Avatar's Blog

Brokers around the country are reporting that during this busy time of year, they are seeing continued interest in condo conversion complexes, but less so than last year. I hear the the southeast is still largely designated as 'undervalued' in both residential and commercial properties. Residents of Charlotte, Atlanta, Jackonsville, Nashville, etc. note that the income levels in those 'undervalued' cities are not commensurate with those of the more expensive cities. But that doesn't seem to stop the price of housing and commercial properties from continuing to rise anyway.

 

Refinancing your commercial property to generate some working capital? Here are some tips for getting started:

• Contact local realtors. Ask them what you could expect to the sell for if you had to sell it in the next four to five months. Ask at least two.
• Consider that realtors want your business and may wear rose colored glasses when quoting you a number. A more realistic number may be something than what they promise you.
• This is the quick sale value of your property and will differ from the MAI appraised value.

To determine how much you can pull from the property, take the quick sale value of the property and multiply it by 65%. Reduce the product by any outstanding liens on the property, including mortgages, tax liens, etc. If some liens can be subordinated, you may be able to keep those in place, so long as the total loans to value does not exceed 80%. The reason? The owner/borrower must always have some equity in the property. Avatar lends up to 65% LTV and permits another 15% in subordinated loans.

P&Ls are not tax returns. They are profit and loss statements. They can be made to demonstrate different phenomena of your business and can be focused toward different readers. If you are making a P&L for a loan package, your P&L should show:

• gross income
• operating expenses including rents, cost of goods, labor, debt service, etc.
• net cash flow into business

Then you can add another section showing capital improvements, major acquisitions, etc. If you simply run it all together, you can make a cash cow look like a money losing proposition. Make sure your P&L shows your business in an honest, but favorable light. Show the cash flow and then show what you spent the income on that will improve the business in the short and/or long term.

Avatar is not a bank lender - we don't fund basd on FICO scores, etc. We don't care what your mother's uncle dog died of and we won't ask why it was your fault. That's what banks do. We lend on loans that make sense for the borrower as well as the lender.

So why do we ask for tax returns and FICO reports? When determining the relative risk factors in any loan, it is prudent to see how low that risk can be proven. If you have solid tax returns over the past few years, that will bolster your request. If not, we won't decline the loan. If your FICO shows low FICO scores, but your P&Ls show strong income, then we know why you are coming to hard money. Banks don't like low FICO scores, but low FICO is not an insurmountable obstacle to our funding of your loan.

We use these elements in our due diligence to see that you are who you say you are and that your numbers 'make sense' all around. Before we do our due diligence, take a moment to do some due diligence of your own. Take a look at your own numbers to see whether the loan you are requesting makes sense for you and your business. If so, you'll be able to make a reasonable argument to Avatar as well.

Calling all brokers! I need your input. I've been writing tips and thoughts about the industry in this column for some time now. A few of you mention that you read it regularly. More of you mention that you read something in particular and take issue with the sentiment or agree.

Now I need your help in a big way. If you read this column, I need to know what's happening in your town. What laons do you specialize in? What's getting funded? What isn't? What are the trends you are seeing? Share your wisdom and I will share it (minus the proprietary stuff, of course!) with your colleagues.

Help me make this a banner year for all of us in the non-conforming lending business. I'm waiting for your emails at: gillian@avatarfinancial.com.

Not sure why, but I am having trouble lately getting decent color photos of subject properties with the loan requests. Brokers and borrowers alike are desperate to close in 14 days or less, but they can't seem to come up with a few clear photos of what they are asking Avatar to lend on.

Here's the tip, folks - loan requests that come in with good quality color photos of the exteriors (and a few of the interior) of the subject property get funded at a rate of better than two to one. This is because photos really are worth a thousand words. When I give a loan package to Avatar's CEO or president, the first question is, "What am I wrapping my arms around here? Show me the photos." If the photos pass muster, they'll look at the numbers and the story. Without photos, there's no loan to consider.

Send photos, folks! It is the fastest route to getting your loan package in front of the president or CEO and getting your loan funded.

Avatar strives to provide an initial response to every loan request – more than 2000 per month by the end of 2005, within 24 hours. Starting on January 2^, of the new year, loan requests began flooding into the office. I am more than three day’s behind in answering loan requests here at Avatar. (Not to worry, by Monday I will caught up again). But – brokers and investors take note…. I have to tell you most of the requests are the fallout of the draconian law signed into effect in April 2005. This sickening piece of legislation has ripped the bankruptcy safety net out from under responsible working families to the benefit of irresponsible credit card companies who foisted loans, credit cards, and other lending instruments on people who could ill afford to pay the usurious and ever increasing interest rates of these ravenous monsters.

