Such as everything in today’s lending world there is reality and there is fiction and there is borrower’s reality. Recently I received an email from a broker, asking me if we were really funding loans ?. At first I thought that this was a weird questions, however, giving it a second thought I realized that this was an important concern from brokers and their clients. Today, I will try to go over why loans are approved and funded and why some are not approved and funded.
Because of low barriers to entry into the real estate industry there are a number of people with limited experience who follow the band wagon. Today some of these activities are Hard Money / Private Money lending, Loan Modification, REO Investments etc.. The lack of experience creates difficulties for brokers and their clients, as brokers realized that what was promised will not be delivered. Another issue for brokers is that to lock a potential deal, they are being quoted rates and points from funding sources before a loan has been reviewed. Once the loan is underwritten, different terms are being given.
Loans are approved and funded if:
- Borrower(s) understand that they need to be flexible
- There is limited rate shopping as the solution is more important than the rate
- There is a package well put together
- Broker, Borrower and Funder work well together
- Borrower(s) are realistic
Loans are not approved and funded when:
- Borrower can not make monthly payments
- Properties is not well kept
- Ltv is high
- Borrowers have not realistic idea of value
The bottom line if a financing you requested is approved just take it.
Tuesday, January 27, 2009
Wednesday, January 14, 2009
What About Commercial Financing?
My first post of the year was optimistic and I continue to be looking forward to 2009. However, it does not mean that this year is not going to be really difficult. As 2008 was the death year for residential real estate 2009 maybe the year for commercial real estate. A good friend of mine, a hard money lender, made the point yesterday that he believes 2009 will be dramatic for commercial real estate. He believes that commercial properties have been over valued and with company failures numerous properties are going to be in default.
In an AP article “Down we go again: Faint…” the reporters goes over the most recent financial news and numbers and it does not look good. Bad results mean that companies are not going to expend and in numerous cases are going to contract. When companies need less space for offices, retail etc.. less income is being generated thus properties ability to service debt is reduce. More property owners are going to find themselves in difficulties and may decide to let their investments go.
Commercial real estate is in part regional and in part based on national trends as we are seeing a general downturn, we should expect a general downturn in commercial real estate. However, some regions maybe much more affected than other and in some cases for different reasons. Clearly Michigan is going to suffer tremendously even if the different auto companies stay in business. Areas with more diversified economy may see a smaller downturn than areas that are less diversified.
Commercial hard money lenders are going to be very selective with the type of financing they are approving. Not only we are going to be more demanding in regard to the general quality of the deal but, it is going to be more and more difficult to finance properties that are in distress situation. There will be still some flexibility available, however, this is not something that we should be expecting. In addition, as the demand for private money continues to increase, we should all be expecting that the financing process to move at slower pace than what we are used to.
In an AP article “Down we go again: Faint…” the reporters goes over the most recent financial news and numbers and it does not look good. Bad results mean that companies are not going to expend and in numerous cases are going to contract. When companies need less space for offices, retail etc.. less income is being generated thus properties ability to service debt is reduce. More property owners are going to find themselves in difficulties and may decide to let their investments go.
Commercial real estate is in part regional and in part based on national trends as we are seeing a general downturn, we should expect a general downturn in commercial real estate. However, some regions maybe much more affected than other and in some cases for different reasons. Clearly Michigan is going to suffer tremendously even if the different auto companies stay in business. Areas with more diversified economy may see a smaller downturn than areas that are less diversified.
Commercial hard money lenders are going to be very selective with the type of financing they are approving. Not only we are going to be more demanding in regard to the general quality of the deal but, it is going to be more and more difficult to finance properties that are in distress situation. There will be still some flexibility available, however, this is not something that we should be expecting. In addition, as the demand for private money continues to increase, we should all be expecting that the financing process to move at slower pace than what we are used to.
Monday, January 5, 2009
On A Positive Note
We know that numerous factors that are influencing our life are not great this beginning of the year, however, there are positive sings for 2009. The first positive news of 2009 is that capital is getting circulated in the economy. While credit is going to continue to be difficult to obtain the different investments programs that have been created at the end of 2008 are moving forward. We are just now starting to see the effects of these programs and as we enter 2009 we are going to see more effects of these investments.
A New president. While, I don’t like to talk about politics it is important to note that Mr. Obama has been aggressive in working on the economy. It seems, from what we know so far, that he is ahead of the curve and has gathered a strong team of financial and economic advisors. It appears that within a few days of taking office he will take actions and launch a new economic program that will help employment and liquidity. Most likely we should start seeing the positive effects of the program in Q3 and Q4.
The bottoming out of the real estate market. In 2008 we were hoping that the markets will bottom out at some point. It appears based on initial numbers that we are starting to see that bottoming out. It may take some markets until the end of the year to see this bottoming, however, it is clear that other markets are now reaching the bottom. The media is always late in recognizing trends and thus you should no see stories on that subject for another 6 months. However, looking at numbers then we are seeing the right signs, which allow us to anticipate the future.
Recognition of the problems. It took, I believe, more than a year for both the private sectors and the different levels of government to realize that we had problems. 2009 may still be a difficult year, but once problems have been acknowledged then they are possible to solve.
From a lending and a Hard Money lending perspective this means that money is going to be tight in 2009. Demand for capital is going to be higher than availability thus increasing the costs of borrowing. However, we should hopefully see some improvements in the second part of the year.
A New president. While, I don’t like to talk about politics it is important to note that Mr. Obama has been aggressive in working on the economy. It seems, from what we know so far, that he is ahead of the curve and has gathered a strong team of financial and economic advisors. It appears that within a few days of taking office he will take actions and launch a new economic program that will help employment and liquidity. Most likely we should start seeing the positive effects of the program in Q3 and Q4.
The bottoming out of the real estate market. In 2008 we were hoping that the markets will bottom out at some point. It appears based on initial numbers that we are starting to see that bottoming out. It may take some markets until the end of the year to see this bottoming, however, it is clear that other markets are now reaching the bottom. The media is always late in recognizing trends and thus you should no see stories on that subject for another 6 months. However, looking at numbers then we are seeing the right signs, which allow us to anticipate the future.
Recognition of the problems. It took, I believe, more than a year for both the private sectors and the different levels of government to realize that we had problems. 2009 may still be a difficult year, but once problems have been acknowledged then they are possible to solve.
From a lending and a Hard Money lending perspective this means that money is going to be tight in 2009. Demand for capital is going to be higher than availability thus increasing the costs of borrowing. However, we should hopefully see some improvements in the second part of the year.
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