How to obtain a private money mortgage
Private money mortgages are loans secured by real estate made by a private lender/investor instead of a bank, lending institution or government agency. Private money mortgages loans are short-term (generally six months to two years) asset-based loans made to the professional real estate investor for the purchase, rehabilitation or equity cash out of real property. This means that the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower’s credit. The security for the loan is based upon fact that the loan will be for no more than 65%-75% of the appraised value of the income-producing property. Non-income producing property (generally land or vacant commercial property) can expect a loan to value of no more than 55-65%. Interest rates can be expected to be considerably higher than conventional loans, usually 4-6% above prime with interest-only monthly payments.
Why would someone be interested in obtaining a loan like this? The reasons are simple:
Problems in qualifying. The borrower and/or the income of the property do not qualify for a traditional mortgage loan. It might be credit trouble from the borrowers past, excessive debt or the property is not producing a sufficient cash flow to cover the proposed. In these cases, the private mortgage lender may be the only available source of funds.
While a traditional lender may look to the property, the borrower, and his/her credit, a private money mortgage lender is concerned with the appraised value. As a security, the property is producing or can produce sufficient income to pay the note and the value of the property leaving the issues of the borrower's credit or income as a less important factor in providing the loan.
Speed of closing the transaction. A conventional mortgage from a traditional source may take between 60 and 90 days to fund. Traditional lenders need to obtain a formal appraisal of the property, perform a detailed examination of the borrower’s credit history and current financial status, and review financial statements and tax returns for both the borrower and the property.
A private money mortgage lender can usually complete a transaction within 7-to-10 days. As the property itself is the main criteria in determining loan approval, there is much less examination of the borrower and the borrower's other properties. The private mortgage lender can generally make a decision within 48 hours of receiving information; whereas a traditional lender may take weeks to have a loan committee commit to the loan.
Privacy. Many borrowers may not want or be able to provide personal financial information. They may be adverse to the hassles of the application process associated with obtaining a traditional mortgage loan. A divorce or business separation may necessitate keeping financials under wrap. Current, accurate financials may not be up to date. While all these would negate or at least, delay his getting a conventional mortgage, it should have no effect on the borrower's ability to obtain a private money mortgage.
Additional leverage. The borrower may want to utilize less of his/her own capital in the property. A traditional lender will use the lesser of the purchase price of the property or appraised value; a private money mortgage lenders lend based on the appraised value only. Hence, the real estate investor utilizing a private money loan is not penalized for purchasing the property at a significant discount to market value.
Investing in Private Mortgages
In the last few years’ investors have been looking for alternatives to the stock market. One area that has seen tremendous growth is the private mortgage sector. Private mortgages have become popular because they offer investors a high yield that they cannot get from GICs or bonds.
Yields of 9% to 12% are available for first mortgage investments while yields up to 18% are available for second mortgage investments. These investments are not without risk but the fact that they are secured by real property has made investors more comfortable.
So what should a novice investor be aware of when considering an investment in private mortgages? The first thing you need to do is understand what a private mortgage is. Essentially, it is just a loan secured by real estate. In a private mortgage investment, you become the lender and you decide whom you will lend your money to and under what terms and conditions.
You can choose to invest in first or second mortgages. A first mortgage means that, in the event of default, your mortgage would have first priority over other creditors. A second mortgage would be paid off only after the first mortgage was repaid in full.
The risk in any mortgage investment is that the borrower will not be able to make their mortgage payments. The typical remedy for this is to sell the house under Power of Sale. Keep in mind that property taxes and expenses like real estate commissions and legal fees must be paid from the sale proceeds before any money is paid to creditors.
To minimize risk, most first mortgage lenders will only lend up to sixty-five or seventy-five percent of the value of the property. Second mortgage lenders are usually looking for a higher yield and are willing to take more risk. In this market, most second mortgage lenders will lend up to eighty-five percent of the value of a home.
Private mortgages fill the gaps that institutional lenders, such as the banks, are unable or unwilling to fill. When a borrower has a unique situation or doesn't fit an institutional lender's normal lending criteria, a private mortgage is usually the only alternative for a borrower.
The difficult part in the whole process is finding a willing investor to meet the needs of the borrower.
When a broker is presenting a potential mortgage investment to you they will provide you with several pieces of information including a detailed application on the borrowers and an appraisal of the property involved. They will explain the pros and cons of the investment and recommend the terms and conditions for the mortgage. Ultimately, it is up to you to decide if this investment makes sense for your portfolio.
Private mortgages are illiquid, meaning that you cannot easily cash in your investment so you really have to be forward thinking. Most private mortgage investors will only agree to lend for a one-year term to help minimize the risks inherent to the real estate sector.
Self directed RRSPs are an ideal vehicle to invest in private mortgages. Interest that you earn is sheltered from tax within the RRSP and the trustee for your RRSP will administer the mortgage for you.
