06/19/2009
To Be Truly Successful in this Market, Educate Yourself
It is no secret that the real estate market is extremely volatile right now. Property values are increasingly hard to pin down, borrowers are less and less able to make payments, and we are facing an abundance of other challenges on a daily basis. In this type of situation, it is more important than ever for brokers to learn how best to sell a deal and to take advice from the lenders they work with to ensure they have a successful transaction.
As a small, private money commercial lender, we have dealt with thousands of brokers over the years. We have seen all kinds of deals—from the craziest, most absurd schemes, to the most solid private money deals that any lender would love to fund. In this market, it is more important than ever that brokers understand what they are doing and communicate in a way that enhances their credibility rather than undermines it.
Many brokers do not know much about commercial real estate lending but profess a desire to learn about it and to do more commercial deals. We often see these people trying to convince us of the value of a piece of property, the manner of calculating cash flow — or any number of other underwriting criteria — when they really know little or nothing about them. A broker is far more effective — and ultimately successful — with lenders when he or she takes the time to learn some of the basics of commercial real estate and finance: DCR, NOI, Cap Rates, NNN, price per square foot, rent per square foot, owner user vs. income property, etc. If there is something he or she does not know, then that broker needs to acknowledge it and be willing to learn from the lender.
With the downfall of residential markets, many brokers are trying to survive by getting into areas with which they have historically been unfamiliar. In this type of circumstance, it is best to follow the guidance of the lenders and underwriters. A broker should find out what their guidelines are and understand the key factors that will enable a deal to close successfully. A broker can then find deals that fit the parameters set forth by the lender and abandon those that do not. One of our top Correspondents has been highly successful due to his ability to walk away from deals that do not meet our standards. The number of deals we see that have no prayer of getting funded–anywhere, at any price, by any lender– is astonishing, and yet salespeople will work for weeks or months on them in hope of a payday that is destined not to come.
To truly be successful in the world of commercial lending, it is fundamental for all brokers learn what does and does not meet the criteria the lenders they are working with have set forth. It is essential to ruthlessly cut out the deals that have no chance of closing and concentrate on the ones that are as close as possible to the guidelines. Doing so greatly increases the potential to make more money, have more fun, and keep borrowers happy!
06/03/2009
Fairway Offers Interest Rates Starting at 8.85%
FAIRWAY AMERICA UNDERSTANDS THE VALUE OF TIME AND MONEY!
Fairway is introducing rates on commercial properties starting as low as
8.85% on private money products.
Get your next loan at bank rates with the speed, ease, convenience and flexibility of a hard money loan.
Call Fairway America today!
(800) 454-0564
www.fairwayamerica.com
05/27/2009
Understanding Commercial Hard Money Investment Loans-Significant equity is the key to a successful closing
Many residential brokers are expanding their businesses by offering solutions for clients seeking small commercial mortgage loans. Multifamily properties in excess of 4 units are the most common commercial loans for residential brokers to handle. There are countless conforming lenders that will accommodate brokers for these transactions, if the borrowers and properties qualify for traditional loans. But how do you succeed in placing these loans when traditional lending sources aren’t an option?
If a borrower or property is not bankable, you may soon find yourself in hard money territory. Hard money commercial lending is generally described as a type of lending that will accommodate borrowers when lower interest rate solutions are not possible. Average pricing on these loans is typically double-digit interest rates, and fees in excess of two points.
Hard money products are designed to provide solutions when no other options are available. Credit, cash flow, property type, closing times and many other factors may establish a borrower’s situation as “hard money.” Of course, these loans come at a significant price. Loan payments on hard money commercial mortgages can nearly double those of traditional commercial loans (described currently as loans priced at 6-8% and 2 points or less). These higher rates and fees often create payments that eclipse the cash flow from investment properties. Therein lies the difficulty of using hard money products for investment properties.
Investors with good credit and a solid, performing property should succeed in obtaining or refinancing an investment property with a small amount of cash into the deal. Their bankable qualifications should also place them in a product with relatively low interest rates, allowing them to maximize their cash flow on the investment with little into the transaction. Of course, the larger the injection of equity into any investment property deal, the greater cash flow on the property.
There are times, however, when a client or property does not qualify for a traditional loan, and hard money is the only option. At this point in the process you will likely run into two challenges:
The Reality of Hard Money LTVs
First, hard money lenders will generally provide no more than 60-70% of the value of the property. This often makes investment property loans difficult because in most cases, borrowers for investment properties are looking to purchase with little to no money down. This is sometimes overcome by a seller’s willingness to offer a private contract. Typically, in these situations, the seller’s loan sits in second position, and bridges the gap between what hard money lenders will provide and what the borrower can put down.
It should be noted that hard money commercial lenders are relatively conservative in their estimation of property values. Be comfortable the property value the client is representing is realistic before brokering a commercial hard money investment loan. If this homework is not done ahead of time, considerable time and energy may be expended without any real hope of the deal closing. In the case of a purchase, be aware that the purchase price of a property is usually an accurate approximation of the true value of the property. Don’t fall into the trap of believing that your client got the steal of the century! 99 times out of 100, a property, commercial investment or otherwise, is sold for a price close to its actual value. People just don’t give away money in real estate transactions.
The Impact of Hard Money Interest Rates
The second challenge of aligning a hard money loan with an investment property is the fact that hard money loan payments, especially in situations where the borrower has little equity into the deal, generally offset or eclipse the cash flow generated from the property. In determining the value of an investment property, income from the tenants is the driving factor.
So, if you run across a client looking for a commercial loan, and they don’t meet the requirements of traditional lenders, you stand a much better chance of closing the deal if they have significant money to put down, or equity in the property of at least 30 percent. This equity injection may offset the negative effects of the hard money rates and fees, and make the property a profitable investment for the client.
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