Archive for August, 2014


Written by: Gerald Harris

When it comes to building a successful investment portfolio, the name of the game is diversification. While the stock market can offer incredible returns, it also comes with a high level of risk. Alternatively, government backed securities offer very little risk, but ruturns might not even keep place with inflation. Private mortgages offer the best of both worlds — very little risk and a great ROI. Here are five reasons for you to consider investing in private mortgages.

1. You get better rates than the banks do.

Traditional lenders are looking for high credit scores and down payments that are at least 20 percent unless you get an FHA loan. In that case, though, buyers end up paying mortgage insurance (PMI), which ends up adding thousands (or tens of thousands) to their payout over the course of the loan. If you act as a private lender, you can charge a higher rate than the banks do. Savvy brokerages have buyers on hand who can pay a higher down payment but simply lack the credit score or income verification to seal the deal. If you connect with one of them, you can both benefit.

2. Being a lender is a lot better than being a landlord.

If you’re the landlord, the onus of the repairs falls on you. Toilet leak? Your problem. Leaky roof? Your problem. Air conditioning unit goes out? Your incredibly expensive problem. This can eat away at your rental income quickly. If you sell the property, serving as a private lender, you still get payments each month, but instead of having to earmark some of the money for repairs, you can put it all in the bank. The buyer has to worry about setting aside funds for repairs, not you.

3. Buyers default much less frequently than renters.

If a buyer enters into a private lending agreement with you, it is important to remember that you are his road back to better credit. The likelihood of the buyer going into default on this mortgage is lower than many people think. It’s true that the buyer represents a risk, but if he has set aside enough of a down payment (30 percent or even more in some cases) for a private loan, that shows some financial skill. So you’re getting a higher rate of return with less risk than you might have thought.

4. You get to set the term of the loan.

Traditional lenders generally extend mortgages that have 15 or 30-year terms at fixed rates, or adjustable rates that allow a certain number of rate changes over the term of the loan. As a private lender, you have a little more flexibility, as you can set the term how you want it. If the client is simply waiting for an influx of cash from a new job or another investment, choose a term of six months to a year. That way, you get your whole principal back sooner with interest, and you can move on to the next investment. If the buyer wants to set up a longer note, such as five to ten years, feel free to go along with it if you can stand having your money tied up that long.

5. You base your lending decision on the property, not the borrower.

The fact that you can set your required down payment as high as you wish, means that the risk of default doesn’t have to be worrisome. If a borrower puts down a large down payment, they will be much less likely to fall behind on the agreement. However, with a large amount of equity already in place, if a default does take place, you have a higher probability of selling at a profit. There are brokers in every market with access to clients who are looking for private lending sources, giving you many opportunities to make a profit from real estate without having to manage a single property.

Written by: Don Konipol

Private mortgage loans can provide professional real estate investors with quick and more flexible access to funding for investment properties. While typical private mortgage loans often come with higher interest rates, these loans are often easier to qualify for, require less paperwork and are based on the value of the property versus the borrower’s credit. See the following article from REIClub for more on this.

You’ve spent the last 4 months trying to get your client a mortgage on his investment property. You gathered all his personal, business and real estate financial information, for not only the property you’re trying to finance but for all his business and property interests. You’ve done projections, forecasts and read through 200 page appraisals. You’ve put together a loan package, sent it to numerous commercial mortgage lenders, only to find out each one needed the same information filled out on their particular unique forms. So you’ve spent dozens of hours more transferring the same information to tens of different applications. You’ve spent numerous hours obtaining “additional information” for each potential interested lender. And now you’ve exhausted all possible institutional mortgage sources and still no loan.

Sound familiar? Perhaps you’re new to the commercial mortgage field. You have been successful originating residential loans, took the NAMB Commercial Mortgage course and decided to expand your practice to include commercial and investment property mortgages. Or maybe you’re already a commercial mortgage broker, successful in obtaining financing for some clients, but feel you just spin your wheels trying to obtain financing for others. The key to spending your time more productively is to understand when institutional commercial mortgage money is NOT available for your client. The key to earning a commission from these same clients is to understand what type of financing may be available for this same client.

Private mortgage loans are loans secured by real estate made by a private lender instead of a bank, lending institution or government agency. Private mortgage loans are short-term (ranging from six months to three years) hard money or asset based loans made to the professional real estate investor for the purchase, rehabilitation or equity cash out of real property. This means that the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrowers credit. The security for the loan is enhanced because the loan represents a maximum of 65% – 70% of the appraised value of the income producing property. On non-income producing property (raw land, lots, construction money) a maximum of 55% loan to value is lent. Investors can expect to pay interest rates of 12% to 14% on first liens and 16% to 18% on second liens in this current low interest rate environment. Historically first lien yield of six points over prime has been obtainable.

Why are real estate investors willing to pay high rates to borrow private money?

