In my last few post, I started to address the subject of capital availability. The picture is not any prettier today; in fact, it’s actually getting worse. This week, I was made aware of a number of new lenders that have stopped lending either because they are out of available capital to lend or just because they are shutting down programs. Professionals are roaming all over the world trying to drum up sources of capital to invest in American real estate.
During the past 30 days, a number of factors have made capital less and less available. More and more banks have restricted their lending abilities in the residential real estate markets. Numerous banks do not make any more such loans, while others are ceasing operations. A good source for this type of information is the blog Mortgage Lender Implode. What was once limited to the residential market is now also affecting the commercial market. More and more lenders in the commercial market are also not lending anymore either because of a lack of funds due to an increase in defaults or because they are going out business.
The lenders that are still lending are currently overwhelmed by the demand for funds. Today, lenders that have money are in the driver’s seat, and it may stay this way for the next 6 to 12 months. What was once considered expensive or excessive lending terms are today considered normal. In addition, if loan applications are not put together well, most likely financing will be denied.
My recommendation for professionals and borrowers alike is to do your homework. Don’t try to be clever if you have reasonable loan terms for today’s environment; just accept them. Make sure the information you provide is consistent and accurate. Be prepared to document information and to be as reasonable and precise as possible regarding values, incomes, reserves, etc. Be engaged and proactive in the process and cooperate with the lender. Have reasonable expectations. A loan approved today may not be available tomorrow. The situation is not likely to improve any time soon and may worsen.
Tuesday, December 16, 2008
Monday, December 15, 2008
Appraisals and Values -- Getting it Right
As usual this week, most news relating to finance or the economy was not good or just depressing. However, some hope was provided to us via an interview in the California Report from Jerry Nickelsburg, an economist with UCLA’s Anderson School. Jerry mentioned that some real estate markets might have started to bottom out. These markets are the ones that have already seen a drop of up to 75% in value or more. Other markets are now seeing the effect of the lack of capital and might bottom out in 2009.
It is clear today that property values are linked to the economy in general and the availability of funds. If there is no money to borrow, then properties are not traded or traded only at lower prices. If people are losing their jobs, then they are not able to make their mortgage payments, thus starting to default, which increases the number of properties being foreclosed, etc. If people do not buy products in stores, then companies will start closing stores and laying off people, which worsens the downward spiral and directly affects the demand for commercial real estate. Bad economic times imply lower property values, especially in today’s environment. If you are wondering what the value of your real estate is, most likely it has gone down during the last year, even in popular resilient up-scale markets, like the good neighborhoods in San Francisco.
Knowing what we do about market conditions, it is surprising to still find appraisers, real estate owners and real estate professionals who believe that the market is doing better than it is. Every week, I come across numerous appraisal reports or property valuations, which for one reason or another show an increase in market values. How can we take these reports seriously? This week, an appraisal I received was so out of touch with reality that I took the pains to go over it in detail with the loan officer.
Today, we can only close a transaction if we make sure we understand the realistic current value of the property. This applies both to commercial and residential properties. Most of the loans that are funded now are funded because the loan officer and the borrower have a clear understanding of what the property value is. Serious and meaningful appraisal reports are very valuable, but difficult to come by. Since there are so many tools available today to estimate property values, there is no excuse for getting it wrong and for having inaccurate expectations. My recommendations are to do your homework thoroughly before you start any real estate financing process and to be conservative in estimating property values
It is clear today that property values are linked to the economy in general and the availability of funds. If there is no money to borrow, then properties are not traded or traded only at lower prices. If people are losing their jobs, then they are not able to make their mortgage payments, thus starting to default, which increases the number of properties being foreclosed, etc. If people do not buy products in stores, then companies will start closing stores and laying off people, which worsens the downward spiral and directly affects the demand for commercial real estate. Bad economic times imply lower property values, especially in today’s environment. If you are wondering what the value of your real estate is, most likely it has gone down during the last year, even in popular resilient up-scale markets, like the good neighborhoods in San Francisco.
Knowing what we do about market conditions, it is surprising to still find appraisers, real estate owners and real estate professionals who believe that the market is doing better than it is. Every week, I come across numerous appraisal reports or property valuations, which for one reason or another show an increase in market values. How can we take these reports seriously? This week, an appraisal I received was so out of touch with reality that I took the pains to go over it in detail with the loan officer.
