Sick of settlement letdowns?

Avoid settlement letdownsA common criticism of private lenders is the regular occurrence of settlement default, where the lender is unable to come up with funds promised. This can happen when the lender doesn’t have a steady flow of cash coming in and is unable to raise the funds necessary to finance the mortgage for the agreed amount.

Usually a private lender will need to raise funds from investors in order to fund the loan. If the lender does not have a steady flow of investor funds coming in or a pool of funding readily available there could be issues when it comes to time to settle. Unfortunately this happens far too often and can leave the borrower high and dry and the project they are borrowing funds for can fall over. Not to mention the time and money wasted on the loan application process.

How to avoid settlement default

If you want to avoid the letdown of settlement default then here’s a few things you can do:

  • Don’t fall for quick settlement claims. Many private lenders will state that they have super fast settlement times, sometimes as little as 24 hours. Usually this is completely unrealistic and used as a marketing ploy. If it sounds to be good to be true…well, you know the rest.
  • Ask about the lenders settlement record. Find out how often loans they have worked on make it to settlement stage. Take a look at case studies and check out testimonials received from respectable brokers or borrowers.
  • Ask where the funding come from. This is a very interesting concept that very few people consider, where does a private lender actually get their money from? Its a good idea to ask who the Lender of Record is? Some lenders will change this on the ultimate loan documentation when a private lender is brokering the transaction to the person writing the cheque. Private Mortgages Australia uses the one vehicle for all its loans. A lot of private lenders use a sophisticated investor networks to underwrite their loan advances. Other private lenders raise funds from wholesale or retail sources with the use of an Australian Financial Services License (‘AFSL’). PMA has received backing from an  independent wholesale funder that has committed to investing up to $100 million to fund our portfolio of registered first mortgage loans.
  • Find out who makes the lending decision? In some cases it is the individual investor that makes the final decision to lend the funds required and will essentially “write the cheque”. This isn’t an ideal situation. Imagine that you are a borrower and you submit a loan to a private lender. Everything seems to be going well, you pay the upfront fees, order the loan documents from the solicitor, but then are taken by complete surprise when your loan application is rejected despite being formally approved. What has occurred is that the loan was approved by the ‘middle man’ but then turned down by the person writing the cheque. Unfortunately this occurs all the time. The smarter alternative is to make sure that the private lender is the one who is making the decisions. This is a safer and more effective situation for the borrower. PMA operates a number of Funds and our Credit Committee makes the lending decision on behalf of the pooled mortgage fund.

If you haven’t already, align yourself with a good private mortgage provider that has a proven track record with finalising settlements which can only be a good thing for you and your clients.

 

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What exactly is a private mortgage?

What exactly is a private mortgage?Originally posted on Mortgage Professional Australia

There seems to be some confusion with brokers about what a private mortgage actually is; so let me set the record straight.

I can understand why there is some misunderstanding with this as the lines can become a little blurred between non-bank, low doc, non-conforming and a mortgage fund.

A private mortgage is quite literally that, a mortgage that is funded via an individual, not a bank or an institution. Private mortgage lending dates back to roman times and is very similar now as it was then, with one-person lending money to another, in other words peer to peer.

In the past many legal firms facilitated private mortgages as they would often have high net worth clients wanting to invest their money, and other clients who wanted to borrow.

While not as many as in the past, there are still a number of legal firms offering private mortgages. It is however more challenging for them now as they are no longer able to act for both the investor and the borrower; this is considered a conflict of interest.

Some brokers call a private mortgage an “asset lend”. This is due to the fact that in the past many private loans would really only focus on the value of the asset being offered as security and while the borrower’s financial situation was noted, it was more to do with the asset than the borrower.

Times have changed and while the asset is still the primary consideration, the client’s financial position and their ability to service and repay the loan are more relevant than in the past. Having said that, paperwork and requirements are still minimal when compared to mainstream loans.

The best way to describe a private mortgage is as a sensible asset lend, meaning relevant questions about the borrower will be asked but there won’t be endless, and often irrelevant, requests for information and documents which often seems to be the case with the banks at the moment.

