know, there would be an additional date after that. We could charge more before we would go after their assets. We wouldn’t want the contact details for the construction lender with the rights to reach out to them and, you know, kind of get the vibe and have they worked with this developer before. We would want recurring reporting updates for the underlying project. Again, I’m not sure how complex.
the project that actually is, whether it is just like a time delay or if there’s any entitlement work going on, but, you know, we include that caveat there, as needed. and, also the past two years of tax returns, from the developer and the business partner. if there are any, as well as the corporate entity itself, we would also have a management prepared balance sheet for the corporate entity.
Um, meaning the equity value of all owned projects at the moment, and then also a personal financial statement, um, which could just be, you know, a balance sheet from the developer and then any of the business partners. So, you know, it seems like, you know, very rigorous across, right for a relatively low value loan. But again, this is a high risk business to be participating in. If you’re going to be trying to do bridge loans. And, um, again, the downside is so severe that.
If you don’t do your work on the underwriting, you could again easily lose your shirt or just get stuck in a really nasty deal. Because if you’re not getting all this info upfront, like who cares? You know, even if you consider that situation where, okay, the, you know, the deal just fell apart and timeline is just indefinite. Okay. How do you get your money back? If you don’t understand what
the underlying assets are that either the business has that you loan to or the owners of that business, then you have no idea what you could go after in the first place. And that’s how you can really assess risk and figure out whether there’s any real liquidity regardless. So that’s also something that you just really have to keep in mind.
And you know, this is how banks make loans as well, too. Like, you know, just a lot of paperwork is required. They’re going to ask for collateral. Like there’s a lot of reason, you know, banks don’t do these type of bridge loans because they’re pretty darn risky. So and you don’t really have that underlying collateral. So, you know, if if other people or generally, you know, banks, they’re they’re smart operators. So if they are not wanting to provide debt on deals and somebody else is coming to you.
to supply debt, like you should be really, really cautious about what type of situation you’re getting into because you don’t want to be the greater fool of basically supplying capital when none of the smartest operators are, or capital providers are doing those type of deals. So, and if you are going to be the only one, then you should price in the risk.
accordingly. So that is the way that we run our business. Not everybody wants to provide that or go through the work, but it’s like, you also if you do it once, if you want to repeat, it makes it lot easier, right? Because then we already have that underlying groundwork. So I always try to preface that. You know, a of people might just go silent, try to find somebody else who might be easier to work with. But again, we are downside protection first.
and foremost, especially in today’s market. Capital markets are very tight. Protect what you’ve got at all cost. With that in mind, SeriousLand.Capital for any of your funding needs, Land Daily Diligence Facebook group. I’m about to hop on in a minute right here. Zero cost review of your land deals and landpricer.ai. Most reliable land pricing tool on the market. Should have the alpha version to test by tomorrow.
After I was talking my CTO earlier today subscribe and share everybody take care now. Bye
