What Type of Commercial Financing is Right for Me
Posted at 1:45 am | Filed Under mortgage-financing-tips.info-part2-20
With interest rates rising and speculation of a cool down in the real estate market, many borrowers are asking, “What type of commercial financing is right for me?” Increased demand for competitive interest rates has led to the creation of conduit loans. Although conduit loans are not extremely new, many borrowers are still unaware that they exist and/or do not understand the difference between portfolio loans vs. conduit loans. A few simple explanations can clear any misunderstanding and help any borrower find the right commercial loan for their real estate financing needs.
There are two basic classifications that cover commercial real estate mortgage debt: portfolio loans and commercial mortgage backed securities (CMBS or conduit loans). Portfolio loans are originated by the lender and then held on their balance sheet for the entire life of the loan. CMBS or conduit loans are single loans that are combined together with other loans that have different property types, loan amounts, interest rates, locations, etc and are held in a trust. These loans are then converted into bonds and sold on Wall Street with varying durations and yields depending on the bond rating they are given.
Conduit loans have become a popular source of financing in the commercial mortgage industry because the securities are able to attract investors because their added value. Typically, the value of the security is more than the sum of the loans in the security and they are extremely liquid. As a result, the loans are able to be priced more aggressively than portfolio loans. Although the interest rates are very competitive, conduit loans are traded as securities and therefore must follow different rules and regulations than portfolio loans. Investors who hold the bonds are willing to pay more for them because of their feature that will not allow them to be prepaid without replacing the investment with government securities that have a similar return.
For investors that flip properties or only hold them for a few months while trying to maximize the cash flow of a property, conduit loans may not be the right solution. Conduit loans seem to be a better fit for someone who is looking to hold on to a property for an extended period of time, such as owner-user properties, or long-term investments. Portfolio loans will generally have lower prepayment penalties than conduit loans because portfolio lenders are more interested in building long-term relationships with their borrowers that will enable them to bring in their borrower’s business deposits and increase the amount of loans that they are able to make.
In every financing situation, it is always good to understand what your long-terms goals are and consider the pros and cons to both portfolio and conduit lending.
Patrick Bennett works closely with Chad Pitt who specializes in Orange County home loan advisement, and is also a
commercial mortgage lender. Please visit our website Us Mortgage Aid and fill out our online application for 4 free quotes for your next commercial or residential real estate loan.
Are Short Sales Really the Answer
Posted at 1:43 am | Filed Under mortgage-financing-tips.info-part2-20
Short sales are all the rage in creative real estate circles today.
Books, tapes, and courses are being offered everywhere, purporting to show investors how to make “huge profits” in foreclosure investing, especially for those with no cash or credit.
What exactly is a “short sale?”
A short sale occurs when the bank let’s a distressed homeowner, who owes more than his property is worth, settle up by paying less than the total owed.
The investor makes his “huge profit” by helping the homeowner negotiate the short sale with the bank, then picking up the property at the lower pay off amount accepted by the bank.
Let’s look at the reality of short sales.
First of all, short sales are difficult to pull off, requiring negotiations with many layers of bureaucracy.
Frequently, the bank you are sending your payments to is not the bank that owns your loan. In fact, it may have passed through the hands of two or more banks. Therefore, more than one bank will be involved.
If the loan required private mortgage insurance, as virtually all mortgages with less than a 20% down payment require, the mortgage insurer is also involved in the negotiations.
The objective for the investor and the home owner is to prove to everyone that that the homeowner is basically destitute and will not profit from the reduced price and the home is worth less than the amount owed the bank.
It is also very time consuming. It is not unusual for it to take weeks for a short sale to be successfully negotiated.
In fact, a realtor friend of mine said he loses more deals than he wins, trying to sell homes on short sales because the houses sold at the foreclosure auction before the short sale process was completed.
Even if a short sale is completed however, there are problems.
The home owner’s credit is seriously damaged. He will also owe income tax on the amount of loan that is forgiven! The IRS considers forgiven debt to be income and demand the taxes owed on the forgiven amount to be paid in cash with the homeowner’s next tax return.
The investor will not get a “huge profit” on a short sale, in most cases.
The reason is that virtually all purchase money first mortgages issued by banks with less than a 20% down payment carry mortgage insurance; demanded by Freddie Mac and Fanny Mae, to be saleable in the secondary market.
Since the bank is protected by the insurance and the insurance companies themselves have a vested interest in the short sale negotiations, can you imagine any scenario which would make sense for a bank insurer, to agree to a drastic reduction of the mortgage amount?
The bank doesn’t care because they are protected by insurance. The private mortgage insurer is not going to let the bank write down the mortgage because that increases the claim they are going to have to pay!
The actual discounts that I have seen and have heard of from other investors is rarely more than 10-12%. In one case, the discount was $4,150 on a $75,000 loan!
Even at the reduced price, the buyer will have to put down cash and qualify for a loan to buy the property, which he may or not be able to do. The “short sale gurus” will tell you this is an excellent way for you to make money on real estate with no money or credit.
