Selling these programs goes beyond simply highlighting their features. Mortgage companies offer similar products, so the key lies in selling the benefits rather than the features. By helping to build and sell new homes, or refurbish older ones, mortgage originators not only support real estate agents, builders and future homeowners but also reap the benefits of increased business.

Builder enticements

Construction-to-permanent loans feature two distinct phases: the construction phase and the permanent phase, providing borrowers the ability to lock in a long-term interest rate at the time of application. What sets these programs apart is their flexibility.

Borrowers have the option, depending upon the lender, to float their rate (if it’s lower than the rate initially offered) to the current market rate prior to the completion of construction. This means that the permanent rate may differ from the one when the transaction first occurred. This helps to safeguard borrowers against rising interest rates and ensures they benefit from the most favorable market conditions.

Why are these programs so crucial in today’s market? For builders, they offer a range of benefits that can help boost sales, reduce risk and improve cash flow. With construction-to-permanent loans, even if a borrower no longer qualifies at the completion of construction, the builder still receives full payment from the lender. In a market where presold homes are turning into spec homes for various reasons (such as rising interest rates or changes in a borrower’s employment status), these loan programs act as a protective shield for builders, keeping them from being stuck with unsold inventory and saving them from financial losses.

Furthermore, these loan programs improve cash flow for builders. With commercial credit lines becoming more expensive and financial institutions tightening their credit requirements, many builders face challenges in financing their projects. Construction-to-permanent loans can eliminate these hurdles, enabling builders to cover overhead costs and realize profits during the construction phase. By closing the permanent loan upfront, builders are assured of being paid their contract price in full, even in the event of borrower default.

Financial safeguards

Mortgage originators can also reap significant benefits from these loan programs. They can eliminate buyer fallout caused by rising interest rates, loss of employment or changes in credit ratings. This not only safeguards the originator’s commissions but also helps to ensure a smoother transaction for all parties involved.

These loan programs offer flexibility in how builders can use their credit lines. By freeing up credit that was previously tied to construction projects, builders can allocate funds toward company expansion, land acquisition or even the development of spec homes. This newfound freedom allows builders to maximize their growth potential and take advantage of market opportunities.

In addition, these loan programs simplify the builder review and acceptance process. Financial statements and personal credit reports are not required, making it easier for builders to access financing without extensive documentation. Even properties initially intended as spec homes can be seamlessly switched to construction-to-permanent programs upon receiving a buyer’s contract.

Revitalize properties

Another solution that has gained traction in the current real estate climate are renovation loans. These are purchase programs that can give buyers the opportunity to transform a stagnant property into their dream home. These loans allow buyers to see the potential in a property and offer them the option to address outdated features, finish basements, add square footage, or even tear down and build something entirely new.

One big plus for these programs is that they can be used for home improvement projects in conjunction with the purchase of a home, making it an invaluable sales tool for Realtors, regardless of their focus as a sales agent or a listing agent. The median age of homes in the U.S. is 44 years, according to census data. Many of these properties require upgrades, repairs or modernization.

Renovation loans can be used to rejuvenate these tired fixer-uppers that might need more than a fresh coat of paint. Buyers often identify the changes they wish to make but struggle to finance them after the purchase. These loans resolve the issue by providing the necessary funding upfront.

Mortgage originators can close more loans by helping buyers understand that, with a renovation loan, they won’t need to worry about paying out of pocket for the upgrades. The lender bases the loan and downpayment on the total cost or finished value of the property. This means that buyers can combine the cost of renovations with their permanent mortgage, resulting in one loan and one closing. Luxury properties are also eligible for these programs, which do not adhere to conventional loan limits.

Custom preferences

By embracing construction-to-permanent and renovation loans, mortgage professionals can help Realtors increase their sales and reduce buyer fallout that results from the inability to find a house that meets a client’s requirements. For example, if buyers want a finished basement in their new home, they may be limited to listings that already have this feature. A renovation loan allows them to purchase a home with an unfinished basement and have the ability to finish it according to their preferences, with minimal additional cash outlay.

Moreover, these loans can help to shorten the overall house-hunting time frame, which benefits both buyers and Realtors. With less time spent searching for a house that meets all the criteria, Realtors can focus on obtaining more listings or finding additional buyers.

Construction and renovation loans can help to reduce or eliminate buyer-seller negotiations that may arise from home inspections. These typically occur after the sales contract has been finalized, and any issues discovered during the inspection may lead to further negotiations. Even if the seller agrees to make the required repairs, it still takes time for them to obtain bids and complete the work.

In some cases, warranties on repairs may not transfer to the buyer, resulting in additional costs. By utilizing these loans, buyers can include the necessary expenses in their loan, eliminating the need for separate negotiations and streamlining the closing process.

Lastly, these loans provide a financing option for buyers interested in teardown projects. Some buyers may wish to purchase a property with the intention of completely razing it and building a new home. Traditionally, this would require multiple financing transactions. Today, however, buyers can simplify the process by completing all necessary financing with a single loan and closing.

