We have all heard of Asset-Based lending, but what the heck is Logic-Based lending?
One of the private money industry’s leading lenders, Cogo Capital recently announced a new set of criteria for determining whether to lend to an investor. Cogo CEO, Lee Arnold, labeled these criteria, Logic-Based lending standards. This is lending that simply “makes sense” even when the deal does not completely fit within the lender’s typical deal wheel-house. Most importantly, the deal must show every indication that it will make the investor money. If it doesn’t, then it is unlikely that the investor will pay back the private lender and no lender is going to take on the bad deal.
Most private lenders have developed criteria for funding deals and those criteria look very similar from lender to lender. The typical rate and terms sheet reflects what is in the private placement memorandum that forms the basis of the hedge fund the lender uses for making loans. Those criteria in terms of the loan to value required, the down payment required, maximum and minimum loan amounts, whether a good credit score is needed, the interest rate and points charged, etc., are all spelled out in that private placement memorandum that is subscribed to by accredited investors. Most of these private placements are asset-based, that is, the quality of the asset is more important than the characteristics of the borrower, but there is no room to vary in accepting a loan and still fund the loan from that private placement.
Enter “Logic-Based” lending. This is a way to change the shape of the loan, when it makes sense to do so, rather than to try to fit a deal that is non-conforming into the standard rates and terms. So, for example, you are an investor who is buying rental property in bulk from a retiring landlord, but some of the properties are valued a few thousand under the lender’s usual limit; or the LTV is 75 or 80% rather than a max of 65% but the property will still cash flow; or, instead of a 24 month fixed rate, interest only loan, the borrower wants to see if they can get a lower interest loan fixed for five years. As long as there are compensating criteria and the deal is a solid one, the lender may be able to find a private investor within their network who will fund the non-conforming loan outside of the private placement memorandum. The “Logic-Based” lender is willing to take the deal to their network of private investors to see if they can get the deal funded outside of their normal hedge fund.
Obviously, the deal must be Logical in order to go to the extra effort of funding a non-conforming loan. The borrower must qualify on a number of the following factors: First and foremost, the deal must be one that will obviously make the borrower money. Then we will look at the borrower’s reserves. If they’ve got plenty of cash to make the monthly payments or free-and-clear property to cross-collateralize on the loan we can consider lending “outside the box.”
Another key factor is experience. Like most lenders, a “Logic-Based” lender will be more reluctant to lend to someone who has never fixed and flipped a property before or for the first-time landlord unless there are other compensating factors. One of those compensating factors is credit score. Someone with good credit will be easier to fund with some “outside-the-box” factors. It is one of those factors that can help us find “soft” and longer term funding for a client because they have shown that they handle credit responsibly over the long haul. One of the last compensating factors we look at is employment. A borrower or loan guarantor who also has a good, steady job with solid income will be viewed more favorably by a private investor for a non-conforming loan than someone who has been a full-time investor for a short time who has no other financial resources. Investors who have shown that they can run their real estate business like a successful business, however, will also be viewed favorably, even if there is no outside W2 income to serve as a compensating factor.
So, the good news, investors, is that we now have sources out there to fund you a loan even if your requirements are a little “outside-the-box.” It still needs to be a “good deal”—one that will clearly make you money—and you still need some other compensating factors that give you credibility as an investor who can follow through and make money with your real estate business.
Fill out the contact form at www.readvantagecapitalllc.com, or call at 319 359 0656 and we will see if we can match you up to the right lender for your deal.
RE Advantage Capital LLC