Avatar's Blog

Both conventional and hard money commercial lenders perform "due diligence", a process whereby the validity of statements made by the borrower, and the value of the property involved, is authenticated. Hard money lenders must work quickly and efficiently to determine the value of the subject property, as well as determine the veracity of the financial documentation provided by the borrower.

Signs of fraud in loan packages can be found in inconsistent financial data, poorly maintained or hastily made profit and loss statements, lack of willingness to provide tax records for personal income, corporate income, or the property, etc. The more 'transparent' your financial affairs, the better your chances are for getting funded with a hard money loan at an advantageous rate in a timely manner.

Hard money lenders consider risk factors involved in loan requests when determining whether or not to consider a loan request. They look for signs of fraud in the loan application as well as in the property itself. Loan documentation, while less onorous than conventional bank loan documentation, is still an important part of the due diligence process of hard money commercial lenders.

Avatar looks at the property location, condition, sales history, tax records, past, present and potential usage, as well as the personal financial information of the borrower to determine the relative risk involved in a specific loan. The more prepared you are with complete financial and historical informaiton concerning your property, business and personal net worth, the more likely your loan will be approved and fund quickly.

The 1031 rollover is one of the best things to happen to real estate investors. By selling and then buying a like-kind property within a specified period of time, investors can roll over their investment capital tax free (for the moment), providing them with more working capital to reinvest. There are many rules to follow, so if you are not aware of this process, it is best to start at the IRS website.

The problem with 1031 rollovers can often be the time constraints on buying the new like-kind property. Once identified, if the property is a single family dwelling, the likelihood of being able to purchase another is reasonably good. But, if you are rolling over an apartment building, commercial or industrial building, trying to complete the identification and purchase of the next property can be a challenge. Fortunately for 1031 rollover clients, Avatar Financial Group can close a purchase loan within two weeks of the time the borrower submits a complete loan package and down payment toward the costs of due diligence. Sooner, if necessary. Contact Avatar if you need to close quickly.

Recently, Avatar Financial Group ran into an interesting scenario with a residential apartment complex located in California. The building was developed and used as an apartment building. It was sold a few years ago to a non-profit organization. The new owners wanted to remove the existing tenants and place tenants in the building who served the organization. This seemed like a good idea, as it would provide housing, community, and a real benefit to the organization's people.

In order to be able to remove the existing tenants, a government zoning regulation required the organization to make a determination to remove the building from the status of being in the rental housing market permanently. The organization stewards signed the documents and the buildng was removed from rental status and the tenants removed to make way for the organization's new purpose.

Sometime later, the organization wanted to use the building as collateral to generate working capital for community projects. They approached lenders only to find that title to the building, restricting it from ever being used for rental purposes, has dramatically reduced the value of the property. Borrower and lender are now trying to obtain a determination as to whether, should the building be sold or transfer hands again, it can ever re-instate it's status as a residential rental property. If not, it will be almost impossible to sell the building at all. Only the raw land will have any value at all. Be careful how you steward your investment properties. What seems to be a good idea today may have long term and far reaching consequences.

Several previous tips have focused - and provided - a list of documents required at closing. It is important to note that the documents submitted must be signed by the guarantors. Use blue pen, so anyone cna be sure that the signature is an original. Print out and sign tax returns, P&Ls, personal financial statements, etc. Each item that requires borrower signatures will be clearly delineated in the list provided with the Letter of Intent and Term Sheet.

Avatar Financial Group does not charge up front fees to review loan packages. A loan package is comprised of color photos of the subject property, perosnal financial statement, P&Ls from the property or other business entity that will support the monthly payemtns for the loan, and, if available, a recent written appraisal of the property. With this information, Avatar is able to make a reasonable determination that the property and borrower meet the criteria for funding. If the answer is 'yes', and the borrower chooses to exercise the Letter of Intent, by signing, only then will Avatar request a down payment toward the third party costs of due diligence.

