Avatar's Blog

The real estate scavengers have already descended on Hurricane ravished parts of Coastal Louisiana and Mississippi. Signs are cropping up heralding companies or individuals who "BUY PROPERTY - ANY CONDITION" and others blaring the familiar "FOR SALE".

Many uninsured and underinsured have no option but to sell the property while they can and investors are swooping in for the kill. Some investors contact homeowners with offers to buy; others head directly to banks to make payoff agreements to get land or property with improvements.

In the end, the face of these coastal areas will change. The smaller homes, the poorest neighborhoods will be cleared. If the conservationists have their way, some of the land closest to the ocean will become a protected marshland, cleared of all human improvements, returned to nature. It will provide a natural buffer for future storm waters.

After that, developers will redesign the cities with new, often more expensive homes, retail centers, entertainment venues, etc.

Hard money lenders such as Avatar Financial Group are already fielding calls from investors large and small for quick loans to purchase properties while it's still there for the taking. While banks and conventional lenders will get their fair share of requests as well, look to see a large increase in hard money acitivity in the region over the coming months.

Many hard money lenders tie their rates to the prime rate. With the prime rate rising over the past few weeks, rates for hard money have increase more than a 1%. Avatar Financial Group has lowered the cost of hard money from prime +7% to prime + 6% for the foreseeable future. This will help borrowers with their real estate collateralized loan needs.

It's often said that banks only lend money to people who can demonstrate that they don't need it. Truer than we would like it to be, there is fortunately an alternatate source for funds when you really need money. In commercial real estate, there is no more pressing a time as when a property is in foreclosure.

If you have a commercial, industrial, or investment residential property in foreclosure, you may be able to refinance the property and buy it back during the redemption period. Hard money commercial loans are designed to be available for situations where banks and conventional lenders cannot or will not take on the risk to fund. Hard money lenders will generally lend up to 65% of the current quick sale value of the property. If you have a good deal of equity in your property, you can collateralize it, even if the property is in foreclosure.

 

Real estate investing, like every other kind of investing should focus on the basic principal of buy low, sell high. Seems simple enough, if we all had crystal balls to tell us which properties were going to go up in value and which were going to get washed dow the drain in Hurrican Katrina or Hurrican Rita or the next Hurricane-of-the-week in the Gulf Coast!

In all seriousness, though, there are some time honored and relatively simple tips that will help you improve your odds in commercial real estate investing.

Location: This seems obvious - choose a good location. But there is more to it than that. Most investors prefer to stay close to home when selecting an investment property. They feel that they know their local market better and can keep tabs on the property as well. This is a good idea if you are investing in relatively small projects, As your investments grow, however, it is prudent to take a more 'global' view.

Look beyond your local city, county and state. Identify hot spots around the country where real estate is beginning to rise in value. Consider trends in life style, business, and weather (yes, Hurricanes Katrina and Rita will have a noticeable and long term impact on real estate in gulf coast cities).

Scour news articles for information about business relocations, quality of life rankings if you are a residential real estate, and other indicators of growth, such as census numbers. Once identified, look at real estate sales in those areas over the recent past to determine trends. If prices have been rising for some time, you may have missed the boat. Look for places where real estate has been relatively stable and are just beginning to show signs of increase in value. Look for reasons for the increase, such as business and population growth. If all the signs are positive, you will see a complete picture of commercial, residential, and construction mileposts that will be the green flag for investment.

The recent rise in the prime rate means that the cost of investing in real has increased. The prime rate has held steady for many months. An increase of a quarter point increases the current hard money rate at Avatar from 12.99% to 13.24%.

Smart money indicates that this may not be the last increase in the near future. If you are considering real estate investments, be sure to take the increased cost of money over the near and long term into  account when calculating potential profits.

Borrowers and brokers alike take note: loan requests that are accompanied by bright, clear, well focused photos of the subject property are funded at rates of better than two to one! In my time in the field of hard money, I have noted that decision makers in lending institutions are like everyone else - 85% or more of them are visual learners. This means that they process information through visual aids.

Words are fine; words - and financial sheets - are very important to any loan package, of course. But, if you want a quick, reliable answer to whether your loan can be funded by Avatar Financial Group or any other hard money lender, make sure you have photos to email to accompany your loan request. A clear, bright photos that shows the subject property off to good advantage may be worth far more than the proverbial thousand words - it may be worth thousands or millions of dollars to you.

The decision makers at reputable lending instituions review many loans each day. They have to separate the wheat from the chaffe in a moment and move on to dealing with those loans that are most likely to generate a successfull conclusion of a business deal. They can't be bothered with projects that might work out. Photos of the subject property enables them to immediately see what they will be funding, where it sits on the street, neighborhood, etc., and determine whether this is a property that fit their lending portfolio. Whether your photos brings you a quick yes or no, it is better to have a solid immediate response when seeking a hard money loan. Send photos! You'll be glad you did.

 

Many borrower want to know if Avatar will fund 100% of the purchase price of a commercial property. They often note that the property is appraised for a higher amount than the purchase price and claim that they will have therefore have instant equity in the property. In truth, the actual resale value of a commercial (or residential for that matter) property is the sum that it will change hands for today between willing parties. MAI appraisals take into account a (sometimes) very long sales lead time - often one or more years to find a buyer willing to pay 'retail' for the property.

Therefore, Avatar will lend up to 65% of the current selling price of commercial, industrial or residential real estate in the US. The balance of funds required to close can come from the buyer or a combination of the buyer and another source, such as a seller carry-back loan. The buyer must put up a minimum of 20% at closing. The balance of 15% can be a subordinated loan.

