Avatar's Blog

Bridge loans are saving the day for some businesses in the areas hit by the recent hurricanes. I have been reading on msnbc financial news about companies who are receiving very short term bridge loans to help pay for rehab of properties and, perhaps equally important, to get over the lack of business in the area while the town rebuilds itself. ....So goes the line.

The economy in general does seem to be trucking along. NPR was touting our national economic health just this morning again, "...despite Hurricane Katrina, other storms, and War in Iraq," said the newscaster, "our economy is showing signs of remaining robust in the coming months." That's all fine and well for those of us who don't live in Katrina stricken Baton Rouge or the State of Louisiana for that matter.

There is an uncomfortable underlying current of lack of health and inability to revive in Baton Rouge that many seem to be ignoring. I don't see hard money loan requests coming from that region at all. That's troubling. The raison d'etre for hard money is to be a source of funds when wolves are at the door, and the banks won't, don't or can't fund. We at Avatar expected to be deluged, as did other hard money lenders. But they have not matieralized. The only bridge loans I am hearing about are very short term (30-90 day) coming from government sources. They are designed to help businesses stay alive while there are no patrons.

No patrons? The city is still deserted? In short, yes. Huge tracts of what used to be a bustling city is still unoccupied and unlivable - they cannot be occupied. People are losing their homes and commecial properties to investors. They're still in property buying mode. It's going to be months and years before these investors are ready to take their profits by reselling to those who will build and those built-out properties are sold in turn to those who will manage and rent them, live in them, or run their own businesses in them.

The cycle is a lot longer than 30 -90 days. Nobody is moving back to town by February. So where will the funds come from in 90 days when these loans come due? I expect many will default.

When the story is reviewed in 5 -10 years, I think we are going to read a couple of feel-good stories about those that 'made it through' the tough times. But mostly, this area, whether those in power choose to move upstream or to build where the old city stood, this city is not going to be re-built. It will be built new - built by those who are snapping up properties from the devesatated now. The new owners will design how the town looks in the future. And there will be new business startups. What was, is dying. What is to be, will be new blood. Tomorrow - who left, who stayed, and who's coming to town.

 

It's been a short week in the world of finance. As I noted yesterday, the loan requests have increased dramatically as the end-of-the-year rush begins. Nevertheless, it's nice to know that we are all still taking a day to enjoy our families and hopefully, take a moment to reflect on all that we have to be thankful (joyful) for.

I've been reading blogs around the web and note that someone listed their Thanksgiving Dinner menu on their blog. One of the comments that followed was from a fellow who said, "I really don't know why you are celebrathing thanksgiving even though I read about it several times...." I was saddened by the idea that this is not one of the ideas the US has successfully exported to the rest of the world yet.

Here's hoping every reader of this blog will remember why we take a moment in each year to ask ourselves as a nation to reflect with gratitude on the many blessings accorded us in this life. Take advantage of the day to gather those you love the most near to you - by phone, at your table, via email, or in your thoughts. Remember that when this life is over, the burning question will not be 'how much money did I fund or how much do I have?" Rather, it will be, "What lives have I touched and what lives have touched mine? And wasn't it a wonderful, wild ride?!" Then go make it so!

The End-of-the-Year rush is already on for commercial lenders. It happens every year. Just as with retail sales, the number of loan requests increases before the holiday season. But it is not Christmas or Chanukah presents lenders are funding - it is investment or commercial real estate transactions that need to be completed before the end of the year.

Several factors are intensifying the 'rush' season this year. With the changing of the guard at the helm of the Fed, real estate buyers and owners are becoming more nervous about where the interest rates will be in 2006. As 2005 was a year of double digit growth in value again, many are looking to complete transactions that will lower taxes. While this is a common phenomenon every end-of-year, the more the potential tax hit, the more the flurry to protect investment capital before it is too late.

Finally, with the continuing doom and gloom reports in various reports about housing bubbles and other real estate crash predictions (most of which I think is bunk, by the way - but more about that later) we are even seeing a flurry of sales designed to 'get out before disaster strikes'. Frankly, there are excellent opportunities out there for the less faint of heart, as the timid sell off properties at lower costs simply to be rid of the property.

Tomorrow, I'll cover some of the doom and gloom predictors and tell you why most if not all of it bunk. Today, suffice it to say that the indicators are not pointing in the directtion of a slump anytime soon.

By popular demand! One good scenario for property purchases when there is no downpayment money is probably the most asked question in my reqpertoire.

