Investors Getting Financing For Investment Properties

Before addressing the above topic, I want to do a quick follow up on the last topic discussed "buying of Commercial REOs". Based on my own experience and supported by articles in the Wall Street Journal and other publication, financial institutions are currently continuing to foreclose on commercial properties and are not making them available for sales. Speaking with numerous current and former banks executives during the past week, it was made clear to me that they will continue to do that until they have no other choices. Banks / financial institutions today do not want to recognize their commercial real estate losses. However, as the economy continues to stagnate we may start seeing a change, potentially by the end of the year.

Getting financing for investment properties is one of the most challenging aspects of real estate finance in general and commercial real estate finance in particular today. Because most large financial institutions, funds, insurance companies, etc… have not yet cleaned their portfolios and recognized their losses, they are not able to invest. Two of my favorite business shows World Business News from the BBC and Bloomberg First Word have had interviews and discussions on this topic. The bottom line is that commercial investment financing is not going to come back soon. The longer it will take financial institutions to recognize their losses the longer the crisis will continue.

Here is what to do when you need to get financing for your commercial and sometimes residential investment properties, call me. Here I am being factitious but not that much really, it is difficult to get commercial financing done in general and commercial investment financing in particular because a lot of people do not have the expertise. As an example a new client of mine was looking for commercial financing on an office building for 6 months and could not find anything. He worked with banks, brokers etc… and nothing happened. However, once I started working with him, we were able to find him a solution within 2 weeks. The key to success was team effort, good financial analysis and the ability to think outside of the box.

To be successful today in getting the financing you need, it is important to be realistic and aware of the financial market conditions. My first recommendation would be to make sure investors understand that there are different type of valuations, an exchange valuation and a financing valuation. This difference applies less to residential real estate investment than to commercial. I would recommend reading my post on Cap Rate Vs. Cap Rate Vs. Cap Rate. Credit valuation is, in a lot of cases, different than Pro-Forma valuation and then there is the income component.

Another recommendation would be to be aware that rates for residential are different than for commercial. It is important to note that residential rates are artificially low. In addition, since there are limited sources of capital for commercial investment properties, it is important to focus on getting the financing done rather than to shop for the illusion of finding the greatest deal. This is true even if an investor has good credit, reserves and the property is stabilized. Today the costs of borrowing are higher than they were 2 years ago, the choices in terms or financing programs are much more limited and fewer people know how to do a proper credit evaluation and analysis. Finding an experienced team can mean the difference between financing success of failure.

My final recommendation, is for investors not to wait until the last minute before they start the financing process as it will take sometimes before the financing close. Investors need to make sure they have all the documents lined up and then be willing to work twice as hard with their financial partner to get it done. Also, if there is any problem with the property, or any other aspect of the file to be upfront so that the problem can be addressed and that there are no surprise halfway through the financing process.

Buying REO A Disappointment

Recently in a Wall Street Journal article, it was made clear that banks had not done much with their portfolio of real estate owned. Here I will focus more on the commercial real estate segment, however, some of it may ring true for residential real estate. One of the reasons advanced by the journalist is that banks have been waiting for the economy to comeback. As the pace of recovery is much slower than anticipated, banks are now faced with the hard fact that they have to start taking actions with their portfolio of owned property. I am not expecting a flood of new commercial properties coming on the market any time soon, however, I am expecting banks to start making sales decision.

Dealing with asset managers and decision makers at banks is quite an experience for most us. I remember having to do that on the residential side of it and it was not very pleasant. Dealing with asset managers on the commercial side is not simple either. To be successful we need to understand what are banks motivations and the challenges they are facing. Banks want to minimize their losses, as nobody likes to accept that they are not going to get their investment back. They don't have a good idea of what would be a good price at which they should sale. Is the market tomorrow going to turn or is it going to take another year. They are looking at the costs of keeping the property vs. the costs of selling today. They are trying to define guideline and policies in a very difficult market. Finally banks in numerous cases are not dealing with credible buyers or buyers' representative.

Banks are going to start making selling decisions because well they have too. They are realizing that the economy is not coming back as fast as they were expecting, thus the losses are going to be permanent. They are under pressure from regulators to clean up their portfolios and to restructure them. In some cases the properties are continuing to lose tenants making it even more difficult to hold on to it. Finally they are starting to be have a better sense on how to price these properties.

Even if they have to sell their real estate owned it is not going to be easy to have access to these properties. One of the challenges that numerous real estate professional are facing is credibility. I have seen emails from banks that state that they are inundated by calls from brokers etc… who in most cases have no experience but want to try to put a deal together. In addition, in numerous cases brokers and professionals are not taking the steps to make sure those potential buyers and investors are qualified. By quailed I mean that they have experience in buying the type of property they are bidding on. They know how to evaluate the property and make an acceptable offer. Finally, real estate professional need to make sure potential buyers can execute on the offer.

This process is going to continue to be tedious but will pick up some speed in the last quarter of 2010 and beginning of 2011. Broker to be successful have to make sure they understand the transaction and do the work required with potential buyers and investors. When real estate professional don't have the experience they should partner with other professional to help them. Finally doing the proper due diligence and making sure that financial institutions have the intention to sell will make an a difference.