As the challenge in Real Estate continues …lets’ take a look how some of the players in Commercial Real Estate are making money by seeking out new opportunities within the Real Estate Sector.
With Sales still down and the prices have not really fallen within proportion, the question is…how to make money in this market ?
Opportunities still exist, although not applicable to all, some are unique to the current environment.
Banks are finding themselves bogged down, having to workout existing loans that have gone into default. The Borrower may be struggling, or the Bank requiring capital can no longer keep the loan on their books. As the overload of workouts continues, Banks are finding that their resources are being occupied on defaulting loans rather than on originating new profitable loans.
In order to concentrate their efforts on new origination, many Banks are willing to sell off their notes at a discount on the face loan amount, the size of which depends on individual circumstances.
Investors are taking a closer look at purchasing these notes, which they see as a replacement for the inability to acquire Real Property at a strategic price.
The note buyer contends with two possible outcomes when buying a non-performing note. The note buyer is first prepared to finish the foreclosure process and thereby , in effect, “buy” the property at a discount.
In some instances, the current owner understands that he is losing the property and is willing to “take a few dollars to walk away”. In this scenario, the note buyer avoids the costly and lengthy foreclosure process, thereby making the note purchase even more profitable.
Secondly, if the Borrower avoids the foreclosure process by paying off the new note holder, the note buyer makes a significant profit, the difference between the face amount of the note and the price that he paid for it. On performing notes, the note buyer receives principal and interest payments throughout the life of the loan.
A less frequent scenario, but one that is open to Real Estate Investing, is when the Bank allows the borrower to buy back his own note. As mentioned above, banks want to rid themselves of some of these real estate loans, and they may therefore offer the current borrower a discounted price if he or she pays them off.
Many of these deals require all cash, and the current owner may not have this capital. To not lose the opportunity to buy their note at a discount, the current owner can partner up with another Real Estate Owner who is liquid who”ll provide the cash in return for equity on the deal.
As more note transactions take place, there is a growing need for non conventional financing. Most Conventional Lenders will not finance a note sale prior to the note buyer owning the deed, yet most note buyers need to close ona loan beforehand.
This leads to another opportunity for real estate investors, the hard money arena. For hard money lenders, the deal is low risk, as the note is usually bought at a discount and by a much stronger buyer putting in fresh equity. With their risk position significantly diminished and the opportunity to make between 12-14% interest plus points, many real estate owners have found it profitable to lend on note purchases.
In the hard money arena, owners remain in their real estate expertise, and they have the opportunity to either make a double digit return on their money or potentially foreclose on and own the property at the amount of their original loan. With the slow down on acquisitions, many real owners have become hard money lenders.
This is an insight into the today’s financing world, involving the Banks, Real Estate Developers, Hard Money Lenders….new situations creates new partnerships and new opportunities. The Financing Market is improving , but until values stabilize and the underwriting environment changes…many of the loans coming up for refinancing are having to seek alternatives discussed above. (credit i. zlotowitz)