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In the third part of The Broker’s Deal Book, Resicom discusses private lending, often an underutilised area of a broker’s business. In this issue, Resicom aims to assist brokers’ understanding of the product class to help them meet their clients’ needs and objectives.
Scenario
A commercial property developer had gone to a Resicom-accredited broker for financial assistance when trying to secure a site. Due to the lumpy nature of their financials, and the current state of the lending market, the client’s bank wouldn’t assist.
The client had purchased two adjacent suburban Melbourne properties to hold and develop for over two years.
One of the securities was a recently cleared residential lot, while the one next door was a commercial warehouse building, most recently used by a panel beating business. The sites held a development approval (DA) on them.
The client’s bank wouldn’t consider the proposal as the client’s current reporting period’s financials weren’t completed and the previous two years of completed tax returns highlighted lumpy income (synonymous with property developers). The loan size of $1.8 million and purpose for it also ruled out most of the traditional non-conforming or second-tier lenders.
Solution
The Resicom team worked through the entire scenario with the broker to gauge the best outcome for the borrower. The needs and objectives of the client — such as credit approval, speed, product flexibility, etc. — were weighed up against the lenders’ prices.
Acting as a mortgage manager for more than a dozen private lenders, Resicom was able to settle the transaction, funded by a single, private investor who lived close to the security properties.
According to the lender, the solution fulfilled the client's and broker’s needs, enabling the client to start arranging requirements for the construction's funding approval.
CEO Stephen Mitchell added: “Resicom always considers a privately funded transaction the same as a stock-standard home loan.
“We give all our deals the old-fashioned ‘sniff test’ to ensure that they make sense and closely consider important information not usually required in, say, a long-term home loan like a clear exit strategy.”
Mr Mitchell continued: “With private loans being commercial in nature, there are some operators in the market who will push boundaries on upfront fees, etc.
“It is so important brokers know the genuine players, thus why we recommend they use our services.”
Private lending do’s and don’ts
Resicom CEO Stephen Mitchell explains some of the do’s and don’ts of private lending that may assist in your initial client discussions.
Do’s
- Do give all deals “the sniff test”. Does the deal make sense and would you lend your money to the client? What is the exit strategy? How is the loan going to be repaid?
- Do remember normal private lending LVR’s sit around 65 per cent.
- Do make sure all clients get Independent Legal Advice on their loan documents.
- Only use trusted private lenders. There are “fee takers” and operators who are only interested in themselves if something goes wrong.
- Can the loan be repaid early without penalty? Acknowledging that private investors look for stable income returns on their investments, any longer than three months’ minimum payment should be negotiated.
- Remember to work out your commission structure and advise the client upfront. Typically, no trail is paid on these loans.
Don’ts
- Don’t sign documentation without carefully reading and understanding the ramifications including upfront fees. The majority of even basic indicative offers from some lenders will tie the client into a fee if they pull out, and they do enforce it.
- Don’t forget to follow up with your client towards the end of the loan term to assist with the exit strategy.
- If the exit plan is a refinance, make sure you can follow through, especially in today’s volatile market conditions.
