Big borrowers tap crowds for loans
Not long ago, former Federal Reserve Chairman Ben Bernanke was turned down when he tried to refinance his home loan.
It turns out Bernanke could take a cue from some of New York’s wealthiest property owners, who have turned to crowdfunding platforms and private investors to borrow money for their real estate. It seems to be a win-win for both investors and borrowers.
In a recent transaction, executed by Propellr, a single-family home appraised at $41 million got a nearly $7 million second mortgage.
The loan was financed with $1 million from individual investors, and the remaining $5.97 million came from institutional investors.
It was a big payday for individual investors, who received the same terms as the institutional investors — 11 percent interest annually on the two-year loan (the interest, prefunded by the borrower, is held in escrow and paid out monthly).
Individual investors also benefited from being able to invest alongside hedge funds without paying the high fees.
But the borrower came out on top, too.
While 11 percent is higher than today’s conventional mortgage rates, securing a multimillion-dollar mortgage, much less one on a single-family second, is nearly impossible in a bank or would require the borrower to have dollar-for-dollar assets in the lender’s bank or securities firm frozen as collateral for the loan.
“Investors are able to help fund interesting and sometimes rare buildings while getting a solid return, and borrowers are willing to pay a bit more for the speed and convenience of securing their loan from an alternative lending platform,” says D.J. Paul, chief strategy officer of Propellr, a New York-based investment firm specializing in alternative assets.
According to Donald Frommeyer, CEO of NAMB — The Association of Mortgage Professionals — since the real estate crash in 2008 and the implementation of the Dodd-Frank Act, banks continue to be stringent in their lending.
Most won’t lend more than $3 million to $4 million, and many won’t even go above what is considered a jumbo loan at $417,000.
“When it comes to bank lending, it is all about risk and exposure,” says Frommeyer. “As a bank, it is safer to do 10 $100,000 loans than one $1,000,000 loan, because if one loan goes bad, it’s only 10 percent of your investment, compared to losing 100 percent on a million dollar loan.”
“This is where private investors are coming in and are able to help,” he says.
But while alternative investment platforms like Propellr are not confined by rules regulating bank mortgages, they will not just lend to anyone. According to Paul, the team at Propellr conducts rigorous analysis to separate the great deals from the mediocre ones before they invest.
“There’s no shortage of people coming to us to secure money for their real estate,” says Paul, “but we perform due diligence on each deal. We end up turning down about 9 out of 10 prospective borrowers.”