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These loan programs are invaluable tools for mortgage originators in the current market. By understanding the benefits they offer to builders, borrowers and yourself, you can differentiate yourself in the market and position yourself for success. ●

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The result is a relatively new breed of real estate: condo hotels or condotels — an incredibly lucrative business opportunity for investors and developers alike. What is a condotel and how does it differ from the traditional condominium?

“Navigating the intricacies of condotel financing requires a strategic approach that includes consideration of different financing options, property locations, management companies and local laws.”

When it comes to real estate investments, two of the most popular options that come to mind today are condos and condotels. While each offer attractive investment opportunities and give owners the freedom to live in a unit or rent it out, there are important differences for mortgage originators to understand before delving into the world of condotel financing.

Unique characteristics

A condotel is essentially a condominium that operates as a hotel. It is typically a five-star complex with hotel-specific infrastructure such as restaurants, bars, spas, beauty salons, swimming pools and conference rooms. Like hotels, condotels are managed by an operator, but some if not all units are owned by individuals rather than the management company.

Investors do not buy blocks of shares but separate units — studios or apartments with several rooms and a kitchen, which can be used as temporary accommodations or rented out. Condotels are often operated by qualified managers under a single brand — including chains like Four Seasons, Hyatt and Hilton.

In addition to owning their units, condotel owners benefit from the provision of hotel services such as housekeeping, maintenance and rental management. In a condominium building, on the other hand, the unit owners collectively manage the property through a homeowners association.

Since condominiums are viewed as residential properties, they can be financed more easily with traditional mortgages. Financing a condotel, however, is more challenging because lenders often classify them as commercial properties. This requires an alternative option such as a commercial loan or special-purpose program.

Owners of condotel units are subject to restrictions on how long they can reside in the complex. The management contract specifies the amount of time the owner may stay at the property. This is usually about four weeks per year. The rest of the time, the units are rented out.

Preferred destinations

Combining the features of a hotel and a condominium, condotels have become a preferred option among people who seek a hotel-like experience along with the comfort and privacy of a home. The first condotels appeared in Miami in the 1980s.

Condotel owners can benefit from excellent rental yields as well as capital appreciation. Because condotels are often found in prime tourist destinations, such as beachfront or downtown areas, these desirable locations tend to experience high demand, which can drive up property values over time. Furthermore, condotels offer a hassle-free investment option for those wishing to enter the real estate market without taking on property management responsibilities.

For a private investor, buying a condotel unit is generally a low-risk investment. These types of properties tend to be high quality and in high demand. Often, all of the apartments are sold out before the construction of the building is complete. The hospitality chain that owns the condotel controls compliance with all standards during construction, and it ensures that all necessary documents are certified by legal and financial organizations.

Financing intricacies

Condotel loans function similarly to traditional mortgages, but there are a few key differences to consider. Lenders evaluate the property’s financial performance, occupancy rates and the management company’s track record before approving a loan.

Borrowers may need to meet specific requirements such as higher credit scores and downpayments (20% to 30% of the purchase price). This is due to perceived risks associated with condotel investments. Condotel borrowers may face higher interest rates or different terms and conditions (e.g., a condotel unit must be managed by an approved hotel management company).

When it comes to choosing the right type of loan for condotel financing, borrowers have several options, but nonqualified mortgages (non-QM) provide the most options and flexibility. Non-QM loans cannot be purchased by the government-sponsored enterprises or federal agencies.

One popular non-QM choice is the debt-service-coverage ratio (DSCR) loan. With these programs, lenders evaluate the property’s income potential to determine the borrower’s ability to repay the loan. This is particularly beneficial for condotel buyers who intend to generate rental income from their property.

Another option is the bank-statement loan program. This allows borrowers to qualify for a mortgage by using their bank statements as proof of income, making it ideal for self-employed individuals or those with unconventional sources of income. This flexibility can be especially helpful for condotel buyers who may have unique financial situations.

Profit-and-loss mortgages can also be advantageous for condotel financing, especially for individuals with diverse income streams. These loans are designed for borrowers who own a business or multiple investment properties. Lenders analyze the borrower’s profit-and-loss statements to determine their income stability and ability to repay the loan.

Industry network

While condotel loans offer a range of benefits, they also come with their fair share of challenges. One of the primary challenges is finding a lender that specializes in condotel financing.

Unlike conventional financing, condotel loans have limited availability in the mortgage market. Mortgage brokers with a strong industry network can help clients identify lenders that specialize in this niche market and effectively navigate the complex landscape.

Condotel loans often carry higher risks for lenders compared to conventional residential mortgages. As a result, lenders tend to impose stricter requirements and be more cautious when underwriting these loans. Determining the value of a condotel can also be challenging due to the property’s dual nature as a residential unit and a commercial establishment.

Accurate appraisals must consider rental-income potential, projected occupancy rates and revenue streams. Mortgage brokers should work with experienced appraisers who are authorized to evaluate condotel properties, enabling borrowers to obtain a fair and accurate appraisal that is essential for loan approval.

