The State of Private Money Real Estate Financing – April 16, 2013

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The upturn in the real estate market has caused investors and fund managers to underwrite a little more cautiously, especially with talks concerning a new housing bubble already starting as seen here and here.

With the market languishing for so many years after the recession, underwriting a trust deed investment was simpler because it was hard to imagine prices could drop further.

Real estate prices in the Southern California market were already below cost. Though downward pressure on price was conceivable, the prices would eventually have to increase to the cost of building the property, at the very least. Thus, from an underwriting standpoint, it was much easier to analyze value and risk in a given trust deed investment.

Fast forward to today where we have had a 6% increase in home values nationwide, from February 2012 to February 2013. This makes the importance of analyzing true value more important than ever.

Investors are more numerous which has decreased annual yields and increased the maximum loan-to-value possible. These facts add to the risk of any potential investment. Less yield and higher loan-to-value makes the proposition less appetizing, but still a great investment if analyzed properly.

On top of that, these very same trust deed investors have expressed increased interest in the buying and selling of the real estate asset itself. This fact makes an investor even more willing to assume greater risk because they’re partially analyzing the transaction as if they might be purchasing the property themselves.

Overall, given the increased risk, private money financing is still readily available for quality transactions nationwide. Expect a more careful analysis of each potential transaction though. Knowing this can help borrowers and brokers alike in packaging their transaction for investor approval.

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