Avatar's Blog

I've been hearing variations on a theme from the brokers I chat with each day.... the recent hikes in interest rates coupled with the noticeable tightening of the reigns on lending criteria among commercial banks is changing the investment residential landscape in the US.

Across the country, I am hearing brokers talk about record numbers of inquiries at the close of 2005 and early 2006. Brace yourself - if these brokers are correct, next week is going see an increase in that onslaught. The largest increase in hard money loan inquiries is among homeowners. They are the canaries in the coal mines*. When homeowners who financed with short term ARMs during the low interest rate window a few years back find themselves unable to meet the continually increasing monthly mortgage payments, they begin to default. We are seeing this phenomenon in single family dwellings and condos/coops, alike. When condo owners can't keep up, prices start dropping - good deals will be out there, courtesy of desperate sellers or the banks that foreclose on them. With an increasing number of such properties (I hesitate to call it a glut, but there will be some and they will increase through the winter/spring), the condo conversion craze will cool.

We saw plenty of investors grabbing up apartment complexes around the country and converting them to condos, reselling the individual apartments for many times more than the amount they paid for the total property. What was a good game plan last year, may not work so well this year. With more people losing condos and SFDs to foreclosure and incresasing interest rates, there will be more folks looking to rent their homes rather than buy one.

I'll be watching to see how the story unfolds this winter. But today, put me down as being 'bearish' on condo conversions and 'bullish' on apartment complex ownership and construction - especiallly in the Southeast.

* Miners used to take canaries into the mines with them. Keeping them close at hand, it wassomeone's job to keep an eye on the birds to be sure they were breathing and well. Canaries are extremely sensitive to carbon monoxide and will die well before adults humans suffer the same fate. If the birds died, the miners had a short window of oppotunity to get out of the mine before suffering carbon monoxide poisoning. Watch the homeowners - they are investors' canaries.

When issuing a Letter of Intent, Avatar generally wants to see P&Ls for the business entity that will support the loan payments, photos of the subject property, and a Personal Financial Statement on the borrower(s)/guarantor(s) of the loan.

Avatar takes a look at loans from a number of different angles to make a decision about loans based on all . The purpose of the Personal Financial Statement (aka 1003) is to see the sibstance of the person or business entity behind the real estate guarantee. The financial situation of the guarantors of a loan can serve to support the argument for financing.

 When creating a Personal Financial Statement list assets, liabilities and indicate the net value of the personal estate. Real estate, investments, bank accounts, and personal possessions such as art, antiques, and household goods may also be applicable.

Avatar Financial Group funds loans that make sense for both the borrower and the lender. To determine whether a loan makes sense for a borrower, A Avatar Financial Group takes a look at P&Ls (profit and loss statements) for about two years' history for the business entity that is going to support the monthly interest-only payments for the life of the loan. When preparing your financials, take a look to see whether you are bringing in at least 1.2 times the sum you have to spend on all your expenses, including the Avatar loan in any given month. This will provide you with a reasonable cushion of cash flow. In the event that you run into a bump in the road during the loan, you will be able to get over that bump rather than run into serious trouble or disaster.

Create a list of your expenses. Remove any existing loan payments that will be paid off with the Avatar loan. Insert the Avatar loan expense instead and take a look at the numbers. You'll know whether this hard money loan is going to make sense for you.

After a Letter of Intent is issued by a hard money lender, the next step is the due diligence process. Due diligence at Avatar FInancial Group consists of the following:

• Review of any existing appraisals and a review of the property by Avatar's appointed appraiser. The appraiser determines the reasonable quick-sale value of the property on which to base the loan. Quick-sale value is the sum one can reasonably expect to receive for a property in the event that it is sold in four to five months' time.
• Review of the property by Avatar's CEO or president. A senior staff member will fly out to the property and walk the premises. The borrower does not need to be present by access is, of course, required.
• Review of P&Ls from the entity that will support the monthly interest-only loan payments. Avatar will look for signs that the loan makes sense for the borrower as well as the lender. The borrower should be able to show that there is sufficient income to pay all the monthly bills including the Avatar loan and still have a few dollars left over to put into a pocket. In other words, if the borrower runs into a 'bump in the road', there will be sufficient cash on hand to get over that bump. Avatar makes loans that make sense for the borrower as well as the lender.
• Legal review - by legal counsel for both the borrower and lender
• Gathering of documents such as tax returns, title, survey, insurance information, etc.

