BUSINESS STR ATEGY
Most do anyway because that is the nature of private lending. If the lender forecloses (and retains the property), the DYR suddenly becomes the ROR on the loan. Private lenders have more flexibility in assessing what DYR to apply, and each situation will be different depending on location, asset type, condition of the property and other factors.
KNOW THE EXIT STRATEGY
The main question for private lenders is “What is your exit strategy?” As banks get more conservative with their underwriting and have stricter ratio requirements, private lenders need to make sure the borrower will be able to meet the refinancing bank’s guidelines or see that the borrower plans to sell the collateralized real estate. Just as rates may vary when considering higher versus lower LTVs, bank rates may vary based on higher versus
Although banks using high DYR thresholds can open more loan opportunities for private lenders, there can also be drawbacks.
lower DYR. This makes sense when considering that banks price their products based on risk. From a borrower’s perspective, negotiations will now have to be looked at from not only
30
PRIVATE LENDER
the CAP rate and the DSCR rate but also the DYR. Borrowers who can make a larger down payment should consider all three ratios. A little extra down payment may go a long way toward receiving attractive terms from the bank or private lender. As a private lender, if you are not already considering your own or a prospective bank’s DYR when transacting a loan, it is a detriment to your bottom line should another downturn occur. The DYR, among other considerations, allows all lenders to better navigate and survive the vagaries of the real estate market and economy. ∞
ABOUT THE AUTHOR
EDWARD BROWN Edward Brown is in the investor relations department at
Pacific Private Money and is
host of the long-running radio show “The Best of Investing.” He has published multiple
works, appeared on CNN and has served as chairman of the Shareholder Equity Commit-
tee protecting 29,000 share-
holders in a $500 million REIT. Brown is also a recipient of a prestigious MBA Tax Award.