Commercial Mortgage Lending – The Ins and Outs of Mortgage Notes for Sale

If you're interested in making money off of the real estate market, there are numerous ways to go about this. Mortgage notes are one aspect of financing to think about when you are looking at buying a commercial property or trading in properties. Commercial mortgages are a common way to buy buildings or land for business purposes. When you are going about commercial mortgage lending, you will give the lender the legal right to the property until this loan is fully paid. This is where mortgage notes come in, which are the legal documents involved. Third parties can look for mortgage notes for sale to buy the obligation to pay back this mortgage amount.

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From one end of this type of financial transaction, then, you have the lender who is responsible for putting forth the money to the buyer. This commercial mortgage lending can take place to help the buyer expand, buy their own office premises, or get away from their lease agreements when renting. On the other hand, you have investors who can then purchase the mortgage notes for sale, which work like bonds. They offer the investors a steady stream of mortgage payments.

In the world of commercial mortgage lending, these mortgage notes for sale can be sold on the secondary market. They can also be part of a larger mortgage-backed security. Notes are valuable because they are signed by the buyer or business owner, who promises to pay the amount of debt as well as the rate of interest. This is what determines the value of the note. If mortgage payments are skipped and the property ends up in foreclosure, the foreclosing party may need to be able to produce this note to prove that they own the debt, making it a valuable document.

It's important to note that commercial mortgage lending only applies to properties that are used for business purposes, rather than residential properties. These particular notes for sale then generate income which can be sold for a lump sum of cash. The seller of the property gains access to the principal amount of money that has already been paid into the real estate, plus any equity that may have accrued. Whether you're thinking about borrowing money to buy your own commercial property or want a form of investment in the real estate market, these mortgage notes are worth learning more about.

Is Your Bridge Loan a “Bridge to Nowhere”?

bridge

Pronunciation: /brij/

Noun

1:  a structure built to span obstacles for the purpose of providing passage over the obstacle.

The definition of a “bridge” connotes a number of challenges that need to be managed successfully before the engineers & politicians can pop open the champagne to christen the bridge a success.

What makes a bridge successful?

1)      Correct identification and evaluation of the nature of the “obstacles” the bridge is intended to ease.

2)      Finding the right group to build the bridge on time and at reasonable cost.

3)      Making sure the bridge works, in that it takes you where you want to go, safe & sound.

The bridge analogy is great when the discussion switches to bridge loans.  A successful bridge loan conquers the same challenges as constructing a brick & mortar bridge over the Mississippi.  (I understand there are over 220 of them.)

First identify the financial obstacles, then determine the right loan structure, and finally make certain the bridge loan takes you to where you need to go.  A bridge loan without a sound exit strategy is about as advantageous as the proverbial bridge to nowhere.  Both inevitably lead to a good soaking!

What is a bridge Loan?

Bridge loans are designed to provide temporary passage over a financial obstacle or rough spot.  Like the concrete bridge that serves a short distance of the entire journey, the bridge loan is designed as a temporary financing strategy, in place only until permanent financing can be arranged.

• Duration for mortgage bridge loans typically range anywhere from 90 days up to 3 or 5 years which is considered short term for real property or mortgage loans.
• The monthly payments are usually calculated on an interest only basis with the principal balance coming due as a balloon payment at the end of term.
• Bridge loan rates are typically much higher than their corresponding conventional counterparts.
• Bridge loan financing typically refers to loans backed by real property or mortgages.
• Some, but not all in the industry use the term “bridge loans” and “bridge loan lenders” interchangeably with “hard money loans” and “hard money lenders”.

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Who uses bridge loans?

Most types of loans can theoretically be “bridged” until more permanent financing is put into place.  Construction loans, commercial loans, rehab loans, mezzanine loans and residential loans can all incorporate bridge features.  The common denominator for the bridge loan  is the temporary nature of the loan.

Some examples:

Residential Bridge Loans:  The home buyer commits to buy a new home but is unable to sell his existing home before the closing date of his new home.  The bridge loan is secured to the buyer’s existing home and the funds are then used as a down payment on the move-up home.  When the existing home sells, hopefully within a few months, the bridge loan is retired with the proceeds from the sale.

Commercial Bridge Loans:   A commercial property buyer is offered a substantial discount on the property’s sales price if he can close within 30 days.   Conventional lenders require more time to underwrite, process & fund so the buyer seeks a bridge loan to meet the closing deadline.

Construction Completion Loans:  A builder runs into construction or project delay.  Their 2 year construction loan is coming due and their current lender has either said “no” to an extension or decided not to extend the loan past the original term.   In this case, the builder seeks an interim or construction completion loan.

Rehab Loans:  The borrower is purchasing a property in sub par physical condition and intends to rehabilitate the property and then elect to either resell it or find a tenant.  After the borrower “flips” the newly refurbished property, he pays back the loan from the sale proceeds.  If the borrower elects to keep the property and rent it out, he or she will seek out conventional financing.

Are bridge loans hard to find?   They can be.  Most lenders offer bridge loans on a custom, case by case basis.  Many bridge loan lenders are private and have specific criteria and restrictions with regard to the type and geographic location of the collateral property.  All the basic best practices of how to find a lender apply equally to bridge loan lenders:  meet many, choose carefully & commit once.   The one thing the lenders will all have in common is their willingness to underwrite a bridge loan increases proportionately with the feasibility & certainty of your exit strategy.

How best to avoid the bridge loan to nowhere? Key to avoiding the “soaker” or the bridge loan to nowhere is to have a strong exit strategy.  The ability to articulate & demonstrate that strong exit strategy to prospective lenders will help tremendously in finding, building and ultimately choosing the right lender relationship and it will help get you the best possible deal.