Private mortgage investments are not for everyone but they can be a solid performer for many portfolios. After yield, one of the key attractions of these investments is that they are a hands-on investment that can be easily understood. You can actually touch and feel your security (the real estate) and you can predict your risk much easier than you can with other investments like stocks and income trusts. If you enjoy choosing your own investments, a private mortgage may be a good addition to your portfolio.
Westrock Capital Corp. is a non-bank private mortgage investor focused on agricultural and commercial lending opportunities for well-located properties and projects in strong Canadian markets. The majority of our commercial transactions are located within established urban centers. However, under the right circumstances, we also provide financing for commercial opportunities in new emerging growth communities throughout Canada.
As a private mortgage investor, we selectively seek investment opportunities in niche markets or business sectors that have been typically underserviced by larger conventional institutional lenders. Typical properties include the following:
- commercial buildings
- hotels and motels
- retirement and nursing home facilities
- development lands
- farms, ranches, acreages & bare land (OUR SPECIALITY)
- apartment buildings
- golf courses
- storage facilities
Construction Loans & Pre-Development Construction Mortgages
- construction mortgages to complete:
- subdivision lands servicing loan
- residential and commercial new construction building projects
- revolving loan facilities for new construction and builder inventory
- renovations, conversions and expansion financing for the changing uses of real estate
- streamlined draw process to meet the timely capital requirements of borrowers seeking construction loans
- structures of construction mortgages vary according to transaction requirements and are flexible and custom-tailored to meet a borrower's specific construction loan requirements
- relatively short-term commercial mortgage financing requirements (typically 1 year to 3 year terms)
- range of commercial construction mortgages: $500k to $5 million
- fixed-term first mortgages for many property types and unique borrower circumstances
- conventional interest-only or amortizing commercial mortgages with a fixed interest rate and maturity date
- covers both purchases and property refinancing
- structures vary according to transaction requirements and are flexible and custom-tailored to meet a borrower’s specific real estate financing requirements
- relatively short-term real estate financing requirements (typically 1 year to 3 year terms)
- real estate financing size range: $500k to $5 million
Bridge Financing for Commercial Mortgages
- short-term bridge financing solutions for both first and second commercial mortgages
- bridge the arrival of longer term financing from a conventional institutional lender or to provide time to value-enhance a project or property type prior to sale
- bridge financing covers conventional and non-conventional situations and typically last from 1 month to 1 year
- size range: $500k to $5 million
Terms and Guidelines
Lending Area: Canada
Minimum/Maximum Loan Amount: From $100k to $5 million
Minimum/Maximum Term: From 6 months to 2 years
Amortization: Interest only or flexible amortization
Rate: Varies between provinces and circumstances, however, in most cases our rates range between 8-11% per annum for first mortgages and 12-15% per annum for second mortgages.
Payment Frequency: Monthly – in some cases loans can include an interest reserve
Loan to Value: Up to 65% on agricultural and commercial loans, higher loan-to-value ratios will be considered with collateral security.
Appraisals: Existing appraisals from a qualified AACI or CRA appraiser up to 6 months old are acceptable.
Recourse/Guarantor: Sometimes required
Turn around Time: Once we have the salient information, we can usually provide a Commitment Letter within a few days, and close within 14 to 21 days.
Formulating a Commercial Loan Request
The following headings are the typical sub-headings we like to see in a commercial loan request, which help to describe and explain key elements of the loan.
How much does the borrower need?
Does the size of the commercial loan make sense? Is the amount sufficient to really work in the long run for the borrower’s purpose? Is it too much relative to the security in place?
Source and Uses of Funds:
How will the commercial loan be used? How much borrower equity is there? How will it be used?
How long are the funds to be borrowed for?
Will there be principal repayments or will the commercial loan be interest only?
What is the security being offered?
A full description of the land and buildings that includes all of the salient information, namely: location; size of lot; age of building(s); size of building(s) (net rentable area and gross floor area if available); type of building; uses; tenant mix; market factors; accessibility; type of construction; any special characteristics.
Is there sufficient value? Will there be enough income to pay the commercial mortgage payments? If not, is there a way to make the commercial loan work by including collateral security? We help our borrowers create value – usually there are points in the process where the value is not yet realized – using collateral security is one way to bridge those gaps in time.
Who are the Borrowers and or Guarantors? What experience do they bring to this project? Any prior relevant experience should be described in detail.
How will the commercial loan be repaid?
Understanding what the borrower needs and what will work best in the long run for all the parties involved means we have to conduct comprehensive due diligence that is sufficiently detailed to answer all questions that may arise. This will include a detailed review of borrower financial statements (3 years), operating statements on the property (3 years) and a careful evaluation of any proforma assumptions that may have to be relied on in the case of new development projects.
Typically this process takes a couple of weeks upon receipt of the information, so timely turnaround is dependent on getting the information assembled quickly.