When it comes to private lending, there are a number of what I call myths as to what private lenders will and will not do with respect to mortgage lending.
These myths or misconception can get in the way of your ability to secure sub prime mortgage solutions from private investors.
By having a better understanding of fact versus fiction, you are placing yourself in a better position to succeed when seeking private mortgage financing.
So let’s get into the primary private lending myths and misconceptions.
Many times borrowers will not be prepared to disclose all their information and when a bank or institutional lender persists for full disclosure, the applicant will through up their hands and say they’ll just go private instead.
The view here is that privates will just lend money and they aren’t necessarily hung up on all the details and back story that led you to your financing requirement.
The reality is that private lenders are always going to concerned about conserving their capital, so while they may not require as much information as a bank or institutional lender, they are going to require enough information to properly assess their risk of investing in any particular deal. If the risk is assessed to be too high, they most certainly will not be providing a loan.
Bottom line, private lenders will not just do anything. Most won’t go high loan to value or enter into a deal where there isn’t a strong potential for exit and repayment. This fact alone can save you considerable time chasing money that may not be available to you.
There are many that hold the perception that all private mortgage financing is high rate, high fees which also relates to the term hard money.
The reality is quite the opposite.
Markets are always driven by supply and demand and the private mortgage market is no different.
Sure, rates are higher than bank rates, but rates and fees are relative to risk. If the risk is higher, the rates and fees stand to be higher as well.
If a private lender is pricing his or her money higher than the risk, then there are other lenders in the market that are more likely to be placing the deal.
Its not uncommon for people to speak of their fear that private lending is a greater risk to him in the event of default as compared to what they could expect from a bank. The thinking there is that in some way, a private lender will be more severe to deal with and can potentially provide a greater risk of property loss to the borrower.
This is again far from the truth as private lenders have the same legal rights as any other lender and follow very similar processes and procedures that you would see from just about any mortgage lender.
In fact, you may find that a private lender is more likely to work with you on a late payment or payment you would like to proactively delay making for some reason than what you might come across from an institutional lender.
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I have written previously about not only how quickly a private mortgage can be approved and funded, but also how quickly the commitment put forward and disappear.
Let me explain with the assistance of a real life example.
The other day we took on a new private lender who has money they wish to place in the Ontario market at this time.
The individual is a seasoned private lender with a very clear idea of what they’re looking for in terms of providing private mortgages.
And right now, they have $3,000,000 to invest in mortgages.
Many times private lenders will get a lump of cash from the payout of a mortgage, or their primary source of revenue produced additional revenues that now need to be investment.
In any case, the good private lenders approach is always the same…they want to get their money out in the market as quickly as possible because its not making much for them sitting in their bank account.
So for a period of time, a lender with money will intake deals and put out term sheets and commitments to fund.
If a borrower does not act on an issued commitment quickly, the private lender will move on to the next opportunity and place their money.
For every private lender out there, there will be times when they have money available and times when they don’t.
And for the larger market as a whole, this is not a big problem as lending opportunities gravitate to those that have money available at a given point in time.
If there is a surplus of available cash among lenders in a certain geography, the cost of funds can do down and the reverse can hold when the money supply gets tight.
But where private mortgage money supply can become a major issue is when you have very specific financing requirements that the average private lender is not prepared to meet.
In these cases, when you get a commitment provided to you that is within your acceptable range, you’d be well advised to take it and take it quickly as the private lender is not likely to wait for you.
If you come back to them at a later date, they may not have any money to put out at that time. And you might have a hard time finding a suitable and acceptable alternative.
This is also a good reason to work with a private mortgage broker that has access to lots of private lenders as there will always be individual lenders that are in and out of the market at any given time.
So if you’re going to utilize the expertise of a broker, you want to make sure he’s going to be able to direct you to lenders that have money to lend when you need it.
Private mortgages fall into what we call the sub prime lending category which basically includes all non bank or institutional lenders that do not price their financing off the prime rate.
In many cases, private money is a secondary form of financing, but that doesn’t have to be the case, especially when time is of the essence.
You will see references to private mortgages as hard money as well and there is many degrees of hardness to consider depending on the financing request and the lender.
