Our Lending Model
Herzer Financial Services originates and services private money real estate loans. Our rates are much higher than most banks and I have been asked many times why a borrower would pay such rates. I find that their reasons fall into three general categories as described below.
The property is not “bankable”: There are several physical and non-physical reasons a property may not qualify for a bank loan. The kitchen may have been torn-out. It may be under construction. It might be encroaching on the neighbor’s property line. It may be more than 25 acres making traditional residential loans very difficult to obtain. There could be any number of title issues such as a “litigation lien” or the City or County may have “red-tagged” the property for some violation. There are many curable physical and non-physical defects that can make a property unbankable. If the property is listed for sale a bank will not lend on it.
The Borrower is not “bankable”: In this era of regulation there are many many reasons a Borrower may not qualify at a bank, especially for loans secured by 1-4 residential units. They may not have filed tax returns or might have judgments outstanding. The borrower may be a Corporation, irrevocable Trust, partnership or other entity. Or the Borrower may have issues with their income or credit, seasoning of assets, income gaps or they may be a foreign national. I had an applicant who had been turned down by a bank because they were receiving money transfers from their parents in Korea. The Borrower may have died and the property is in probate. The Borrower may be an “Accommodator” for a 1031 tax-deferred exchange.
The loan structure or type is not “bankable”: Some loans require multiple properties as collateral, too complicated for a bank. Banks do not like very short-term loans such as bridge loans or “fix and flip” loans. Some banks will do construction loans but require very strong borrowers. Often the Borrower needs/wants to close the loan very quickly, not something a bank can do. Banks typically will not do non-recourse loans or stated income loans.
Many loans have elements of more than one of these categories. For instance our construction loans are often to an LLC that does not have income; the guarantor does not have strong assets or income. But between the builder and his partners they have a strong down payment and prove a history of building homes that sell.
Many of our bridge loans encumber both the “departing” residence and the “replacement” residence and perhaps even a third property. The loan will be repaid upon sale of the departing residence making the whole transaction very short-term.
Our fix and flip loans often must close fast, are short-term, the borrowers are LLC’s, and the guarantor’s show little income. We make the loan because they have a strong down payment, a low LTV, and have demonstrated good rehabbing skills.