Chasing the Unicorn Loan – An Misstep By Many Real Estate Investors

By Douglas Katz –  08/16/2023

As a real estate investor, you’re likely no stranger to the challenges that come with finding the right financing for your investment properties. However, it’s important to recognize that not all financing programs are created equal. In fact, there are instances where the perfect program you’re seeking might not even exist within the market’s offerings.  Because I see frustrated investors spending an inordinate amount of time and resources to find the impossible loan, I want to shed light on the realities of finding suitable financing and explores alternative options beyond traditional debt, such as hard money loans.

The Quest for the Perfect Financing

For many real estate investors, especially new ones, the journey to secure financing can be an arduous and fruitless one. Hours spent sifting through loan terms and conditions can sometimes lead to frustration, especially when it seems that the right program is nowhere to be found. What investors often fail to grasp is that lenders operate on a delicate balance of risk and reward, and this balance fundamentally shapes the financing landscape.

The Reality of Risk and Reward

Lenders are fundamentally driven by the principle of risk assessment. To provide consistency, they typically create programs with guidelines that fit their acceptable risk profile. They will price these options in line with the level of risk.  Higher risk for the lender will always equate to higher pricing for the investor, period.  If a deal presents a risk level that surpasses a lender’s comfort zone, the likelihood of them offering a program diminishes drastically  Simply put, no degree of pricing provides enough reward for that risk.

Investors frequently find themselves in a bind when they’re seeking terms that fall outside the acceptable risk profile of any lender.  They fail to make the realization that the reason for the lack of options is driven by their status or that of the deal and that no amount of searching will uncover some amazing program that 99% of lenders are not offering.  Even if they find a private lender that is open to a more customized loan structure, this will not eliminate the risk and reward analysis and pricing 0n the part of the funding source.  In fact, private lenders offering their own money will have more scrutiny.  While they may disregard something an institutional lender won’t, they will do so at a premium like any other lender would, so don’t expect bargain pricing.

Understanding the Role of Risk Mitigation

Investors often overlook the crucial strategy of risk mitigation. Rather than solely fixating on finding the right program, they should focus on reducing risk associated with their financial situation or the investment itself. This can involve various tactics, such as bringing in co-borrowers with strong financials and experience, or injecting more equity into the deal.

Often times, there may be simple solutions to strengthen a deal.  This is simple in that you can take the lender feedback on why their programs do not work for your deal and find ways to fit the box. For example, many lenders in the investment space will allow the use of the higher of the credit scores of the guarantors, so adding a borrower with superior credit can overcome not meeting the required FICO minimum.  This can also work well with assets or experience.  This is simple, but for many not easy, but demonstrating commitment to the project’s success and showing an understanding of the risk analysis for a lender can make the difference.

Beware of Scammers and Predatory Practices

The pursuit of the perfect financing program can sometimes lead to desperation, rendering investors vulnerable to scams and predatory practices. Scammers prey on individuals who are desperate for funds, often demanding upfront fees and vanishing when it’s time to deliver.  They comb social media groups for investors looking for impossible deals and use their desperation to charge them upfront fees to get access great programs, which never comes to pass.  Often, it is not even that difficult and they just post that they offer unattainable terms and the desperate investors come to them.

The reality of a hostile and predatory investment real estate marketplace should always be in the back of investor’s minds.  They need to regularly use the power of why.  Whether it is why they cannot find the programs that they needs, why they are getting declined or why a lender would offer a loan type at favorable terms when nobody else will.  Investors need to exercise caution and thoroughly vet any lending opportunity before committing their resources or personal information.  This is essential to avoid falling prey to scams

A Strategic Approach to Financing

As an investment real estate broker, I’ve witnessed countless investors struggle to find financing that aligns with their goals. It’s essential to recognize that the financing landscape is defined by the interplay of risk and reward. While the perfect program might remain elusive, investors can adopt a more strategic approach by focusing on risk mitigation and exploring alternative options like hard money loans. By doing so, they can secure the funding needed to grow their real estate portfolios while safeguarding themselves against potential pitfalls. Remember, in the world of real estate financing, knowledge and strategy are your most potent allies.

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