For the most part private mortgages are non-code, meaning they’re not designed for mums and dads to buy a house. They are typically commercial transactions such as for a business person wanting to raise capital, or a developer wanting to purchase or raise funds on a site. The key is business purpose which is good, as these are just the kind of loans the banks seem to have the most trouble with at the moment and is why private mortgages have become very relevant for brokers.

Private mortgages are typically short term, 12 to 24 months and are designed to provide a fast no fuss solution for a borrower seeking business related capital. For this reason, the borrowers exit strategy is important. This will often be the sale of an asset or a refinance with a mainstream lender following the loan term.

We are often asked if a private mortgage is safe for the borrower, an odd question really when they are the one that is being lent the money. Perhaps this is because some people think private mortgages come from the underworld and non-payment will result in a visit from thug on a Harley Davidson.

This is far from the truth as private mortgage investors are typically professional business people and the loans are documented via a registered mortgage that is prepared by solicitors. The security documents a borrower will sign are much the same as those a bank would produce.

Even though most private mortgages fall outside the code, if a loan does go into default, standard recovery action would be applied. Borrowers can take comfort in the fact they have the same protections with a private mortgage as any other non-code commercial loan.

While not the answer to every loan problem, a private mortgage can be a great way of securing business finance for a client when the banks have either said no, are asking way too many questions, or if quick settlement is needed.

If you haven’t already, align yourself with a good private mortgage provider as this will ultimately mean more options and more options mean more settlements which can only be a good thing for you and your clients.

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How does the private lending process work?

It’s no secret that the banks’ can be slow, with the lending process often taking 6-8 weeks to be completed. Greater flexibility and quicker turnarounds are major reasons borrowers often prefer to work with private lenders when obtaining finance. In a recent survey we found that nearly 50% of brokers had decided to work with a private lender because their client needed fast access to funding. This may be because they have an urgent business opportunity, need to quickly refinance some debt or require an injection of funds so they can finalise a project. Access to quick funding is often the difference between being able to take advantage of an opportunity or missing the boat.

So, how exactly does the private lending process work then?

Private Lending Process

Step 1. Submit application form

The Borrower or Referrer fills in the Quick App Form (found here) which includes details about the business, the individual borrower/s, loan amount, loan purpose and real estate assets and liabilities.

Step 2. We conduct initial assessment

We look at the details provided and see if it is possible for us to offer a loan in the provided circumstances.

Step 3. We issue an Indicative Letter of Offer

We provide the Borrower with and Indicative Letter of Offer which gives the details of how much we are willing to lend, the terms of the loan and the interest rate. If the Borrower decides that the Indicative Letter of Offer is suitable to them then they pay a small assessment fee ($550 to $770 inc. GST depending on complexity) to cover costs for searches that we need to ensure that everything is in order for us to move ahead with the loan.

Step 4. Conduct due diligence

Due diligence involves assessment of the applicant, loan structure, security position and exit strategy. There are a number of documents we need the Borrower to send us  to complete these tasks which are included on this checklist here.

Step 5. Issue Letter of Offer

Once we have conducted all the necessary checks and searches we will then issue a formal Letter of Offer. This includes the final interest rate, expected disbursements at settlement and details of any outstanding conditions to be met prior to settlement (if any).

Step 6. Settlement

Once the Borrower has accepted the Letter of Offer loan documents are prepared and sent to applicant’s solicitor by email. Upon return of the fully executed documents the approval fee, legal costs and prepaid interest are deducted from the loan and the balance can be paid by the next business day, sometimes sooner.

Referrer fees are paid within 24 hours from settlement with no clawbacks.

 

We endeavour to make this process as quick as possible and depending on the complexity of the loan can move from the initial application to settlement in as little as 5 business days – possibly sooner. If your client requires quick turnaround on a loan then make sure you get in touch with Senior Relationship Manager, Shanta Lobo at [email protected] or call 1300 856 683.

