For those not familiar with private lending or have never even heard the term, it takes a bit of explaining. But once explained, it makes perfect sense and its importance in the real estate industry becomes immediately evident. How so? Private investors view real estate a bit differently than a bank or traditional mortgage banker. Private loans are shorter term in nature ranging anywhere from just a few months to three years and are the vehicle for taking a project from one place and putting it in another. It’s a sort of a bridge which transitions a property from “distressed” to “ready-to-sell”.
When a bank reviews an application for financing there are two basic approvals that must be obtained. Without just one of these two means the application can’t be approved. The two approvals are the applicant and the property. The property must be currently marketable and eligible for traditional financing. The borrower as well must meet certain credit and income standards. But if the subject property is in a distressed condition, a bank might not approve the property regardless of how well qualified the borrower may be.
Let’s look at a common scenario. Say there is a duplex in Redondo Beach that has been sitting vacant in an established neighborhood. The property has been listed for nearly six months with barely a visit. Why? The property is in very poor shape. The roof is sagging in one area and the front porch of both units is failing. The property is in such bad shape, a bank won’t place a loan. When a lender issues a loan on real estate the property must be in a marketable condition which means anyone buying the property could get a loan on it if needed.
Let’s now consider there are no private lenders at all. There’s no such thing. This particular duplex would have few choices. The first option being a complete tear-down and a rebuild. That’s expensive to raze the property and build brand new from the ground up. The other option would be to pay cash for the property and make the necessary repairs. Doing so, however, ties up an investors’ cash and puts a crimp on liquidity. Real estate investors in like to have cash at the ready when a new deal hits the market. Instead, the property continues to sit and fall further into a state of disrepair. The condition also drags down the current value of the properties surrounding it.
With a private loan, however, a real estate investor in Redondo Beach can leverage the funds needed to both acquire the property and finance the costs needed to make the improvements to the duplex. The roof is replaced, the front porches are repaired and numerous other repairs are made. After just two months, the duplex is brought back into a market-ready condition and listed for sale. Once the property is rented on both sides, there is a positive cash flow each month. The market rent for the area is also such that a buyer can live in one of the units and rent out the other and the rental income offsets the mortgage payment. Without private lending, distressed properties have few choices.
If you have an investment property in Redondo Beach on your radar that needs a private money loan to get from distressed to market-ready, contact me today and I will be happy to assist.Questions? Contact Dara Keo Today!