Thursday, September 26, 2013

Private Mortgages - When/From Who/Negotiating Terms

Private mortgage lenders can be companies or individuals who provide necessary financing when normal institutional options are not available. They hold security on the property, as would a typical bank type mortgage, as an asset backed loan.  They can prove to be an excellent alternative to conventional financing in many circumstances.

Examples of where taking mortgages out from private sources can be a preferred option:
·        Buying a specialty property (ie.gas station), that banks will not consider
·        Buying a property with physical impairments (ie.environmental issues)
·        Loan to value considerations (needing 80% vs. institutional @ 65%)
·        Poor  credit rating or previous bankruptcy
·        Needing a short term (stop gap) loan for a short period of time (ie. 1 yr.)
·        Small business owner with unverifiable income
·        Needing quick financing approval in order to firm up a sale
·        Seller financing often can include more favourable terms given the
their motivation in selling the property

Private mortgages are best sourced through Mortgage Brokers (MB), who would have a list of companies or individuals who wish to invest their cash into private mortgages. The mortgage brokerage industry has grown exponentially in the last 20 years in Canada, so there are a plenty of MB’s to consider. The key is to ensure they are qualified to deliver a private lender, who can meet your objectives and timelines.

Things to look for include:
·        Will a detailed Letter of Commitment be provided
·        What other costs and fees are involved
·        Time to process the approval
·        Can you meet the private lender to review your situation
·        Costs to Payout Early (prior to expiry of the term)

Keep in mind that if your intentions and commitment are sound and your mortgage ends up being paid as agreed – it proves to be a good investment for the lender.  The key then is to take this position upfront, in order to help you negotiate the most favourable terms. As with everything in real estate – ‘you don’t get what you get what you negotiate’. Even when dealing in the private mortgage market, don’t sell yourself short! 

As always, enlist the assistance of an experienced commercial realtor in locating the best private financing sources available in your area.

Thursday, September 12, 2013

Private Mortgages - Need a Written Mortgage Commitment?

If you look to finance a purchase through a Private Mortgage – that is a lender who is not a financial institution – is the process any different with respect to obtaining a formal (written) Mortgage Commitment (MC)?  It should not be and there are a number of reasons to insist on receiving one, before moving forward.

As with any of the specifics involved with the transaction, you want to be informed in advance of all costs and obligations which pertain to the mortgage. All of the same details which we outlined with institutional lenders, may infact apply to the private mortgage. There could also be some additional ones – ie. upfront administration fees, punitive penalties for early payout, mortgage brokerage fees and the list goes on.  Best practice, is to insist on a detailed MC so that there are “no surprises” at closing.

Private lending plays an important role in the commercial property market. It is often a good option and sometimes the only option, in being able to fund a purchase. With that said, the industry is littered with closings (and non-closings), on transactions which involved private mortgages which were significantly misunderstood until the day of closing. The ramifications of this are not only costly, but painful to experience for all concerned.

As a final note and with respect to a Vendor Held Mortgage (with the Seller), a major benefit is that you are able to incorporate the terms of the MC within the body of the offer. You can not only outline mortgage amount/rate/term/amortization (the basics), but also cover prepayment options, specifics on guarantors, any details on secondary financing etc. Some of it may need to be negotiated, but you at least get it on the table
and they become terms within your Agreement of Purchase and Sale.  The Seller is often your best source of Private Financing, so make sure that is your first stop!

It’s worth repeating - the “DEVIL IS IN THE DETAILS”. Again, it’s always a good idea to review a MC with your lawyer and your Experienced Commercial Realtors upon receipt, and especially given the fact that much of it affects their task in closing the transaction.