They advise an investor to contract for a property, negotiate a short sale and then “flip” the contract to another buyer for a higher price without owning the property himself.
As we have seen, with the actual discounts in the 10-15% range, this is a highly unlikely scenario.
In summation, the short sale is not the panacea for “huge profits” to be made by those with no credit or cash. It only leaves them “short” of the cash they spent to buy those courses!
Copyright 2005 Bill Young. Bill is a former bank loan officer and is an experienced real estate investor. He writes and lectures on many aspects of real estate investing. He and his team have developed an automated, Internet based investment system that produced 52 desperate homeowners who Gave them their properties over an 18 month period. To learn more about it, go to http://MotivatedSellersOnline.Com/APS
If you are facing foreclosure, get help with a free, 5 Part Mini-Course, “How to Stop Foreclosure” http://301url.com/stopforeclosures
Tags: foreclosure, mortgage, private mortgage insurance, real estate, short saleShould I Get Into Real Estate Investing To Get Out Of Debt
Posted at 3:18 am | Filed Under mortgage-financing-tips.info
As a general rule, real estate investing is an excellent way to build a solid financial foundation and get out of debt.
But — you have to do it under the right circumstances, and for the right reasons.
One of the most common scenarios that I see among the new and inexperienced, who have gotten themselves into big trouble with real estate investing, is jumping into a deal that they don’t understand, in
hopes of earning a chunk of money quickly so that they can pay off existing personal debts.
Someone along the line gave them the idea that they could solve all their financial problems by jumping into a real estate deal to make quick cash.
If you are desperate for $20,000 and you’re trying to think of a way to come up with it in the next 30 days, you can use real estate as a strategy, but you should be willing to get advice or consult with an independent professional who can give your deal an honest evaluation that is in your best interest.
Many folks get into deals that they barely understand and wind up in a worse financial situation than they had to begin with. I recently counseled with a young man who had excellent credit, documented income and had a “friend” who is an appraiser. The friend approached the young man and said, ” I can set you up with
some good real estate deals, I’ve got the connections in the business, we can make some big money quickly”.
So our young investor jumped in, assuming that his friend had everything under control. He also assumed that he was soon to be on the fast track to financial security.
He signed paperwork he barely read. He did not understand how the deals were to work, or how the money would actually be made.
He committed his credit as the buyer for the properties, while
his friend, the appraiser, would be responsible for all the confusing details the young man did not know anything about.
With no legal advice from an attorney, and without consulting with anyone ahead of time, he signed paperwork that was so poorly written and so vaguely worded that I was shocked when I
read it. If only he had contacted me first, this never would have happened.
This young man made three critical mistakes.
A: He thought he was going to make easy money because he had “a friend in the business”.
B: He committed his credit and signed as the buyer for deals that he did not understand.
C: He failed to get an independent evaluation of the terms of the deal.
Turns out, his friend the appraiser was engaged in a bit of loan fraud. He inflated the appraised value of the property so that the lender loaned more on the properties than they were actually worth, pocketed the extra cash, and left this young man holding the bag on properties worth about $200,000 with loans outstanding of about $300,000.
Now he will have to borrow more money to fix the properties
and try to get them sold in order recover as much cash as he can for the lenders. He may still face foreclosure and possibly even bankruptcy.
Given his lack of experience, he should have gotten professional advice first. For the average new investor, who’s never done a deal, who doesn’t understand real estate that well, or has no experience with writing contracts, you should never, ever, in my opinion, engage in any kind of real estate deal, or give cash to anyone, until you have consulted with someone who knows what to do. Someone who can at least give you the benefit of an educated, independent opinion.
Have someone look at the numbers and evaluate your deal
appropriately. They can make educated recommendations about what you need to do. Ultimately, you make your own decision about whether or not to invest.
I waited a number of years before I finally got personally involved in a transaction for investment property.
I wanted to be sure that I understood what was going on.
In my early days, I chose to work for other real estate investors either on a freelance, contractor type basis or in a paid position
just so that I could learn enough about the business to understand what was going on. I also became a licensed agent.
But I did not get directly involved until I understood what was happening.
Real estate investing is, in my humble opinion, is one of the best ways on the planet to generate and maintain true wealth.
You can generate income, and build assets through appreciation. Houses are shelter and provide an essential human need. A house has a value that goes far beyond the price. You can’t live in your stocks. You can’t raise your children inside a bank CD. Real estate makes sense for a lot of very fundamental reasons.
You can make $10,000 in a short period of time. I see it done every day. But the people who are doing it know how the deal works, and most importantly, they understand where their profit is coming from and how they will generate it. They also understand what their risks are and what they will do if plan A does not work out and plan B becomes necessary.
It is a fact that over the long term, investing in real estate is a great way to pay down debts, build income and secure your future — If you buy right and plan well. Get the help you need, do your due diligence, and make sure you understand the terms of the deal.
Donna Robinson is a real estate investor, author, and consultant located in Atlanta Georgia. You may read more of her articles on her website at http://www.RealEstateInvestorHelp.com or you may contact her by email at drobinson@reihelp.com or call 404 542-9903.
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