And perhaps this is the best place to have a discussion on what I’m referring to as private mortgage logic.
Hard money definitions, for the most part, are focused in on equity lending where the equity in real estate is the primary consideration for making a loan. The term hard can relate to a number of different things depending on who you’re talking to such as hard to find money, hard to work with if payments are not made, hard cost or higher cost of funds and so on.
As a private mortgage broker, the one hard money notion that makes very little sense to me is that money can be procured from a private lender where the risk of loss to the lender is disproportionately higher than their potential return.
The idea here is that true hard money can be acquired for situations that don’t make any sense from a risk and reward point of view, but because a high interest rate will be charged, private investors will still advance money.
One of the most common examples of this is the $0 down mortgage to someone with some combination of poor credit and cash flow.
While it is certainly possible to get this type of private mortgage, its not probable, and the reason why is that it doesn’t make economic sense for both the borrower and the lender.
For the most part, private loans are secured by equity in real estate so in the event of default the private lender has the ability to foreclose on the borrower and recoup the money advanced without it costing them any money.
This is what we call “make sense lending”.
And each situation is going to be different.
There will be situations where the loan to value considered by a lender will be higher than the average and situations where its also lower.
But what is true far more often than not is that each deal must stand on its own merits and if the risk of lending and the cost associated with that risk make sense to both the borrower and lender, then its very likely financing will be able to be arranged.
When this is not the case, the money will certainly be “hard” to find.
Some people conjure up images of private lending similar to some type of loan shark where if you don’t get paid someone is going to break your legs and high risk lending can be justified in this fear of retribution fashion.
But in reality, this couldn’t be further from the truth, at least in anything I have seen or been a part of over many years of working in the mortgage business.
Private lending exists because their is a viable need for it in the market place that is not being met by banks and institutional lenders. This is true for both residential and commercial property lending.
Private lenders are investors that choose private mortgages as an investment vehicle no different than any other type of investment where the potential return and investment risk or weighed before any money changes hands.
And if a lending scenario is presented that allows the lender to acceptably manage their risk of loss in exchange for a cost of financing acceptable to the borrower, then a loan agreement can be entered into.
The bottom line here is that lending requests that don’t make business sense or the don’t have any common sense to them will not likely attract private money.
Understanding this can save you a lot of time chasing after something the highly unattainable.
That being said, there are also no absolute rules when it comes to private lending either as individual lenders can also do whatever they choose. But once again, just because something is possible doesn’t make it probable.
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Private money is being used more and more for short term financing options, both on residential and commercial property, where there is enough time, or the cost to complete is to high, to get a bank or institutional lender in place.
Strategically, many property owners and investors utilize private funds for bridging different transactions which can include buying the time necessary to find more ideal long term funding.
So while more people are considering AND using private equity lending as a primary option, there are still a lot of misconceptions in the market place about how private lenders make their borrowing decisions.
For instance, because private lending is always focused primarily on the equity in a property, then the immediate assumption is that not much else is going to be looked at or assessed by the private lender before making a lending/funding decision followed by near term funding.
The reality is that most private lenders will look at whatever they think is going to be relevant for them to get comfortable with a deal.
This most certainly will vary from lender to lender and even from deal to deal.
But the notion that just because you are asking for a private mortgage, that a due diligence process similar to what a bank would put you through is not going to be forth coming may or may not be true.
What is consistently true is that the lower cost forms of private money are going to perform more due diligence in order to make sure that there is very little chance of problems.
This can include review of financial statements, rent rolls, tenant contracts, and so on.
It can also include updating property and environmental appraisals similar to what a bank or institutional lender would require.
But many times potential borrowers will seek out private money with the expectation that there will not be this extra work or checking or review involved and just because a higher rate of interest is being charged, that assessing and lending against the equity in the property should be enough.
Certainly that can be enough, but as previously mentioned, that type of restrictive information approach can also lead to higher rates of interest and higher borrowing fees.
For these vary reasons, its not uncommon for a solid deal to end up being priced higher in the market because lower cost competitors were eliminated from the equation, based on the amount of information provided to them to assess.
First, the pricing on a private equity mortgage can vary considerably from one lender to another. Lower cost offerings are more likely to be provided for consideration when more information is made available to assess risk.