When interest rates of 14% to 18% are added to four-to-eight points, the real estate investor/borrower is paying 20% plus annually for the money borrowed. Its obvious why this is a good deal for the private mortgage lender, but why should real estate investors be willing to pay these high rates when conventional mortgage money costs 7% to 10%? There are many reasons, but all fall into four categories.

Qualifying Problems

The real estate investor/borrower and/or the real property does not qualify for an institutional mortgage loan. This can be anything from low borrower credit scores or too much borrower debt, to the borrower’s properties not producing a sufficient enough income. Further, the property itself may not support the type of loan the borrower wants. Many institutional lenders will not loan amounts under $500,000; many will not lend second lien money even if there is significant equity in the property. If major repairs or rehabilitation is necessary, institutional lenders will not be interested unless the project is very large and the borrower has an extensive track record. In these cases the private mortgage lender may be the only resource available for the real estate investor/borrower.

Institutional lenders are concerned with both the appraised value of the property and borrower and property credit. Private mortgage lenders are only concerned with the appraised value, as long as the appraised value represents a fair market price. Hence, if a property is producing or can produce sufficient income to pay the note and the value of the property will fully secure the note and provide sufficient equity, then the borrower’s credit is not an issue for the private mortgage lender.

The Need For Speed

Speed of closing the transaction. Mortgage money obtained from banking or institutional sources, called conventional mortgage money, usually takes between 60 and 90 days to fund. Institutional lenders need not only obtain appraisal of the value of the property, but also require detailed examination of the borrowers credit history and current financial status, as well as financial statements and tax returns, not only for the property collateralizing the loan but for all real property and business interests owned by the borrowing entity and the borrower himself.

Private mortgage lenders on the other hand can usually complete a transaction within seven-to-10 days. Since the property itself is the main criteria to be used to determine loan eligibility, much less information on the borrower and the borrower’s other properties are required, resulting in a much quicker approval process. The private mortgage lender can make a decision within 24 hours of receiving information; institutional mortgage money must be approved by a loan committee that may only meet twice a month, and that may send the loan request back to the loan officer for more information, necessitating a further two week delay until the committee meets again.

Privacy Concerns

Borrowers may not want or be able to provide personal financial information or go through the hassles of the application process associated with obtaining an institutional mortgage loan. The borrower may be going through a divorce or business separation and may not want his wife, partner, government, lawyers, etc. to obtain his personal financial statement. Additionally the borrower may not have all financial information on all his real properties and businesses up to date or complete; he may have filed for an extension on his latest tax return; his accountant may be behind in preparing his financial statements. While all these would negate or at least delay his getting an institutional mortgage, it should have no effect on the borrower’s ability to obtain a private mortgage loan.

More Money

The real estate investor may be able to borrow more from the private or hard moneylender and therefore have less of his own capital invested in the property. Institutional mortgage lenders lend based on the lower of the cost of the property or appraised value of the property; private mortgage lenders lend based on the appraised value only. Hence the real estate investor utilizing a private or hard money loan is not penalized for purchasing the property at a significant discount to market value. Additionally, most private mortgage lenders do not have onerous seasoning requirements to make the loan.

Investment Parameters

The investment parameters for private mortgage loans differ considerably from those of institutional mortgage loans, as we partially discussed in the previous section. The most important parameter to be considered when evaluating a private mortgage loan request is loan to value. This is the ratio of the amount lent expressed as a percentage of the properties value. For example if an office building is worth $100,000 and we lend $65,000 total secured by this office building, then our loan to value ratio, or LTV is 65%.

Private mortgage lenders will typically lend up to 50% on raw land or undeveloped property; 65% on commercial income producing property such as office buildings, shopping centers, warehouses, etc. and 70% on residential income property such as a duplex or apartment complex. The key words here are up to; the maximum amount will be lent if all additional criteria are met and if the lender feels good about the loan, lower amounts can be lent if the loan or borrower is considered less than ideal. This is a gut decision made by the lender with an in depth understanding of the criteria being used and the experience of looking at many lending proposals.

The second parameter is the type of properties to lend on. This is often determined by the comfort the lender has in disposing of this type of property in case of default. All other things being equal, single use property which would take a year to sell is obviously less desirable than a multi tenant office building which would not only sell quickly at 65%-80% of market value, but which would be producing income with tenants paying rents while the property is up for sale.

The third investment parameter the private or hard moneylender is concerned with is the cash flow or income potential of the property being put up as security for the note. Although many private mortgage lenders are liberal in this area, the monthly interest payments to keep the note current must come from somewhere. If the property is rented out and is producing a cash flow after all expenses of an amount at least equal to the note payment, the monthly payments can be covered by the property income alone without the borrower having to come out of pocket. This adds a great degree of safety to the note. Cash flow from other income properties or other sources can be substituted for cash flow from the property being placed as collateral; however, the income to pay the mortgage payments must be available from some source.

The fourth major investment parameter the lender must consider is exit strategy. Very simply, this is how the borrower plans to repay the loan. Since most private mortgage loans are short term the private mortgage lender has a keen interest in finding out the borrower’s exit strategy and in analyzing whether this exit strategy is viable, and the risk of this particular exit strategy. The particular exit strategy must have a reasonable chance of success.

