Congratulations on your decision to plunge into the investment business for property! Although there are many times in front of you, you may also have some big frustrations as well. The achievement of the funding is often the most stressful time for any investor and trade, and greater frustration. However, by better understanding the investment property mortgage loan process can move easily through the frustrations and to become an investment property owner more quickly.

Like the purchase of residential mortgages through a mortgage broker or a bank, it is likely that this is a commercial property lender or broker for commercial purchase. While his agent and your lender may be of some help to you, if you can do some work before seeking funding, can greatly reduce your stress level. This allows you to enter the process to know better what to get easy approval. And if you’re looking for a more complicated approval, you can go to the table with all the facts that the lender will want.

Being part of his task, before speaking to a lender, is to understand that there are three common ratios used by commercial lenders to assess the risk of an investment. If they are educated about these relationships can be reached at the table with your lender in a positive position by being significantly prepared. Their preparation will show the lender that you know what you are doing and this will be more likely to do business with you.

Take a moment and consider these ratios more closely:

The debt coverage ratio (DCR)

The debt coverage ratio (DCR) describes the lender the amount of income is the production of goods when compared with the cost of the total debt on the property. The DCR is calculated by taking the net operating income divided by the total debt of the mortgage on the property.

Most lenders want to see a DCR of at least 1.2 to consider lending money on a property. Any DCR below 1.2 indicates that the lender that the property is probably going to lose money. Lenders do not like to give a property with a high potential for loss.

The loan-to-value (LTV)

The loan-to-value (LTV) is the same as that may be associated with residential loans. It is simply the total debt of property ownership in comparison with the current market value.

Residential while lenders are well under 75% LTV, you will find that commercial lenders use LTV 75% less than was provided in general. This means you will have to retain 25% untapped equity in the property.

Some commercial lenders that go beyond the norm of 75%, but is likely to pay more for debt than if you had stayed below that percentage.

The debt ratio

In general projects for small business commercial lenders will be required to submit a personal financial statement, as collateral in lending opportunities. The debt ratio will be your own personal monthly housing expenses, divided by their gross monthly income.

The debt ratio shows the lender how much money you have personally that is not already earmarked for expenses each month. Most commercial lenders do not lend to you if your debt ratio is above 25%. Some have been known to provide up to 36% however, again, you will pay a premium for that loan.

Before approaching a lender who wants to understand these three reasons and run the numbers to their unique situation. In determining whether the financing will be easy or difficult, since the beginning of your project, you can work better with the investment of commercial property mortgage lenders. Any loan is possible, but is more likely that when you have done your homework before talking to a lender.

Posted by pooch | No Comments »

Distressed Debt is starting to make a lot of noise in the alternative investment arena, and with everyone jumping on the boat it might be ready to tip. I have seen numerous announcements of new distressed debt funds and I think we will keep seeing more down the line. Here are questions you should be asking: who are going to be the winners and losers, and does anyone really know how distressed the debt really is?

The buzz in the investment air went from buying real estate to buying distressed debt. What I would like to concentrate on here is distressed debt in the form of real estate mortgages. Being a fund manager of a specialized fund that operates as an asset based lender in the business of alternative financing, we are getting hit almost daily with people looking for money for foreclosure acquisitions. Everyone is talking about buying foreclosures, and the media is again helping to purport the good news/bad news story by publishing articles about investors making big money through foreclosures. The most favored structure for investors is to negotiate short sales with banks before the foreclosure, and lately it seems the banks are more open to this option than before.

A short sale, for those of you not familiar with the term, is a sale of a mortgage note for less than its face value. Banks do this because they want to get the bad debt off of their books. This works well in a good market because it gives the new note holder instant equity in an appreciating asset with the hope of a large gain on the eventual sale after an eventual foreclosure. Granted, in this current market, short sale pricing is a little more discounted than usual, but for good reason since the housing market is a bit in shambles. Once an investor actually does negotiate a short sale and take possession of the note, the long foreclosure process begins.

First off, real estate is not a liquid asset and the foreclosure process makes it even more illiquid. If you are looking for a quick turnaround, look somewhere else. The foreclosure process is not only long and tedious, but if you are unfortunate enough to buy a note for a residential property that is owner occupied, the law is not on your side. As a rule, commercial property is a less regulated structure that is more of a business agreement than the regulated monster that is residential lending. In residential lending, the law gives the borrower every possible leniency and time is on their side. A residential owner can stretch out a foreclosure for anywhere between 6 to 18 months, and depending on the state and how much they fight it, it could go even longer than that. Imagine having to service the debt that was used to buy the foreclosure during this long unpredictable wait; every month the payment to carry that debt eats into the profit. However, that is only the start of the pain because you also need to add up all the costs like legal, insurance, maintenance, and the potential damage that will have to be repaired when the borrower leaves (needless to say, evicting someone from their own house brings out the worst in people). Wrap it all up and distressed debt starts looking less like a slam dunk and more like a dunking tank.