Second, if you have a strong financial profile to work with and are only trying to access private money for short period of time until lower cost long term financing can be arranged, then it can be highly beneficial to work with a private lender and provide the information they request, even if its information you don’t think they should need to look at as a non banking lending.
First of all, when we talk about prepayment, we are talking about paying back all or part of the principle amount of a private mortgage before the end of the interest term.
This is not an unusual occurrence with private loans due to the fact that many are bridge loans and while the standard length for an interest term is one year, the use of the money may only be for a number of months.
And when the exit strategy to repay the loan develops prior to the end of the term for the mortgage, a prepayment of funds will occur.
For a mortgage to be prepaid, the mortgage needs to be an open mortgage that allows for early repayment.
If the mortgage is closed, no prepayment can occur and fill payment will be required at the end of the mortgage term unless a renewal option exists or is extended by the lender.
When a mortgage is open, there may or may not be prepayment penalties associated with early principle repayment.
This is going to be important to understand before you sign a commitment for private funding in that an open mortgage does not automatically infer that there will be no prepayment penalty.
For many private mortgages, the prepayment penalty is going to be three months interest on the amount prepaid.
But there are many different variations to prepayment penalties or costs as well.
Some mortgages will be fully open with no penalty for any amount of principal prepayment at any time during the loan term.
Other private loans will be open with no penalty after a certain number of months have passed from the start date of the mortgage, but have a penalty in place up until that point.
The actual amount of the penalty and the way its calculated can very quite a bit, but it cannot exceed the rules governing this action which typically cannot be more than three months interest on a mortgage with a term of one year.
So when you’re looking to secure a private mortgage on a piece of real estate you now own or are in the process of acquiring, try to match your prepayment options with your needs so that you can minimize your borrowing costs in the process.
At the very least, make sure you understand the prepayment options that are provided in a mortgage commitment so there are no surprises down the road.
Because private lenders are unique individuals that make their own lending decisions in many cases, you may also be able to negotiate a prepayment option that will work for you instead of just accepting whatever is provided in a loan commitment.
That being said, if time is of the essence to get funding in place, you may not have the flexibility to negotiate or seek out a superior repayment option in the time you have to work with. In those cases, make sure you at least understand what your options are and manage you cash flow accordingly if a prepayment opportunity arises.
Some private lenders will require a higher cost of funds and as a result, they must gravitate to the area of the market that will provide that type of return.
On the other end of the spectrum, there are private lenders that are very risk averse and will provide funds at rates close to what banks and institutional lenders will provide, but the risk needs to be very low and the the borrower needs to be prepared to go through a longer due diligence process.
Private mortgage pricing is an often miss understood area of private money lending.
The most common point of view is that private money is going to be priced at 10% or higher for first mortgages and 12% or higher for second mortgages.
And while this might be true in terms of the averages, there is a wide range of values around these numbers that can apply to a variety of funding scenarios.
If you have the time to go through the application process, and do not require a high loan to value ratio on good, solid, marketable property, the private mortgage pricing range is more likely to be in the 6% to 8% range for a first mortgage.
But if you’re in a hurry and need funds in a matter of days, then the pricing can get into the 12% to 14% range for first mortgages.
Every private lender also has their own unique way of looking at the market, pricing risk, and determining what they want to get for a return on any particular deal.
So the key here is finding the right fit for any one particular deal and being prepared for the pricing range the deal is likely going to fall into based on risk and timing.
The best way to accomplish private mortgage placement is through an experienced mortgage broker who can quickly assess your situation and put you in touch with private lenders that fit your needs.
Trying to locate private money on your own can not only be difficult to accomplish, it can also result in a less than ideal borrower/lender fit.
If you want to know more about private mortgage pricing for a current or future residential or commercial property financing requirement, I recommend that you give me a call so I can quickly go over your situation with you and discuss private mortgage financing options available to you.
One of the key things to keep in mind when working with offerings for private mortgage financing, especially when requesting amounts over a million dollars, is that any offer for financing is going to have a very short life.
In the private mortgage lending world, most private lenders are individual investors that put all or some of their investment portfolio into private mortgages.
