INVESTMENT PARAMETERS WHEN MAKING A PRIVATE MORTGAGE LOAN - PART 3
Exit StrategyThe fourth major investment parameter we must consider is exit strategy. Very simply, this is how the borrower plans to repay the loan. Since most private mortgage loans are short term the private mortgage lender/investor has a keen interest in finding out the borrower’s exit strategy and in analyzing whether this exit strategy is viable, and the risk of this particular exit strategy. The exit strategy must have a reasonable chance of success. Typical exit strategies include property sale before the note is due, refinancing the property with a long term mortgage loan, packaging the property with other properties owned or to be acquired by the borrower and obtaining a blanket mortgage on all the properties, borrowing on equity in other property owned by the borrower and selling a partnership interest in the property to an equity investor. Each of these strategies has numerous variations. The lender must determine the viability of any particular exit strategy. For example, if the exit strategy is to refinance the property, the lender must determine if the credit score of the borrower is high enough to qualify for a long term mortgage; if the property cash flow is sufficient to cover the debt payments on a long term mortgage and if the property will meet the general criteria set up by the mortgage lenders most likely to refinance the property. This analysis becomes very quick and easy with experience and as knowledge of the mortgage and investment real estate market is increased over time.
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