Financing your syndicates property.

Borrowing money to finance
the Real Estate Purchase

Leverage

Leverage or the borrowing of money to finance your syndicates property can increase your rate of return. By borrowing, you can control a larger property with a larger income stream than would be available from a smaller property that you could afford to pay cash for. Using borrowed finds is only profitable if the interest rate percent on the loan is less then the net profit percent generated from the property's income. For example: If a property has an 10% net cash profit (an 10% cap rate) and you can get a mortgage at 8% then the spread is 2%. If the loan is 80% of the price, then you are borrowing four times the amount of cash invested. 2% times four is a return increase of 8% on the cash invested. The properties 10% net return on the properties cost is now 18% on the cash invested.

 Real Estate financing

Knowledge of real estate financing is of prime importance to your success as a real estate Syndicator / investor. I recommend that you read a few books on the subject. I will cover here the basic concepts of financing a deal and a list of the typical paperwork your lender will request. It is not unusual to find more than one method used to finance a property. If you are not experienced in dealing with the many intricacies of mortgages get competent assistance. Always remember, every aspect of the loan is negotiable, ask and you just might receive.

Each state is governed by laws covering deeds of trust, and mortgages. You should familiarize yourself with the laws of your state by reading a text book such as modern real estate practices (for your state) Most college book stores will have this. Regardless of your state's individual laws on title and lien theory of mortgages, the security interest of the mortgage (the lender) is legally considered personal property. This property interest can only be transferred with a transfer of the debt, which the mortgage secures.

To put it plain English, the liens (all debts owed) on the property follow along with any title transfers, or change in ownership. Because of this most loans will have due on sale clauses.

Mortgage loans consist of two parts, the debt, and the security for the debt. The note is the promise to pay a debt with interest. The mortgagor (borrower) executes a promissory note, or notes in the amount of the debt. The deed of trust is the document that conveys the property (creates the lien) to the mortgagee (lender) as security for the debt. A properly executed mortgage is a negotiable instrument. The payee, or holder, may transfer his or her right to payment to a third party. The borrowers right to transfer is limited by the due on sale clause found in most mortgages.

Because the notes are secured by the property, lenders can control the risk of lending on real estate. This security allows for flexibility in payment plans, length of loan pay backs, interest rates, and other provisions of the note.

This flexibility allows for creativity in financing your properties. If the sellers is financing the property then everything is very negotiable and you can be as creative as the seller will allow.

Lenders:

The mortgage business is very competitive, There are multiple sources for financing available. Some of these are local banks, national banks, conduit lenders, credit unions, private lenders (hard money lenders), and loan or mortgage brokers. Brokers and conduit lenders can further stretch your sources such as insurance companies, private banks, and retirement systems, all of whom usually lend via brokers one type or another. A good way to find brokers is to ask your banker or from ads in trade magazines specific to the property type you are interested in.

Terms:

Typically for commercial loans you will pay a higher rate then for residential loans. The requirements for down payments are also higher. The reason for this is that should the lender need to foreclose on the loan for nonpayment the cost of doing so is considerably higher then for a residence. In addition the time to sale a commercial property and the resulting caring cost is much longer and more problematic.

Loan rates are often 2% points higher then residential loan rates and down payments are most often 20% to 30% of the purchase price. Terms are most often 20 or 30 year amortizations with a five year balloon (balance due in five years).

The lender is interested in making a loan that is the most profitable he can make and to protect his institution. Your interest is to get the best terms you can with the most flexibility and to avoid as many restrictions and limitations in the loan that you can. Often the loan application and commitment letter provide only that information that you will find acceptable with a lot of the details presented only at the last minute at closing. The truth in lending form and the good faith estimate will help answer most of the questions concerning a loan. If the loan is a private one you may have to do some digging to get the information.

Here are some of the questions you should ask before you decide on a lender or close on a loan.

• Is the person you are dealing with a independent loan broker or a representative of the lender?

• How will the representative or broker get paid and by whom?

• Does the brokerage agreement prevent you from shopping elsewhere for a loan?

• If you find a loan elsewhere are you obligated to pay the broker?

• Does the loan application prevent you from shopping elsewhere for a loan while the application is pending?

• How long will the lender have to accept the loan application?

• Does the loan commitment letter contain all the charges for making the loan?

• Is there a loan deposit, or fee, is it refundable, and will it be held in escrow?

• How long is the loan commitment good for?

• Can you review the truth on lending disclosure prior to closing day?

• Can you review the good faith estimate prior to closing day?

• What will the cost of making the loan be and can you get a list of fees or cost by line item?

• Once the commitment letter is received can you get a review copy of all the loan documents?

• What insurance will be required on the property, on the loan and on the borrowers?

• Will an assignment of rents be required?

• What guarantees and obligations and any limitations will be required from the borrower

• Will there be any restrictions on secondary borrowing?

• Will there be a due on sale clause?

• Will there be a mortgage escrow requirement and if so how much and for what purpose?

• Will a title policy be required and at what cost?

• Will a new survey be required and who pays for it?

• Will the loan contain any prepayment penalties?

   

A diligent syndicator will take a hard look at the terms of the loan and any documents requiring a commitment of the syndicators or the investors funds. Your attorney should review all documents unless you are very confident of your ability to review them yourself. Your attorney wills eek to over protect you and the lender will over protect themselves so you will have to make the final decisions using your good judgment.

Keep in mind that the loan has to meet your financial requirements and allow you to provide the returns with the most flexibility possible for your investors. You are in business to make money for yourself and your investors and that must be the priority even if that means turning down a unreasonable loan.

The loan submittal paper work:

To get a loan from any traditional sources you will need a considerable amount of paper work. Here is a list of the paperwork I had to submit on a recent deal. You will need documentation on yourself and any active partners owning 20% or more of the deal.

• A Loan application.

• A description of the deal and key dates

• A Personal financial statement.

• Two months personal bank statement.

• Personal brokerage and savings account statement.

• Two years personal tax return.

• Two months personal bank statements.

• Income statements on owned income properties.
  

In addition the real estate agent supplied the lender with;

• My earnest money deposit check.

• Copy of the purchase contract.

• Information and photos of the property

• Two years income statements on the property.

• Current income statement on the subject property.
  On more complicated deals I have occasionally had to provide one or more of the following. I have listed some of the less common deal specific paperwork request. You will start with the top list and supply the other items only on request. Keep in mind this caveat, provide only what the loan underwriter ask for, do not volunteer anything.

• Project feasibility study.

• Repair estimates and or contracts.

• Phase one environmental report.

• Copies of tenet leases.

• Business tax returns.

• Life insurance policy assigned to lender.

• Property surveys.

• Copies of all LLP paperwork.

• Copies of partnership agreement.

• Copy of DBA certificate or assumed name.

• Existing loan subordinations.

• Your resume or those of active partners.