When they have money that becomes available to them, they want to place it into the market as quickly as possible, otherwise their cash funds are not earning any type of appreciable return.
So when they have money to invest in private mortgages, they are actively looking at deals and placing the ones they like as quickly as possible.
The result of all this is that private lenders are continually “in” and “out” of the market, depending on if they have any cash available to invest at any given point in time.
Compare this to a bank or institutional lender who in theory at least never runs out of money, the dynamics around making an offer and keeping it available for you to accept are somewhat different.
For instance, even in the situation of the bank or institutional lender, all offers for financing will have an expiry date, but if you came back to the lender well after the expiry of the offer and wanted to get a new offer to allow you to move forward with the deal, chances are there would be no issue with this happening, provided that the fundamentals of the deal and your ability to qualify financially were the same.
This may not be the case with a private mortgage lender in that if you let an offer lapse and then go back to the lender weeks or months later, there is no guarantee that they will have any funds available to you despite that they had previously approved your request for financing.
This is less likely to happen with smaller amounts of financing, but as the amount requested increases, it becomes more of a risk.
And while there are always other options to turn to in the market place if a particular lender can no longer fund your deal, you may not necessarily end up with the same or as good an offer and could find yourself either scrambling for another option or settling for inferior rates and terms if pressed for time.
The key point to remember when dealing with a private lender is that when you get an offer you are prepared to accept, act on it fast or it may not be available to you for very long.
When it comes to residential mortgage options, getting quotes from multiple lenders is an acceptable industry practice, largely because the application assessment process if very straight forward for “A” credit type applications.
Some lenders will even accept multiple applications for the same borrower, submitted by different brokers.
But when it comes to commercial property financing, the unwritten rules of engagement are different.
For instance, if a commercial lender receives more than one application for financing from a borrower or business entity that owns a commercial property, they typically will assume that there are several other lenders being given the same information.
Because of the amount of work that can go into a commercial mortgage application assessment, many of these lenders will not consider the deal further if they feel that its being spread all around the market.
This is even more true with private lenders.
With private mortgage financing on commercial property, there are considerably less lenders available compared to private money for residential property.
And because most mortgage brokers don’t have direct relationships with private lenders, they send these requests into their network, many times working through other brokers, trying to find someone to help their client.
If more than one broker gets involved, there is a good chance that one private lender could end up getting several different applications for the same deal from the broker network.
When this happens, there is a good chance that the private lender will just decline the request and move on to the next opportunity as its pretty obvious that the deal is being broadly shopped around and they don’t want to waste their time.
The solution to this is for the borrower or client to control their own deal.
What this means is that if you want to work with multiple brokers and/or go to lenders directly, you need to make sure that you are aware of each lender that is being contacted and that the mortgage brokers you are using are not only disclosing where they are taking the deal, but are also made aware of where they shouldn’t be presenting the deal.
When the commercial property requirement is with a bank or institutional lender, this type of control is very doable.
But with private mortgage lending, its much more difficult due to the fact that private lenders that finance commercial properties are more rare and mortgage brokers are more apt to be protecting their sources and will not likely be prepared to divulge who they are going to take the deal to.
The only way around this is to provide short term exclusivity to one broker at a time.
Private lenders tend to show their interest in a deal pretty quickly and if a broker can’t get a term sheet for you in three to five business days, its likely that he or she does not have a direct lending source and is scouring the market for one.
If in a week or so the broker you are working with comes up with nothing, then its time to move on to the next one.
By taking this approach, if the second broker ends up taking to the same lender as the first broker, no harm is done because the lender did not express any interest in the deal the first time around.
The key here is for the borrower or applicant to manage their deal so that they don’t loose out on a private mortgage opportunity on a commercial property due to excessive shopping.
In almost all cases, private mortgage interest rates are going to be higher than anything provided by a bank or institutional lender, and most of the time the rate is considerably higher.
For instance, where a conventional bank mortgage rate for one year may be at or around 3%, a private mortgage rate for one year can range from 7% to 11%, depending on the lender’s assessment of risk and competitive interest in the deal.
The reality is, however, that private mortgages are priced where they are priced for a reason.