Condotel financing requires an understanding of the unique business model underlying these properties. This includes analysis of the revenue potential, vacancy rates, resort management fees and the overall success of the property’s rental program. Prior experience and knowledge in this area is instrumental in securing favorable financing terms.

Thorough research

Navigating the intricacies of condotel financing requires a strategic approach that includes consideration of different financing options, property locations, management companies and local laws. The various non-QM financing options available should be thoroughly researched and evaluated.

It should be noted that different lenders will have specific criteria for financing condotel properties. By considering various options, you can identify lenders that specialize in condotel financing and are willing to work with such buyers.

Condotels located in popular tourist destinations, business centers, transportation hubs or areas experiencing rapid construction activity are more likely to attract buyers and vacationers, thereby generating higher returns. Lenders consider the investment potential of the property when determining the financing terms and conditions. Locations with a stable and growing real estate market should also be considered. This reduces the risk of property depreciation and loan default.

Efficient property management is essential for maximizing returns on condotel investments. Strong property management ensures proper maintenance, marketing and guest services, leading to higher occupancy rates and increased rental income.

Condotels, with their unique characteristics, may be subject to specific legal considerations. These include zoning and land-use regulations, licenses and permits, tax and insurance implications, and condo association rules such as restrictions on rentals or operational limitations. They may also include requirements related to various aspects of the financing process, such as downpayments or interest rates. Since all of these regulations and requirements can vary from one jurisdiction to another, it’s important to know the local laws.

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As the real estate landscape continues to evolve, the condotel phenomenon offers a unique blend of luxury, convenience and profitability. For those willing to embrace the challenges and complexities, condotels can open the door to a new and lucrative dimension of real estate investing.

With the right knowledge and a strategic approach, mortgage brokers can turn their clients’ dreams of owning a fully serviced accommodation with the potential for high rental yields into a reality. Equip your clients with the information and strategies outlined here to help them embark on a journey that could redefine their real estate portfolio and financial future. ●

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In Episode 025 of the Scotsman Guide Author Showcase, Carl White interviews Joseph M. Miller of Partner Valuation Advisors about his article, “Retail is Proving Resilient,” in the December 2023 issue of Scotsman Guide Commercial Edition.

Joseph M. Miller is a managing director at Partner Valuation Advisors and serves as national practice lead of the company’s retail valuation practice. He has more than a decade of experience and has appraised some of the most prominent commercial properties in the U.S. He was named a Retail Influencer by GlobeSt.com and is sought out as a top valuation expert.

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“Given these occupancy challenges, investors are interested in redeveloping malls into other uses, such as medical offices or multifamily communities.”

The slowdown of the commercial real estate market has affected all asset classes, but the retail sector — which faced its own difficulties prior to the period of rising interest rates and return-to-work challenges — is somewhat less impacted. Unlike industrial and multifamily properties, retail did not see significant pricing increases over the past few years. Capital market struggles and capitalization rate increases are being felt across all property types, but the recent changes in retail property values are not as dramatic when compared to other sectors.

Value by subsector

Across the country, there are varying levels of interest in retail properties based on size, quality and tenancy. Single-tenant net-lease properties with long remaining lease terms continue to be the most sought-after assets.

This property type typically attracts a large pool of potential buyers, which drives pricing upward. Net-lease properties with strong credit tenants and remaining lease terms of 10 years or more are seen by many investors as being similar to a corporate bond. The shorter the lease term or the higher the risk associated with rent payments (tenant credit), the less interest the property will gather in the marketplace, pushing pricing downward.

Overall, the second most-desirable retail property type is the grocery-anchored community shopping center. Many institutional investors view grocery-anchored centers as a stable investment opportunity. Typically, grocers have performed well over the years and have been relatively “internet-proof.” Many tenants in grocery-anchored centers strategically lease these spaces due to the increased customer traffic that a grocery store will drive to a center. While grocery-anchored centers are judged as a positive, the specific grocer in place affects this desirability. Many investors still view Whole Foods and some large, national grocers as value-add opportunities, while local grocers and other national chains are not viewed as strong in-place tenants.

Power centers and lifestyle centers can be attractive to investors at higher capitalization rates. These are large outdoor shopping complexes. Power centers typically have three or more big-box stores, while lifestyle centers house upscale shopping, restaurant and fitness options in promenade-style spaces. The main driver of value for a power center is the tenant mix. If there is a good blend of national and local tenants with internet-proof offerings, the center will likely command decent investor interest. Many of these properties have a large entertainment focus (movie theaters, experiential offerings or restaurants) that can create a more attractive tenant mix. The most significant concern for these centers is the occupancy cost that a tenant can bear during their lease term.

As real estate operating costs (e.g., insurance and taxes) continue to rise, tenants are hyperfocused on industry-average occupancy costs, local occupancy cost ratios and brand occupancy cost ratios. If occupancy costs at one location are considerably higher than average, many tenants will look for cost-effective alternatives in the market. As tenants continue to focus on operational expenses, landlords must offer upper-level amenities and incentives to retain existing tenants and attract new ones.

