Real Estate

Private Placement Loans – Alternative Mortgage Financing for the Purchase and Refinancing of Properties

With current interest rates hitting all-time lows, one would suppose it should be easier than ever to get a home loan, especially since mortgage payments are more affordable due to lower interest rates.

However, nearly 100% of the loan products offered by institutional lenders today are strictly “prime” loans and are available only to the best-qualified borrowers with perfect or near-perfect credit, income, and employment. Additionally, the property, which serves as collateral, must also be in pristine condition to qualify.

One of the most significant by-products of the most recent financial crisis and subsequent “great recession” was the effective disappearance of “alternative” mortgage loan products, also called “subprime.”

In the past, when borrowers buying or refinancing property didn’t have high enough credit scores but had solid jobs and income, they could qualify for alternative home loans that offset the extra risk with higher interest rates.

Lenders making these types of loans required interest rates one to three percentage points higher than “prime” loans. The higher rates were considered sufficient to offset the additional credit risk.

In today’s market, that would put “non-prime” mortgage interest rates in the range of 5% – 7%. However, a plethora of strict financial regulations and the effective disappearance of the private secondary mortgage market virtually eliminated these mortgages.

At the same time, due to tough economic times, many real estate buyers and homeowners who have solid down payments or good equity in their properties are unable to qualify for prime mortgages due to lower FICO credit scores or because they are not fulfilling some other loan. qualification requirement.

In some cases, it is the property, not the borrower, that does not qualify for financing. This is common in the case of buying or refinancing properties in foreclosure or so-called “fixer-uppers”, which are properties that require major repairs.

Private placement loans, sometimes called “bridge financing” or “hard money,” can provide a viable financing alternative for borrowers or properties that do not qualify for principal loans.

What is a private placement loan? In short, it is a mortgage loan financed through a non-institutional lender, such as a non-public pension fund, IRA retirement account, hedge fund, investment pool, mortgage broker, and/or private lender. , which is primarily asset based.

These loans require higher down payments (purchase) or substantial equity positions (refinance). In some cases, multiple properties may be cross-collateralized as security for the loan.

Private placement loans are typically short-term (two to five years) and are used as temporary (bridge) financing, not as a permanent loan. Here are two real life examples of how this type of funding was used effectively.

Bob (name has been changed) was a real estate investor who wanted to purchase a short sale condominium property at a substantial discount. Bob was a solid borrower with excellent credit, a job, an income, and a large down payment. However, the project in which the condominium was located had pending litigation between the HOA and the developer.

None of the major lenders would not lend it, even though the condo unit was not directly involved in the lawsuit. Bob got a very good price for the condo, which was about 30% below market value.

He made a sizeable down payment and our company obtained a private placement loan for him, which was funded in about three weeks. Bob believes that he will sell, refinance, or liquidate the property within three years. In the meantime, this condo is a great rental investment that he paid about 70 cents for.

The second example illustrates how a private placement was used to help homeowners save their equity through refinancing. Mark and Joan (names have been changed) were successful entrepreneurs and operators for over 30 years. They owned a commercial building and several income properties, most of which held significant shares.

After Mark was diagnosed with a serious illness and was no longer able to work, his business deteriorated and he eventually had to go out of business. His main source of income was gone, as were his savings and his good credit rating.

They soon defaulted on their mortgages, and the bank declared the loans past due and payable. The lender foreclosed, and Mark and Joan were unable to refinance their properties due to poor credit and reduced income. Additionally, there was some deferred maintenance on their properties, making them very difficult to sell in their current state.

When Joan contacted us, her situation was urgent. They had no funds to cure the defaults and were about to lose their properties with substantial actions. Our firm was able to arrange a private placement loan with a non-institutional lender, which was funded in approximately four weeks.

The new mortgage paid off all existing loans and provided Mark and Joan with much-needed cash reserves, including additional funds to repair the properties. About a year later, Joan was able to sell her business and income properties and withdraw her shares. The private placement loan was paid off in full, saving borrowers millions upon thousands of dollars in principal.

These are the basic characteristics of private placement financing:

  • Loan must be secured by real estate (all property types considered, cross collaterals may be accepted)
  • Loan-to-Value (LTV): 50% – 75% of the appraised value (less in case of vacant land)
  • Loan amounts range from $100,000 to $5,000,000+
  • Typical loan term: 2 – 5 years (longer terms are available)
  • Typical interest rates: 8.9% – 12.9%
  • Fast financing, usually in 3-5 weeks

Obviously, Private Placement loans are not appropriate for all credit situations and are rarely used as permanent or long-term financing. They require solid capital and interest rates are higher than prime loans. However, these types of loans can be especially useful when major lenders are unwilling or unable to lend due to borrower or property requirements and/or when there is a need for quick financing.

In most cases, private placement loans are used as “bridge” financing, allowing borrowers to quickly purchase an attractive property or refinance their property to preserve principal or obtain a cash withdrawal. The typical strategies that exist are refinancing or selling the property.

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