When Financing Puts a Luxury Sale at Risk: A Guide for Real Estate Agents

At the top end of the market a good offer can still fall to financing. You’ve got the buyer with the means, the property is right, the seller is ready, the loan just doesn’t work in the way the bank wants to see it.

Sometimes it’s just a matter of timing. Sometimes it’s a property that still needs to go. Often it’s a client who is genuinely wealthy but whose wealth doesn’t quite fit into the standard loan application.

Private real estate financing won’t be the right answer for every client. It can be the right answer in some cases though, and knowing it exists and knowing what a private lender is looking for can go a long way to keeping a transaction moving. This guide looks at the circumstances in which that conversation is worth having.

When a conventional loan may not fit

A few patterns tend to show up before a luxury transaction stalls over financing:

• The client needs to buy prior to their present property selling.
• The seller wants a firm timeline from the buyer’s lender which the buyer’s lender is absolutely not in a position to give.
• Your client is self-employed, runs a business or has the majority of their wealth in investments and/or property rather than in salary.
• The purchase is being made via a trust, an LLC or some other entity.
• A lender has asked for either further documentation or more time than is permitted under the contract.

None of these rules out conventional or jumbo financing. They’re just the points at which it’s useful to have a second option in place.

Buying before selling

A fairly common scenario in the luxury market: your client has found the next home but the majority of their equity is still in the one they’re currently living in. You can’t just wait for that to sell as you’ll have lost the purchase. Making the offer conditional on that sale will of course make the offer very weak.

Bridge financing is for that gap. A private bridge loan is normally secured by property (which can be the current home, the new home or both) and is repaid when the current home sells or when the longer-term finance is in place.

The questions that matter are practical:

• What’s the equity in the house at the moment and how much is still owed?
• What does the client think the current home is worth and is that a realistic price?
• What if the sale takes longer than we’d planned?
• Will the client refinance the new house into a long-term loan and are they eligible for that?

A bridge loan works a treat when the exit is credible on a conservative timeline rather than just on an optimistic one.

When timing and certainty decide the deal

In a competitive luxury sale the strength of an offer is generally judged by how likely it is to close. A seller looking at two offers might go for the one with the fewest financing contingencies and a clear route to funding.

Conventional lenders have very good reasons for following the processes they do and those processes take the time they take. A private lender will look at the property, the equity and the repayment plan themselves. That can shorten the decision process, though every loan is still subject to underwriting, appraisal, title and all the other closing conditions.

Certainty usually has a price. Private finance will generally be more expensive than a standard loan. When certainty is worth paying for then you have to look at the cost of that certainty against the cost of a transaction that doesn’t close.

Clients whose finances don’t fit a standard file

Lots of luxury buyers are perfectly qualified in every practical respect and yet still very difficult to underwrite on a conventional basis. A business owner may have a very modest level of taxable income. An investor may have a very substantial asset base and very irregular cash flow. Some clients will hold property through trusts, LLCs or partnerships.

A private lender will look at the transaction as a whole (the property, the equity in the property, the borrower’s position in general and how the loan will be repaid). That doesn’t mean the documentation is any less important, it just means you can start the conversation from the strengths of the deal rather than from a checklist which the client is simply going to be unable to tick.

Primary residence, second home or investment

How your client is going to use the property is absolutely critical from the very first meeting. A property that is going to be a home for your client, a second home and an investment property are all going to be looked at in a very different way, and the type of loan required, the disclosures that are needed and the process itself can all be different for each of those scenarios.

Tell us right at the outset whether the property will be the client’s principal residence, a second home or an investment property and who will be the title holder. That’s by far the quickest way of establishing whether there’s a route at all.

What to expect from private financing

• It’s generally short-term. Private loans are usually structured around a defined exit point (a sale or a refinance).
• It’s generally more expensive than conventional financing. The interest rate is just one element of the cost; you also have to take into account the upfront charges and the payoff terms.
• Equity is the key issue. The property and the borrower’s equity are absolutely central to the decision.
• All loans are subject to underwriting. Nothing is approved until the lender has had a full look at the transaction.

How to bring us a scenario

Alliance Portfolio is a California-based private real estate lender. The lending team is focused on coastal California markets.

If the client’s financing is in any way putting the transaction at risk, the most useful first step is a short summary of the deal itself (property location, estimated value, existing debt, requested loan amount, purpose, timing and how the loan will be repaid). What to send a private lender explains each of those items.

You can submit a scenario via the web, give us a call on (949) 349-1322 or get in touch via the contact page. We’ll be absolutely straightforward as to whether we see a way forward.