Mortgage environment

Toward the lower end of the range in value for retail properties are smaller neighborhood centers with local tenants, as well as Class C and lower regional malls. Many of these centers have seen continuous declines in occupancy rates and tenant quality, which can result in questions of highest and best use for the center, as well as its long-term viability.

Overall, debt remains available for retail properties, but commercial mortgage lenders are taking a harder look at asset quality, tenant quality and cash-flow stability before financing a transaction. Lenders are still willing to finance upper-tier retail assets and single-tenant net-lease properties with relatively long remaining lease terms.

These types of properties are viewed as strong investments and are less risky than many other retail assets. While lenders are willing to place debt on these assets, property owners are dealing with lower loan-to-value (LTV) ratios compared to prior years. On top of the LTV constraints, the debt-service-coverage ratio may also impede the lending decision, as many borrowers are experiencing lower levels of cash flow than in previous years.

For less desirable assets, traditional financing remains difficult. Lenders are often concerned with the best uses of these properties and their future viability. Owners of these assets may seek alternative financing from private lenders, hard money lenders or mezzanine lenders. The short-term funding offered by a nontraditional lender allows the property to be repositioned or stabilized so that traditional long-term financing can eventually be secured.

Occupancy challenges

As a result of market disruption caused by e-commerce, malls continue to struggle. With brick-and-mortar retail sales permanently impacted by online competition, retailers must reduce expenses to keep physical stores open.

Since they’re among the most expensive retail environments for tenants, malls must reduce rents to remain competitive. Consumer sales are not likely to increase dramatically, so rents must trend down. This leaves mall owners to choose between lower occupancy and more income, or higher occupancy and less income as compared to prior years.

Given these occupancy challenges, investors are interested in redeveloping malls into other uses, such as medical offices or multifamily communities. Municipalities are beginning to work with developers to help loosen the restrictive covenants that have historically hindered redevelopment efforts, resulting in success for some properties. But adaptive reuse can be more costly than ground-up construction, particularly in the case of a retail-to-multifamily conversion.

Vacancy issues, of course, are not limited to malls. With the closure of businesses like Bed Bath and Beyond, vacancies plague owners of big-box retail centers everywhere. Gyms and other types of tenants have absorbed some of these vacancies, and in some markets, landlords have attracted community colleges or churches to replace the former anchor tenants. Where demographics support them, experiential tenants such as golf simulators may lease large spaces — a boon for landlords since these ventures not only solve the vacancy problem but attract valuable foot traffic to other parts of the center.

If they’re unable to attract a replacement tenant, many landlords will have to redevelop these big-box spaces and create smaller spaces. Multiple small spaces will bring in higher rents than one large space, but converting a big-box space into in-line suites requires significant capital investment.

Informed decisions

To undertake any of these options, retail property owners must determine whether a project offers sufficient return on capital. To inform their decision, they may request a market study, performed by a valuation consultant with retail expertise and knowledge of the local market.

A market study can inform income projections for the proposed use by providing an analysis of supply and demand within the local market. Owners may also engage with a qualified engineering consultant to perform a feasibility study. This includes information about the site and its infrastructure, potential improvements, a conceptual layout, permitting requirements and costs, and an estimate of construction costs.

If owners can overcome the obstacles to redevelopment, the overall inventory of retail square footage will decrease to a volume that might be more appropriate for today’s retail industry, where online sales compete with traditional stores. Less inventory will allow for better absorption of space, providing a potential upside for the retail sector in the long term. ●

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In Episode 021 of the Scotsman Guide Author Showcase, Carl White interviews Brian Decker of Modern Lending about his article, “Take the Jolt Out of Power Bills,” in the November 2023 issue of Scotsman Guide Residential Edition.

Brian Decker is CEO of Modern Lending, a mortgage bank operating in 15 states with locations in California, Tennessee and Arizona. In 2022, Decker stepped into a full-time role as CEO of Modern Lending. That same year, he also founded Soar Energy with HGTV stars Tarek and Heather El Moussa, as well as United Wholesale Lending CEO Shelby Elias.

The post Author Showcase: Brian Decker, Modern Lending appeared first on Scotsman Guide.

In Episode 020 of the Scotsman Guide Author Showcase, Carl White interviews Tom Davis of Deephaven Mortgage about his article, “Invest in Your Future” in the October 2023 issue of Scotsman Guide Residential Edition.

Tom Davis is chief sales officer of non-QM lender Deephaven Mortgage. He joined Deephaven in 2022 and has more than 20 years of experience helping lending partners with their non-QM and agency needs. He holds a bachelor’s degree from Florida Atlantic University, where he double majored in finance and management. Deephaven was founded in 2012 and led the formation and development of the non-QM market. 

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Nonqualified mortgage (non-QM) programs have gained popularity as a feasible choice for borrowers with distinct financial circumstances. Non-QM loans are quality loans that cannot be purchased by the government-sponsored enterprises or the federal government. There’s a surprising number of non-QM loan types available that can help potential borrowers who are in good financial situations but may not have a W-2 income.

