When you’re a private lender like we are, you get to set your own rules. That’s much different compared to traditional lending in today’s marketplace. Here in the United States, the most common home loans issued are those approved using standards set forth by Fannie Mae and Freddie Mac. That’s important because it keeps the mortgage marketplace liquid. As long as a lender approves a loan using these guidelines the loan is eligible for sale in the secondary markets to other mortgage companies, investors or directly to Fannie Mae and Freddie Mac.
Without these secondary markets, mortgage loans would be much more difficult to qualify for. Why? Because lenders don’t fund new mortgage loans by opening up their vault and pulling out some money. If that were the case pretty soon the lender would run out of funds. Today, conventional mortgage lenders utilize an available line of credit to temporarily fund the mortgage loan and then replenish that very same line by selling the loan.
But because ABO Capital approves loans using its own guidelines, it’s not necessary to follow any third party regulations. That doesn’t mean we’ll approve most any loan application that comes across our desk, we don’t, but we simply don’t need a secondary market in order to succeed. So how do we look at loans differently? We look at the overall project and the prospect of the investor being able to successfully sell the refurbished property providing enough funds to pay off our loan with interest. An investor can sell the property but can also keep the property and replace our loan with a new, permanent mortgage. It only depends upon the intentions of the individual investor.
That’s our view. When we review a new loan application we look at the whole picture. Is the project viable? Does the investor’s plans make sense? Can we get third party documentation the investor can successfully replace our loan within a specified time period?
One of the primary ways we assess a situation is to order a property appraisal and request the appraiser provide a report based upon the rehabilitation work having been completed. For example, an investor in [area] finds a fourplex but the current owner has let the property degrade to the point that a traditional bank won’t place a loan on it. The owner is trying to sell but can’t. An appraiser will visit the property and review its’ condition. At the same time, the appraiser will research other four-unit residential properties to determine market value. A rent survey will be performed to establish what sort of cash flow will be generated by the subject property once stabilized.
After a thorough review of the application and the appraisal report, we see the [area] property will in fact cash flow each month and the future market value will be well above what will be needed in order to pay off our loan plus interest. That’s how we look at the whole picture. We don’t simply look at guidelines, we look at future success.