The real estate market was on fire this past summer, with cars parked around the block at open houses and cash offers well above asking price. This boom has left critically low levels of housing inventory across the country.
For property investors specifically, low inventory levels have either reduced their fix-and-flip business or halted it altogether. Thanks to the rise in average home prices, as well as the ongoing protections against foreclosures, there haven’t been enough viable properties for investors.
The federal eviction moratorium officially ended this past August when the U.S. Supreme Court ruled that the Biden administration and the Centers for Disease Control and Prevention had overstepped with a previous extension. The eviction ban was enacted in September 2020 and was extended four times.
Foreclosures, short sales and tenant evictions have been largely paused since March 2020, tying up many distressed properties that would normally be good options for investors. The end of the moratorium could unlock more supply even as demand for distressed property is peaking.
While some people looking to purchase a primary residence for the first time will benefit from a larger supply of distressed assets, the majority of the post-moratorium buyers of these properties are likely to be investors seeking to renovate neglected properties before flipping them for a profit or holding them as income-producing rentals. Commercial mortgage lenders and brokers need to prepare themselves and be willing to adjust their processes to handle the volume of potential deals that haven’t existed in well over a year.
Homes acquired through conventional means are relatively easy to assess. There is full access to the property, standard appraisals and financially prepared buyers and sellers with proper documentation.
Investing and lending on foreclosed properties or ones involved in short sales are a different beast. For example, many homes obtained through foreclosure auctions will not allow interior appraisals before closing. This immediately takes away a major tool used by lenders and investors to understand the value of the property and the viability of a deal. It is a hurdle to overcome.
Therefore, commercial mortgage brokers need to find lenders that are willing to adjust their parameters for certain types of deals. For example, if a lender typically finances 85% of the purchase price upfront, you may need to convince them to lend at 65% loan to value by using a drive-by appraisal and holding the remaining 20% in escrow.
Once the full appraisal comes in and the numbers look accurate, the lender can release the remaining funds to the borrower. Providing less leverage upfront will protect the lender in case of a low appraisal. The lenders that you work with must have the flexibility to structure a deal in a way that the sale can be completed and the project is still viable to your clients.
Remember that everyone is working with best guesses on these deals until full appraisals come in. Both parties need to have open lines of communication and understand the acceptable margins of error that could occur in these types of transactions. Make sure to keep your internal teams on the same page with any criteria adjustments so there are no communication errors. Perception is reality, and you want your clients to trust that you’re on top of things from start to finish.
Speed is king
“I can get this property for $100,000. With $50,000 of work, I believe I can sell it for $300,000. Yes or no?”
Mortgage brokers and lenders can expect calls like these from investors attending a foreclosure auction. Speed will be a lender’s biggest asset as these auctions are competitive and require quick answers for financing deals. In many cases, a deposit is required before the auction is finished, and deals are expected to close in 14 days or less.
You need to be ready with a “yes” or “no” to secure these opportunities, and it is important not to waste the borrower’s time. Don’t be indecisive. If you say, “let me call you back,” you’ll likely lose the deal and potentially lose the client’s long-term business. Being prepared to deliver a quick answer will let you close more of these deals and keep the pipeline flowing.
Having strong knowledge of a borrower’s history will help you with these split-second decisions. Are they in good standing with your company and have a history of successful deals? Do the numbers make sense if they’re accurate? Say “yes” and move forward from there. Are they a brand-new borrower for you or new to real estate investing? Politely say “no” and avoid the risk until they’ve proven themselves. Flexibility will allow you to demonstrate speed, and speed will be a competitive advantage that some lenders won’t be able to match.
Borrowers as partners
Investors typically have more immediate needs, questions and obstacles to overcome than those faced by traditional homebuyers. It’s important to act as their business partner on these deals and not just as their financier. Making borrowers feel important is always a good thing, but by guiding them through the deal from start to finish and offering answers whenever questions arise, you’ll both be better able to make informed decisions along the way.
It’s important to find a lender that is transparent about the process. These unique transactions often require adjustments to the closing process or the ability to manage surprise renovation expenses once the work begins. If you have the available workforce, dedicate one of your team members to work exclusively on foreclosure and short-sale deals, or at least assign a point person to handle many of the questions that come with these specific types of deals.
Your company may need an in-house expert. This will carve out a niche for your company that few others are providing. The borrower will see you as their business partner on the deal and not just as their financier. This will improve the relationship and open the door to future deals.
After a year of scarce inventory, the end of the eviction moratorium will bring many triumphs and failures in the world of mortgage originations. Being prepared with a well-defined strategy will let you stand out from the competition and maintain happy borrowers that trust your process. Make adjustments when needed, and be ready to answer any questions or concerns that arise throughout the deal to show your clients that you are an expert in the field.
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As a broker working on behalf of investors, you need to find a lender willing to be creative and proactive with their loan programs. The lender must have a dedicated loan program and a certain level of underwriting flexibility for this type of acquisition. Developing such a network will let you stand out.
Let borrowers — your business partners — know that these loan programs are available and to contact you with any deals they find. If the deal goes well, word will get around. You could then find yourself with a new pool of lifetime borrowers that rely on you as their lending partner for many more deals to come. ●