 

The hardest calls I field are those from people who are losing their homes due to foreclosure. I hear the same stories again and again. Most say they “know” that “most people” who declare bankruptcy probably spent too wildly and deserved it, but their situation is different – they have a child, a parent, a spouse or other family member is dire medical straights. They have lost jobs, been hit by natural disasters, and more. The hear trenching stories go on. I’ll tell you what: this tall tale that people who go bankrupt and are foreclosed in America are in that boat because they deserve to be there is the biggest, most ugly lie corporate America and our own bloated-with-personal-wealth-they-want-to-protect-and-increase government officials we have ever seen. The founding fathers are rolling in their graves now. What’s next – debtor’s prison?

 

And what does that mean to brokers and real estate investors around the country? Apartment rentals are going to be hot – people who lose their homes need to rent a place to live. Condo converters beware. Some of those buyers will lose their homes with the adjustable rate mortgages now beating them into penury. They will be renting apartments next year and their condos will be selling for a song – which will directly compete with your ‘retail’ priced condos now being converted.

 

I’m looking for what this will mean to retail strip malls, office buildings, industrial centers, golf courses, ski resorts, mobile home parks, and more. The country continues to lose the middle class. Look to the extremes to serve the markets that are growing.

So many folks - both borrowers and brokers are surprised when they do business with Avatar. Our slogan is "a refreshing change from business as usual" and we try hard to live up to it. But it occurs to me (must be the spirit of the season not quite wearing off) that hard money doesn't have to be such a rough place to make a living.

I hear from literally hundreds of brokers and borrowers with loan requests every week. I do my best to return every call within the day or at the latest the next day. I do my best to respond to every loan request in an equally timely manner. Do I succeed? Not every time. But Avatar's reputation for being respectful, accountable, and reliable is based on the fact that we strive for that kind of response time and succeeed almost 100% of the time.

Moreover, I note that more often than not, borrowers and brokers alike begin their conversations with a bit of a brusqueness in their voice. By the time we hang up only a few minutes later, their voices are more pleasant and they have generally shared something personal or at least friendly in tone before saying goodbye. As we look to the New Year and consider ways to increase busines, I'd urge every professional broker 'out there' to consider beginning their conversations with clients and potential clients, as well as with colleagues and lenders with a kinder tone and an expectation of civiility. It's got to start somewhere - why not with you? You'd be amazed at how your cadre of Raving Fans grows and how quickly your referrals increase. Old news? Sure it is. But I can tell you from personal experience as well as from the Sales masters, simple civility and inherent kindness will increase business in the short and long term more than almost any other trait in the business.

Brokers around the country are reporting a banner start to 2006. With banks and conventional real estate lenders tightening the reigns on business, investment and real estate lending,  non conforming loan brokers are finding their phones heating up.

Commercial purchases are up in the southeast and south central states. The northern midwest, usually quieter in the winter months is seeing a brisk upswing in real estate loan requests.

By far the most noticeable increases are still in the owner occupied residential lending arena across the country. Hardest hit appear to be the midwest and southeastern seaboard with more requests for foreclosure bailouts than other parts of the country. Condo-conversion afficionados take note - if condo and home owners are being foreclosed on, they will need new residences in a hurry. And the first stop will be apartment buildings. Check the litmus papers to see if it's really time to convert those apartments to condos. Consider whether you might to be the only apartment complex left in a town with empty condos and increasing numbers of folks looking to rent instead of purchase.

The first stage of approval of a hard money loan results in the issuing of a Letter of Intent. In order to get one, Avatar's president or CEO takes a look at photos of the subject property, a personal financial statement on the guarantor of the loan, and P&Ls from the entity that will support the monthly loan payments.

When submitting a loan to Avatar, start by filling out the 2-minute loan scenario form accessed from the home page. The form will ask for some basic information, including when you purchased the property - or when you plan to buy it. You will be asked what you paid (or will pay) for the property and what the current value is. If you have an appraisal, enter the value and the date of the appraisal.

Provide a short executive summary in the notes section of the form - tell us what you are planning to do, why you are seeking hard money rather than a conventional loan, how the monthly loan payments will be made, how long you plan to keep the loan and what your exit strategy will be. An exit strategy is the manner in which you will pay back the loan at the end of the term of the loan. This might include sell the property, refinance it, or obtaint he money in some other way.