The first stage of a private money loan approvals is the issuing of a Letter of Intent. When you submit a loan to Avatar, your loan is reviewed to be sure we are a good match for your needs. If the LTV, loan size, property type and location, and borrower equity ratio is sufficient, then a Letter of Intent is issued to you.

The LOI is generally emailed to the broker of record who then forwards it to the client. To get a Letter of Intent, be prepared to provide the following:

• Photos of the Subject Property
• Personal Financial Statement on the Borrower(s) / Guarantor(s) of the loan
• P&Ls from the entity (last year and YTD this year) that will support the interest only monthly loan payments.
• Executive summary

The executive summary is an important element of the loan package. It should contain information about the borrower, the object/purpose/use of funds of the loan, length of time the funds will be needed, why the borrower is seeking hard money rather than a conventional mortgage, exit strategy and any pertinent info that will help Avatar to determine whether this is a loan Avatar is prepared to fund.

Keeping information about 'skeletons in the closet' or 'bumps in the road' hidden at this time is a costly mistake for borrowers and brokers alike. Once the LOI is issued, the borrower will be asked to sign and return the Letter and wire (or pay via online form) a down payment toward the third party costs of due diligence. If the full lending scenario is not disclosed before the LOI is issued, that information will come out during the due diligence process. It does not serve the borrower well to have the down payment funds spent in pursuit of a loan that does not meet lending criteria when a quick yes or no is possible without any expenditure of funds.

Brokers and borrowers are encouraged to provide complete information about the loan situation and borrower when submitting the initial loan scenario. Within a few hours, you will have a reliable answer from the CEO and/or president of the company - a response you can count on. For more info or assistance with submitting loan requests, email gillian@avatarfinancial.com.

When you submit a hard money commercial loan request at Avatar Financial Group the request proceeds through a series of reviews in order to proceed to funding. Here is what to expect:

1. Initial review - your request is reviewed to determine if it meets Avatar's lending criteria for size of loan, loan-to-value ratio, property type, etc.
2. Initial review by the president or CEO of Avatar - at Avatar, qualified loans go directly to the top. Photos of the property, financial statement, and P&Ls on the entity that will support the loan payments are reviewed. If the loan 'makes sense', a Letter of Intent is issued.
3. The borrower reviews the terms, rates, etc. of the Letter of Intent. If s/he wishes to proceed, the Letter is signed and a downpayment toward the third party costs of due diligence is made.
4. Avatar proceeds with the due diligence process including an inspection of the property by a senior Avatar staff member, an appraisal review by Avatar's appointed appraiser, financial document reviews, etc.
5. Once the due diligence process is completed, the funding documents are prepared. Legal counsel for both the borrower and lender review the documents and 'sign off' on it.
6. The loan is funded.

For many months I have written the blog for Avatar Financial Group. In the beginning, I wrote the column as a TIPS log, helping new and seasoned brokers alike to understand what a good loan submission package contains and how to increase 'Yes' answers for their loan requests.

After awhile, I turned to news, closings, and other info about the hard money commercial loan business. After a few months, I noticed more and more emails coming in asking me to return to my original focus - helping brokers be better brokers.

So that's what 2006 brings to the Avatar blog - a return to our mission of providing excellent service in every we can to borrowers, brokers and professionals in the hard money commercial lending profession.

Here's to the New Year - may you all increase your client base, may your loan packages improve daily, and may more of your loans close as you become increasingly more capable at submitting 'winning' loan packages.

Tip 1 - PHOTOS. I predict that I will come back to this concept numerous times int the coming year. But let me start off by saying that loan scenarios that come in with excellent quality photos - good lighting, exterior and interior images showing clean, well maintained properties, are funded at a rate of better than two to one.

