In the complex and competitive world of commercial and multifamily real estate transactions, brokers must consistently seek out innovative and effective solutions to close deals. One particularly potent tool is the strategic use of private money. In scenarios where traditional financing proves insufficient, private money can bridge the gap and ensure a seamless transaction. This approach is not just about securing funds; it's about navigating the intricate landscape of real estate finance with sophistication and precision. In this article, we will explore how brokers can leverage private money to close more transactions, with a detailed example to illustrate this strategy in action.

Big Picture: How Macroeconomic Uncertainty Impacts RE Financing Options

The real estate market is dynamic, and financing commercial or multifamily properties often involves complex layers of funding. In recent times, banks have tightened their underwriting policies and shifted towards a more conservative approach due to several factors, including the upcoming election, the risk of a recession, and uncertainty surrounding the Federal Reserve's timeline to decrease interest rates. This cautious stance aims to mitigate risk but can create significant challenges for buyers who cannot meet the remaining equity requirement.

The tightened underwriting policies mean that banks are more stringent in their lending criteria, often resulting in lower loan-to-value (LTV) ratios. Consequently, many commercial and multifamily property buyers find themselves needing to bring more equity to the table, which can be a substantial hurdle.

For Example

Consider a situation where a selling agent has a commercial or multifamily property prequalified by a bank for a loan, but the bank will only lend up to 50% LTV. The prospective buyer, keen on securing the investment, can only provide 35% equity. This scenario creates a critical funding gap that threatens to derail the transaction. Here, a bridge loan from a private lender becomes an indispensable tool, providing the necessary capital to achieve a combined loan-to-value (CLTV) of 65% and enabling the successful closure of the deal.

Step-by-Step Guide to Closing the Transaction

1. Initial Prequalification and Property Evaluation

Most selling agents get the subject property prequalified by a bank before it hits the open market. This establishes the initial loan amount based on the bank’s LTV criteria. For instance, if the property is valued at $1 million, and the bank offers a loan up to 50% LTV, the maximum loan amount from the bank would be $500,000.

Key Points:

• LTV Ratio: The bank’s conservative lending approach ensures they only finance a portion of the property’s value.

• Buyer’s Equity: The buyer can bring 30-35% of the property’s value in equity, which translates to $ million in our example.

2. Identifying the Funding Gap

With the bank’s loan and the buyer’s equity combined, there is still a shortfall to meet the property’s purchase price. In this case, the combined amount ($5 million from the bank + $3-3.5 million from the buyer) totals $8-8.5 million, leaving a funding gap of $1.5-2 million.

Key Points:

• Funding Shortfall: Identifying this gap early allows brokers to explore alternative financing solutions.

• Solution Search: The focus shifts to securing additional funding to bridge this gap.

3. Introducing Private Money: The Bridge Loan

A bridge loan from a private lender can be the perfect solution to cover the funding gap. These loans are typically short-term and designed to provide immediate capital to close the transaction while long-term financing is arranged.

Advantages of Bridge Loans:

• Speed: Private lenders can move quickly, often closing in a matter of days or weeks.

• Flexibility: Bridge loans can be customized to meet the specific needs of the transaction.

• Second Position: These loans can be placed in a second position behind the primary mortgage, maintaining a manageable CLTV.

4. Structuring the Bridge Loan

In our example, let’s assume the buyer needs an additional $150k to close the deal. The private lender agrees to provide this amount through a bridge loan, placed in the second position. The combined loan-to-value (CLTV) would now be 65%, which is within acceptable risk parameters for most private lenders.

Key Points:

• CLTV Calculation: $5 million (bank loan) + $1.5 million (bridge loan) = $6.5 million loan amount. With a property value of $10 million, the CLTV is 65%.

• Repayment Terms: Bridge loans are typically interest-only with a short-term duration, giving the buyer time to secure permanent financing or refinance.

Advantages of Using Private Money for Brokers

1. Closing More Transactions

By offering a private money solution, brokers can facilitate transactions that might otherwise fall through due to funding gaps. This expands their ability to close more deals and serve a wider range of clients.

Key Points:

• Increased Deal Flow: More transactions closed equates to higher revenue for brokers.

• Client Satisfaction: Buyers appreciate brokers who can provide creative financing solutions, leading to repeat business and referrals.

2. Competitive Edge

Brokers who understand and utilize private money have a distinct advantage in the market. They can position themselves as problem-solvers, capable of navigating complex financing landscapes.

Key Points:

• Market Differentiation: Offering unique solutions sets brokers apart from competitors.

• Expanded Network: Working with private lenders builds valuable relationships that can be leveraged for future transactions.

3. Flexibility in Deal Structuring

Private money offers flexibility in structuring deals, allowing brokers to tailor financing solutions to meet the specific needs of each transaction. This adaptability is crucial in a market where no two deals are alike.

Key Points:

• Customized Solutions: Brokers can craft bespoke financing packages that align with buyer and seller requirements.

• Versatility: Private money can be used in various scenarios, from commercial properties to multifamily units.

Conclusion

Navigating the intricacies of real estate finance demands creativity, adaptability, and a readiness to explore unconventional solutions. As illustrated in our example, private money can effectively bridge funding gaps, maintain favorable loan-to-value ratios, and facilitate the successful closure of deals. Mastering this approach enables brokers to increase transaction volume, foster stronger client relationships, and build a reputation as a knowledgeable, solution-oriented professional.

Looking to explore more about RSR Lending's Bridge Loan programs? Lets talk.