These mortgages can unlock opportunities for clients to purchase a home and they offer adaptability in an ever-changing lending environment. Mortgage originators can build their business and meet their clients’ needs if they’re familiar with these products.

Decisive advantages

One of the key advantages of non-QM loans is the flexibility they offer in underwriting guidelines. Unlike traditional loans, non-QM programs take a more holistic approach to evaluating a borrower’s creditworthiness. These loans consider various factors beyond conventional metrics. This flexibility allows borrowers with nontraditional income sources or irregular employment histories to secure financing.

Non-QM lenders understand that financial profiles can be complex, so they cater to borrowers who don’t fit the rigid requirements of conventional loans. Self-employed individuals, freelancers and those with income streams that aren’t documented on a W-2 form can benefit from this flexibility. Non-QM loans consider bank statements, tax returns and other documentation that provide a more accurate representation of a borrower’s ability to repay a mortgage.

Non-QM loan programs revolutionize the lending landscape by offering expanded options that cater to a borrower’s diverse needs. These programs provide a broader range of products specifically tailored to meet the requirements of individuals who may not qualify for a traditional loan. The inherent flexibility of non-QM loans allows borrowers to explore alternative financing solutions that align with their unique circumstances.

Additionally, non-QM loans often have less stringent documentation requirements. While still adhering to responsible lending practices, these programs may accept alternative forms of income verification, making it easier for self-employed individuals or those with irregular income streams to access homeownership.

Compared to conventional mortgages, non-QM loan programs often feature a faster approval process. Non-QM lenders focus more on the borrower’s ability to repay and the collateral value rather than conforming to rigid guidelines. With less emphasis on extensive documentation and a more streamlined evaluation process, non-QM loans can be approved more quickly, enabling borrowers to secure financing promptly.

This accelerated approval timeline is especially beneficial in competitive real estate markets or when time is of the essence. Borrowers who may have missed out on a property due to a lengthy approval process with a traditional lender can turn to a non-QM loan for a quicker resolution.

Versatile options

One of the strengths of these loan programs is the versatility to offer a number of options for varying situations. A bank-statement loan, for instance, can be offered to a client who can show a set amount of income over 12 to 24 months, giving them the ability to purchase a home without having a traditional W-2 income.

Let’s say a self-employed applicant wants to purchase a home. The person owns multiple commercial properties with negative business-tax-return income and cash flow due to deferred maintenance on the properties and a lack of rental income tied to COVID-19 restrictions. But the brick-and-mortar business itself has more than sufficient revenue now to pay for the mortgage. A lender could approve a loan for this business owner by averaging their monthly deposits and factoring in a 50% expense ratio, thereby completing the financing for the purchase of a primary residence without the need for personal or business tax returns.

Another non-QM program is the asset depletion loan. If a borrower faces difficulty in qualifying for a traditional mortgage due to limited income, he or she could qualify if they have substantial assets — such as investments, savings or retirement funds. In these situations, an asset depletion mortgage program could come to their rescue. Instead of solely relying on income, the lender factors in the value of assets and their potential to generate income over time.

By incorporating both profit-and-loss statements and 1099 miscellaneous income forms, self-employed individuals or independent contractors can address the obstacle of lacking a steady monthly salary. These individuals can leverage their profit-and-loss statements to prove their financial stability and become eligible for a loan. Instead of relying solely on monthly income, the lender can consider the average annual reported income over 12 or 24 months to assess their repayment capability. This approach provides a more accurate picture of the client’s financial standing and helps them qualify for the mortgage they need.

Non-QM lenders offer a second chance for borrowers with past credit issues. While conventional loans may be out of reach for those with previous bankruptcies, foreclosures or recent credit events, non-QM lenders evaluate credit history within a broader context. They account for extenuating circumstances and the borrower’s ability to manage their finances since the negative event occurred.

This aspect of non-QM lending provides an opportunity for responsible borrowers who have rebounded from financial setbacks to obtain financing. It acknowledges the potential for financial recovery and offers a path to homeownership that would otherwise be inaccessible.

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Non-QM loan programs offer a host of advantages that empower borrowers who face unique financial situations. The flexibility in underwriting guidelines, expanded loan options, faster approval processes and second-chance opportunities often make non-QM loans valuable tools for those who don’t fit the traditional lending mold. ●

The post These Loans Should Take Center Stage appeared first on Scotsman Guide.

Whether the destination is a tourist’s dream, a metropolitan area on the rise or a country experiencing major growth, commercial mortgage brokers need to know that leveraging the assistance of a private lender can give motivated clients an edge in affluent markets around the globe. In fact, it’s precisely the in-demand nature of these markets that makes private lending an excellent option for investors, rather than a backup option if a traditional lender falls through.

“For even the wealthiest borrowers, using one’s own money to fund a real estate purchase is risky. They would rather invest their money in other ways.”