Today, we can only close a transaction if we make sure we understand the realistic current value of the property. This applies both to commercial and residential properties. Most of the loans that are funded now are funded because the loan officer and the borrower have a clear understanding of what the property value is. Serious and meaningful appraisal reports are very valuable, but difficult to come by. Since there are so many tools available today to estimate property values, there is no excuse for getting it wrong and for having inaccurate expectations. My recommendations are to do your homework thoroughly before you start any real estate financing process and to be conservative in estimating property values
Monday, December 1, 2008
Property Values Are Gone
A friend of mine who is also in real estate went to a professional conference last week. One of the speakers was from the California Association of Realtors. This speaker told the attendees that, based on the Multiple Listing Service (MLS) value, single family residences in California have lost, on average, 46% of their value. The speaker added that, on the coast, the values were a little stronger than inland. This means that, in some areas of California, single family residence values have dropped as much as 75%. From what I am seeing, even property values in areas where single family residences have held up reasonably well so far are now starting to decline.
In the hard money world, there is starting to be a noticeable shortage in the availability of funds as numerous borrowers who cannot qualify for agency loans have turned to us. This shortage of funds and the decline in home values have made securing a loan from private money sources much more difficult than it was even a month ago. This lack of funds has also driven up the cost of money. On average, the cost of money has gone up by 1% for the interest rate and by 1% in points. This trend may continue for the next six months and may even worsen.
In today’s environment, getting financing for borrowers who need private money is difficult. As a loan officer, broker or borrower, be aware that if you want your loan to be funded, you need to make it as easy as possible for the lender. As a start, you need to make sure that the estimated value of your property is reasonably accurate - be realistic with estimating property values and make sure that the value you are using can be easily supported without being merely a figment of your imagination. While, in the past, hard money loans were typically provided on the basis of stated income, this has changed in today’s environment such that many borrowers are now expected to provide full documentation.
To succeed in this lending environment, borrowers, brokers and loan officers need to work well together and be realistic. Brokers and loan officers especially need to make sure clients understand the challenges that currently exist when funding loans.
In the hard money world, there is starting to be a noticeable shortage in the availability of funds as numerous borrowers who cannot qualify for agency loans have turned to us. This shortage of funds and the decline in home values have made securing a loan from private money sources much more difficult than it was even a month ago. This lack of funds has also driven up the cost of money. On average, the cost of money has gone up by 1% for the interest rate and by 1% in points. This trend may continue for the next six months and may even worsen.
In today’s environment, getting financing for borrowers who need private money is difficult. As a loan officer, broker or borrower, be aware that if you want your loan to be funded, you need to make it as easy as possible for the lender. As a start, you need to make sure that the estimated value of your property is reasonably accurate - be realistic with estimating property values and make sure that the value you are using can be easily supported without being merely a figment of your imagination. While, in the past, hard money loans were typically provided on the basis of stated income, this has changed in today’s environment such that many borrowers are now expected to provide full documentation.
To succeed in this lending environment, borrowers, brokers and loan officers need to work well together and be realistic. Brokers and loan officers especially need to make sure clients understand the challenges that currently exist when funding loans.
Wednesday, November 26, 2008
The Belt Is Getting Tighter
An informal survey of numerous loan officers around the country shows that the belt is indeed getting tighter. There is money available, but it appears that the money is staying on the sidelines. With Fannie Mae and Freddie Mac’s reported losses (see the following AP article by Alan Zibel “Freddie seeks gov’t aid after $25.3 B loss”
), the tightening of lending will most likely continue and may worsen. Loans insured by the above-mentioned companies and the Federal Housing Authority (FHA) will see increased scrutiny. Both property owners and borrowers will continue to be under the microscope.
At all levels, the demand for alternative financing is increasing, which makes approving and funding hard money loans more difficult to some extent. Today, hard money lenders see borrowers with 700 FICO scores or higher. These borrowers have properties with strong values and lower LTVs. The typical hard money borrower, who, a few months ago, was able to get any money needed, will find getting a loan funded today much more of a challenge.
