Relationship Lending, 100% financing, and direct lending. Do these deals happen?
Member since 2023 · 2 posts · 0 votes
Relationship Lending, 100% financing, and direct lending. Do these deals happen?
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Doug SmithPro Member
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votesHi Michael, Study's have shown that the default rate on 100% financing deals is astronomically high. "Skin in the game" is, as good lenders know well, critical in reducing risk to lenders. The only people that offer 100% financing on non-owner-occupied properties these days are 1) scammers and 2) rookie lenders that have never been through a downturn and don't know better. Others can chime in and disagree if they wish, but chances are those that will argue will fall into one of those two categories. "Relationship Lending" doesn't mean that the lender has abandoned solid, proven underwriting principles. It simply means that a rapport is being built and that the lender, now that they know more about the borrower and their operational competence, might be a bit more aggressive. That doesn't mean that the lender will throw caution to the wind and finance anything that the borrower throws at them. Good lenders will still need to understand 1) Character (aka credit...which is part of the relationship and knowing the borrower), Capactity (the planned exit strategy and the ability of the borrower to pay back the loan), and Collateral (what happens if the borrower can't/won't pay...how is the lender going to recoup their investment and how long will it take). I, and most real, experienced lenders will not do 100% financing for an investor, non-owner-occupied deal. Be wary of those that say they will and really, really look at their backgrounds.
6 Replies
- 2yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
Hi Michael, Study's have shown that the default rate on 100% financing deals is astronomically high. "Skin in the game" is, as good lenders know well, critical in reducing risk to lenders. The only people that offer 100% financing on non-owner-occupied properties these days are 1) scammers and 2) rookie lenders that have never been through a downturn and don't know better. Others can chime in and disagree if they wish, but chances are those that will argue will fall into one of those two categories. "Relationship Lending" doesn't mean that the lender has abandoned solid, proven underwriting principles. It simply means that a rapport is being built and that the lender, now that they know more about the borrower and their operational competence, might be a bit more aggressive. That doesn't mean that the lender will throw caution to the wind and finance anything that the borrower throws at them. Good lenders will still need to understand 1) Character (aka credit...which is part of the relationship and knowing the borrower), Capactity (the planned exit strategy and the ability of the borrower to pay back the loan), and Collateral (what happens if the borrower can't/won't pay...how is the lender going to recoup their investment and how long will it take). I, and most real, experienced lenders will not do 100% financing for an investor, non-owner-occupied deal. Be wary of those that say they will and really, really look at their backgrounds.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Michael Wolfe
Typically the answer is no, 100% financing does not exist. We have done it in one instance, but also secured three other properties with significant equity in them. At the end of the day, our loan to value was less than 50% based on securing the other other properties
7e investments53 Reviews - Member since 2023 · 2 posts · 0 votes2yI understand not taking a deal due to risk. I wouldn’t expect a lender to lend money for an asset/investment that can’t show it is capable of repayment. But what if you can show repayment is guaranteed or next to guaranteed, wouldn’t that remove significant risk in the deal or would lenders still refuse to fund 100% regardless?
Quote from @Doug Smith:
Hi Michael, Study's have shown that the default rate on 100% financing deals is astronomically high. "Skin in the game" is, as good lenders know well, critical in reducing risk to lenders. The only people that offer 100% financing on non-owner-occupied properties these days are 1) scammers and 2) rookie lenders that have never been through a downturn and don't know better. Others can chime in and disagree if they wish, but chances are those that will argue will fall into one of those two categories. "Relationship Lending" doesn't mean that the lender has abandoned solid, proven underwriting principles. It simply means that a rapport is being built and that the lender, now that they know more about the borrower and their operational competence, might be a bit more aggressive. That doesn't mean that the lender will throw caution to the wind and finance anything that the borrower throws at them. Good lenders will still need to understand 1) Character (aka credit...which is part of the relationship and knowing the borrower), Capactity (the planned exit strategy and the ability of the borrower to pay back the loan), and Collateral (what happens if the borrower can't/won't pay...how is the lender going to recoup their investment and how long will it take). I, and most real, experienced lenders will not do 100% financing for an investor, non-owner-occupied deal. Be wary of those that say they will and really, really look at their backgrounds.
I ask because I came to a vetted lender (that was open to discussing 100%) with a very profitable deal and the sole reason they turned the deal down was “Sponsor lacks liquidity to close the deal plus net worth is low.” Low net worth seems like a poor excuse when you know you’ve been working with a new investor or an individual doing their first deal.
What you recommend a borrower do in this situation? I appreciate all replies, they are very helpful and much appreciated! - 2yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
That's a very, very valid reason that they gave. The default rate on no-down-payment, non-owner-occupied deals is astronomically high. Other lenders can do what they wish, but the legit lenders I know won't touch 100% on non-owner-oc deals. They are all going to want skin in the game. If you lack the liquidity...that would be even more reason to pass for a lender. What happens if there is something unexpected in your situation? There's no reserve to fall back on. I know it's not what you want to hear, but it's the honest-to-God truth.
- 2yStuart UdisPro MemberAttorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
100% financing should not be viewed as a likely scenario. If the project happens to benefit from significant entitlement, lenders may treat the increased value (the imputed equity) as your cash consideration and therefore offer 100% or close to 100% financing, but you would have to create significant value for this to be considered. Unfortunately there are many "real estate gurus" out there selling courses and mentorship that misleads many into believing real estate investing can be accomplished with little or no money. Real estate investing is a capital intensive business and those who are most successful generally have liquidity or access to LP investors who can satisfy the equity portion of the capital stack. If the equity is an obstacle, I would suggest focusing your time and energy on building relationships with LP investors rather than seeking out 100% lending relationships. It is a more sustainable business model.
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
if you want to borrow 100% from your brother or your dentist you can work out whatever terms you want.
are you feeling like you 'need' 100% for something?
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