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A Final Look at 2010 in Private Lending and A Look Forward to 2011

The year 2010 saw an abundance of short sales and REO properties hit the market with savvy investors purchasing as many of these distressed properties as their wallets could afford in order to “fix and flip”.  In some cases, these individuals were purchasing homes for as little as $.30 on the dollar.  Unfortunately for the homeowners on the same block as these distressed homes, the value of their home dropped significantly because of these “rock bottom” prices.  This was the real estate climate for 2010 and in my opinion, will be the same for 2011.

From a private lending standpoint, the ability to lend an investor in the above-mentioned scenario funds for the acquisition of these distressed properties makes good business sense.  For instance, if a home was foreclosed on by the bank for a lien of $250,000 and sells it on the open market for $150,000, a prudent lender would lend up to 65% of the new sales price.

This is a win-win situation for both parties as the borrower (investor) receives a good portion of the cash they need to acquire the home while remaining liquid enough to make the repairs they need.  The lender has a low-risk loan with the possibility that the value of the home can and probably will increase once the borrower makes the necessary repairs.  If the proper due diligence is performed by all parties, it can be a successful transaction.

So what happens to the homeowner who is seeing his value decrease in the short term as the neighborhood is flooded with these distressed properties?  Initially there is a sense of frustration but with patience, he can expect to see improved homes on the block with neighbors that will hopefully maintain the home and more importantly, the mortgage.

Real estate has and always will be cyclical.  Timing is everything and unfortunately for those who purchased their home from 2004-2009, it will be sometime before those values are realized again.  The real estate market is starting to level out but the rebound is still several years away.

Sacha Ferrandi is a licensed Real Estate Broker with the California Department of Real Estate, a licensed Mortgage Loan Originator with the Nationwide Mortgage Licensing System and a partner at Source Capital Funding, Inc., a leading private lender that specializes in the underwriting and funding of residential and commercial real estate loans. For more information please visit, www.source-capital.com. Sacha can be contacted at (858) 705-6144, or via email at sferrandi@source-capital.com.