Land Financing - Not That Simple!

It has always been a little more complicated to evaluate land financing than any other real estate transactions. In part because there are much less land transactions so less comparables. In addition, different pieces of lands, even geographically closely related, may have significant different usage. This being said, there is still a need to provide financing for land and land development.

When thiniking of land value here are couple of pointers for you and your clients to consider. If the land is supposed to be developped for residential purpose make sure the final value of the lot make sense. The estimated value of the lot has to be in line with the future value of the completed property. If the land is only used for agricultural purpose, then the valuation is done based on agricultural value. There is a significant difference in value between land entitled and land that is not. However, at this time the difference in value is not at significant as it once was. Finaly, we at this time land for commercial use is in higher demand than residential development.

In term of financing, land values have dropped significantly not only accross California, but in the US in general. The drops that was seen and that we are seeing are related to how fast and high values of improved property had increased in the last 5 years. Land values have drops between 30% and 80% in the past 8 months. When providing financing a lender will look at these issues and then be conservative. On land not entitled LTV will be 25% to 35% on lot LTV will be up to 55%.

Make sure to send me your feedback on this and other post at gui@euroeq.com.

Fast Funding Reality or Fiction?

Everyday I am contacted because a borrower needs money rapidly. When I say rapidly, I mean within three to four days. While it would be nice to be able to deliver funds this fast in mosst cases it will not happen. For due diligence I contacted a number of other hard money lenders as an informal survey and all agreed that this was not feasible. As you can see I did not say impossible, but realisticaly not feasible.

Hard Money loans are not gambling money, they are loan securitized by colateral which is real estate. The securitization process requires to go through a number of steps. Taking these steps from identifying the property, putting together a loan solution, to recording the loan will take a number of days. In general it is difficult to fund a loan in less than 6 days on average.

As a perspective I have spoken with colleagues that have funded loans in four days. At the same time, I have spoken with colleagues that would not even look at packages unless they have at least 6 to 10 days. If a loan is needed rapidly then but can not be arranged there are a number of alternatives to be considered, from getting an extenssion on a purchase contract and foreclosure to negotiating with different creditors. In most cases this can be achieved succesfuly, only once in my experience this was not possible.

Commercial Apartment Financing and Underwriting

Each time I speak with a relative in France who is in banking, I am reminded how lucky we are in this country with our financial system. Even in times of crisis, the availibility of funds is greater than in most countries in the world. The trick is to use these funds to do the right investments.

Commercial Apartment Financing is the first type of property that we will be looking at. These types of properties are very comon and in general good investments for buyers. I am referring here, to building with more than 4 units. Up to 4 units, these buildings are considered residential properties and will be subject to residential guidelines. In this post, we will go over the process and time line next post will go over the numbers.

Here is the process either for Refinancing and/or Buying:

Day 1: Loan Application Received by Broker/Bank
Day 2: Initial Review
Day 7: Initial Review completed Bank / Broker express interest
Day 8: Terms and Condition offered to Borrower
Day 9: Terms Accepted additional documentation provided by borrower
Day 13: Conditional Approval Issued subject to Appraisal
Day 14: Appraisal Ordered by Funding entity
Day 30: Appraisal Received
Day 40: Final Approval issued
Day 46: Documents Drawn
Day 47: Documents Signed
Day 50: Loan Funded
Day 51: Loan Recorded

As usual this is only an estimated timeline, subject to changes based on the bank and the time of the year etc... In general a Hard Money lender can fund these types of loan much faster from 10 days to 30 days depending on the specifics. I am seeing and doing this regularly and numerous investors are using hard money lenders because they need short term financing and no prepay.

Second Position Loan on SFR Stated/Stated Just Funded

Before moving forward with Hard Money Commercial underwrting, I wanted to go over a concrete loan that I funded. From time to time, I will go over real loan cases to move from theory to practice. This loan was funded as a second position, stated income, stated assets loan, interest only with no prepay.


This loan was complicated for a number of reasons:
- Owner Occupied
- No Prepayment Penalty
- Loan Amount
- Loan Position
- Use of Funds
- Employment Status

At the same time they were couple of positives:
- Credit
- Loan To Value



Working with the Mortgage Broker and helping him understand all the potential challenges became very important. Fortunatly, we were able to communicate effectively and enough equity was available in the property to make the transaction possible. Challenges that we addressed:


Employment: One of the two borrower was self-employed for a short period of time. While we don't verify income we want to be confortable.

Use of Funds / Proceeds: Funds would be used to finance the above referred business. The combination of both new business and need for operating cash more challenging to approve.

Loan Position: A second position is not bad, but in this trouble lending times, every aspect of loan becomes important. A first position is always better than a second. However, the borrower was not interested in a new first since they had a loan with a fixed interest rate bellow 6%.

Loan Amount: The loan amount needed was higher than the loan amount of the loan in first position. We would have preferred doing a new first loan, but borrower had a great rate for his first.

Prepayment Penalties: In Hard Money lending prepayment penalties are, in numerous cases, part of a loan. They help provide investors and funds guarantied returns. In this case the borrower wanted to have the flexibility to refinance in 6 months as their financial position will be changing.

Occupancy Status: in some cases it can be an issue due to maximum APR authorized by law. When loan amounts are small and/or interest rates are high then we run on the maximum APR allowed by the law. In addition, we need to be carefull on the number of maximum points that can be charge as they will be included in the APR. As a second position in this case we had to charge a higher rate

Compensating factors wer the LTV after all we ended up making a loan at a 60% LTV. Who would not want to do it? Credit was reasonable for a Hard Money lender, mid 600s.

Commercial Valuation The Golden Ratio DSCR

Understanding how to value commercial properties is always a challenge. Not only the valuation process will be based on the income that a property generates or should be generating, but also on local and regional factors such as employment and the overall economy. Today, one more factor will be of consequence the availability of credit. Income is the primary decision making factor, all of the other ones are secondary even credit(to a certain extent).

Income is important, because a commercial property is an investment. Investments need to generate return that are performing to a minimum level. Every investment type will have a different expected return the more risky the investement the higher the expected return should be. For example buying a stock in coke will have a lower return than buying a strock in technology start up. The same applies to buying and selling Non Owner Occupied and Commercial properties.

The DSCR or Debt Service Coverage Ratio establish the relationship between income and debt on the property. The higher the DSCR the higher is the level of income in relation to the debt that needs to be serviced.

Debt Service Coverage Ratio = Net Operating Income / Debt Service

• Net Operating income = Gross Income - Vacancies - Expenses
• Debt Service = Monthly/Yearly loan payments

DSCR >1 Highly desired in most of the country provide best credit

DSCR = 1 Not as attractive but limited number of financing available

DSCR <>Very limited options