Email steven@sma.fund Phone +61 488 22 44 16
Private money is used by a wide range of borrowers, including:
high net worth individuals
sophisticated real estate developers
opportunistic real estate investors
who prefer the speed and simplicity of dealing in this flexible market.
They are not just credit challenged applicants who have limited choices, though of course these will be considered as well depending on the security.
Factors include
Opportunity cost and timing. We will take into account special circumstances and urgency
Bridging finance requirement
Generally, we require no formal "external" valuation. There are exceptions, however, the applicant simply needs to honestly answer one question before talking to us – what would the subject property sell for were they to put it to the market in an orderly manner for sale in (say) 120 days. Simplistically, the answer to that is what the asset is currently worth.
Not presently meeting standard institutional guidelines. “Transition” finance to bring your proposal to one acceptable by your bank, or perhaps your bank has too high an exposure into a particular area or asset class and you need time to source alternative institutional funding.
Being primarily asset and “exit” based, private investors have no fixed parameters. A personal relationship is developed based on commercial realities and not generic one size fits all decision making.
Balance development stock and maturity of an existing loan. Sales are taking place, but you don’t want to be subjected to un-necessary pressure from your existing financier to drop prices – firstly because of bottom line development profit and secondly, it may undermine values for your future developments in the area.
Quick property turnaround (e.g. renovation) may not warrant institutional funding delays
No working capital/cash out restrictions and general flexibility of private investors
Credit impairment. PMCS is asset focussed, performing our own internal due diligence, and no credit reports are required.
The question often arises as to why borrowers would borrow private money on real estate transactions at significantly higher pricing than through banks or other institutions.
The general (and inaccurate) assumption is that these are always high risk ventures and the borrowers do not have the creditworthiness that would allow them to borrower from regular and conventional sources. There are in fact a wide variety of factors that determine whether or not a borrower would be a candidate for private money. Several of the most common ones are touched on above, and further expanded below.
Quick funding of a time sensitive loan. Banks and conventional financial institutions normally take make longer than private money lenders to close a loan due to strict regulatory oversight.
Reduction of red tape and paperwork hassles. Traditional lenders require substantially more documentation than private lenders, have more stringent committee processes, and may generally cause more processing time when time is of the essence.
Flexibility and creative problem solving. Personal relationship. Private money lenders are more creative and complex loan situations. A property may have an issue which makes it difficult for conventional lenders to finance.
Nature of the loan and market conditions. Prevailing market conditions, asset or location concentration may cause conventional ultra-conservatism, extra processing time or provision of more security than necessary, taking away an applicant’s ability to marshal resources as required. PMCS on the other hand will assess the property or project’s risk as a clean canvas, determine where it sits on the risk curve and price it accordingly. In essence, private loans are equity based and the most important component of the loan is the evaluation of the real estate. A borrower’s past history and level of commitment plays a part in the determination of viability, but it is not the “apex” factor.
Reduction of equity participation. Borrowers may also consider using PMCS for a portion of the traditional equity component of a project – “skin in the game”, “hurt money”. Equity investors will generally require a “preferred” position (e.g. Redeemable Preference Share, which looks like equity but behaves like debt) and coupon rate in addition to profit share. It all depends on the deal.
Borrower circumstances. Again, these are not just limited to credit problems, including past bankruptcy as is usually assumed. There may be tax liens or other credit lines required repayment. Neither determination to stave off insolvency, nor an actual receivership or liquidation is necessarily a deterrent for us. The property may be part of a divorce negotiation or other family matter.