| Borrower FAQ
How does the nontraditional loan process work? How does the nontraditional loan process work? First, a borrower has to submit a Nontraditional Short Form Application. Please make sure to complete the executive summary section (and all the others; that’s why they are there. First impressions count) We judge an application on factors such as the type of property, location, ratio of income to expenses (if applicable), loan to value ratio, borrower equity and subjective variables relating to the individual behind the loan, including, most importantly, his or her experience. That takes a few days. If we allow you to pass go, we begin the due diligence process. At this point we also send you a letter of intent/term sheet. The borrower has to sign the letter of intent/term sheet and return it with a deposit, to cover the down payment on the 3rd party costs of due diligence. A new nontraditional loan will be funded approximately five to seven business days after it has been approved. In unusual circumstances we can fund more quickly. Why do developers use nontraditional loans to finance real estate projects? The demand for nontraditional loans arises in the gaps between institutional lenders. It most typically involves special situations, such as nonstandard collateral or the need for a fast closing. Special situations include: (i) a creditworthy borrower who is at his borrowing limit or who has some event-inspired constraint on his ability to borrow from a bank, (ii) a borrower with a good buying opportunity, but poor credit that does not reflect a character issue, (iii) a borrower who turns over property quickly, such as a rehabber, and who values quickness and ease over the lower cost of bank financing, (iv) a property with an oddball characteristic, such as a regulatory problem, a problem with topography or soils, or an environmental problem, but with either underlying inherent value or a ‘Plan B’ exit strategy that makes it a candidate for an unconventional lender, and (v) a borrower with lots of equity in a non-income producing property but with other income producing assets that can be pledged to repay the loan. Regarding speed, nontraditional works when (i) the opportunity for a good deal depends on the ability to offer a quick close, (i) the property is about to go out of contract or (iii) the nature of the purchase does not allow for the long lead time required for bank funds, such as an auction. What is a nontraditional loan? A nontraditional loan is a loan secured by assets whose value is sufficient (based on a quick sale valuation rather than an MAI appraisal valuation) to cover repayment of the loan. “Well, that sounds like what banks do,” you say. True, but the emphasis in a nontraditional underwriting is on the collateral, with much less attention paid to the other factors weighted more heavily by banks, such as a high credit score. (Don’t get the wrong idea. A low credit score doesn’t help in qualifying for a nontraditional loan.) Also, nontraditional lenders will consider other collateral, such as second mortgages on other properties, as security for the loan. On what kind of property do you offer nontraditional financing? We lend against any type of real estate located in the United States except residential property. The residential property exception applies to the residence of the borrower. We will lend against residences held for rental and/or investment. How do you determine the value of a property used as collateral for a nontraditional loan? Commercial real estate is valued at its quick sale value, not its MAI appraised value. Investment property or property held for use in a trade or business usually requires a lot of time and money to resell at its MAI appraised value. A nontraditional lender is not a bank or traditional lender. We don’t want to manage or liquidate defaulted properties. Because a nontraditional lender must liquidate a property held in inventory as soon as possible, the quick sale valuation is critical to underwriting. What size nontraditional loans do you offer financing for? We like deals that hover around $50,000 to about $250,000. What is the maximum loan to value allowed for a property used as collateral for a nontraditional loan? The maximum loan to value is 70 percent. Actually, I lied. If you are a stranger and you want to borrow $1 million against raw land, the loan to value requirement will be much lower than 70 percent. If on the other hand, you are an urban renovator who knows your market and has a track record of buying, renovating and selling properties at a profit — and I’ve done business with you — the loan to value can be higher. Why is it important to have an exit strategy? Nontraditional loans are short term. Without an exit strategy at the outset, the lender has to question the likelihood of repayment. Having an exit strategy doesn’t mean having an exit strategy from the property, but rather an exit strategy from the loan. If for example you are rehabbing a multi-family residential project, your exit strategy can be either to sell the finished project turn-key to an investor or to refinance with a traditional lender. I can even help you find the lender. In fact, I may insist that we work on that together as part of the due diligence for the nontraditional loan. It’s like life. It depends. A blanket loan is a loan secured by more than one property. If the loan to value on the primary property isn’t high enough, we will accept a pledge of other property, including in some cases second mortgages or interests in limited liability companies. This is a very fact-specific area, but we have no hesitation looking at nonstandard collateral. Does a borrower pay upfront fees when applying for a nontraditional loan? No. The borrower has to pay a deposit with issuance of the letter of intent/term sheet in order to front the costs of due diligence, such as any title work, engineering or valuation services used to evaluate the loan opportunity. What we don’t spend of the deposit on third party costs gets returned to the applicant.
1. Delays in receipt of deposit to cover due diligence |
