CLOSE first, THEN optimize the financing Written by Gregg Winter
In today’s white-hot real estate market, it’s like shootout at OK Corral. Move first and faster than next guy, or you’re dust.As Manager of a Private Mortgage Fund which makes Bridge and Mezzanine loans on commercial and investment real estate, I continually come in contact with individuals (in some cases potential borrowers, and in other cases potential Fund Investors) who are SHOCKED that anyone would EVER borrow at rates of 12% or 14%! It’s an interesting initial visceral reaction that usually dissipates when individual “does numbers” and quickly realizes that there is a huge difference between borrowing at a hefty rate for only 10 or 12 months vs., say, five or ten years. Further comprehension usually follows as individual ponders various factors that typically motivate Borrowers to seek a Bridge Loan such as an upcoming time-of–the–essence closing where a bank has yet to produce a commitment letter for one reason or another yet deal MUST close within, say, 10 days. Another typical reason is an individual having an opportunity to buy a property at a time when individual’s liquidity is limited, their cash flow is weak, or their credit scores are less than perfect, but they see a compelling upside strategy and have a clear plan and budget outlined to achieve it. We often provide Private Money for situations that, once stabilized, will easily qualify for bank financing. Use right tool at right time: Bridge loans are NOT intended to be utilized for a long period of time, and, of course, no one uses them as long-term permanent financing. The Bridge lender must be smart, nimble and FAST. The staff, legal counsel and appraisers of a private lender need to operate like a SWAT team; analyzing, underwriting, drafting loan documents and closing loan in very short order. The underlying quid pro quo for Private Money MUST be: “we’re expensive but we’re fast and dependable”. Expensive for a few months is also entirely different than expensive for 10 years. The fact is, that in today’s fast-moving real estate world, speed and certainty of execution are priority #1. It’s hard enough to find a property worth buying. Many sellers will not permit a mortgage contingency, and of course, market is swimming with 1031 tax-free exchange buyers who can buy all-cash or put down a significant down payment. Clearly, an all-cash buyer or a buyer armed with a financing commitment will usually be chosen over a buyer who insists on a conventional mortgage contingency. Often strategy must be: Find a worthwhile asset, tie it up, CLOSE on asset with temporary, fast, dependable financing, and THEN put perfect, low-rate financing in place once you control asset and have luxury of time to get it just right. First hit target, then worry about getting a Bull’s Eye: We sometimes see perfectionist buyers determined to “win” on buying an asset, fiddling around with various LIBOR-based, low-rate bank financing alternatives, wondering which will save them more money, while their competition is either paying all cash or has a Bridge loan lined up so they can go to contract without a financing contingency (two metaphors that come to mind are: “winning battle but losing war”, and “playing violin while Rome is burning”). Sometimes these “low-rate obsessed” buyers end up with a beautiful commitment for a nice low rate and nothing to buy with it. It’s obviously important to know when urgency to have a FAST and FIRM loan commitment outweighs anything else.
| | Pop Goes The "Real Estate Bubble" Myth!Written by Roseanne Nepht
If you turn on TV, listen to radio, or even surf internet, you'll notice that there is a lot of people talking about "Real Estate Bubble", and asking question, "when is it going to burst?" They (these so-called experts) have been saying for years that real estate market can't continue this type of growth. These "experts" remind me of chicken little, with all of their prosphesy of doom and gloom, and "sky is falling" syndrome. The truth is there has never been a real estate bubble in past, or presently, and there will certainly never be one in future. Talk about there being a "real estate bubble" is stuff that urban legends are made of.Here's readers digest version of what it all means. The real estate market is really, a "wave". It's cyclical, and we are riding on a big wave right now. Real Estate is just like Investing in stock market, There are good years when values rise and there are years that are better, when values rise even higher. That's it, in a nutshell. Real estate has gone up and down throughout history, and generally speaking, it is fairly stable. When you look at a graph of real estate values, you would be able to see a clear pattern of increasing values. Now some years would have higher peaks than others, and all in all, it is a gradual building slope from left to right. And it looks just like a wave. In addition, there are more up cycles, than down cycles. So recent growth we've had will be followed by ones of downturn. The only difference is that it may not be as much of an increase, in other words increase will be slower. The bottom line is, it will still be growth. This is why there will always be growth. Real Estate is a basic need. People need a roof over their heads. You can rest assured that people will be renting, buying, leasing, and selling homes. And it doesn't matter if market is low or high or if interest rates are up or down. Real Estate is a sure thing!
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