The due diligence process includes a site inspection by an Avatar representative, usually the president or CEO will personally make that visit and, if possible, meet with the borrower as well. An Avatar appointed appraiser will determine the quick-sale value of the subject property. This is not a traditional complete appraisal. Rather, it is a determination of the price Avatar can expect in the event that the loan defaults and the property needs to be sold on short notice. This will be the value on which the loan amount will be determined.

Finally, a review of financial documentation, legal, and escrow work will be completed and the loan will be funded.

Private lenders have lending criteria as varied as conventional lenders and even more so. Here is Avatar Financial’s Lending Criteria:

•  Loan size - $500,000 - $10 / $15,000,000
• Location - Urban and suburban US properties
• Collateral - Improved commercial & investment residential real estate
  (not land or construction)
• WA & CA – residential owner occupied
•  Rest of country - residential owner occupied if held in a corporate entity and proceeds used for business purposes
• Rates -Prime + 7% (about 12.75% today) + 4pts
• Terms -1-3 years (no prepayment penalties after ~6mos)
• Max LTV -65% LTV* –
• “value” = actual purchase price of the real estate for purchases.
• “value” = Avatar’s opinion of the appraised value of real estate for refinances.
• Creative: Interest only payments; blanket 1 loan over 2 or more properties; can wrap points and fees into the loan

 

There are two types of private lenders: instutionally funded lenders and investor funded lenders. Regardless of the type of loans the private lenders makes - real estate based, equipment loans, personal loans, land, construction, factoring, or any of a thousand other types of loans, the source of funds comes from one of these two sources.

Investor funded lenders are companies formed to connect borrowers and private individual lenders. For example, private high net worth individuals who wish to invest in mortgage backed securities contact investor funded lenders to indicate how much they have to invest and, perhaps, what kind of projects they are interested in investing in. As with any investment process, there is a screening process to assure that the investor is qualified to make the investment. Then the investor remains on a list of potential investor funding sources for the company.

The investor-funded company promotes its lending capabilities and specialties to the business community, inclduing brokers and borrowers. When a loan request is submitted, if it meets the lending criteria of the lender, a prospectus is developed and 'floated' to the group of investors who have expressed interest and been qualified. The money is collected, due diligence is completed, and the loan is funded.

Investors are paid a reasonable return on their investment in the way of interest payments, the company takes a payment in the form of interest and points as well. The advantage of an investor funded lender lies in th epoosiblity that there will be greater flexibility in lending critiera, in other words, a greater likelikhood of finding private individual investors who will take on greater risk projects for a higher return on their investment. The drawbacks are that it may cost more for the loan and may take longer to get all the money collected from the investors to fund the loan.

Brokers and borrowers alike are always looking for the direct private lender - the source where the checks are written. Almost all the 'lenders' advertising in print and online media today are brokers pretending to be lenders. This unfortunate situation leads to a poor reputation among all hard money lenders and brokers in commercial and residential financing.

Whnd contacting leads located in print or online media in search of direct lenders, it is prudent to ask, "How are you funded?". This simple question will separate much of the chaffe from the wheat. If the party on the other end of the phone stutters or hesitates, you're almost certainly speaking with a broker. Trust me on this.... lenders know where their money comes from; they know how they are funded!

There are only two answer to the question of funding source: investor funded and institutionally funded. And there are advantages to both. Tomorrow, I will cover the differences between the two types of funding for direct private lenders.

Recent reports indicate borrowers are abandoning fixed-rate financing options in favor of adjustable-rate and interest-only loans. Adjustable rate and interest-only loans accounted for 63% of originations during the second half of 2004. Especially in the higher cost SFD market, purchasers are increasingly likely to utilize ARMs and interest-only loans, whereas these products have traditionally been used to lower monthly payments only when fixed mortgage rates rose to unacceptable levels. 100-percent financing and no- or low-documentation loan products, in conjunction with ARM and interest-only products, increase the financial risk for borrowers if a rise in interest rates causes monthly payments to rise or property values to decline. Between the popularity of these types of loans, soaring debt among the US population, and new bankruptcy laws, we may well see a sgnificant increase in foreclosures, as was the case in the late 1980's when interest rates rose to more than 18% for adjustable rate mortgages.