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Meet the PMA Team

We have come a long way since we launched PMA five years ago! We’ve grown from a two man band into a company with nine employees and new hires on their way. After receiving $100M in institutional backing earlier in the year we are excited to have the opportunity to further build the business and deliver even better products and service to our clients. Find out a bit more about the wonderful people at PMA and read a little known fact about each of the members of the team. 

Tony Barbone is Managing Director of Private Mortgages Australia

Tony Barbone
Managing Director

Tony began his career as a private lender in 2009 when he started lending money to business borrowers using his own capital and on behalf of high-net-worth investors. Tony now leads the team of professionals at Private Mortgages Australia Pty Ltd arranging short-term finance for business borrowers. Tony’s specialises in Registered First and Second Mortgages and Construction Finance.

Random fact about Tony: He has a double crown 

 

Tim Hart is Director at Private Mortgages Australia

Tim Hart
Director

As Director at Private Mortgages Australia, Tim is responsible for leading the team alongside fellow founder Tony Barbone.

Tim has been a full-time investor since 2006. He has completed a multitude of investments in residential real estate, commercial property and private lending in this time. His web-based software system, Property Investor System, is the most comprehensive of its kind in Australia.

Random fact about Tim: When he was 10 he was the partner in a recycling business.

 

Peter Cuskelly is General Manager at Private Mortgages AustraliaPeter Cuskelly
General Manager
Peter joined Private Mortgages Australia in 2015 to take on the role of Credit Manager and now holds the position of General Manager. He has a wealth of experience in credit across all types of lending including commercial, agribusiness, mortgage and personal clients.  Prior to joining PMA he was a mortgage broker with Full Circle Financial Group where he offered individual and commercial clients tailored finance options to suit their needs. He has also worked with a number of large institutions including ANZ and Commonwealth Bank. Peter’s passion is working with clients to provide innovative and cost effective solutions whilst maintaining acceptable levels of risk.

Random fact about Peter: His grandfather was a jockey.

 

Julie Ciccone is the Business Development Manager at Private Mortgages AustraliaJulie Ciccone
Business Development Manager
As the Business Development Management at Private Mortgages Australia, Julie is responsible for building relationships with brokers and educating them about the services we are able to provide. She has experience working with borrowers particularly developers that require finance for the purchase of land, property and/or construction including draw down of equity. Julie is passionate about communicating the benefits of working with a private lender to referrers and making sure we’re able to deliver the best results for their clients.
Random fact about Julie: She used to have a children’s clothing business in North Essendon. 

 

Shanta Lobo is Senior Relationship Manager at Private Mortgages AustraliaShanta Lobo
Senior Relationship Manager
Shanta joined Private Mortgages Australia in 2017 as Senior Relationship Manager. Shanta has over 20 years’ experience in lending including consumer, commercial, cash flow and trade finance.
Prior to joining Private Mortgages Australia, Shanta was a Business Banking Manager with NAB. She has also worked at Suncorp Bank and CBA in similar roles. She is experienced in risk assessment and risk management. Shanta enjoys customer interaction and helping businesses achieve their goals and budgets by structuring their cash flow and lending requirements effectively.
Random fact about Shanta: She was once a school teacher. 

 

Anna Sanchez
Financial Controller
Anna is a diversified professional who has extensive experience in the fields of accounting, book-keeping, account management and sales. She has a broad knowledge of the financial services industry and has worked with clients across the a wide spectrum including trading, manufacturing and information technology.
Random fact about Anna: She was once was once an active girl scout and cadet officer in high school.

 

Erica Cabanilla is in the role of Credit Support at Private Mortgages Australia.Erica Cabanilla
Credit Support
Erica is a highly skilled administration professional with six years’ hands-on experience in diverse office environments. She is knowledgeable in current industry trends and technology. She understands the needs of a company and can provide them exceptional results through a flexible and intelligent approach. At Private Mortgages Australia, she is responsible for conducting initial credit assessments, bookkeeping and database management.
Random fact about Erica: She can watch Starwars non-stop from Episode 1 to 6.