The interest rate reflects the risk to the lender.
If there was all sorts of opportunity for a bank or institutional lender to place these primarily equity based mortgages at lower rates, they would in a minute.
But for those individuals and entities that fall outside of the lending requirements of a bank or institutional lender’s “A and B” lending programs, it can be a considerable fall to private money.
So yes, private money does come at a higher cost.
But it also serves a very vital role in the mortgage financing market place, providing short term credit for those with some sort of cash flow and/or credit distress, as well as providing bridge loans for transactions or capital requirements that do not afford enough time for conventional bank financing, even if the borrower would otherwise qualify for it.
There can also be a considerable range in private money pricing with the best rate available coming within two to three percentage points of conventional rates.
And the longer a borrower in some form of financial distress waits to get financing in place, the more likely they are going to fall into the higher end of the rate range.
When considering private mortgage financing, the focus should be less on the interest rate and more about the costs you are going to be facing if you don’t get mortgage financing in place.
In situations of mortgage default or foreclosure, losing your home or your home equity is likely a significantly higher cost than any private mortgage.
In situations of bad credit and debt consolidation, private mortgage rates are a bargain compared to the credit card balances you might be trying to get rid of.
And if you’re trying to save a real estate deal or generate capital for either a revenue generating or cost saving action, the cost of interest on a private mortgage may very well pale in comparison to the lost profits or incurred costs from not having funding in place by a certain date and time.
Once you have exhausted all your bank or conventional lending options, a private mortgage is likely your next best choice.
The cost is relative to the alternative.
Many times private mortgage interest rates can turn out to be a bargain compared to the alternative.
In situations where you are in need of additional funds and you have distressed or strained credit, paying out your existing mortgage or mortgages with a new private mortgage can be the best choice available to you.
Because a private lender is going to be more concerned about equity versus credit score, there is a much higher likelihood that refinancing can be done through a private money provider compared to a bank or institutional lender. This becomes more relevant if you are under any type of time pressure as a private mortgage can be put into place in less than two weeks while you can spend months trying to find a better institutional solution when your credit is not in good standing.
But being in a bad credit scenario isn’t the only time to consider a private mortgage refinancing.
In most situations, a private mortgage is a short term, or bridge financing facility that will need to be repaid in a period of one year.
Therefore, if you have circumstances where a short amount of time will allow you to be able to secure longer term financing from a bank or institutional lender, a private mortgage refinancing option can provide the time required to improve credit, cash flow, or search for better options.
In the case of commercial property financing, a bank or commercial mortgage can take two to three months or longer to arrange at times.
If you have a short term mortgage refinancing need either because your current bank does not want to renew your existing mortgage, or you require additional funds for your business, a private mortgage refinancing of your existing mortgage can stabilize your balance sheet and cash flow quickly, and provide the time necessary to work through not only the options available to you in the market, but the time it takes to pursue them.
The key with private mortgage refinancing is that it has the potential to provide capital in the short term to help you avoid costs or take advantage of opportunities that exceed the incremental cost of private money.
Not being able to repay your existing mortgage on a timely basis, or provide additional funds for debt consolidation or other short term funding needs can be costly and far exceed the incremental cost of financing between bank financing and private financing.
At the same time, not all mortgage refinancing situations will be well suited to private mortgage refinancing options. But for those that are, a private mortgage can end up helping you make or save money in the short term.
If you would like to better understand private mortgage refinancing, I suggest that you give me a call so I can quickly review your situation and provide private mortgage refinancing options for your immediate consideration.
The point though is to have a contingency plan in place in case that something goes awry with your primary financing strategy.
So what could go wrong with a standard residential or commercial property application?
All sorts of things.
And the more people involved (lawyers, appraisers, accountants, consultants, etc.) the more chance their will be a timing delay, a miscommunication, and request for more information, and so on.
Unfortunately, most people don’t think along these lines, and perhaps most of the time they don’t need to. But at the first sign of trouble, getting plan “B” into place can be a whole lot cheaper than the alternative.
The goal of any of my clients is to get the cheapest form of money possible and I always strive to get them what their looking for if at all possible. But the reality of the world of finance, especially when you are talking about non standard mortgage transactions, is that something goes wrong more often than you may expect.