The truth of the matter is that hard money lenders want buyers to have money in the deal when they buy a property. There are precious few exceptions to the rule and the resulting loans are very costly. Here is an option worh considering.

If the seller and buyer are interested in working cooperatively, and the property has a good deal of equity in it, the following scenario may work.

Seller takes on an operating partner and prepares to bow out of the property by becoming a silent financial partner. The seller adds the future buyer to the deed of the property with the agreement that the new person will be the hands on manager of the property. The partners refinance the property. The silent partner takes cash out from the refinance. This serves as the new partners equity payment.

The operating partner 'works' the property and makes the monthly loan payments. When the operating partner is ready to refinance the property, by prior agreement, the seller's name is taken from the deed and the operating partner refinances and pays off the balance owed to the seller.

If the buyer / operating partner defaults, the seller / financial partner can, per provisions in their agreement provisions to take over the property again. In that event, the seller will have the option to remove the operating partner from the deed, take over payments for the loan, locate a new buyer and sell the property or let the property default.

Investors with 1031 rollover purchases must deal with strict time constraints set out by the IRS. If the sale and purchase of the suject properties don't conform to the timestables, it can cost them dearly. Recently, I sold an investment residential property and was looking in the Seattle area for a replacement property. Selling the property took less that 48 hours. Properties are selling hot and fast in the greater Seattle market.

 Buying a replacement property was another story. The window of opportunity was closing quickly and the only serious option I had was falling through. I needed a backup. I did my research online. I was willing to buy investment property anywhere in the US that seemed likely to increase in value and be manageable as well. That's when I discovered TIC, Tenant in Common properties.

Although TIC has been around for many years, they have only recently (in the past 3-4 years) caught on as 1031 rollover options. Investors are flocking to the idea in droves. And rightly so. I did. TIC offers all the advantages of investment real estate and gives you the opportunity to be part of a larger project without having to manage the building or property at all.

For more info about TIC, email me at gillian@avatarfinancial.com I'll share some of my resources.

Hard money lenders generally want similar information when funding loans. Intiially, they are looking for photos of the subject property, profit and loss statements (P&Ls) , and generally a personal financial statement on the borrow/guarantor.

Once the lender has reviewed these documents and spoken with the broker or borrower about the loan, if the lender approves the loan at this first stage, they issue a Letter of Intent. The borrower will be asked to sign the Letter of Intent and will be asked at that point to make a down payment toward the costs of due diligence. In the case of Avatar Financial Group, only the third party costs of due diligence (the costs which are outsourced, not performed inhouse).

When the lender receives the funds and the signed LOI, the due diligence process begins. Depending on the lender, the process takes anywhere from a few days to a month or more. Avatar Financial Group closes loans in an average of two weeks. When time is critical, shorer closing times can be arranged.

The cost of money is rising and the rush is on. Just as the holiday season heats up with an increase in retail sales, commercial loan requests are increasing at a rapid pace. After so many months of quiet, to what do we owe this phenomenon?

There are several indicators that are encouraging people to move on loans where before they dawdled:

1. After 18 years at the helm, Mr. Greenspan will be moving on. The new Master is an unknown quantity. Anything from a drop in rates to a rapid increase is possible. Many business owners, developers, and investors cannot take the risk of a sharp increase in the cost of money. They need to fund and lock in rates now.
2. Rates have already been rising. Only a few months ago, the Prime Rate hovered around the 4% region. With the Prime at 6%, borrowers are seeing the handwriting on the wall.

As the economy continues to thrive, the trend in the rise of the cost of money is not likely to reverse any time soon. Expect the increase in requests for commercial and investment loans to increase and the concurrently the cost of money to increase to meet the demand.

 

I spoke to Max today. He lives and works in New York City. Max is a business loan broker. Many of the readers of this blog are loan brokers, so I thought you'd be interested to know....

I 'met' Max in the aisles of a supermarket while I visiting my mother in Hamden, CT. We had spoken on the phone about a loan scenario before I left Seattle a few days before. I told Max I'd be in the NYC area and he suggested we make time for a cup of coffee. A pleasant offer, but there was no time for that. My mother was ill and I was there to care for her, not visit or conduct business.

Nevertheless, as I strolled the aisles, picking up foods for the weekend, Max called my cell phone. He didn't want to talk about the loan scenario. He just wanted to see how my mother was doing - and how I was doing. I was floored. I barely knew this broker, but here he was, checking in on me late in the evening when he no doubt had better things to do. We chatted about family for awhile. I learned about his wife, his children, and his dreams for their future. When we hung up, I had a new friend, not just a broker who needed a deal to be done.

