Working With Available Capital – Part 3 (Last)

In the first two entries related to working with available capital we look at the real estate market liquidity and borrowers motivations. Today in the third part of the serie we will look at the exit strategy. Clearly being able to get back the capital invested is going to be a very important aspect of our decision to invest. We are private investors, but we also work with conventional sources of funds either through correspondent relationships or partnerships. Having an understanding on how other sources and financial professionals look at properties, allows us to make better and more informed decisions.

Valid exit strategies are, pay down, refinance and sell of the property each one of them will or will not make sense based on the details. If we start with a pay down, most private loans are interest only, thus they don’t include monthly reduction in principal. Most borrowers will not include additional payment on a monthly basis to reduce principal if they don’t have to. An alternative would be for borrowers expecting an influx of capital and plan to do a partial pay down. If this is part of the exit strategy we would want to verify that it will happen. We will ask for documentation supporting borrower’s claims.

While principal reduction is a possible exit strategy, the most likely ones are refinance and / or the sale of the property. In general we underwrite loans at no more than 65%LTV, however in some case we need to be more or less conservative. To allow for future refinance we need to look at properties’ income and apply debt service criteria to our underwriting. When we receive a package with a current debt service of 1 either the property is under rented / performing and we approve it. Or since the exit strategy is refinance, and refinance requires anywhere from 1.2 to 1.3 DSCR we will decline. We would be approving this loan for a refinance if no matter the DSCR we felt the LTV was low enough, the potential for future income was real and we could either refinance them into another private loan if the property’s financials did not improved enough or potentially extend their current one. We look at it relatively the same way for residential properties, if we have to take them over would rent cover costs?

Selling a property is a valid exit strategy and depending on the property type and location we will allow for more or less time. For example, if borrowers come to us and say they need finance on a commercial piece of property on a short term basis prior to a sell. We will most likely allow for financing to be between 12 to 18 months. However, if a residential borrower comes to us we will allow for 6 to 12 months no more. If borrowers tell us that they cannot execute within these timelines we have concerns on the validity of their exit strategy. In the case of sell as an exit strategy, we will ask for listing agreement with agent, agent contact information, escrow information, why borrower is selling etc… if all lines up, we will move forward.

This is the last post related to working with available capital. As you can see because capital is limited and market conditions are challenging we go beyond just looking at values when we make an investment decision. We both try to be reasonable in our investment approach and at the same time accommodate borrowers. We look at multiple criteria when underwriting, from our understanding of the market, to the exit strategy. By being thorough this has allowed us to stay in business in these trying times and to provide positive returns to our investors.