The big question is how certain are the funds betting on this strategy. Furthermore, I am curious about whether or not there is a long term strategy for these funds? If there is a long term strategy, what is it? Because the amount of new loans being made is decreasing, and once we start churning through all of the bad debt and foreclosures, how much business will there be to support a multi-billion dollar fund?

This is not to say that there aren’t a lot of very skilled fund managers out there with the experience and know-how to make this kind of strategy pay off, but if I had to take a guess, I would say that the Asset Based Lenders (ABL) are going to be the big winners here.

Now I am possibly biased. In full disclosure, the fund I co-manage is an asset based lender collateralizing on commercial real estate, but here are the facts to back up why the ABL’s are the play here. It takes cash to negotiate a short sale, and it is next to impossible to get a bank to give you an unsecured line to go out and buy short sales. Even trying to get a loan on a commercial property that you already own is becoming a magic trick, so these buyers only have one choice and that is alternative financing. These alternative financing sources can charge what they want for the simple reason of supply and demand. When I say they can charge what they want, I am talking about rates in the neighborhood of 11%-20% on average, and those are good returns in any market. Not only can they charge what they want, but they can also afford to be cautious. Most alternative financing sources (many being ABL funds) only lend on commercial real estate, and during the heyday, banks were lending somewhere between 75% to 100% loan-to-value(LTV) while ABL’s were generally lending around 65% (LTV). On average that is 15%-20% more collateral in a deal, and collateral translates into security. In addition, most good ABL’s are originating and underwriting their own loans which helps keep these valuations accurate. An experienced ABL should know how to sift through the numbers and nuances of a deal to understand what the end looks like before the start.

ABL’s are currently doing very well and the significant returns are still ahead of them. One must consider that ABL’s are probably going to lend around 65% LTV on a note that has already been negotiated down between 25%-30%. In fact, the new norm for ABL’s seems to be below a 60% LTV. That means that a note that was discounted 30% is then discounted by the ABL’s another 40%, and clearly the security starts looking more secure. If the borrower defaults and the ABL forecloses on the property, there is an awful lot of equity remaining to provide a potential gain in the end. It’s easy to see in the short-term that ABL’s are generating great returns through high interest, and in the long-term they have the potential to secure healthy gains through possible foreclosure on their own deals.

Let’s be clear, there is a vast amount of opportunity in distressed debt. However, the most lasting and secure opportunity is in the hands of whoever is at the end of the end game, and that long end game player is the Asset Based Lender.

Posted by admin | No Comments »

The news is not good. More than 30 subprime lenders have closed their doors this year to date, with more to come in the next few months. And one of the largest subprime lenders, New Century is willing to bite the dust. With all this and more, I would like to examine the effectiveness of the subprime market “dead” until this restructuring is finally over.

Many of you have asked what can be done to stop the mortgage hemoraging and how you will be able to survive the new market realities. In response, I have met some of the best comments and suggestions from his fellow warriors like you.

For his current subprime borrowers, here are some ideas:

1. Try to restructure its financing agreements. If this is a purchase, the seller takes some of the closing costs or reduce the price? If you can modify the DTI and LTV on the loan that may have a chance.

2. Is it possible to consolidate any debt on the loan? Can you get rid of seconds and HELOCS paid at the table? What about paying any other debt too? This will help your debt ratio.

3. Borrowers put on hold until your credit score increases. Can you wait a few months while they sort of? A better score that increase their chances of getting a loan. Do you have a credit repair company you work?

4. If the borrowers are already in deep exclusion or bankruptcy and losing the house within a month, I would like to give the loan. Yes, it could be saved, but not worth their time or aggrevation. Despite what you hear, these loans are a nightmare to deal with when this late in the game! I know that NO reputation of the lenders who tap these loans because who wants to take the risk!

5. One extreme option may be “hard money lending,” which is private financing for opportunistic investors with little to know requirements. They make their own rules and as such, make their own exorbanent high interest rates.

6. If the borrower is in fact a tight bind, we could call one of those “we buy houses” dump ads and place. Yes, it helps them. But not given a penny in my pocket. Once again, is a last resort.

7. Be sure to call all subprime wholesale account of their representatives and to obtain criteria for updating their rules for loans. You want to make sure that their loans can still do you have in the process.

8. See their borrowers to a company debt management that can help them back on track. Once again, you do not get any of this. Just a thanks and gratitude. You remember them and hopefully send some references.

I hope these tips will help you give some ideas on how to survive the subprime restructuring.

Posted by pooch | No Comments »