Final Thoughts on Power of Sales – Providing Private Financing

As noted in an earlier blog, there may be opportunities within your market to provide the financing required for investors to purchase POS  properties. Often times, financing is hard to come by and the projected returns (ROI) can be very attractive as a result.

As with every investment, the key to providing private financing is doing a proper risk assessment. Closely examine the basics of the deal, with particular consideration to the following:

·        Suitable loan to value ratio

·        Cash flow which supports the debt obligations

·        Or – credible business plan with owner-occupant

·        Viable buyer covenant (aka – credit rating/financial standing)

·        Quality/value/liquidity of the real estate

·        No surprise issues – ie. environmental, zoning/municipal

·        Secondary Financing – will there be any (behind a Private First)

If the deal meets the above criteria or most of it, then it’s time to assess what sort of return is required to move forward. Typically, it will be higher – possibly 3-4-5% higher than conventional commercial financing – creating a high return investment. In the right circumstances and on the right properties, providing private financing can be very profitable.

In the broker world, we often see where a prospective Buyer investigates the purchase of a commercial property, doing considerable due diligence – only to take a pass on the investment as an owner.  To then take a look at it as a private mortgagee for a subsequent buyer, may make sense and might just be the better investment with respect to the property.

Again, private mortgages aren’t for everyone, but if you target POS properties as part of your investment strategy, it’s just another way to play that market.  In today’s ultra low interest rate environment, it might just help provide the type of yields you are seeking.  Next up… a new series of topics starting in February.

Power of Sale Properties - Most Common Myths (Ontario, Canada)

1.     THE SELLER (LENDER) ONLY NEEDS TO RECOVER THE MORTAGE BALANCE OUTSTANDING. Myth – As the Lender (who commences the POS proceeding) needs to make best efforts to realize fair market value.

2.     SELLER  WILL OFTEN TAKE THE FIRST OFFER SUBMITTED. Myth – Institutional lenders will often require an advanced marketing period (prior to considering offers) to ensure adequate exposure to the market. This not only creates a higher likelihood of multiple offers, but shows best efforts to broadly expose the property.

3.     SELLERS RARELY NEGOTIATE. Myth – Again, in making best efforts to obtain market value, sellers often will negotiate hard and for better terms (aka) to realize a market supported sale. Infact, most institutional lenders will likely have a full appraisal report on file which they will be relying on.

4.     SELLERS OFTEN WILL PROVIDE NEW FINANCING. Myth – Most institutional lenders avoid this facet of re-selling the property, given the conflicts of interest which it creates. Not to say it never happens, but inquire early on to see if it is even possible.

5.     SELLERS HAVE AN OBLIGATION TO REMOVE ALL TITLE PROBLEMS – Myth – You are dealing with an ‘as is’ with ‘no reps/warranties’ sale in most cases and can because of this inherit title problems which you will need to deal with. Get your lawyer involved on the purchase early in the process, to make sure you deal with any title/ownership issues which exist.

6.     SELLERS WILL NOT ACCEPT CONDITIONAL OFFERS. Myth – Maybe/maybe not, it will more likely depend on the competitive environment of the property and your particular market.  As much as ‘non conditional’ offers may be more common on residential properties, they are not as common place on commercial properties and generally lenders understand this. Best practice, is tight timelines and very specifically drafted clauses which clearly address the reason(s) for the conditions.           

Although not necessarily a comprehensive list, these would be the most common myths that we see in the market.  As always, seek out the assistance of experienced commercial brokers when dealing with Power of Sale properties.