And private mortgage financing is a great source for a contingency plan, based on the speed that deals can be put into place.
Unfortunately, many individuals that can qualify for an “A” mortgage facility will not even consider this as private money is viewed to be too expensive, or only applicable to the desperate.
But when you’re running out of time trying to close a deal that requires mortgage financing, the cost of a private mortgage can be a pittance compared to the cost of breaking a contract, or losing out on a great property purchase.
And a private mortgage only temporarily replaces the lower cost form of money you’re after as by definition it is only a bridge loan anyway. But by getting on in place in time to complete your business you have also effectively bought time to get something better in place to pay it out.
The key to a private mortgage contingency plan is not waiting too long to put one together.
As a general rule, you should allow two full weeks to get a private mortgage in place, although it can be possible to get this done faster.
If you find yourself a couple of months into a commercial mortgage financing process, for example, and are running out of time for some reason, then the private mortgage route may be the best short term option available to you.
To find out more about your private mortgage financing options on a given transaction, give me a call so we can quickly go over your requirements together and discuss private mortgage solutions that can be implemented right away.
A common request for a Scarborough private mortgage tends to relate to mortgage refinancing or debt debt consolidation where the applicant is trying to leverage the equity in their property.
But there are many, many scenarios where a private mortgage could be put into place through our lending partners.
While there are a lot of situations where bad or distressed credit may bring someone to private mortgage financing, this doesn’t have to be the case, and in many instances, private mortgage loans can be preferred over bank or institutional mortgage financing alternatives.
For instance, any time a Scarborough property acquisition transaction needs to be completed in less than 10 business days, the only realistic option to get funding in place can be a Scarborough private mortgage.
Yes, on residential properties, it can be possible for a bank or institutional lender to get something approved, closed, and funded in two weeks, but its hard to rely or depend on that happening due to the amount of people that are typically involved in a institutional mortgage transaction.
With a Scarborough private mortgage financing request, if all the loan requirements are in order, a private mortgage lender that services the area and has a focus on faster turnaround time with their lawyer and mortgage broker is going to be much more likely to be able to meet the required timeline.
With commercial mortgage financing, the process can take at least 30 to 60 days to complete provided there aren’t any unexpected delays in the application process.
A Scarborough private mortgage can be a good first step in getting a commercial mortgage in place in less time, which will in turn provide the time necessary to explore and secure a longer term bank or institutional commercial mortgage solution.
Construction financing in many cases is preferred from private lending sources due to once again to the speed of getting funding in place as well as the higher average level of predictability in the draw management process that is associated with private construction loans.
And for lower loan to value requirements on solid real estate properties, the Scarborough private mortgage funding rates can come close to what some banks and institutional lenders would be prepared to offer on the same property.
So regardless of your situation, if you’d like to explore your Scarborough private mortgage options more thoroughly, I recommend that you give me a call so we can go through your requirements together and discuss different avenues for private mortgage financing available to you.
The are likely different explanations as to where the term hard money loan came from, but the way I explain it is that because a mortgage is being issued primarily on the basis of equity where the borrower has some combination of strained cash flow and/or credit rating, a private lender is going to act on any lending defaults very quickly because of the risk to them associated with payment defaults.
The comparison would be to a bank or institutional mortgage, where default in payments will still be responded to and dealt with, but potentially not as swiftly as may be the case with a private lender.
In reality, this makes good sense in that the private lender is already providing financing in situation where a certain amount of financial and/or credit distress exists in most cases. Therefore, the need to follow up on any default of payments or any failure to meet terms of the mortgage quickly, is going to be important to make sure the lender can recover their capital.
Hard money doesn’t mean that some rough looking customer in the image of a loan shark is going to break you leg if you don’t make a payment, at least it doesn’t in my world. Private lenders are secured by real estate and as such have legal rights to realize on their security in the event that a borrower does not make their required payments. There’s nothing really hard about it.
That being said, there are degrees of private mortgage lending and hard money loans.
For instance, the more distressed the borrower’s financial and credit profile, the lower the loan to value a private lender is going to advance and the more closely they are going to be watching the account for any problems with repayment.
