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Funding Strategies in an Evolving Market

Expert tips for developing your correct financial structure by Kendra Rommel Since the COVID-19 pandemic began, there has been an odd sense that we have been operating in some sort of time warp. Anything that happened before March feels like years ago, yet the fact that it’s October seems almost surreal.  Nothing exemplifies this feeling more than the roller coaster ride of the real estate market. The uncertainty created obstacles and accelerated the velocity of change, challenging investors, contractors, lenders and related businesses to address and adapt to a myriad of challenges and obstacles. Remarkably, even amidst the uncertainty, a health care crisis did not become a housing market crisis and the real estate market has continued to be strong. Thriving as a real estate investor, broker, or lender, today requires a sound and stable financing strategy. Having a consistent, reliable capital partner is perhaps the most important element to building a solid business model. This may evolve over time— from your start in business to becoming an experienced pro. Regardless of your strategy, there are a myriad of capital or financing options available to you.  Here are some tips for developing your correct financing structure. Types of Finance Private lenders. There are two types of private lenders:  (1) Individuals such as friends, family, accredited investors, etc. that are known to be syndicators or funds, and (2) Institutional private money lenders, sometimes called hard money lenders, who have their own capital as well as institutional capital partners, such as banks and Wall Street investment firms. A notable difference with private money is the fact that they base risk on the asset, rather than on the individual’s personal borrowing strength. This makes the loan process considerably faster and easier than conventional lending. Conventional Lenders. Banks, credit unions and mortgage lenders are common for investors who have strong individual borrowing strength. Interest rates with conventional lenders are at historic lows. However, LTVs are lower and down payment requirements are higher than private money programs. Qualifying for a bank loan on an investment property can be onerous, difficult and time consuming. Additionally, banks typically have a maximum exposure limit for the borrower which limits the amount of properties they can finance. Mortgage brokers. They do not lend their own money. Instead, brokers work to find you the right lender from all the options available. For this, they take a commission in the form of points on the loan, which are paid at closing. Real estate partnerships, Joint Ventures (JVs) or Equity participants. These are individuals or companies included in the participation of any one deal, (usually as a limited partnership or as a passive partner to the primary). It is standard for a prospective partner to want to review the investment strategy, summary, pro-forma and intended exit strategy. Warehouse Banks/ Bank Lines. These are banks that extend a line of credit to lenders at predetermined terms, such as type of assets, terms, pricing, and LTVs. This line enables lenders to fund less on their company balance sheet. Selecting A Capital Partner Circumstances such as the recent pandemic clearly illustrated the absolute imperative of conducting due diligence when choosing to align with a capital partner. It is important not to think merely in transactional terms—getting a good deal on one property—but rather focusing objectively on who will be your best capital partner as you grow and change through market shifts, both forecasted and unexpected. Capacity and Access to Capital. At the onset of the pandemic shutdown, many lenders had their warehouse lines leveraged and they were reliant on institutional capital partners buying their loans at a premium to remain profitable. Overnight, warehouse lines and institutional/Wall Street buyers froze. This forced many lenders into a compromised position of which they had to stop originating or funding deals. Experience. There is simply no substitute for experience—whether it is a sales associate, broker, or lender. They need to have a broad perspective and know how to deal with fluctuations in the market, handle challenging or creative scenarios, and understand what makes a mutually beneficial deal. The industry has been feast or famine over the past decade and those who have weathered the ups and downs can bring that expertise to bear for your benefit.  Options. One of the biggest rookie mistakes is to focus on rates. Keep your focus on the entire financing structure. This will ensure you do not miss crucial details in achieving the highest ROI possible. When evaluating a credible finance partner, they should strive to understand each unique strategy and exit plan to enable them to provide the best loan options to meet their clients’ individual needs and goals. True capital partners are problem solvers. Communication. Clear communication and transparency are vital for building a successful relationship with anyone, especially your capital partner. Funding Strategies It is critical that financing strategies and guidelines align with the specific investment opportunity. Financing solutions are not one-size-fits-all. Each sponsor or property likely will have a different strategy and disposition plan. Therefore, be clear on your intention with the asset(s) so you can determine the short and long-term objectives. Having a clear exit strategy in advance, including timelines, will help you find the right financing solution while maintaining the highest margins or returns: Fix and Flip. When you find a good deal, you have to be able to move quickly to acquire it. It is important that you have supported data verifying the neighborhood value range, the bottom and highest comps. Also, know what types of finishes or appeal warrants the high versus low end of that market. In today’s market, investors are optimistic that they can reap returns quickly, whether it is through simple cosmetic updates or more complex ones. Rehab Financing. When you finance your rehab, this portion of the loan is typically held in a control fund & issued in draws as a reimbursement when the work is completed. This is a great option to preserve your liquid position and be ready for

