By William J. Tessar, President and CEO of Civic Financial Services, a premier institutional private money lender for real estate investment financing. With more than 30-years of experience in the mortgage and lending space, he is also host of Industry Insights the monthly show featuring expert advice and discussion on the real estate investment market.
The most important aspect of success in real estate investing is having ready-access to capital when you need it, so you can seize opportunities in today’s dynamic real estate market. In fact, many investors will wait for the right opportunity to roll along only to see it vanish because they didn’t plan ahead and have capital partners with different financing options all lined up and ready to go.
If you’re only looking for capital when you need it, 99 times out of 100 you’re not going to make the best decision—only the fastest. The better strategy is to cultivate your real estate financing sources first, beginning with understanding the different options that are available and what lenders are looking for. Each option has different requirements and parameters, which we explored in our recent Industry Insights show.
Understanding the Differences
“One common option for investors is conventional real estate financing, which is based not only on the property, but primarily on the warm body behind it,” said Robert Kang, relationships manager at First Republic Bank. When working with real estate investors, Kang looks at where the borrower’s income is coming from, their ability to pay off the loan and whether the investor has a second source of repayment if things go south.
Kang also looks at whether the capital will help the investor achieve their goals or actually hinder them. “We’re taking a snapshot of what their life looks like at a certain point,” he says. “That’s why we love to build relationships and get to know the individual investor, where they are today, and where they are going.”
Hard money and private money lenders each look at residential investment property financing opportunities with a different set of optics. “We don’t have set guidelines,” says Kevin Guisnow, a senior loan officer with PCL Group, a true hard money lender. “Each deal is individual and we look at it with an open mind.”
Guisnow says he likes to get to know investors, their passion for their project, their exit strategy and how they plan to repay. However, he adds that the property itself comes first, because if the investor defaults, Guisnow has to determine whether he can take it back and sell it to recoup his investment.
Institutional private money lenders like CIVIC, are a kind of hybrid capital partner. They have access to capital from institutional partners like banks and from Wall Street. They can operate more quickly and have more flexibility than conventional lenders, but also have stricter underwriting guidelines than a pure hard money lender.
Investors who need a steady stream of accessible capital can also get residential financing from a private money lender or a correspondent lender to access ‘warehouse lines’ of credit. These are lines of credit that, once established, can be used to finance properties that meet certain guidelines established by the lender. While having ready access to affordable capital is hugely advantageous, there are often barriers such as volume commitments that may create barriers for typical investors or small brokers.
“Some warehouse financing vehicles can be complicated, while others are fairly straightforward,” says Vinnie Ciardullo, senior vice president of capital markets for CIVIC Financial. He adds that the longer that a warehouse lender holds real estate assets, the greater amount of due diligence it requires from the lender.
Speed to Close
In addition to greater flexibility, another big benefit of hard money lenders is that they can usually close loans much faster than other sources. For example, conventional financing typically takes 45 days, while private money lenders like CIVIC typically take one or two weeks. If the deal is right, hard money lenders like PCL Group can get them done in a few days.
For example, Guisnow recently had an investor who was buying an unhabitable historic landmark with no comparables within five miles—and she had to close in seven days. Guisnow was able to qualify the investor based on her tax returns and her 70 percent loan-to-value (LTV) position. “After getting her on the phone and hearing her passion and vision, I got past the valuation part of it,” he said. “I got the feeling this is going to be a good loan, and to this date, so far, so good.”
With hard money lenders like PCL Group, there is no minimum or maximum financing, although they may not look at deals less than $400,000. The money can be used for anything from single-family properties to apartment buildings, even ground-up construction, but not for buying land.
Conventional lenders will typically provide financing for owner-occupied homes, therefore it is generally challenging for non-owner-occupied properties. The DTI, Income qualification and LTV requirements are usually more stringent as well. Kang said most of his investment financing deals are around 60 percent LTV, but says he’s gone way above that many times when “it made sense.” For true hard money lenders like PCL Group, the LTV ratios are generally between 70 and 80 percent, but other private money lenders like CIVIC can go as high as the low 90s.
Prepayment penalties are another factor to consider. For a conventional lender like First Republic Bank, paying off a loan in less than three years will cost the borrower just $500, no matter the loan size, Kang said. For a hard money lender like PCL Group, there may be a guaranteed interest involved if the investor plans to pay back the loan within a few months. For CIVIC, there is no prepayment penalty, however, there may be early termination fees when financing involves using warehouse lines of credit.
Tips for First-Time Investors
Most seasoned real estate investors are familiar with the different types of financing options and understand the process. But those relatively new to the game, it can be daunting. What can they expect?
Kang says to be prepared for lots of questions. As a conventional lender, he’s focused on how the money will be used and how the investor plans to pay it back. “We work with the deal from start to finish, so we have to understand every little piece of that deal,” he said.
Ciardullo adds that investors should consider how easy it is to work with a particular lender, noting that a lender with a low rate but is hard to deal with may not be worth it. “Even if you’re sacrificing cost, finding a partner that’s easy to deal with and gives you quick access to your capital is going to help you tremendously in the long run,” he said.
Guisnow says investors should understand the financing terms, do their own due diligence on the property, and be truthful with their lender. “Show us everything, because we’re going to find it, and if you don’t disclose it, your odds of getting a loan from me are slim and none,” he said. “Be upfront and be prepared, and you’ll have a better result.”
About Civic Financial Services
CIVIC is one of the nation’s leading institutional private money lenders, having funded more than 10,000 private loans totaling over $4.5B. For more information on our short term bridge loans or long term rental loans, call CIVIC at 877-472-4842 or visit www.civicfs.com
You can also access our Capital Strategies Guide @ https://www.civicfs.com/ThinkRealty
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© 2021 Civic Financial Services, LLC. All Rights Reserved. This is not a commitment to lend. All offers of credit are subject to credit approval. Restrictions may apply. All loans are made in compliance with Federal, State, and Local laws. Civic Financial Services, LLC is a California Finance Lender under NMLS 1099109. Loans made or arranged pursuant to a California Finance Lenders Law License 603L321. Civic Financial Services, LLC is an Equal Housing Lender. For complete licensing information, please visit https://www.civicfs.com/Licensing