 

Lauren Taylor is the Head of Marketing and Communications at Private Mortgages AustraliaLauren Taylor
Head of Marketing and Communications
Lauren is a well-respected marketing professional with 10 years’ experience in both Sydney and London. She has worked for an extensive list of companies from all sectors including corporate, technology, consumer and digital. At Private Mortgages Australia she is responsible for disseminating information to our broker audience through our social media platforms, website and e-newsletter.
Random fact about Lauren: She used to have a pet cow called Austin. 
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Private Mortgages Australia Secures $100M Institutional Backing

The Private Mortgages Australia team

The PMA team: Shanta Lobo (Senior Relationship Manager), Tony Barbone (Managing Director), Tim Hart (Director), Julie Ciccone (Business Development Manager) and Peter Cuskelly (General Manager).

Funding enables larger loan amounts and more competitive interest rates

 30 May 2019: An independent wholesale funder has committed to investing up to $100 million with specialist commercial mortgage manager Private Mortgages Australia to fund its portfolio of registered first mortgage loans secured by Australian property.

The investment will enable PMA to grow the number of loans they are able to service and will see the maximum loan amount increase from $2 million to $10 million on registered first mortgages. It has also allowed PMA to offer more competitive interest rates with their base rate now at 9% per annum for applicable loans.

“We expect that the changes to loan amounts and interest rates will attract a wider pool of borrowers and will help grow the business exponentially in the next few years,” said Barbone. “More and more of our referrers are coming to us looking for a more flexible lending solutions after their clients haven’t been able to obtain funding from the banks, so it’s great that we will be able to help even more of them now.”

Private Mortgages Australia, which specialises in short-term loans for small-to-medium businesses, has recently seen a marked increase in the number of borrowers coming to them for finance after being turned down by the banks. This funding will help the national lender to accelerate the growth of its lending business to Australian SMEs and developers.

“Receiving this level of backing is a landmark achievement for Private Mortgages Australia, our borrowers and referrers,” said PMA Managing Director, Tony Barbone. “Our backers clearly believe we are a leader in this space and have confidence in our business model to provide fast and flexible finance to our SME and developer clients. We’re just about to celebrate our fifth year in operation and are excited to have the opportunity to further build the business and deliver even better products and service to our clients.”

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What does the election result mean for private lending?

Scott Morrison and the Coalition won the electionIn the lead up to the federal election there was a degree of stagnation across both the residential and commercial property markets with house prices dropping in the major cities and clearance rates at commercial auctions much lower. The looming possibility of changes to franking credits and capital gains taxes had people feeling nervous that their pockets could soon be feeling a lot lighter. Therefore, many Australians were waiting to see the outcome of the May 18 election before making any financial decisions.

However, with the election now done and dusted, and the Coalition remaining in power, a level of certainty and stability has come back to the market. The constancy of a familiar government will boost confidence in the property market and should see vendors and buyers reengage. Add to this the likelihood of interest rate reductions as early as this month and buyers, investors and developers are feeling a lot more confident about the future.

Property investors will be keeping an eye on where the billions promised in infrastructure spending is distributed, which may present growth opportunities in suburbs and regions which get a funding injection. The Coalition’s First Home Loan Deposit Scheme and APRA removing the 7% serviceability guidance may also have some effect on the housing market, however this remains to be seen.

For private lenders, a confident and stable market is always a good thing. It means borrowers are feeling better about the value of the properties they are purchasing and lower interest rates on current investments are helping to keep dollars in their pockets. At Private Mortgages Australia we are confident that now the results of the election have been finalised we will see an increase in loan applications from borrowers and also an increase in the amount being borrowed.

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How property development finance works

Every homeowner understands the difference between their mortgage and the equity they have in their home but when it comes to commercial real estate transactions like property development finance, the difference between equity, preferred equity, mezzanine debt and senior debt can confuse even the savviest financial minds.

Let’s take a look at what’s called The Capital Stack to better understand where the different types of finance sit in a commercial property development.

The Capital Stack for property development finance

Senior Debt

Senior Debt is secured by a First Mortgage on the property itself, so if the borrower fails to pay the lender can sell the security property. This greatly reduces risk on the principal invested because, at worst, the lender can recoup its principal by selling the property.

