Fraught Financing

Rates are low.  So are home prices.  So what’s preventing many from buying?  For some, buying has become an obstacle as they are finding that financing their real estate purchase has become difficult.

With a strong credit background, considerable down payments and reserves, many potential home buyers are finding that few lenders are willing to finance their purchase.  One potential home buyer was unable to finance their home purchase as they owned their own business. Their company, though young and established on a few years ago was already showing strong growth and income, with minimal debt.

It is no surprise that lenders are tightening up their lending practices.  This is one of the issues taking place in the current negotiations between  attorney generals and banks (part of the proposal provides a set of procedures for banks to follow in processing foreclosures in order to avoid problems such as the robo-signer debacle.  In return, the banks would be granted relief from civil actions challenging those practices from the AGs that sign on to the deal.)

For beginning investors hoping to capitalize on foreclosed homes to attract the growing rental population or upgrade into multi-unit/mixed use property, the lending process can be even more daunting.

Real estate located in buildings considered non-warrantable can be one of the most difficult to finance (an association becomes non-warrantable due to several factors; the most prevalent reason is low owner occupancy).  An investor looking to purchase in a non-warrantable building can have one of the most difficult transactions to take place.

Financing is still possible for many of these situations, even for an investor purchasing in a non-warrantable building.

Portfolio banks/lenders (community banks) have been stepping up, filling the demand needed.  Though many times, transactions are reviewed on a case by case basis, many community banks are lending to those in the community looking to invest there as well.  However, many of these community banks are finding themselves undercapitalized and at risk for failure.

Northbrook’s CenTrust Bank N.A., for example, is looking to receive a $10 million in new equity after almost going through a prior $10 million infusion from another private-equity firm.   GreenChoice Bank, the environmentally focused lender in Chicago formed in 2010 with $8 million in fresh capital, is hunting for another $4 million.

The disappearance of more community banks could further slow recovery, especially in areas where financing is vital not only for real estate purchases, but for small businesses that depend on these institutions for business/start-up financing.

Private money lenders are becoming another viable options with some home buyers.  While banks are a traditional source of financing, the instrument of financing is from a private individual or organization.  These could be more difficult to find on occasion as there may be stipulations on how many loans can make before requiring a banking license.

Seller assisted financing is occasionally available as well, although it seems to be growing less popular since the 80s when rates were high as sellers are either unable or uninterested in being tied to the property they are selling.

As financing procedures continue to remain strict, understanding available options may help parties to a transaction find successful alternatives.  Each option has different restrictions, procedures and loan types.

Sherwin L. Sucaldito, REALTOR®, GREEN, ABR, CRPM
The Institute of Luxury Home Marketing
Green REsource Council, GREEN
Accredited Buyer’s Representative , ABR
Certified Residential Property Manager, CRPM
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