The reason the buyer is required to put up 20% has to do with commitment to the project. Hard money lenders find that when buyers have no equity at all in a project, the propensity to 'drop off the keys' if they run into a bump in the road increases dramatically. Basically, the borrower notes that others have money in the deal, but they don't - and if things don't go as planned, it is very easy to throw in the towel. Borrowers who have cash to lose if they pull out of a deal and let the loan default, are far more committed to working through rough times to make the project a success. Avatar seeks to work with borrowers who are committed to their projects; our goal is to make loans that make sense for the borrower and for the lender.

 

When purchasing commercial real estate, buyers generally obtain an MAI appraisal before making an offer to the seller. The actual sale price of the property is very often somewhat less that the MAI appraisal. When calculating the cash requried to close the deal, consider the following rule of thumb:

Borrower must put down 20% cash at closing. This can come from cash already on hand, a financial investor/partner, or additional real estate may be mortgaged to generate the capital needed to purchase the new property. If you plan to use property you already own to increase the loan size from Avatar, count on being able to take out up to 65% of the quikc-sale value of that property. If there are liens on the property (ie: existing mortgages), those will need to be paid off at closing, leaving you with the balance to use for the new purchase. In rare instances, some existing second or third lien lenders may subordinate to the new Avatar loan, in which case you may be able to mortage up to 80% of the existing property (65% from Avatar and up to 15% more still out with subordinated second or thirs lien lenders).

Avatar will lend up to 65%  of the price you pay for the property - this is sometimes known as the 'street value' of the property and is generally up to 20% less than the MAI appraised value. It is the price for which the property will change hands between willing owners today.

If you are putting up 20%, and Avatar puts up 65%, Avatar permits a subordinate loan, such as a seller carry back loan for the balance of 15% to complete the purchase. The seller cannot put up 35% and leave the borrower/buyer without any cash equity in the project at all.

During the dot.com boom of the late 1990s, commercial loans were flowing like water. Almost any project could find funding form conventional lenders, private lenders, angel investors or others. Business loan brokers contacted businesses of all sizes pushing, let alone offering, working capital loans for almost any purpose, collateralized by almost anything at all. Terms and rates were favorable to the borrower and money flowed, as new and existing companies 'ate up' the available lending cash.

With the bursting of the dot.com bubble around the middle of 2001, conventional lenders clamped down on lending criteria and the spigot shut off - tightly and quickly. Using more stringent criteria reminiscent of pre-dot.com times, bank – with or without SBA backing – rejected borrowers’ requests. Businesses in need of capital due to falling sales and a weakening economy, found themselves unable to borrow even from lenders who had hounded them to take out loans only several months before.

As the economy tanked, hard money lenders began to flourish. Suddenly, non-conforming loans were being made to borrowers who previously qualified for conventional loans with interesting results. Borrowers who knew previously knew nothing about non-conforming loans, private lenders, hard money loans, etc. became familiar with them. Ironically, the behavior of conventional banks during the dot.com boom helped to lend credibility to this erstwhile sideline of commercial lenders who can issue term sheets in a day and fund ‘on a dime’, as it were. Since conventional banks moved quickly and lightly through the due diligence process during the boom years, the promises of hard money (non-conforming lenders) to do the same as the economic squeeze began to be felt, came as no surprise.

For better or for worse, hard money private lenders became much more mainstream. Some borrowers were appalled at the attitudes, rates, fees, etc. associated with some unscrupulous private lenders. On the other hand, the opportune moment in economic history gave birth to numerous honorable, reliable private lending companies - Avatar Financial Group of Seattle, WA, being one of them.

“At the turn of the century, Avatar’s principals had already been funding hard money commercial bridge loans for more than a decade. We saw the signs in the market and knew it was time for a solid institutionally funded hard money lender to meet the growing needs of US commercial real estate owners and investors,” said Jerry Zevenbergen, CEO of Avatar Financial Group. “There’s an old saying that banks only lend money to people who don’t need it. Because we can work with borrowers during hard times, we can keep the wheels of commerce turning.”

Today, hard money lenders fund an increasing number of loans for the purchase or refinance of commercial, industrial, and investment residential properties. Borrowers in need of speed and flexibility look to companies like Avatar Financial Group for financial support to buy or refinance properties throughout the US. These hard money loans are used to purchase or refinance properties quickly. For manufacturers, they generate working capital to keep wolves away from the door or to gear up for a big incoming order. Hard money lets buyers take advantage of real estate opportunities that would be lost if the deal had to wait for a conventional lender to complete a commercial mortgage. The reasons people seek out hard money lenders varies as widely as the loan scenarios themselves. The common thread is speed, flexibility, and funding criteria based not on the credit scores of the principals, but on the value and equity in the subject real estate property.

 

Avatar is a commercial hard money lender. We are institutionally funded. Other hard money lenders are investor funded. In general, the advantages of an insitutionally funded lender includes some of the lowest rates in hard money, fewer points, and the speed of lending. Institutionally funded lenders are already funded. They have made arrangement with institutions, such as banks, retirement funds, etc. to fund loans. The money is in the bank, as it were. Investor funded lenders have to develop a prospectus and float it to investors to collect/raise the money needed to fund a loan. This can take anywhere from a few minutes to several weeks. So institutionally funded lenders may be able to fund more quickly in some cases.

On the flip side, institutionally funded lenders might be described as 'near bank deal' lenders. At Avatar, we say, "If the bank almost said yes, we're your lender." Investor funded lenders may be more expensive and may take more time, but one can generally find an investor for almost any kind of risk, provided the return on investment is sufficient to make the risk worthwhile.

If you are looking for a hard money loan, try institutional funding for speed and rates. At Avatar, we can let you know within a couple of hours of receiving your loan package whether your loan is a good match for Avatar.