Why We Make Short-term Residential Loans?
We focus on making loans backed by real estate; primarily residential real estate. All of our loans are short-term (6-12 months) and are made to real estate investors. We believe this strategy allows us to mitigate market, economic and borrower risk in many ways.
First, we are experts in housing. Having sold thousands of homes as well as having an in-house real estate brokerage ensures a very broad understanding of the home market, supply and demand, and cycles.
Second, the fact that our loans are short-term avoids us from being tied to long-term loans when the market is shifting and values are declining.
Third, our loans are relatively small (on average $200,000), our risk is mitigated in many ways. One loan can have a limited effect on our portfolio and overall yield. Additionally, most of our underlying assets (homes) can provide solid returns as rentals in the event of default or foreclosure. This rental option assists DLP as the lender in mitigating risk; in addition to providing an exit option to the borrower when selling the asset isn’t an ideal option.
A Typical Loan…
A borrower finds a great opportunity to purchase a single-family home for $145,000, which is in need of renovation. The borrower estimates, based on comparable sales in the area, that the property would be worth $240,000 if it were completely updated. The borrower’s contractor estimates the cost of the rehab to be approximately $35,000. The borrower must settle on the property in 30 days.
The borrower obtains a loan from Direct Lending Partner for $156,000, (65% of the after repair value (ARV), based on an appraisal and/or broker price opinion to purchase and rehab the property. At settlement, the borrower buys the property for $145,000. $121,000 is provided by this private loan, and $35,000 is held in escrow by the Direct Lending Partner for the rehab. As the rehab progresses, the work is inspected and funds are released based on a pre-arranged draw schedule with the contractor.
If the borrower plans to sell the property, s/he pays off the loan upon the sale. If the borrower plans to retain the property as a rental unit, the borrower refinances the property and obtains a long-term conventional mortgage. Banks are much more likely to refinance an existing mortgage on a rehabbed property when the tenant is paying the mortgage.
|Expenses – e.g. closing cost and commissions:||$10,500|
|After repair value:||$240,000|
|Direct Lending Partner loan (65% of ARV):||$156,000|
|Amount of loan released at closing:||$121,000|
|Amount of loan retained for renovations:||$35,000|
|Amount capital buyer invests at closing:||$34,500|