I have been in the world of Real Estate Finance for over 14 years now, and I can definitely say that I have never experienced anything like what I am seeing in the capital markets right now. Whether it’s a good friend buying their first little two bedroom starter home or a client of substantial net worth trying to refinance their apartment community in another state, it is very difficult, if not nearly impossible to obtain traditional capital for your real estate needs these days. Although there has been a slight thawing of the capital markets, only the “crème de la crème” are getting financing these days. So what can one do if they want to get some form of financing to make that dream acquisition a reality?? I have a few suggestions that I will briefly share with you.
- Ask for seller financing AKA “carry back.” I know of many investors, large and small, who got their start in real estate by asking their seller to “carry back” all or a portion of the purchase price of their subject property. This can apply to any piece of property that is out there (single family residence, multi-family units, office building, raw land, etc.). Depending on the motivation of your seller, and/or the kindness of their heart (literally), they may take a leap of faith and become your bank. If they do, this will avoid the long drawn out process of getting a loan approved through a conventional which can take anywhere from 60 – 150 days in the current environment (and you still may not get approved!!).
- Get a co-signer. This may make for interesting bed fellows, but many times you may know someone who has substantial net worth who wants to see you succeed and is not fearful of linking their financial creditability with yours. If so, this could be a way to avoid missing out on a great opportunity, particularly if your financial profile is weak and/or you don’t have the track record that a bank is looking for. The caution with this option is that your destiny is tied to your partner, and the only way that you will be able to separate yourself from them is if you go through the process of demonstrating your ability to financially stand on your own two feet or find a new partner to partner with. Moreover, your partner will most likely want to be cashed out at “market value,” meaning that if there has been some appreciation in your asset, they will want their share of the current value, and not the value at the point of purchase.
- Form a real estate syndicate. Many people choose to forego buying properties on their own and instead choose to incorporate as some form of buying group. Whether it be a limited partnership, REIT (real estate investment trust), or LLC, the advantages to buying in a group can be numerous. Limited partners receive their portion of the profits while assuming none of the direct liability. As the entity establishes a track record (usually two years of profitability), its financials will allow it qualify on its own operational merits. Many times syndicates purchase their properties “all cash,” completely side stepping the loan approval process completely. The main disadvantages are that someone usually assumes liability as the general partner, and may have to sign a personal guarantee for the first two to five years. Additionally, the procedures for removing oneself from a syndicate can be legally challenging requiring multiple appraisals and agreements to determine the value of the portfolio and how the remaining partners will payoff of the departing member.
- Go “hard money.” For those of you who are not accustomed to this term, this is money that is normally borrowed from entities that promise cash for your real estate needs with very few documentation requirements. Normally the entities that provide this type of financing have pooled together a group of high net worth individuals and have allocated funds to make loans to those in need of “fast cash.” Whereas a conventional bank may take (as previously mentioned) 60 – 150 days to approve you for a loan (depending on type of property and complexity of the deal) a hard money transaction can be closed in literally days, as the decision maker may be just one individual who just needs to see the property and run a desktop analysis of the value of comparable properties in the area and confirm that there are no issues with ownership (title) of the property. Although you will receive the cash fairly quickly, the interest rates are usually double digit and you normally won’t get more than 70% of the money that you need. Accordingly, you will have to bring some money to the table, as the hard money lender will want you to “have skin in the game.”
These are just a few of the ways that one can get deals done when traditional financing is not available or an option. I will have more interesting factoids and comments to come on how to navigate the world of real estate finance. In the meantime, if you have comments or questions, please post a comment or reply.