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Q&A With Kendra Rommel of CIVIC Financial Services

How would you describe current economic and real estate market conditions? Everyone is comparing the current financial and real estate situation to the mortgage meltdown of 2008. But today’s conditions are completely different. Yes, we may be facing an economic downturn, but previous downturns stemmed from a loss or depreciation of assets, while this market shift was sparked by a nationwide health crisis and resulting job losses. This market uncertainty caused Wall Street to pull back or cease purchasing loans they previously were acquiring at a premium from lenders like CIVIC. As a leading private money lender, however, CIVIC was well-positioned to weather this storm of uncertainty. We are well-capitalized and have very strong relationships with Wall Street. We remained aligned with our capital partners to ensure we could continue offering financing solutions needed in the marketplace. Our capacity to fund both bridge and rental loans is as strong as ever. Why does this affect the real estate investor market? Overnight, many lenders that built their business selling to institutional capital sources, REITs or hedge funds were forced to hold on to recent originations either on their balance sheet or on expensive warehouse lines. While this is fine in theory, many lenders didn’t have the liquidity available to do this, much less the liquidity needed to fund new originations. In addition, warehouse lenders also paused, reassessed their positions, and many in our industry faced margin calls that needed to be met in an extremely short period of time. Since many lenders didn’t have liquidity to meet the large margin calls, especially without the ability to turn their capital, what was initially just a health crisis became a liquidity issue. What does all this mean to real estate investors, lenders and loan originators? Lenders had to quickly decide whether they had to pause or pivot to remain in the game. Companies like CIVIC had to make adjustments such as lowering leverages, raising interest rates and placing some bumpers on our loan guidelines. CIVIC remains a very well capitalized company. Our loans are still performing today just like they did in January and February. How did your customers react to the pivot? The initial reaction was difficult, but we’ve adjusted a bit as Wall Street’s concerns and fears have abated. We have been 100% committed to our customers throughout the pandemic and have been focused on being consistent, trusted financial partners. In fact, we recently received the highest monthly Net Promoter Score in our company’s history, and today our pipeline is as strong as it has ever been. What is the biggest challenge CIVIC is experiencing today? I think the biggest challenge is the fact that, until we have a vaccine in place, there is no known end in sight. So we need to remain diligent and adaptable to be able to shift as needed. CIVIC is very well-positioned to do that. Have there recently been any positive developments? Yes. First and foremost, the real estate market continues to be robust. As a result, Wall Street has resumed interest in acquiring these products. Even more exciting is that the industry has adapted to the “new norm” of constant change and is thriving—whether it be working remotely and moving services to a virtual delivery model, or capitalizing quickly on new opportunities. What advice do you have to offer from this experience? As an Originator one of the most notable opportunities for our team has been the ability to create strategic partnerships that bring value to each other. None of us are exempt from the current or future economic setbacks. So it is imperative we link arms with great partners and recognize the opportunities we can still capture, as we are stronger together. I would also say that during tough times, the values you commit to as an organization become critical. I believe that CIVIC’s core values of being a great partner and acting with honor have given us a lift and will keep us strong as we navigate through unchartered waters in the coming months.

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