http://www.fullcirclehousing.comMORTGAGE BROKERS – HOW TO FINANCE A MORTGAGE LOAN WHEN THE BORROWER OWES MORE THAN THE PROPERTY IS WORTH
So, you already know that conventional or institutional lenders will not be interested. The answer may be a VERY CREATIVE private lender.
Let me inform by example. We were recently contacted by a mortgage broker representing a borrower who owed $2,100,000 secured by a motel worth arguably $2,000,000 – if we counted every piece of furniture, nut and bolt. Obviously, not a situation that would normally work.
To add to the difficulty, property taxes in excess of $145,000 were past due, and a few other miscellaneous liens added another $95,000 to the payoff total. But, this situation had two aspects going for it that made this refinance transaction possible.First, the borrower had a 1st lien with a loan balance of $1,210,000, and an SBA second with a balance of in excess of $875,000. Both these loans were in default, in fact a payment on the SBA loan had not been made in four years.
Second, the borrower had 5 outside investors with strong balance sheets who had guaranteed the mortgage notes and who wanted out, in the worst way.
The operations just couldn’t support $2,100,000 in mortgage debt, especially when the loans where accelerated and default interest was raised to 15%!
Because the loans were in default, and the property located in a judicial foreclosure state making foreclosure a slow and expensive process, we were able to negotiate a good size discount on the first lien – we purchased it for $970,000. We were able to negotiate a supersized discount on the SBA 2nd – we purchased it for $250,000.00Our top limit for our loan was 65% LTV or $1,300,000. Doing the math, we needed $970,000 to pay off the first mortgage, $250,000 to pay off the SBA, $145,000 for property taxes and $95,000 for other liens, a total of $1,460,000. Additionally we charged 4 origination points or $26,000 while the mortgage broker charged 2 points, another 13,000. Our subsidiary that negotiates commercial debt charged 10% of the amount discounted, or $81,500. So, with the closing costs charged by the title co for the new rewritten loan (which occurred after we had acquired the existing mortgages), we would need about $1,600,000, $300,000 more than our maximum loan amount.
The issue was resolved by getting the outside investors in the motel to agree to contribute $60,000 each. In return for their $300,000 total, they received release from liability on the $875,000 owed the SBA.
The silent partners agreed to turn back their interest in the motel to the general partner, who now owned 100% of a $2,000,000 motel with equity of $650,000. And while he has the cash flow to make our payments on the new $1,300,000 note at 12%, there is little left over after debt service. However, with six months of timely payments under his belt, property taxes current, and no additional liens, he is seeking and should be successful finding a 7 or 8% loan to take us out, and have a successful operation.