Beauty in the Eyes of the Lien-holder

by John Wilhoit Jr. on

men with ugly faces

Like art, loans are sometimes critiqued as beautiful, ugly, abstract, well done or amateurish.  Unlike in art, we use other words to describe mortgage loans; well secured, in compliance, in technical default, over-leveraged and exceeding disposition value.  But who most uses these words?  The mortgagee, the lender.

It’s true; mortgagee’s (lenders)  are people too.  But most are not real estate people, they are bankers, investment adviser’s or portfolio managers charged with protecting the assets within their respective portfolios.  As lenders, it just so happens that many of the assets they invest in are  real estate assets.  Is this a contrary statement?

Three men are blind-folded and an object is placed in their hands.  They are asked to describe the object.  The first man feels an object slender and moving like a snake; the second man has his arms wrapped around something so big it must be a tree trunk; the third man is holding a coarse object that is very long and “undone” at the end like a rope. The first man is holding an elephant’s trunk, the second man the elephant’s leg, the third man the elephants tail…

It is important to recognize that a lender looks at your assets COMPLETELY differently than you do.  As an owner we see real estate assets from facets that include; an operational business, a revenue producer, pride of ownership.

Lien-holder: A right given to another by the owner of property to secure a debt

The vocabulary and language of the mortgagee is very different from the vocabulary and language of real estate investors.  A mortgagee thinks in terms of:

  • Return on equity: a measure of  how well a company reinvest earnings to generate additional earnings.
  • Alienation clauses: a clause in the loan documents that make the loan due and payable if the property is transferred).
  •  Beneficiary: refers to the lender in a deed of trust.
  • Liquidation value: the probable price at a “forced sale”, the fire sale price where reasonable market time is unlikely.

Every hear a real estate owner discuss liquidation value with a smile?  Probably not.  Lenders are all about risk and protecting their investment, their cash.  This is done through various level of assessing risk, controlling risk, mitigating risk.  And there are varying types of risk they look at; market risk, asset risk, strength of borrower.

Mortgage: security for a debt, or loan, utilizing real estate as collateral

One example of the perfect real estate deal from  a lender’s perspective is new construction, very, very low loan-to-value with an extremely high debt service coverage ratio and high reserves.  As this deal is only one in a hundred lenders consider every day deals… every day.  Our bread-and-butter deals are their bread-and-butter deals.  When seeking financing the matter at hand is to determine which type of bread and what flavor butter as this changes from one lender to the next.

As a borrower it is your responsibility equally with the lender to identify whether or not the deal you are seeking to finance or re-finance fits into the lenders “box”.   If yes, then great.  Just recognize and be able to respond to inquiries that compel the lender to continue towards a loan closing.  Keep in mind that although you and your lender are discussing the same deal, the perspective on risk, the vocabulary and objectives come together and diverge all along the way.

Comment here and tell us about your all time favorite loan closings.

About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel.  http://www.MultifamilyInsight.com 

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{ 2 comments… read them below or add one }

Victor B. Murray, CPM March 24, 2013 at 7:34 am

John, your choice of artwork could not have bp been better. . . I see the ugly and abstract, but as for the beauty? “Eye of the beholder”, right?

When my eldest brother was just a child, my father worked for a developer. Dad thought it would be a good experience to take him to a high rise lobby unveiling of some dark and ominous art work. The proud developer asked my brother what he thought of it, to which my father cringed awaiting his eldest son’s response. Looking pensively at the artwork, my brother responded that “it’s thought provoking”. Relieved as my father saw the developer smile, my astute brother was promptly taken for ice cream after the event ended.

Thank you for your “thought provoking” blog!

Victor B. Murray, CPM March 24, 2013 at 7:43 am

John, your choice of artwork could not have bp been better. . . I see the ugly and abstract, but as for the beauty? “Eye of the beholder”, right?

When my eldest brother was just a child, my father worked for a developer. Dad thought it would be a good experience to take him to a high rise lobby unveiling of some dark and ominous art work. The proud developer asked my brother what he thought of it, to which my father cringed awaiting his eldest son’s response. Looking pensively at the artwork, my brother responded that “it’s thought provoking”. Relieved as my father saw the developer smile, my astute brother was promptly taken for ice cream after the event ended.

Thank you for your “thought provoking”

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