Direct private lenders bring three distinct advantages to the table in competitive, wealthy real estate markets. These include speed to closing, flexible deal terms and fewer regulatory controls. Opportunities in affluent real estate markets can move fast. This is influenced by the popularity of the market (i.e., the sheer number of investors who want to plant their flag) and the scarcity of property in some smaller locations.

When there’s a long list of interested buyers putting together offers, becoming one of the first who can get to the table and close the deal is of utmost importance. Although traditional lenders may have few qualms about approving a loan for property in a popular, high-end locale, they still need months to work through their own red tape. Private lenders, however, can meet this need for speed with the resources and skill set to close in as little as a few days.

Private partners

Even in hot real estate markets, traditional lenders may only be willing to fund a certain deal type. These deals need to meet the bank’s strict internal criteria for use, inspections and other quotas.

Such internal criteria may often rule out opportunities to acquire properties such as raw land — real estate that’s extremely valuable within the context of an affluent market but will not pass muster with a traditional lender that has a blanket policy against land loans. This is especially true in international markets, where traditional lenders will rarely work with borrowers on any type of property, let alone raw land.

Private lenders, on the other hand, have flexibility built into their business models. They can take a step back and examine the merits of a deal in a way that traditional lenders may not be able to. Private lenders will take into account the quality and affluence of the market when evaluating a potential opportunity. Plus, they don’t have arbitrary, internal policy-driven limits that may fund a loan for one borrower and not for another. Simply put, the chances of obtaining the funding needed are higher when partnering with a private lender.

For even the wealthiest borrowers, using one’s own money to fund a real estate purchase is risky. They would rather invest their money in other ways. Instead, they go to private lenders for bridge loans to fund their real estate deals while they pursue other funding sources. Private loans give borrowers confidence that they’re making smart investments with a layer of protection.

On top of that, specialized private lenders are highly experienced in navigating the real estate laws in many foreign countries. Borrowers thus get both financial and regulatory security when they seek funding from these private lenders. This combination, including the faster approval processes when compared to traditional lenders that take months to decide, makes private lenders the go-to sources for investors planning to enter foreign markets.

Caribbean islands

Wealthy foreign real estate markets present a multitude of opportunities for mortgage brokers and their clients. Some of the most breathtaking landscapes — and most coveted real estate — can be found throughout the Caribbean.

Driven by the region’s pristine location and the exclusivity created by its wealthy enclaves, Caribbean countries have vibrant economies that are fueled by the global tourism industry. The islands offer limited inventories of real estate due to their sizes, resulting in premium prices that can reach seven or eight figures for the best locations. This growth isn’t expected to slow down anytime soon either.

One example is the French territory of Saint Barthelemy, better known as St. Barts. Property ownership opportunities are highly sought after on this small island that covers about 10 square miles. The limited space and unique surroundings have fueled the interests of international buyers, driving up the premiums that investors are willing to pay for their own piece of paradise. Villas can cost more than $5 million throughout the island, with the most exclusive beachfront properties easily fetching quadruple the price.

Another popular Caribbean destination is St. Maarten, an independent constituent country with ties to the Netherlands. At just over 13 square miles, St. Maarten presents many of the same opportunities and challenges as St. Barts when it comes to exclusivity and availability. The island continues to attract many of the world’s wealthiest people. This presents an opportunity for both residential and commercial investments. For instance, some Guana Bay villas with ocean views can cost as little as $1 million, whereas luxury cliffside compounds can go for $20 million.

The Cayman Islands, a British overseas territory, boasts one of the highest standards of living in the Caribbean. Developed and raw-land investment opportunities abound in this trio of islands. It’s one of the fastest-moving real estate markets in the Caribbean and a corporate magnet due to its status as a global tax haven. The country levies no income tax, capital gains tax or corporate tax. The largest number of offshore companies in the Caribbean region are registered here.

South America

Investment opportunities in several South American countries also continue to attract attention. These include Brazil, where high-end properties in major cities such as Sao Paulo and Rio de Janeiro are multiplying fast, with a particular interest in luxury apartments in both cities.

For instance, the luxury and ultra-luxury apartment sectors in Sao Paulo expanded quickly in the first nine months of 2021, with sales more than doubling compared to the same period in 2020. In Rio de Janeiro, the luxury home market has grown by 200% in the past five years. Combined with a relatively competitive market and an appetite for new construction, these growing cities are attracting investors from around the world.

Although Peru isn’t the wealthiest country in South America, its real estate market has been on the rise. In 2021, new home sales in the Peruvian capital of Lima were up 44% year over year. With a population of 11 million, Lima is among the largest cities in the Americas, and the demand for residential and commercial real estate continues to grow as a result. The nation has a growing population and a housing deficit that can benefit from foreign investment. Peruvian legislation has allowed for infusions of foreign capital to help fuel growth.

Northern neighbor

While Canada might not be the first country that comes to mind when thinking of real estate investment hot spots, our neighbors to the north have proven to be a popular location for cross-border buying sprees. The country’s high standards of living, economic diversity and stable political climate have attracted new residents and flourishing business opportunities.

