Wednesday, January 29, 2014

Final Thoughts on Power of Sales – Providing Private Financing

As noted in an earlier blog, there may be opportunities within your market to provide the financing required for investors to purchase POS  properties. Often times, financing is hard to come by and the projected returns (ROI) can be very attractive as a result.

As with every investment, the key to providing private financing is doing a proper risk assessment. Closely examine the basics of the deal, with particular consideration to the following:

·        Suitable loan to value ratio

·        Cash flow which supports the debt obligations

·        Or – credible business plan with owner-occupant

·        Viable buyer covenant (aka – credit rating/financial standing)

·        Quality/value/liquidity of the real estate

·        No surprise issues – ie. environmental, zoning/municipal

·        Secondary Financing – will there be any (behind a Private First)

If the deal meets the above criteria or most of it, then it’s time to assess what sort of return is required to move forward. Typically, it will be higher – possibly 3-4-5% higher than conventional commercial financing – creating a high return investment. In the right circumstances and on the right properties, providing private financing can be very profitable.

In the broker world, we often see where a prospective Buyer investigates the purchase of a commercial property, doing considerable due diligence – only to take a pass on the investment as an owner.  To then take a look at it as a private mortgagee for a subsequent buyer, may make sense and might just be the better investment with respect to the property.

Again, private mortgages aren’t for everyone, but if you target POS properties as part of your investment strategy, it’s just another way to play that market.  In today’s ultra low interest rate environment, it might just help provide the type of yields you are seeking.  Next up… a new series of topics starting in February.

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