Do portfolio lenders' terms vary by deal?

Question

Hi all. I'm hoping to use a portfolio lender to finance my first flip. If I find that BankA offers residential rehab portfolio loans, will their terms depend on their confidence in the deal, to include my experience and the quality of the proposal? Or is it more like, BankA offers a product and it's always structured a certain way, has a certain interest rate, duration, etc?

Thanks!

J Scott · Answer

The only bank in Maryland I've spoken with about portfolio loans has been Revere Bank.  I believe there are a few others, but I don't know which in-particular offer portfolio loans.

@Ned Carey - Did you work with a local portfolio lender recently?

Also, do me a favor and shoot me the colleague request message to my personal email (in my signature).  I get so many BP messages that I just can't keep up with them, and they get lost.  But, I'm better with personal email...

Chris Martin · Answer

Got it.

Regarding banks lending for REI and bank lending average rates... you can find some detail at fdic.gov. Of the 63 in Maryland, you'll probably find one that caters to NOO.  fdic -> Industry Analysis > Bank Data & Statistics > Institution Directory then county (e.g. Baltimore) to find 7 under $100M to investigate.

J Scott · Answer

I think he just means any random portfolio lender (i.e, "Bank A" versus "Bank B")...I was confused about that at first as well...  :-)

To answer the OP's question...  In general, most portfolio lenders will have a standard product (specific requirements, specific downpayment amount, specific rate/terms, etc).  And that product will be relatively similar between most portfolio lenders, in my experience.  That said, if you have a unique situation, it's very possible that the lender will be willing (or require themselves) to tailor the loans to you specifically.

For example, if you have a lot of cash reserves, they may not be as strict on the income requirements.  Or, if you don't have any experience, they may do the deal with a slightly larger downpayment.

The whole point of a portfolio lender is that they have the authority to make their own underwriting guidelines and create their own loan products, and sometimes they'll go "off script" if the deal/investor warrants it.

Chris Martin · Answer

Collateralized line. In the simplest form, you pledge X properties in a 'pool' that is effectively an 'equity line'. You then can tap the equity line up to prescribed limits. The 'pool' contains unencumbered or high equity property depending on what you negotiate. The security is a UCC/DT filing covering the pool. You can add to or delete collateral (depending on your terms with the bank) with releases (similar to what builders do when selling individual properties in a subdivision) and the borrower is basically free to take draws at will. It is possible to substitute collateral but we've not done it directly. We have done releases, and they do get complex because of the cross collateralization.

An ideal pool for us consists of stabilized B/H with darw limits that provide funding for all the company's capital needs. In our case, 'X' is 7 with a draw limit of $250K. That's the cash for acquisitions. Hold 1 month, 3 month, whatever... the bank doesn't care. A borrower could sell a flip(*), replentish the pool, and repeat. Fix a B/H, add it to the pool (or create a new pool), or refinance and replentish the pool. Lots of flexibility depending on the borrower and the bank terms.

Regarding "My takeaway is that you may be able to find one that will work with you ... but you'd go into it knowing your terms won't be much better than hard money." I disagree. The CL rate is based on a rate spread and is comparable to the 5.34% rate for the bank across $474M in commercial loans. That rate, BTW, is based on the balance not the draw limit. The line 'fee' for most commercial banks, from a small (2) sample set, typically costs 1% of draw limit annually. That fee is negotiable.

(*) We don't flip. If you do, think about flipping in a different entity than your B/H portfolio

Chris Martin · Answer

Regarding "I guess I don't see the value-add for the 'portfolio' lenders with buy-and-hold deals when the outcome is often the same for them as flip deals." When you run out of governemnt subsidized money (e.g. an under market, Fannie Mae subsidized loan) you may see the value-add the portfolio lenders bring to the table. I think the limit is 4 GSE loans. If that's your portfolio size limit, then I guess I don't disagree. As @Upen Patel points out there is a market for other lenders.

I've found that once you develop a relationship with a 'portfolio' lender, they will work with you (the borrower) on whatever project you have. Residential B/H, Fix/flip (even though I don't do this other bank borrowers do), apartment loans, commercial projects, collateralized lines, even industrial redevelopment... the point is that access to funding in general is the key. So that's the value-add. Can't say it better than @J Scott: "The whole point of a portfolio lender is that they have the authority to make their own underwriting guidelines and create their own loan products, and sometimes they'll go "off script" if the deal/investor warrants it."

Once you get going, a collateralized line is the way to fund flips. But you need to have some equity and operational history first.

Matt Powell · Answer

Can you explain what a collateralized line is?

It sounds like portfolio lenders are a bit of a "chicken or the egg" situation. They won't lend to you if you haven't worked with them before, so how can you ever start working with them? My takeaway is that you may be able to find one that will work with you (I haven't had luck yet with good income, good credit, and no experience), but you'd go into it knowing your terms won't be much better than hard money. Maybe the most likely path of entry with portfolio lenders is to use hard money for your first couple deals to get that "experience" puzzle piece they're looking for, then maybe they'll work with you?

And good thoughts on the GSE limits. I'm just not there yet, so it hadn't crossed my mind. I was never saying portfolio lenders don't have their uses.. only saying that I didn't see the advantage for them to fund a rehab-then-rent deal and not a flip deal.

Upen Patel · Answer

@Matt Powell What you are talking about is precisely why hard money/private money lenders exist. Unless you can find a lender that specifically does rehab/flip loans (for this whey will charge you points and/or higher rate), other lenders conventional or portfolio are focused on buy-n-hold financing.

Matt Powell · Answer

So help me understand this. I assume what you're saying is that there's not enough time for the lender to collect any interest on their money when the borrower pays it all off in 3 months when his flipped house sells. But consider how I'd use a portfolio lender for a buy-and-hold property: I'd use their loan to purchase and rehab the property, and when I'd finished rehabbing in 3 months, I'd refinance the loan to a 30 year fixed (or whatever vehicle makes the most sense) and pay off the portfolio lender anyway. In both scenarios I've paid off the lender very early. I guess I don't see the value-add for the portfolio lenders with buy-and-hold deals when the outcome is often the same for them as flip deals.

Just trying to learn. I assume there's a puzzle piece I'm missing.

Matt Powell · Answer

Thanks for the recommendation @J Scott. I'll be contacting them. Sent you an e-mail.

Do portfolio lenders' terms vary by deal?

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