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| August 01, 2008 |
By: Polyana da Costa |
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s cash-hungry investors, homebuyers and developers struggle with one of the worst credit crunches in U.S. history, the promise of quick, no-hassle financing can be enticing.
That’s why a large wave of people are turning to private lending companies, which lately have been perceived as one of the only roads to financing.
Private lenders are generally funded by wealthy individuals, hedge funds and other large pools of private capital. Private lenders normally have less strict underwriting requirements than banks since they are not federally regulated. But that comes with a price paid in higher interest rates and shorter loan terms.
Local and national private lenders active in South Florida say they’ve seen loan applications rise 30 percent to 40 percent in the last six months. Many are coming from developers with loans in default or about to expire, or with incomplete construction projects. Others are investors acquiring commercial and residential properties. Some are even first-time homebuyers who normally would opt for a conventional loan.
“No one can get conventional financing today,” said Brett Forman of Forman Capital, a private lender in Delray Beach. “It’s a nightmare. So a lot of these people are coming to us.”
That is what Shamar Knighton, a novice investor, did after unsuccessfully working with three banks to finance the purchase of a house in Washington, D.C.
“I first went to Wachovia Bank, but they ended up taking so long to give me an answer that I lost the contract on the house I wanted to buy,” Knighton said. “That got rejected. Then I found a second property, and I went to SunTrust and Citibank, but it didn’t work out, and I almost lost the second house.”
Knighton, 28, works as a loan officer for Cornerstone First Financial, a mortgage brokerage company and knows the industry’s inner workings. Since his firm is a broker and not a direct lender, he still has to go through the same channels as any other borrower. And he said because he is a broker, his application gets more scrutiny than most.
In the past, he said he would never have chosen a nontraditional loan, but he got a loan from Bridge Capital Lending, a Weston-based, private-lending company.
Knighton said he is borrowing $300,000 at 12 percent annual interest to buy a $215,000 house — which he hopes will be worth about $500,000 after he uses the extra money to make repairs.
The strategy is similar to tens of thousands of investors who bought houses and condos during the boom years hoping to resell them for a quick profit. Many got burned.
But Knighton — who will have to start making monthly payments of $3,200 in six months and will have to repay the balance in full in one year — said he is confident the house will be worth more when it’s renovated.
“My plan B is if I don’t sell it in a timely manner, I’ll refinance it. It will be easier to refinance then because I’ll have the equity,” he said.
Craig Garcia, a managing member of Bridge Capital, said most of his business has been coming from investors who want to take advantage of the downturn in the market to acquire discounted residential properties but can’t qualify for conventional financing.
Garcia said the company understands the risk of lending in the current chaotic market. Despite having more lenient underwriting standards than the banks, Garcia says, the company is selective when it comes to which deals it funds.
“Of 30 inquiries we get, we maybe close on five,” he said. “And we are doing conservative estimates of the value of the property.”
Private lenders say the loans they are making are safer than those made a year ago because of the larger pool of applicants.
Click play to listen to Donald Vizcaino talk about the demand in the market | “We have been able to cherry-pick better-quality deals,” said Donald Vizcaino, regional sales manager of Coral Gables-based SF Partners Mortgage LLC, a commercial real estate-direct private lender that advertises it will approve a loan in 24 hours and close in two to four weeks.
“The average credit score for borrowers in our portfolio used to be 575 to 620,” he said. “Now the average is 650 to 750.”
Vizcaino said on a daily basis, he gets about 50 to 60 inquiries for commercial loans. Of those, about 15 make it to the underwriting department and about 10 or 12 are approved, he said.
Tal Friedman, an apartment broker in Marcus & Millichap’s Fort Lauderdale office, said most of the deals he has in the works are being financed through private lenders.
“A lot of the properties we are dealing with now are underperforming, coming through foreclosure or short sales, and most of the time the buyer doesn’t have what the banks are requiring as a down payment,” he said.
When it comes to condo development projects, it can be difficult to convince even a private lender to provide additional financing to distressed developers.
Forman, of Forman Capital, said he has gotten several calls from developers nearing foreclosure, but he can’t always help.
“We can only help when we do the math and the numbers make sense,” he said. “We can try to find a solution in almost any deal, but when there was a flaw in the business plan, it’s difficult.”
Jonathan Hornik, senior vice president of New Jersey-based Kennedy Funding, said the company also has gotten a large wave of inquiries from South Florida developers.
“We talk to them a lot, and we hear a lot of stories of developers who got trapped in this credit crunch,” Hornik said. “We are seeing people that normally would have just picked up the phone and gotten an approval from a conventional lender, but now their lenders are not even returning their calls.”
While Hornik has closed several loans recently for acquisition and refinancing of land deals elsewhere in Florida, he hasn’t closed on any South Florida loans lately.
“We look at every deal, but South Florida has been one of the hardest-hit regions, so it’s hard,” he said.
Like conventional banks, many private lenders are working through the aftermath of the residential meltdown. Norman Weinstein, principal of Delray Beach-based Stateside Capital, said the company was a direct lender on about 70 development projects.
“Half of those are in default,” he said. “We are getting a lot of inquiries, but even for private lenders, it’s very hard.”
Still, compared to banks, which now shun South Florida residential projects, private lenders offer hope to developers.
Weinstein said the company is in the process of providing about $7 million to a developer to finish a luxury, single-family home in Boca Raton. The mezzanine lender pulled back because “it was unable to fulfill its obligations,” Weinstein said, declining to provide further details.
Recently, Forman also provided a $12.23 million loan to developer Clark French to complete construction of a 22,200-square-foot mansion in Vero Beach. The primary lender, Seacoast Bank refused to provide more money when the project went over budget. The project would have stalled if French had not found an alternative source of funding, Forman said. The mansion will be marketed for about $30 million when complete.
Forman also is analyzing a request for $7 million to refinance 103 unsold units of a condo conversion project in Fort Lauderdale. The developer, which he declined to name, sold the bulk of the approximately 300-unit project at an average price of $200,000. But the balance on the mortgage on the unsold units recently came due, he said.
“It’s well-priced. So we are scratching our head on that one and thinking we can maybe do it,” Forman said.
The interest rates on these types of loans can vary from 8.5 percent to 18 percent per year, Forman said.
While private lenders said they’re playing it safe, they also worry about whether their borrowers will be able to repay the financing or if the market will have improved enough for them to sell when the short-term loans are due.
“It’s easy to make a loan; it’s hard to get repaid,” said Hornik of Kennedy Funding.
He said the company’s loans are for three years, not one year. While that may help lower the risks, it is still impossible to gauge whether the real estate market will be fully recovered in three years.
In many cases, documentation proving income may not be a priority to private lenders. The property value is the key to the deal. They want to fund under-valued properties. And typically, they lend about 65 percent of the property value, said Vizcaino of SF Capital.
“Nobody gets married with an eye on divorce,” said Hornik of Kennedy Funding. “We don’t lend money thinking we want to foreclose on the property — but we have to consider the possibility.”
Polyana da Costa can be reached at (561) 820-2065.
Craig Garcia photo by Melanie Bell
Correction
The last name of Tal Frydman, a Marcus & Millichap broker, was misspelled
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