Getting a loan today from a hard money lender will depend not just on the property but also on the overall picture of the borrower. An important component to successful funding will be the exit strategy - how a loan will be repaid. Borrowers, loan officers, and account executive need to be willing to work closely together in order to make financing happen. Once you have a loan approved, move forward quickly to close the loan, as it may not be available tomorrow.
), the tightening of lending will most likely continue and may worsen. Loans insured by the above-mentioned companies and the Federal Housing Authority (FHA) will see increased scrutiny. Both property owners and borrowers will continue to be under the microscope.
At all levels, the demand for alternative financing is increasing, which makes approving and funding hard money loans more difficult to some extent. Today, hard money lenders see borrowers with 700 FICO scores or higher. These borrowers have properties with strong values and lower LTVs. The typical hard money borrower, who, a few months ago, was able to get any money needed, will find getting a loan funded today much more of a challenge.
Getting a loan today from a hard money lender will depend not just on the property but also on the overall picture of the borrower. An important component to successful funding will be the exit strategy - how a loan will be repaid. Borrowers, loan officers, and account executive need to be willing to work closely together in order to make financing happen. Once you have a loan approved, move forward quickly to close the loan, as it may not be available tomorrow.
Wednesday, November 19, 2008
There Is Money, but the Loan Don’t Close
The interesting contradiction to think about is that there is money available to lend, with hard money lenders especially wanting to make loans, but loan don’t close. Everyday, I am surprised by this situation. In a tight lending environment, you would think that when lenders want to lend and borrowers want to borrow, a match would happen. More often than not, it does not.
One of the major reasons I see for loans not closing is that borrowers do not have the right expectations. Borrowers think that if they have a decent credit and property profile, loans will be funded. That is not good enough in today’s environment.
In addition, borrowers don’t understand why private loans are so expensive. The primary factor is that the capital used to fund a loan is not insured by any federal agencies and not resold to other investors. If a loan is not repaid and the value of the property goes down, the lender assumes all of the losses. The interest rate charged to the borrower reflects the combination of this estimated risk and the availability of funds. Once the right balance between these two components has been found, the pricing will be determined. The number of points charged by the lender is a reflection of origination costs, loan management costs, an amount to cover the estimated risk anticipation of potentially having to foreclose on a property, and maximum the APR allowed by law.
Borrowers and real estate professionals should understand these different aspects of pricing a hard money loan. This will allow them to be better prepared (i) to get a loan approved, and (ii) to provide the best application possible to get better pricing. In addition to the two components mentioned above, other issues that will be considered are Loan to Value (LTV), property location, and property type. Each factor will have a potentially large influence on final pricing. If a borrower expects a first quote to be definitive, then this most likely will kill the deal because, with hard money lending, every detail counts and will influence the final price. Moreover, today more than in recent years, lenders are able to dictate what a loan looks, and borrowers and real estate professionals need to adjust their expectations to this major new reality or else like their loan won’t close.
One of the major reasons I see for loans not closing is that borrowers do not have the right expectations. Borrowers think that if they have a decent credit and property profile, loans will be funded. That is not good enough in today’s environment.
In addition, borrowers don’t understand why private loans are so expensive. The primary factor is that the capital used to fund a loan is not insured by any federal agencies and not resold to other investors. If a loan is not repaid and the value of the property goes down, the lender assumes all of the losses. The interest rate charged to the borrower reflects the combination of this estimated risk and the availability of funds. Once the right balance between these two components has been found, the pricing will be determined. The number of points charged by the lender is a reflection of origination costs, loan management costs, an amount to cover the estimated risk anticipation of potentially having to foreclose on a property, and maximum the APR allowed by law.
Borrowers and real estate professionals should understand these different aspects of pricing a hard money loan. This will allow them to be better prepared (i) to get a loan approved, and (ii) to provide the best application possible to get better pricing. In addition to the two components mentioned above, other issues that will be considered are Loan to Value (LTV), property location, and property type. Each factor will have a potentially large influence on final pricing. If a borrower expects a first quote to be definitive, then this most likely will kill the deal because, with hard money lending, every detail counts and will influence the final price. Moreover, today more than in recent years, lenders are able to dictate what a loan looks, and borrowers and real estate professionals need to adjust their expectations to this major new reality or else like their loan won’t close.
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