As value-add opportunities continue to appear, mortgage brokers can help their clients grow their real estate portfolios by incorporating bridge loans from private lenders into the financing strategy. Private money bridge loans offer an apt alternative to conventional financing for borrowers looking for the speed, leverage and flexibility needed to take advantage of lucrative opportunities.
When value-add opportunities come to market, the attractiveness of an offer lies not only in the dollar amount, but also in the speed at which the buyer can close. Therefore, when the right opportunity presents itself, time is of the essence. While bank financing may take several weeks to close, many private money bridge lenders can close loans in a matter of days.
While private money rates are higher than traditional loans, after closing the acquisition the buyer and mortgage broker can seek a lower rate by refinancing the property into a bank loan. Alternately, if a buyer’s new property can be renovated and flipped in less than a year, the buyer can simply finish the work and sell the property.
Private money bridge lenders are a perfect fit because they are inherently short term, and typically do not require expensive prepayment penalties. Should the borrower pay off the loan early, either through sale or refinance, they would not incur these prepayment penalties which are common with bank financing.
Mortgage brokers can further assist clients by recommending that they work with a private lender to leverage their current assets to obtain funds for new opportunities as they arise. By utilizing properties that are either owned free and clear or have substantial equity, a borrower can secure cash-out refinancing to maximize their profitability.
Conventional banks do not readily offer cash-out refinance loans, nor do they typically approve loans for borrowers with substantial real estate portfolios. Private money lenders, on the other hand, do not have these restrictions and are eager to work with active real estate investors.
The lender’s flexibility is key, however, in these transactions, especially for borrowers who are otherwise averse to leverage. Mortgage brokers should find a lender that will cross-collateralize properties in a borrower’s portfolio into a single loan, which simplifies the process and will keep title and escrow fees low.
Furthermore, the lender should provide for partial reconveyance of collateral, should the borrower want to sell or refinance the properties individually.
To ensure speed and flexibility, it is prudent for mortgage brokers to develop a strong relationship with a reliable lender. In the current climate, there are an increasing number of new lenders and funds entering the market. While many promise to be direct lenders with the ability to close quickly, the fact is that many are not able to deliver what is promised.
To combat this, find a private lender that is open to building a relationship, and one that has a proven track record for speed, flexibility and satisfied borrowers. In addition, seek out a lender that is willing to listen to its borrowers and accommodate their needs.
In all, mortgage brokers offering their clients a smart method for increasing their portfolio through private money bridge loans will be providing their clients with the speed, leverage and flexibility that make a difference in a fast-paced environment.
Johanna Traynor serves as senior loan officer for Lone Oak Fund LLC, where she leads the firm’s loan origination department.