But like any other mortgage commitment from any other type of lender, the borrower is required to meet the terms of the mortgage as is the lender. Any breach of terms will likely result on action being taken by one side or the other.
A hard money loan is not difficult to secure if you know where to find the private lending sources that would be interested in your financing request.
The challenge or hard part is that most private lenders do not have their own retail presence and many don’t ever even meet with the borrowers.
In order to locate a suitable source of hard money loans, you need to be working through an experienced private mortgage broker that has access to private lenders that funds mortgages in your area.
If you need a hard money loan or would like to know more about them, please give me a call and we’ll go over everything together.
Private lenders are typically individuals that make their own assessment and lending decision and if they are comfortable with the case for financing, as well as the risk related to the deal, they will issue a commitment to fund the deal.
When we’re working to place funds through a bank or institutional lender, the requirements of the lender are more cut and dried and basically inflexible. Working with large transactional volumes requires a consistent application of lending criteria in order to efficiently process and approve deals. That makes a good deal of sense from a business point of view, but it can be frustrating for a borrower if they don’t quite fit into the lender’s box.
This where private mortgage lenders can provide tremendous value in the market place due to the fact that they control the ability to customize their approach to any given deal and potentially fund good deals that are not quite bankable or fall between the institutional lender cracks so to speak.
A major con of private lending that most borrowers don’t understand is that private lenders want to assess and fund deals quickly as they have funds available to put out in the market. Idle money doesn’t earn them a return, so they are interested in finding suitable deals and funding them.
Where the con comes in is that most borrowers don’t realize or appreciate that once they receive an offer to finance from a particular private lender, they need to act quickly on it or it may not remain available to them.
Unlike a bank that really has no limit to available funds, a private works with a finite money pool and if someone is waiting too long to accept an offer for financing, the private lender may very well place the funds into another deal.
Many times borrowers will shop the market and gather different quotations, circling back to different quotes over a period of time. While this approach may work with a bank or institutional lender, its certainly not guaranteed to work with a private money lender.
The key here is to start the financing process with a private lender knowing that if he or she give you 5 business days to accept an offer and you don’t accept it, there is a very good chance that it may not be available to you weeks or months later.
And while that may not seem like a particularly big deal, many times there is a sense of urgency around private mortgage financing requests and if you take too long and miss out on an offer, there is no guarantee you will find a suitable replacement in the time you have to work with.
One of the most common scenarios is with a commercial or industrial property that requires mortgage financing.
While a bank or institutional mortgage will certainly provide you with a lower interest rate, there can be considerable other costs that can be required by the lender before any commitment or funding is provided.
These days its a given that any commercial or industrial property will require a third party phase I environmental report from a recognized environmental consulting firm as well as a recently completed property appraisal from an AACI appraiser.
Depending on the property and its prior use or its location, a phase II environmental audit may be required right off the hop.
Then, if the borrower is self occupying the building, operating financial statements may need to be prepared by the accountant, perhaps to the level of review engagement.
All these things cost money, and in many cases quite a bit of money in addition to the time it takes to get everything completed and back to the lender for review.
While a private mortgage lender could also ask for all these things as well, in many cases there can be substantially less cost incurred to third party verifiers, making the private mortgage option less expensive if you calculate an effective interest cost for the transaction with all costs included.
At the same time, a private mortgage may also not be a long term commercial mortgage financing solution as most private lender do not provide funds for more than one year with the maximum time available no greater than 5 years. That being said, if you’re tight on cash flow right now, its going to be more cost effective and cash flow friendly to get all the bank or institutional requirements done over a period of time, when it makes sense to get everything done, versus being buried under all the costs at the outset of acquiring a property.
The other situation where a private mortgage is going to be a better option is when time is short for closing. While the bank may be able to provide a cheaper option, it doesn’t do you any good if its going to take longer than you have to close the deal.
And depending on the circumstances, not closing can be very expensive and significantly more expensive that getting a private mortgage in place quickly and getting the deal closed.
If you’d like to discuss private mortgage options for a residential or commercial property you need to finance, give me a call and I’ll quickly assess your requirements and provide relevant private mortgage funding options for your consideration.