What Is Genuine Private Mortgage Lending? Advantages and Disadvantages.

Brief topical overview –

·         Private Mortgage Finance - What is it?

·         First mortgages & Second mortgages? Yes

·         Opportunity finance - A primary focus. Yes

·         Transition finance - Another primary focus.  Yes … (or) how to make a silk purse out of a sow’s ear. What is it?

·         Development & Structured Finance? Yes, including “Phased Development” funding for acquisition, structured equity, with institutional “exit”

·         Residual Stock (up to $20.00 M) - Yes

·         Clean canvas? Yes … proposals stand on commercial merits alone, so no generic pricing/term/fee matrix is possible until the proposal is discussed.

·         Formulaic approach to lending and recovery? No

 What is genuine private mortgage lending and who are private lenders? Who benefits? What are the differences between private and institutional mortgage loans?

1. What is genuine private mortgage lending and who are private lenders?

Put simply, according to one investment group, “the definition of a private lender is an individual that you can negotiate directly with on a personal basis to borrow money for real estate investments”. 

·         Genuine Private Investor Mortgage Finance entails a personal relationship.

·         Private lending is the oldest form of lending. LRPM’s primary role has been to transition a non-code first mortgage lending proposal which has merit but which does not fit bank/institutional guidelines to a point where it does. Generally, this has taken place over a term of 6 to 12 month.  Our facilities are heavily asset and “exit” focused.

 2. First & Second Mortgages

Private first & second mortgage funding is now available! $300,000 to $6,000,000 for a single property, but significantly larger sums may be available for completed strata units or other structured finance, including development loans.

 3. Opportunity Finance – Take Advantage of it.

There may be a significant benefit available to a borrower, but only if a property purchase (for instance) is settled very quickly. Where the property is sufficiently attractive as security, information provided to us by the applicant is accurate, and the transaction has a positive risk/reward/cost benefit (and this is important to lenders as well for due diligence reasons), we are able to process and settle the loan without the delay and in a timeframe unable to be matched by institutions with layers of reporting levels.

 4. Transition Finance – make a silk purchase from a sow’s ear.

Even though a borrower may be in a sound financial position and offering strong security, the proposal may not currently fit institutional funding criteria. For instance, it may take time that the borrower does not have available before settlement to bring its financial statements (or BAS) up to date.

In these instances, we refer to the process as “transition” finance. We provide breathing space for the borrower to attend to matters to suit institutional lending requirements, and because of the extra costs of private finance, incentive to do so.

5. Development & Structured Finance

Until recently, we had not been involved in development, structured, equity (both ordinary and preferred) or mezzanine proposals.

·         "Pre-sales" may be arranged by us.

·         For developments, is it feasible for LRPM to use private as well as bank/institutional debt, preferred private equity and other structures in combination and peacefully co-exist? Categorically, “YES”! LRPM refers to it as “Phased Development Finance”.

6. Residual Stock (up to $20.00 M)

If you have leftover units from a development and need to discharge the existing facility, LRPM may finance unsold stock to provide time for orderly sale or long term refinance.

7. Clean Canvas

In the private space, each proposal is a clean canvas, and early discussion is important.

·         There is no strict formula or set of guidelines and each of our private investors has differing appetites in terms of investment amounts, locations, type of security and investment return expectations etc.

·         Therefore, it is not possible to provide an un-equivocal “loan matrix”, until we have at least discussed the proposal with you and considered its merit.

·         For example, we may take into account the “uptick” in property valuation achieved where the applicant has obtained DA during a long term contract, option or similar. In that manner, we may fund full purchase price where there is real “skin in the game” (though significantly less than required institutionally).

8. Pricing

For the reasons above, pricing is on a deal by deal basis. Call me for a quote.

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This is the first installment of several to clarify LRPM role, and genuine private investor finance in the industry. LRPM is a packager and manager working in conjunction with a limited number of high net worth private investors. It is not a finance broker and works with these investors. There is no conflict with finance brokers.  It completes an Information Memorandum after packaging and due diligence, supervises to settlement, and assists with loan management after settlement. We do not claim to work with numerous investors, but have strong commercial and personal relationships with a few.

To a degree, the “private mortgage lending” waters have been muddied over time by smaller institutional lenders (with some of the characteristics of genuine private lending), and this will be discussed in a subsequent installment.

In the meantime, if you have a scenario to discuss or seek clarification, please contact the writer, Steven Acworth via LinkedIn, or on 0488 22 44 16 or follow the details on our web site …. (to be continued …)