Micro-Cap Review Magazine Quarter 1 – 2013

Page 77

F E AT U R E D A R T I C L E

Trouble Is Opportunity 2013

appears to be beginning the same way 2012 ended. A divided President and Congress fighting about going over a “Fiscal Cliff” and raising our

country’s debt ceilings. An uncertain economy. Conventional lenders unwilling to provide credit to fund real estate acquisitions and projects because of the economic uncertainty. The fact is, we are still recovering from the worst economic crisis since the Great Depression. While values of real estate in 2012 are substantially less than they were in 2007, the demand for capital is increasing in order to fund real estate transactions throughout the country. Yet the ability to get loans from conventional lenders remains difficult, it creates a tremendous opportunity for those who want to be in the private/hard money lending market.

n By Jonathan Hornik, Esq.

This article will touch a little on what it takes to be successful in today’s private lending or hard money world. It is important to note that the private lending world has changed dramatically since the credit crash of 2007 and subsequent deep recession that the United States has suffered. Careful and meticulous underwriting and due diligence needs to be performed on each hard money deal being considered for a loan. Let’s begin by underwriting a private loan transaction. There are threshold questions that must be answered before one is to consider moving forward on a private money transaction. The first is understanding the borrower’s “exit strategy”. The borrower must have a realistic vision on how they plan on repaying the lender. Will they sell out the property if it’s a construction project, or bulk sale multiple properties in a collateralized package? Are they hoping for a refinance from a conventional lender. In such case, you must have some assurance the refinance will take place. Those entering into the private lending business must understand that you are a lender and not a real estate owner of property. This understanding is important as your intention is always, for each loan, to be repaid with

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interest, points, and fees; rather than going through a costly foreclosure and becoming an owner of the property. The next threshold question that must be answered is, what I call, “skin in the game”. “Skin in the game” refers to the equity contribution of the borrower towards the purchase and/or real estate project. For purposes of clarity, all private money loans will be secured by either a Deed or Mortgage and should be in the First Priority Lien position, with equity behind it. The more equity that is required to be contributed to the project by the borrower, the safer the real estate loan. That is because in a properly structured secured private money loan transaction, 100% of the equity will be lost prior to any debt being lost. This is reflected in the Loan to Value Ratio (LTV) of the property or Loan to Cost Ratio (LTC) (in a development project). By way of example, a loan of $1,000,000.00 at a 50% LTV would have the borrower contributing $1,000,000.00 in equity. “Skin in the game” not only protects the debt, it also indicates the level of commitment the borrower has to the property. It is important to point out that when underwriting a private money real estate deal, you want to see real dollars put toward the real Micro-Cap Review Magazine

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