In the end, the deal didn't close - the borrower faded away as happens in so many deals. But Max kept in touch. Now and then he'd call with a deal and after awhile, we would call just to chat and see how business and family were doing. We’ve never met in person, but I know how hard Max works to make personal contact with his clients, to bring a superb level of service, knowledge, and professionalism to his work every day. He is a credit to the profession - the kind of man who deserves to hit it 'big'.

Well, Max called today. He had big news - the holidays are coming. All his children will be with him for the day. And his youngest - a toddler - will be having his birthday only a few days before. It is going to be a busy week at Max’s house next week.

I smiled. Big news indeed, of the best kind. Max knows how to live, love, and cherish the finest things: his family and his friends. Finally, Max told me there was more news. News he didn't dare to breathe of or think of yet. He was about to close a really big deal - the kind most brokers only dream of, or perhaps don't even dare to dream of. It is scheduled to close next week.

Well, Max - congratulations! It couldn't have happened to a better broker or a better man. From all of us in the business of serving the nonconforming business loan market, our heartiest congratulations to a man who deserves to reap the reward of a career well made and a reputation well earned.

Here's hoping more of us will do as well in 2006!

A lot of brokers want to know how Avatar makes its funding decisions. The short answer is: pretty much like any other honorable hard money lender in the US. Here are the three basic questions Avatar asls of every loan:

1. Can the property serve as collateral for this loan?
   To answer this question, Avatar sends out an appointed appraiser to the subject property. The appraiser consults for Avatar - don't expect to see or receive a complete appraisal when the visit is over; this is a consulting job. The appraiser determines what the quick-sale value of the property will be by askimg, "In the event that the loan goes sour and Avatar must sell this property in 3-5 months' time, what could one reasonably expect to receive for the property?" In general, if you are buying property, the quick-sale value is the price you are paying for it today. If you are refinancing, ask a realtor how much you would get if the property had to sell in 90 - 150 days
   
2. Can the borrower afford the monthly interest-only payments as well as all their other expenses, while still having a few dollars left over to put in their pocket at the end of each month?
   Avatar will want to see last year and YTD current year profit and loss statements from whatever entity will support the loan. Avatar does not want to make loans that will drive anyone to bankruptcy or foreclosure. We make loans that make sense for the borrower as well as the lender. So Avatar will want to see that you bring in about 1.2 times the amount you spend each month or more. This will make the loan a comfortable, wise move for you.
   
3. Does the borrower have a reasonable exit strategy?
   Within 36 months, you will need to pay back this bridge loan. What situations will change between now and then that will enable you to refinance this property with a conventional lender? Or will you sell the property? Or will be able to pay back the loan in some other way? A simple statement will serve as your exit strategy, so long as it is reasonable and workable.

For more info about lending criteria, contact Gillian at Avatar - 888-886-0097.

I field over 200 phone calls each week from folks looking for hard money loans. Many are, in fact, looking for rehab loans. However, among those who are seriously looking for a hard money commercial bridge loan for the purchase or refinancing of an income producing property in the US, the most frequently asked questions are 'Where do I begin? What do I have to send you to get this ball rolling?"

The secret to creating a successful loan package is a two part process: be thorough and pay attention to details. Here is what a hard money lender needs to make an initial assessment of the project:

1. Good quality color photos of the property - inside, outside, and the neighborhood
2. P&Ls (profit and loss statements) for the prior year and year-to-date for the current year.
3. Personal Financial Statement on the borrower (sometimes called a 1003)

If you have an appraisal on the property, get it into your computer and email it - faxing an appraisal turns the photos to black and white mush - not much use to the lender. Look at the financials you submit. Determine whether they will support all your expenses including the monthly loan payments. The lender will want to see a ratio of at least 1.1 : 1, preferrably 1.2 : 1 of income to expenses, including the new loan. Obtain and submit payoff documents from existing lien holders if you are refinancing a property. If you are purchasing, submit the purchase and sale agreement with the purchase price clearly marked, as well as a bank statement showing proof that you have 20% of the cost of the property ready to put down at closing. This simple bank statement can separate you from the many who submit loan requests without really having the capital to invest in the property. It will move you 'to the head of the class', so to speak.

For more information about creating a successful loan package, email gillian@avatarfinancial.com