Cities such as Toronto and Vancouver continue to grow, creating opportunities for investors to build new housing and commercial properties. Sales of all types of housing in Vancouver — a hotbed for tourism, the entertainment industry and the technology industry — rose by 23% year over year in August 2023.

Rents for a one-bedroom apartment in Toronto, the wealthiest city in Canada as measured by the number of high net worth individuals, have grown by 40% in recent years. Additionally, Canada does not have residency or citizenship requirements to own property, making it easy for U.S. investors to access the market.

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Affluent markets around the world offer opportunities for commercial mortgage brokers to help clients expand their business operations. Private capital can serve as a game-changing entry point into these exclusive investment arenas. In a competitive land and property market, the flexibility and speed that a private lender brings to the table can make all the difference between getting the deal done and missing the boat. ●

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Private energy-efficient mortgages, as well as Fannie Mae’s HomeStyle Energy and Freddie Mac’s GreenChoice mortgages, are reshaping this landscape. These options will revolutionize how buyers purchase their dream homes while also fulfilling their aspirations for eco-friendly living.

Mortgage originators will want to understand these options and relay these choices to clients, especially younger borrowers who may be prioritizing a reduction in their carbon footprint. To illustrate the transformative power of these programs, let’s delve into a real-life example.

Modern expectations

Across the U.S., prospective homebuyers often face a critical dilemma: the challenge of finding an available home within their budget that aligns with their modern expectations. A significant portion of the nation’s owner-occupied housing stock (about 75%) is at least 20 years old, while a startling 35% was built more than 50 years ago, according to census data.

Millennial homebuyers, the age group that’s consistently influencing the market’s direction, are increasingly seeking modern amenities and energy-efficient features. Yet after putting down a substantial downpayment, they are left financially strained and unable to undertake necessary upgrades.

One of the options in the past has been a form of financing called Property Assessed Clean Energy (PACE). These loans allow property owners to make upgrades — including solar panels, lighting systems and water-saving tools — that are repaid over time through assessments that are in addition to property tax bills.

There are disadvantages to PACE financing. For one, the owner may experience difficulty selling the property in the future since the debt is tied to the property rather than the borrower. Second, lenders may be reluctant to accept these homes as collateral since their claims may be subordinated to the unpaid assessment should the property go into foreclosure. Third, residential PACE programs are currently available in only three states (California, Florida and Missouri).

Fannie and Freddie have developed their own energy-efficient mortgages, the HomeStyle Energy and GreenChoice loans. Another option is a private energy-efficient mortgage that allows a homeowner to allocate up to 15% of the purchase price to eco-friendly improvements. These enhancements can encompass a spectrum of upgrades, ranging from energy-efficient appliances and solar systems to advanced heating and cooling solutions and eco-conscious landscapes.

Tangible example

To grasp the impact of a private energy- efficient mortgage product, consider the following example. Let’s assume a homebuyer purchases a $600,000 home with a 5% downpayment. They might spend $10,000 on a credit card for new appliances in the first year. Additionally, they anticipate an electric bill of roughly $350 per month.

In this scenario, their overall financial picture would include $4,700 a month for principal, interest, taxes, homeowners insurance and mortgage insurance. The credit card payment for the appliances (at a 23% interest rate) would add $300 a month. Including the $350 electric bill, this equates to a total monthly bill of $5,350. But by utilizing a private energy-efficient mortgage product, the expenses could be dramatically altered.

If the homeowner opts for an energy-efficient mortgage to install solar panels and new appliances, the monthly bill could total $4,950 for principal, interest, taxes and insurance. That’s an additional $250 per month compared to the previous example. But the homeowner would eliminate $300 a month in credit card debt while the improvements could reduce their power bill to as little as $40 a month.

Under this scenario, the combined monthly commitment would total $4,990. With a small increase in their monthly mortgage payment, the homeowner reaps substantial benefits. In this example, the energy-efficient mortgage product offers potential savings of up to $360 each month.

Path forward

This new approach is arriving in a housing market that needs new tools. It showcases how a relatively modest increase in the monthly mortgage payment can lead to substantial savings in other areas. The incorporation of energy-efficient upgrades not only improves the environmental impact of the home but also has a direct positive effect on the homeowner’s financial picture.

Electric bills are expected to rise by an average of 10% this year and possibly another 10% next year. The eco-conscious approach offers a beacon of hope for many. It illuminates a path toward sustainable homeownership while simultaneously freeing homeowners from the burdens of mounting credit card debt and escalating utility costs.

This new sustainability-driven approach is more than a financial instrument — it’s an embodiment of progress. By merging affordability, sustainability and practicality, this innovative solution exemplifies how visionary thinking and adaptability can drive transformation in real estate finance.

