Jul
9
Money Gets Tighter for Commercial Deals
July 9, 2008 |
I was very surprised last week when Lehman Brothers and IndyMac ceased accepting new applications for multifamily loans. Both of these lenders were active in the small balance arena (less than $1MM loan amount) and I have closed loans with both. As we know from basic economics, less competition is not really a good thing for the consumer or in this case, the borrower.
As banks and lenders tighten their guidelines and heck, even go out of business altogether, it seems that more and more real estate investors are trying to get the crazy deals done with conventional financing. Now, I am all for creative strategies to acquire properties but to expect a conventional lender to go along with it is just foolish.
Earlier today, I received an email from a client that purchased a 12-unit property a few years ago for which I arranged the financing. Today he inquired about a “cashless transaction” where the seller would carry back the 20% down payment, a promissory note for the earnest money and a new lender would place an 80% LTV loan on the property to “cash out” the seller. Oh, and the buyer has no money.
This is a 100% CLTV (combined loan to value) deal to a borrower who not only has no cash available for down payment, closing costs or earnest money, he has no cash reserves in case something happens. Would you loan YOUR money to an investor in this position? I don’t think so.
In my Finance It Right Collection, I say that you must choose your investment strategy based on the financing that you can (or can’t) qualify for. In this case, he cannot qualify for financing so he is wasting his time and the time of the seller and me by trying to put together this impossible deal. Instead, he should be focusing on deals that require no money from the buyer such as lease options and subject-to’s. As an investor the sooner you accept the fact that banks aren’t giving it away anymore and YOU are the one that must get creative, the better off (and richer) you will be.
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