How Sub-Prime Lending Markets Will Affect You

September 14, 2006
By: Keith S. Donald

Some of the major sub-prime lenders have gone out of business within the last year as a result of predatory lending practices. There is much more to the story! A sub-prime lender is one who lends money to high-credit risk individuals.

The biggest players, including some very large banks and insurance companies, are losing tremendous sums of money at this "high-risk and low-reward" game.

Over the past year, most major lending companies, including the biggest and oldest in the business, experienced some difficulty in one way or another. Many have either struggled to keep their doors open or have actually filed for bankruptcy.

Those still standing have had their investment ratings downgraded due to the industry's legal and political risks, not to mention the financial realities of investing money to high risk borrowers, secured only by high risk, high loan-to-low-equity-value properties.

The strategy of aggressively creating loans and then selling them off in pools of securities, known as "securitization", has given fuel to this multi-billion dollar industry, at the expense of profits.

Equity Is Still King

Spending money to make money might make sense in the right business platform - but giving it away tends to spill red ink all over the place.

Consolidation in sub-prime lending markets will likely make equity king again - forcing deal-makers to return to "practical solutions" for real estate financing options, and not always just for sub-prime borrowers.

How This Affects You

Okay, it’s time to think of new ways to help our clients with creative solutions for everyone.

For many of you it will be a whole new educational process. Fortunately, you don't have to look far - I am a quick e-mail away. And the time to get started is sooner rather than later.

Remember, every deal is different and we can always give you some basic guidance so you'll have a complete understanding, and the ammunition you need for closing deals in a much tougher market.

For example, did you know that table funding (otherwise known as simultaneous closings) has become one of the hottest techniques in real estate transactions over the past eight years?

It makes up an estimated 20% of all private note sales. With this strategy sellers needing cash can sell a newly created note simultaneously with the sale of their property!

Installment Sale

It’s fairly common for most Sellers to assume that they need all the cash at closing. However, an installment sale can often be a better alternative, both from a tax and a reinvestment standpoint.

Another strategy worth considering allows a client holding existing paper to use that paper as collateral to secure more assets, while continuing to enjoy higher returns and more tax benefits.

The Best Strategy

If you are disposing of real estate assets or need to liquidate existing notes or to sell a property, feel free to contact me ahead of time. I am happy to help you determine which strategy might work best.

What I am proposing is that you use one of the many alternative-financing techniques, providing a broad range of options so you can complete transactions much more quickly and profitably.

More Options

Here is a handful of options you can choose from:

1. Private seller carry-back purchase mortgages
2. Table funding or simultaneous closings
3. Trading equities
4. Exchanging
5. Substituting collateral
6. Bartering
7. Using land contracts
8. Converting existing notes to cash
9. Structuring lease options

All of these deal-making strategies have been used for decades and are valid, viable, and valuable techniques.

Problem Solving

Professionals such as Realtors, attorneys, CPAs, and mortgage brokers have used these techniques reliably for years - knowing that they offer practical solutions for their clients.

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