Energy-efficient mortgage products of all kinds transcend traditional boundaries in the real estate sector. They offer not only a tangible way to upgrade homes but also a means for creating a more sustainable future — one that is within reach for homeowners from all walks of life. ●

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A report from Black Knight showed that in June 2023, homeowners with a mortgage had $10.5 trillion in tappable home equity, or the amount of equity a homeowner can access while still retaining a 20% share. This number has grown significantly since February 2020, at the start of the COVID-19 pandemic, when U.S. homeowners had roughly $6 trillion in tappable equity.

“Collaborating with companies that specialize in home equity investments could open up new avenues for diversified financial services.”

In recent years, a new home equity product has emerged that helps homeowners who might not otherwise qualify for traditional financing options. It’s called a home equity investment (HEI). This type of alternative financing helps homeowners access cash without monthly payments.

Future value

A home equity investment provides homeowners with a lump sum of cash in exchange for a share of their home’s future value. Homeowners can access their home equity without selling their property or adding to their monthly payments. Some HEIs also don’t have the restrictive qualification standards of traditional loans, such as minimum credit scores or monthly income requirements.

For example, about 1.5 million home equity lines of credit (HELOCs) are originated annually, but most lenders require a FICO score of at least 620. Comparatively speaking, few companies offer the nontraditional HEI product and partner with homeowners throughout the term of the investment. It’s a partnership that benefits both the homeowner and the investor: The more the home value goes up, the more each of them benefits.

In addition, home equity investments aren’t installment loans that require a monthly payment. They don’t affect a homeowner’s current mortgage. This means that a homeowner can keep their existing mortgage and not worry about selling their home or refinancing right away.

There are a few requirements for homeowners to meet, which vary across HEI providers, but these typically include a minimum amount of equity in the home and limits on the type of property serving as collateral. Homeowners can use the funds to better their lives in many ways — such as paying off debt, saving for retirement or renovating their home.

Homeowners have recently turned to home equity investments because of their significant levels of equity, rising interest rates and existing 2% to 4% low-rate mortgages. In addition, the lack of homes for sale makes current homeowners less inclined to sell, leading to a well-known phenomenon known as the lock-in effect.

Lock-in effect

The lock-in effect is a trend in which homeowners feel stuck in their existing properties. This effect is being driven by a combination of factors: borrowers with historically low-rate mortgages, the rapid increase in interest rates over the past two years and the lack of available inventory to choose from. According to the National Association of Realtors, existing home sales in July 2023 were 17% lower compared to the same period last year.

Rising mortgage rates have certainly caused homeowners to feel locked into their homes and existing low-rate loans. The Fed has raised benchmark rates at the fastest pace in history — 11 times since March 2022. For many homeowners, it doesn’t make financial sense to give up their favorable rate for a higher one.

Even if homeowners might normally move for new jobs, growing families or location preferences, they’re frequently choosing to stay put. Not only is the rapid increase in interest rates fueling these decisions, but the lack of inventory has driven up home prices. If a homeowner does move, not only is their mortgage rate likely to go up but so is the cost of their new home.

Significant advantages

First and foremost, home equity investments provide homeowners with a way to access valuable cash. Their equity, which accumulates over time as they make mortgage payments and property values increase, can be accessed through an HEI without the burden of monthly payments, which sets this option apart from a traditional loan.

Many home equity investment companies take a more flexible approach to credit scores. While they are often required (since the HEI is a risk-based product), some providers don’t have a minimum credit score. This means that homeowners who might not otherwise qualify for a HELOC, home equity loan or cash-out refinance may be eligible for an HEI. Many homeowners use their cash to pay off high-interest debt and repair their credit scores.

Oftentimes, income statements are not required to prequalify for a home equity investment since it is not an installment loan. This makes it a great option for homeowners who may be in between jobs, self-employed or retired.

Additionally, home equity investments typically have no restrictions on how the funds can be used, offering homeowners the freedom to allocate proceeds accordingly. Whether it’s for home improvements, debt payoffs, educational expenses or any other financial goals, the choice is entirely theirs.

Leveraging the equity that homeowners currently have, in exchange for a lump sum of cash, will reduce the amount of equity they’ll have in their homes. And because the borrower is sharing a portion of their home’s future value with an investor, this reduces the amount of equity they’ll collect in the long run.

Finally, HEIs often allow homeowners to repurchase their equity at any point within a specified time frame, which can extend up to 30 years. This feature adds an extra layer of flexibility and control, allowing homeowners to tailor their financial strategy to their changing circumstances.

Partnership opportunities

U.S. home equity is at the highest point it’s ever been, but accessing this wealth is still not easy for many homeowners. Traditional home equity products (including HELOCs, reverse mortgages and cash-out refinances) are not always accessible to homeowners due to stringent qualification criteria.

For homeowners who might not otherwise qualify for a traditional financial product and need to access their home equity, originators should determine whether the homeowner is eligible for a home equity investment. Adding this option to their offerings also presents an opportunity for originators to assist a wider range of clients.

Collaborating with companies that specialize in home equity investments could open up new avenues for diversified financial services. As the demand for alternative home financing continues to grow, mortgage originators may be able to partner with these companies to offer more tailored solutions to homeowners while adapting to the ever-changing financial markets. ●

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