One arena where hard money can be helpful is to get a quick loan, in second lien position, against a multi-family property. There is a tremendous need in California for that right now because so many multi-family property owners have low-rate first mortgages at 50-60% loan-to-value (LTV) that were made some years ago.
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There are two major reasons why the multi-family property owner is reluctant to refinance the first lien to a larger amount:
1- They have a great rate on the first mortgage. Rates for buildings purchased in 2003 or 2004 were term loans with a note rate below 5.5%; today those rates are 6.5% or higher.
2- They have a very restrictive prepayment penalty on the first mortgage. The more common prepayment penalty is offered as a declining penalty over 3-5 years. Commercial Mortgage Backed Securities (CMBS) have a much more restrictive prepayment penalty referred to as yield maintenance or defeasance. Simply put, the borrower must guarantee the lender (who in turn guarantees the investor) a yield for a specific term; this can be much more costly than the declining penalty. Why would someone borrow money with yield maintenance as a prepayment penalty? They received a much lower rate.
We recognize two things in the multi-family market in Southern California:
1- Multi-family properties are undervalued when analyzed on a per-unit basis. High land costs and rising construction costs make existing properties that have utility as a potential conversion to condominiums valuable. Condominiums can fetch as and average of $300,000 in San Diego County. Many times we'll try to loan up to 60% of the future value of a conversion.
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2- Multi-family properties have rising yield potential. There still is a housing shortage in the lower end of the market in Southern California. Vacancy rates are falling and average rents are rising. We'll try to extrapolate how an existing owner might "reset" the rents to reflect the market if the property is improved and deferred maintenance is performed. We'll analyze the debt-service coverage ratio (DSCR) and lend on a 1.0 coverage using "market" rents or future value of rents.
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Why would a borrower with good credit and equity borrow money at 13-14% ?
The answer is that nobody else funds second mortgages on multi-family properties; we will. Many of our private lenders owned multi-family properties in their more aggressive investing years so they understand the property type.
Sometimes, a multi-family property owner is looking for some quick money for 1-2 years. The amount they need is not much in relation to the first lien and value. Borrowers with a CMBS mortgage often find that the high costs and rates associated with our loans are actually quite a bargain when compared to a full refinance of the first lien.
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Please contact me if you have any questions.