Mezzanine Debt

Mezzanine Debt sits behind the senior debt in order of payment priority. Once the developer pays operating expenses and the senior debt payment all income must go to pay the mezzanine debt. If the developer is unable to pay (assuming they aren’t also in default under the senior debt), the lender typically has the ability to quickly take control of the property. The senior debt and mezzanine lenders will usually enter into an agreement, called a Priority Deed, where they spell out how their rights interact (i.e. what happens if a developer stops paying both of them).

Preferred Equity

Preferred Equity is perhaps the hardest portion of the capital stack to speak about generally because, for better and worse, it’s very flexible. Preferred equity holders have a preferred right to payments over regular (common) equity holders. “Pref” equity positions range from “hard” preferred equity, which function similarly to mezzanine debt and include a fixed coupon and maturity date to “soft” preferred equity, which is more likely to include some of the financial upside if the project performs well. While hard preferred equity holders may have the ability to make some decisions or kick out the developer if they fail to make payments, soft preferred equity holders typically have more limited rights.

Common Equity

Common Equity is the riskiest and most profitable portion of the real estate capital stack. Typically the developer (or sponsor) will be required – by the lender and/or by other equity investors – to invest their own money as some portion of the equity to have skin in the game. Equity investments carry the greatest risk, because investment agreements entitle every other tranche of capital to be repaid before common equity holders. However, if the property development does well equity investors usually receive an exceptional rate of return. This is because they receive a portion of profit which can easily outstrip the return paid to debt holders usually expressed as an interest rate.

For example, a sponsor may have sourced senior finance at 6% per annum, mezzanine finance at 22% per annum but the sponsor and common equity holders return on investment is 50% per annum. Another way to think about it is that common equity is very expensive when compared to debt within the capital stack.

Understanding the stack is incredibly important as certain lenders will only become involved in particular types of property development finance and interest rates will vary depending on the risk. Currently, Private Mortgages Australia provides Senior Debt and Mezzanine Debt, and have aspirations to offer Preferred Equity in the future.

If you’d like to discuss finance for your next property development project then please get in touch.

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Will 2019 be the year of private lending?

Private lending in 2019With the release of Commissioner Hayne’s report  it’s clear that 2019 is going to bring about a number of changes to the private lending industry for lenders, brokers and borrowers alike. We take a look at how we see 2019 panning out for the private lending market.

A move towards transparency

The royal commission has destroyed borrowers’ trust in the big four banks, and now they’re looking for alternatives that offer honesty and transparency. This is an opportunity for those lenders with straight-forward and open lending processes to put their best foot forward and show borrowers that there is a genuine alternative to the mainstream banks.

Continued tightening of the purse strings

2018 saw the banks reducing their risk appetite and placing a number of restrictions on what they will lend and who to. This meant that obtaining finance became increasingly difficult for borrowers, particularly commercial borrowers. This restricted lending environment looks to continue throughout 2019, with the findings of the Hayne report recommending further regulations for the banks’ lending systems.

However, this has created a real opportunity for non-bank lenders who look at lending situations in a different light to the banks. Private lenders are able to be more flexible in who they will lend to. Rather than just look at the serviceability of the loan, they will look at the bigger picture when making a lending decision. This means that while the purse strings are tightening at the banks, more opportunities to access funding will become available through the non-bank sector.

Rise of commercial brokers

Borrowers seeking alternative lenders with transparent and flexible lending processes are going to need help. In these uncertain times, borrowers will increasingly look to brokers for guidance and advice. This is particularly the case for business borrowers who are most likely to be turned away by the banks. For this reason, it makes sense that a number of residential brokers will consider diversifying into the commercial space in order to assist this growing group of borrowers.

The year of private lending?

Overall, the changes in the lending landscape will shine a spotlight on the advantages of working with a private lender. Whether a borrower has become disillusioned with their big four bank or has had their loan application rejected, 2019 will see more and more people looking for an alternative solution for their finance needs. Private lenders have always been able to offer something different to the banks, however this year looks to be the time when the benefits of a non-bank lender really become known throughout the industry.

