Opening the window of opportunity - evaluation of loan availability for real estate industry - Review & Forecast, Section IV

Most real estate investors are under the false impression that financing is unavailable for real estate. However, many financial institutions are willing to make loans for real estate with a good cash flow, high occupancy, a good leasing history and experienced ownership.

The current regulator classification of loans has created incentives for banks to negotiate with borrowers. Once a loan has been written down by the regulators or classified, the banks want the loan paid off. My company is working with many clients to help them negotiate discounts on loans -- often as high as 50 percent -- by finding a new bank to put up the money to pay off the original bank.

In one case of a current loan with a leading life insurance company, the lender was not only willing to take prepayment without a breakout fee on the fixed-rate loan, which had a relatively high yield, but was willing to take a discount on the principal as well. In this case, the life company needed liquidity because of other problems, and our loan, although current, had certain vulnerabilities.

If a borrower has a loan with a bank, it is definitely worth inquiring if they are willing to accept a discount if the loan is paid off. It's especially wise to explore these options if the lender has other problems, though these opportunities are not solely limited to lenders with problems.

Consider also the opportunities to buy properties from banks. Although anyone can bid on a foreclosed property when a bank finally is ready to begin marketing, the best acquisition opportunities are available before the bank forecloses. Investors who are aware of a problem property before the bank forecloses should begin working with the institution during the process of taking ownership.

Not only does the bank save money by disposing of the property before the acquisition is completed, it is often willing to share the money it saves in carrying costs with the purchaser in the form of a reduced price. A successful offer can include purchase money financing from the bank, if the proposed purchase money financing is properly underwritten and presented to the bank.

The structuring of financing that the institution selling is being asked to provide must satisfy the credit criteria, which requires intimate knowledge of each institution's underwriting criteria. Buyers must be extremely knowledgeable because the task of selling assets at financial institutions has become very compartmentalized.

While banks have a policy of making REO information available to the public, in reality, a potential buyer must dig for information because there is no longer a single source. The bank officer who is responsible for finding the buyer often does not know the criteria for underwriting and financing.

There are now many opportunities for buyers to receive discounts for prepayment and because banks want to avoid having a loan "criticized" by examiners or want to get a loan which has been criticized off the books. As the volume of real estate problems increases, commercial banks, savings banks and life insurance companies, which have real estate problems that are just beginning to surface, will become even more compartmentalized to deal with enlarging real estate owned portfolios.

No one should feel that the window of opportunity to buy foreclosed real estate or other properties from banks and insurance companies will be missed. These problems will be around for years, and the window of opportunity is not even fully opened yet.

COPYRIGHT 1993 Hagedorn Publication
COPYRIGHT 2004 Gale Group