12/17/2008
Private Money Loans That Are Likely to Get Funded
With the general lack of financing available in the marketplace (banks, conduits, life companies, credit companies, etc.), borrowers are increasingly having to look toward private or hard money sources to get the financing they need. As a result, we are seeing a large volume of deal flow at this time. Much of it is not very attractive as new deals for a variety of reasons. Here are some thoughts on what we, and other lenders that are active in the market, are looking, as well as not looking, for.
First and foremost, lenders are looking for deals with viable, legitimate sources of repayment. The days of “stated income” or no clear exit strategy are gone. Deals that are reliant on the sale of property in order to pay back the loan are also dicey in this market. As most people know, the inventory of property on that market is very high. There are many properties available, there is not a lot of financing available, and prices are very difficult to gauge at this time. As a result, a loan structure that relies purely on the sale of the property with no real ability to service debt until that happens is increasingly less likely to get funded.
We are seeing many, many land deals. Busted subdivisions, projects that are partly completed, parcels of bare land, or other types of projects with no buildings on them are everywhere. Our experience is that these are virtually impossible to get funded with debt in this market. With the oversupply of property already on the market, the marketability and value of land right now is very low. Combine this with the fact that there is no repayment source or income being generated from the property and these are probably the least likely loans to be funded in this environment. A much more likely source for capital for these projects is equity, and even that is very hard to come by and is, of course, very expensive.
We are also seeing lots of borrowers who are being asked (to put it politely) to leave their current banking relationship. Many are still current on their payments but have covenant violations (debt to worth requirements, debt coverage ratios, etc. that do not meet the banks guidelines). If there is good equity in the property, and the property is either occupied by a user, rented to one or more tenants, or is rentable to a variety of types of tenants or users, these can be very attractive scenarios for private money lenders. We are actively lending in situations like this where we have a viable borrower and a property that has reasonable marketability, flexibility and/or rentability.
Most lenders I know have far higher delinquency than they have had in the past. Therefore, they are actively involved in collections, workouts and default situations. Because they are spending a lot of time on this, they are acutely aware of new deals strengths and weaknesses and what the likelihood is of delinquency, default, and/or impairment is or is not.
In short, we are in an extremely fluid and challenging market environment. Lenders with capital are being very choosy about what projects they are funding as there is a high flow of volume to wade through with many projects not making a lot of sense or relying on the ability to liquidate property at values that are not likely to be realistic any longer. Projects with viable repayment ability and good exit strategies are far more likely to get funded today as lenders are trying much harder at making loans that are not likely to go into default.