Notes for Sale – Getting Started in the Note Business.

While listening in on a podcast the other day, hosted by Brecht Palombo, founder of distressedpro.com some of the data points presented during the podcast were quite interesting and worth sharing.

• At the height of the mortgage boom, 14% of property financings were still owner financed, despite easy credit conditions in the marketplace.

• Today, approximately 26% of property transactions involve owner financing, which seems reasonable in context of the tight credit environment we currently face.

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Give or take a percent, these numbers imply a lot of private notes have been and will continue to be structured & created by property owners as a means to get their real estate transaction done. On the other side of the coin, there are many private note investors who are actively searching for more competitive yields in today’s low interest rate environment.   The two should meet. 

Brecht’s guest speaker was Troy Fullwood, founder of Pinnacle Investments and a 10 year veteran in note acquisition.   Relaxed, casual and informative, Troy spoke about getting started in the note business using plenty of real life examples and cases.   Troy also generously shared his strategy for sourcing owner financed notes using specific examples and novel ideas on how to reach note owners.   Finally, the podcast covered what Pinnacle was seeing in terms of rate, term and credit quality in the private market.   A good read/listen that can be found at www.distressedpro.com/blog/podcast-how-to-get-started-in-the-note-business/

A most notable quote from the podcast was  “One of the reasons I wanted to do this call with you today Brecht, was to, how do you say, for lack of a better word stir the pot up a little bit. Those people who are thinking outside the box are going to be able to capitalize on today’s marketplace.”

That’s a great approach.  Notes are being created in owner-financed real estate transactions in ever increasing numbers and will be with us a while.   If you are a real estate agent, mortgage or finance adviser here’s another area of opportunity for you to team up with quality private money lenders advisers who represent local demand for competitive yielding real property notes.   Notes aren’t exclusively the domain of the “big guys”.

Brecht Palombo, founder of www.distressedpro.com a data services site that real estate, investment and banking professional use  to find bank contacts and evaluate the REO and non-performing loan information for US banks.

Troy Fullwood, founder of Pinnacle Investments, a property investment company focused on the acquisition of residential and commercial whole loan assets and owner financed real estate notes.  Since 1997 Pinnacle has been involved in over 12,000 secondary mortgage transactions throughout the United States and Troy is a frequent speaker at industry events and conferences.

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Preparing for Commercial Real Estate Loans from a Commercial Mortgage Lender

Business real estate, indeed, any real estate can be a complicated business. When it comes to commercial mortgages, typically the commercial property itself is used as the collateral in default of payment. Finding a commercial mortgage lenderis easier than many may people think; many banks, even in tough economic times are more willing to extend loans to a business where they may not be willing to extend a loan to an individual. Commercial real estate loans will still need for the borrower to have a good credit score, however, and often seek information about previous and prospective business successes. 

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Depending upon the bank's criteria, when it is time to underwrite commercial real estate loans many companies will look carefully at the property in question. This will often include an inspection of the commercial property, and will take into account the condition, location and upgrades of the property. A commercial mortgage lender may look at what is called loan to value, which is the amount of the loan versus the amount of the value of the property. In addition, the interest rates for a property used for commercial purposes may be somewhat higher than a loan for a residential property.

If you want to open a small business or move to a different property, finding a commercial mortgage lender who is well versed in small businesses is crucial. Many commercial real estate loans for a small business may have stipulations, due to the higher risks that come with operating a small business. However, there are many sources that can help you understand the financial requirements you need. Look online, and see if there are checklists that can help you prepare for getting a commercial loan, and always check into government grants or loans, as this may be a potentially lucrative resource. 

If you want a local commercial mortgage lender, always try to look at the competition carefully. See which company offers the best terms for commercial real estate loans, and which have had the most foreclosures. If possible, make an appointment at several different companies to consult about initial terms, financial possibilities and opportunities. This may give you an added advantage when it is time to draw up the loan terms.

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Notes For Sale - What Are Notes? Who Are Note Brokers?

Are you looking for notes for sale or a list of note brokers Although there are many resources on the internet about this, some of them are not worth the “ink” they’re not printed on! As you know, note brokers are middlemen (or matchmakers, if you prefer) who connect buyers and sellers of one particular financial commodity – the note. The note is a form of debt, usually connected to some real estate. The broker is out there to find an investor who wants to buy a note, and put them in contact with the current owner of a suitable note.

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Any list of note brokers is going to include many people who have either a financial or real estate background (or both) and who are always looking for notes for sale. As the matchmaker, they help facilitate financial transactions that two parties are already in need of, but may lack the resources to put together on their own. In exchange for this valuable service, the broker receives a commission that justifies their time spent. The current note owner gets paid in cash, and the new investor owns an instrument that will pay dividends along the long term. In effect, everyone wins.

 When perusing a list of note brokers, you want to be sure that you are dealing with someone who is on the up and up. The same is true when you are evaluating notes for sale. No matter where he or she started, the note broker is someone you need to be able to trust to come through on a complex financial transaction. He or she should be someone of integrity, with a clear background in real estate, finance, or law, who has a strong reputation in the community. This can also be evaluated through membership in professional associations and organizations.

If you are interested in adding your own name to the ever growing list of note brokers, and finding notes for sale for your own business, it is not impossible for a newcomer to get started. Connect with real estate offices, banks, and others who are involved in the real property market if you plan to deal in those kinds of notes. Of course, there are other options available which might also suit your talent and background. You will have to build a roster of sources that will allow you to select the “juiciest” notes and beat out your competition, which is expected to grow.

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