This has nothing to do with the financial business. It has everything to do with human nature. Put yourself in the shoes of the lender. She or he has more than a hundred potential deals to review in a week. Which ones take precedence? Easy - the ones where the lender can quickly see exactly what it is that they are being asked to put their arms around and lend money on.

Speak with your clients about the importance of good photos. Photos should be submitted in email format - low resolution jpegs. Trust me on this - if you have monster files that clog the lender's email server, you will not be their favorite broker this week. Learn to reduce images, improve highlighting, increase light or clarity, etc. for the images you submit. The time you spend learning this and tending to the images will pay off in more closed loans - definitely worth your while!

Good luck - I'm looking forward to working with you in 2006.

Over the years, Avatar Financial Group has developed a well earned reputation in the industry for living up to our byline - "a refreshing change from business as usual" in hard money lending. We focus a good deal of our attention on the quality of the service we provide, from initial contact through completion of the loan. We try to be sure that brokers and their clients are respectfully treated with straightforward, timely information and action.

We also choose to work with providers who help make our information dissemination and marketing serve our clients best. SEOmoz, LLC of Seattle, WA manages our website, including design, content, and search engine optimization (hence the name, SEO. For those who are interested, "moz" doesn't stand for anything, but stemming from the site Dmoz.org, an Open Directory Project, it has come to mean free or openly shared technologies.) This week, Newsweek wrote an article about the work of SEOmoz.

If you have ideas for information you'd like us to provide you, or want to sign up for our newsletter, which provides news about recent closings and tips for developing better loan packages, new clients, etc.please contact me at gillian@avatarfinancial.com.

Jean-Maxime would like to point out that there's a case to be made for OIL at $100 a barrel. He says, "I knew three years ago we were going to see higher oil prices. $75 a barrel is a given. Higher oil prices are going the be the norm for a while. The prices of the past years were artificial. Heavy demands are constant now, particularly from India & China. They are now competing for raw materials / commodities across the board, driven prices up."

So what's that got to with real estate? Everything. The cost of operating properties is going to continue to rise. You can pass these costs to your tenants, but you will see the reflection of increases in your bottom line as well. The market will only bear so much. Calculate what oil at $100 will do to your bottom line before investing and when considering what to sell.

Also consider what will replace oil. Natural gas, solar, hydro, and other options begin to be very competitive when oil hits $65 a barrel. We're there, people. Time to see what retrofitting will be needed in your properties to take advantage of cheaper energy options.

CB Richard Ellis announced that they arranged for the sale of the Wingate Commons in Fort Lauderdale to Weston Wingate for $3.75 million. Houston based real estate trust, Hines Real Estate Investment Trust is offering $200 million in common shares and is planning a $2.2 billion IPO. The commercial news of sales, increases in prices and soaring times for Invesment Trusts continue.

At the same time, residential real estate news i showing signs of cooling all over the country. And every one of the articles contains caveats that although homes are taking longer to sell and prices are not soaring as quickly as they have been, the housing market is still as hot as ever.

Well, yes. And no. It is not possible for things to be slowing and things to be the same. Simple physics. That said, it is true that the housing market is still hotter than it has been in many decades. It just isn't as hot as it was only a year ago. So buyer beware. I am getting more and more requests for residential bridge loans from folks who are having trouble selling their homes before they buy the new home. They still feel they have to get in on the home they want now before they are bid out or lose the opportunity. However, they are not getting the same response from others when trying to sell their own homes.

Location? Hardly. The requests are coming in from the San Francisco area of CA - from up and down the coast of CA for that matter. Denver, Houston, Wichita, Boston, Atlanta. It seems to me that the problem is more the with the particular sellers than with a specific area. Houses are selling a little slower - that's all there is to it. Some folks aren't quite catching on and they are desperate to get into that ne home before they have a firm sale on their own.

My advise? Settle down, folks. Your house might take a few months to sell, instead of a few days or weeks like your neighbor's home did last year. No big deal. But things are beginning to slow.