Typical exit strategies include property sale before the note is due, refinancing the property with a long term mortgage loan, packaging the property with other properties owned or to be acquired by the borrower and obtaining a blanket mortgage on all the properties, borrowing on equity in other property owned by the borrower and selling a partnership interest in the property to an equity investor. Each of these strategies has numerous variations. The lender must determine the viability of any particular exit strategy.

Dear Readers, I have been away for a few weeks and unable to post during that period.  I am back now and hope to pick up as before, looking for and posting the best content I can find.  I am always anxious to receive your feedback, so feel free to let me know your thoughts on the comment section of this Blog.  Let’s get the conversations started!  Best, Barry


The Rise of Private Fund Lenders
By Steve Edwards and Jubin Meraj at law firm Manatt, Phelps & Phillips | Commentary

As the market for traditional home loans made by banks and other customary lenders remains constrained, despite the growth of housing sales generally, the market for non-traditional mortgage lending may be positioned to expand significantly, says Edwards.
ORANGE COUNTY—Many have attributed the financial crisis that started in late 2007 in significant part to fallout from the home mortgage meltdown. Less well-known is the fact that the very industry that arguably set the stage for the downturn has generated important economic opportunities for certain investors and entrepreneurs. Today, as the market for traditional home loans made by banks and other customary lenders remains constrained, despite the growth of housing sales generally, the market for non-traditional mortgage lending may be positioned to expand significantly.

A simple comparison of the pre-recession housing market to the current market provides insight on the changing mortgage industry. Prior to 2008 the landscape of housing looked something like what you might expect in a “normal” economy: 85% of sales were of non-distressed homes with traditional mortgages to individuals, 10% were all-cash sales of non-distressed homes, and approximately 3-5% were distressed sales. The breakdown in 2013 seems radically disparate in comparison: only 40% of sales were to individuals purchasing with mortgages, 40% were all-cash sales, 15% were distressed sales and 5% were flips.[1]

Indeed, the end of 2013 marked a three-year high in distressed sales in the United States at 16.2% of all residential sales.[2] Though it is true that the most recent numbers from RealtyTrac show a slight dip in sales of distressed homes – only 14.3% of all U.S. residential sales in May 2014 – distressed sales are still disproportional when compared to pre-meltdown rates. Rounding out the picture is the recent increase in the volume of home sales and rise in median home prices, despite the high level of activity for distressed properties.

This all begs the question – what do buyers of these distressed assets intend to do with them? And, perhaps more importantly, who is financing (and underwriting) all of these distressed home sales?

As to the first question, the answer of course varies by buyer. But there is a growing sector of buyers who are looking to recapture value in what they believe to be significantly undervalued homes. The median price for distressed homes in May of this year ($120,000) was 37% below the median price for non-distressed units nationwide.[3] Private investors are capitalizing on opportunities to purchase these homes at low values (relative to historic prices), adding value by renovating them, and then holding them out for lease or resale at prices on par with or better than the non-distressed inventory.

As to the second question of where the money is coming from, it is clear that traditional banks are not willing to finance the “fix-and-rent/flip” investors. These loans – characterized by banks as high-risk but low-yield commercial loans – are not the types of credits traditional lenders want to put on their books. Instead, much of the capital is coming from Wall Street equity. Perhaps the most illustrative example of this is the story of Blackstone Group LP. Blackstone, one of the nation’s largest investment firms, has spent the last two years becoming the country’s largest residential landlord by buying 41,000 properties, most of them distressed. Industry wide, institutional funds like Blackstone’s have acquired 1 million homes in the past three years.[4]

But the U.S. housing market is no small pie – based on the most recent numbers from May, sales of residential properties exceed 5 million units, or close to $1 trillion, on an annualized basis.[5] So even taking into account the abundance of Wall Street money, the level of activity in the distressed space indicates a large body of potential borrowers underserved by traditional lenders.

Stepping up to fill that void are entrepreneurial real estate veterans who are forming private funds that originate and acquire home mortgages specifically for the “fix-and-rent/flip” sector. The private fund lenders are making short-term (6-12 months), relatively high yield loans for acquisitions of both distressed and opportunistic residential properties. These lenders are also using warehouse lines of credit (somewhat paradoxically, often from national banking institutions) to further improve returns to their investors by leveraging their lending activity. Perhaps even more ironic, the loans acquired by the private fund lenders are sometimes securitized and resold to the investment arms of big banks – banks that would not have made the underlying loans in the first instance.

One important question is whether the model developed in the changed home mortgage industry can and will be duplicated in other underserved credit markets. Much of the same economics – high volumes of distressed properties selling for markedly discounted values and historically neglected by traditional banking institutions – are at work in other industries as well. Distressed small apartment buildings and small shopping centers may next capture the attention of Wall Street and the private fund entrepreneur.