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How to obtain development finance

Development FinanceIt is well known that to secure development finance from a major bank is getting much more difficult. Like the GFC days when it was virtually impossible to obtain finance, tighter controls continue to be implemented. Banks generally require 100% of debt coverage from pre-sales and they have pulled back on the percentage of hard costs that they will fund.

However, there are non-bank lenders and private lenders that will look at a project from a different angle to the major banks. Developer finance lenders will work off the gross realisation value (GRV) of the project rather than the traditional hard cost or total development cost (TDC) method when working out how much they will lend.

The main things non-traditional development finance lenders will look at are:

  • The project – does it make sense?
  • The profit – is there a big enough profit in the project?
  • The people – are the people behind the development experienced?

GRV development finance method explained

Gross realisation value (GRV) based first mortgage facilities look at the projected end value of the project and will extend funding to a percentage of that. In general, the maximum GRV is 65%, or 70% in some cases.

Advantages of GRV development finance

  • No pre-sale requirements can mean a higher realisation price especially in a rising market.
  • No pre-sale requirements can mean the project holding costs are less and the development can commence more quickly.
  • Less developer equity required.
  • Taxable income figures for the borrowers are not generally required.
  • All fees and interest can be capitalised

GRV development finance general guidelines

With non-bank lenders and private funders, each project is looked at on an individual basis. However, below are some guidelines that, if met, will help you secure developer finance.

  • Projects should be in desirable locations with high demand for the product being built.
  • Profit margins should be between 15% and 25% depending on the type of project.
  • The borrower should be an experienced developer.
  • The borrower, while not generally required to prove serviceability, will need to have some tangible assets behind them and not be credit impaired.
  • While the funding may typically be available up to 65% of the GRV or end value, this ratio cannot be exceeded at the land stage or any stage of the development. If the land has increased significantly from when it was purchased there is no restriction on using the increased value. This means that 100% of hard costs can be funded in some circumstances.

Have a read of a case study for a development finance deal we recently undertook and you can also hear more about how PMA can help developers with finance in this video.

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A word from our referrers – Lee Spyda

Lee SpydaLee Spyda from Investor Loans Network Gold Coast is a valued PMA referrer. He is committed to empowering clients through education, supporting them to reach their goals and providing exceptional service. We decided to have a chat with him and find a bit more about why he loves being a commercial finance broker.

  1. Tell us about your career history? I’m celebrating 10 years as a mortgage broker this year which is an important milestone for me as I really enjoy this work. I’ve also worked in sales and prior to moving to Australia in 2000 I undertook an apprenticeship in Pattern Making with Rolls Royce Industrial Power Group which was incredibly interesting.
  2. What do you find interesting about commercial finance? The most interesting thing about commercial finance is that every deal is different, there’s never a one-size fits all. For me, it’s really straight-forward. It’s about applying common sense and assessing each deal on the individual merits and circumstances and getting the best result for your client.
  3. What’s the most interesting commercial finance deal you’ve worked on? I’m currently involved in a property development consisting of over 140 townhouses which is really interesting. Over-purchasing blocks of units or other property with no deposit is a favourite scenario – solving the problems and making it work.
  4. What’s one piece of advice you always give to commercial clients? I always tell my clients that it’s not just about the interest rate, it’s the cost of the money in the long-run. We look at all the costs and make sure that the deal has the best chance of making a profit. In the end a percentage of something is better than a percentage of nothing!
  5. What are the benefits of working with a non-bank lender like PMA? Non-bank lenders like PMA have extremely quick approval times, a straight-forward loan process and, best of all, common sense is applied to each deal.
  6. What do you like about working with PMA? I’ve always enjoyed working with PMA because they have a great team, a simple approach and they look at things for what they are when making decisions.

 

Lee Spyda talks about commercial lending Lee Spyda is the Director & Finance Strategist at Investor Loans Network Gold Coast where he helps his clients to build their passive income property portfolio through asset protected structures to secure their financial future.

Lee has a Diploma in Finance and Mortgage Broker Management.

To get in touch with Lee contact [email protected]

 

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