Filling the financing void with private equity funding

Watching deals unfold from contract to close and being privy to the financing process for hundreds of individuals every year, we are in the unique position to see how often financing goes wrong and borrowers are denied their loan most often at the last minute, right before closing.  From our vantage point, it appears over 50% of financing requests do not get approved in today’s restrictive loan environment.

The most troubling thing about seeing this is borrowers are often willing and able to put 25-35% down payment for a conventional loan and by all measures are well employed with a stellar credit record. The lender may be backlogged with loans and indifferent to the contract timelines, but most often it seems they are creating insurmountable hurdles for the borrower at the 11th hour as a justification for either denying the loan or delaying the closing. The loan issues may be either property-related (old roof tiles, outdated electrical system) or borrower related (recent credit card charge or 1099 income).  Problems with the loan usually surface well after the loan commitment period has passed and all contingencies have been waived. A few sellers may opt for patience and kindness, but many ambitious sellers are opting to pursue the deposit and re-market the property to the next highest bidder. Though obtaining a buyer’s deposit requires a judge and court action, the interpleader process is generally efficient and not very difficult, even without a lawyer.  If you did not close on time, you will likely lose your deposit as a punishment for wasting your seller’s time, which is what the deposit and the contract is intended to do.

What is the solution for this scenario? Private equity lending or bridge financing (often called “hard money lending”) can and does fill the void at crucial moments and can save borrowers the loss of their deposits and the property. Interest rates are substantially above conventional loans (i.e. 10-12%) but the lender can make a decision on the loan in 2-3 business days regardless of credit or immigration status, if the property meets their criteria.  Most important, they can usually close within one to two weeks. The terms of the loan varies from 1-3 years, are normally interest-only to keep monthly payments low, and they most often have “balloon clause” which require borrowers to refinance when the loans become mature, also known as a “balloon mortgage”. As unsettling as this may seem to borrowers, with their initial equity and even modest market growth, and appropriate time, they are often well positioned for a refinance at the end of this period.

Jordan Suppan, a Miami- based private equity real estate investor who was formerly an investment banker, says “Our loans generally work for two types of buyers- first, the flipper/rehab professional who needs to use their capital for the renovation or the solid borrower who has a 25-30% down payment at stake or as much as a 50% on a condo, and has either an incompetent or unwilling lender that they had counted on.  Or second, a solid borrower who lacks access to conventional loan markets such as a self-employed individual or a foreign national. We are open to reviewing every opportunity and can provide an answer to the borrower faster than most private lenders out there because of our small size and large availability of capital.”  Suppan adds, “Private loans can help buyers close on a great deal and buy them some time to obtain conventional financing, while not under the gun”. Private lending is quickly losing its stigma,  as traditional lenders pull back and private investors fill a crucial void for bona-fide borrowers struggling with the new restrictive lending world. With over 15,000+ new construction condo units hitting the Miami-Dade market within the next 12-24 months, private lenders may also find themselves useful to buyers unable to find lenders willing to finance the glut of condos hitting the market.  Having resources in private lending markets can only benefit borrowers and real estate professionals alike.

Disclaimer: The Closing Company, Inc. is not a law firm and is not providing legal or tax advice in this post.  For legal advice, please consult with a licensed Attorney. For tax advice, consult with a Certified Public Accountant. Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.