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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   September 2010

4 Criteria for Make-Sense Lending

Many investors still want to make loans -- if the deals are logical

Commercial mortgage brokers are aware that it is much more difficult to get their clients' commercial loans funded in these challenging times. The rules have changed for virtually all lending sources, including private-money investors. Gone are the days of lending on pure loan to value (LTV) based on an appraisal and with no questions asked.

It's important to work on loans that an investor will more likely fund, as opposed to those with no chance of closing. Many investors would prefer to invest their money in high-quality real estate loans instead of the stock market. But projects and properties must meet certain criteria -- including the following -- before these investors will consider doing a loan.

  1. Location: Investors typically aren't excited about making a loan in a remote location. Even if it is a great building, this can be challenging. Keep in mind that even if an investor will do the loan, it will have a conservative, low LTV. If it doesn't meet that criteria, move on.
  2. Property type: It is tough to find loans for land right now. An investor's first thought will be, "Do I ever want to own this land?" If the answer is yes, you may get your client's loan funded. There isn't a good chance that an investor will fund a blighted property that it might get back through foreclosure. Investors aren't interested in acquiring a problem property when property values aren't increasing. There are better investments.
  3. Borrower profile: Private-money investors are looking at the borrower's character more so than in the past. Everyone faces challenges in today's economy, but if you're working with borrowers who have never paid their bills and who have a history of poor credit, most investors will not want to deal with that type of individual now. If the location, property type and LTV are right, however, then you likely will find plenty of investors willing to fund the loan. But you must have all the criteria working for you; otherwise, you're probably wasting  your time.
  4. Property operations: Investors want to ensure that the property's income can service the loan. Is there money left over after expenses each month? If not, determine other reasons that investors should consider doing the loan and explain them when submitting your client's loan package. Perhaps the property was mismanaged. Maybe the borrower is creating increased value to the property. Whatever the reason, share it upfront.

It is also a good idea to take a quick look at the property's operating numbers and see if they are realistic in today's real estate world. These include rental income, vacancy rate, adjusted income, operating expenses and net operating income. 


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