How Can Bridge Loans save the SF Real Estate Market?
We are seeing an extreme shortage of inventory in the SF Real Estate market. Buyers and agents complain there are no homes to purchase, while sellers fear selling their home just to find themselves in the unenviable position of competing for homes with all the existing buyers.
Not even in the heyday of the dotcom boom in the late 90’s, when we saw buyers offer stock options in their purchase contracts, was competition as fierce as it is right now. In those heady days we were seeing prices go up at a precipitous rate, but we were still able to help our clients sell their existing home and buy up into a bigger home or downsize into a smaller property. For these sellers we often helped them secure a “Bridge Loan”. The Bridge Loan would allow sellers to access the equity in their current home without having to sell it first. They could purchase their new home before they sell the one they are currently living in.
The Bridge Loan (also Interim Financing, Gap Financing, and Swing Loan) eliminates the unsavory possibility of ending up “Homeless”, and being forced to make several moves: First from an existing home into temporary housing and then finally into the home they eventually purchase. This also eliminates the extra costs and hassles associated with multiple moves including “equity erosion” when a seller, now a buyer, is stuck renting as prices continue to head upwards.
So why is housing inventory in San Francisco so low? We believe the answer is two fold. On the one hand owners are watching their properties appreciate for the first time in 5 years, and frankly waiting may net them more money in the future. The other, possibly more important, reason is that owners often decide to sell their property after they have decided where they want to move to, and if they don’t want to leave San Francisco they quickly become aware this may be a difficult proposition.
As for the sellers expecting larger returns in the future this is a risk because, as Yogi Berra said, “predictions are difficult especially about the future”. Homes may or may not be worth more in the future, and often life shows up to decide when the right time is to sell a home. Not being able to find the next home is a powerful incentive not to move, and this is where Bridge Loans could make all the difference.
The Bridge Loan is financing with a short duration designed to “Bridge the Gap” between the time a new home has been purchased and when the old home has been sold. A Bridge Loan is used by purchasers who need the equity from their current home to pay the down payment on the new home. During this period the home purchaser will actually own both properties and will therefore be responsible for paying two mortgages; one for the old home and one for the new home. Bridge loans come with higher interest rates and usually require collateral typically in the form of real estate, but the freedom a bridge loan offers can make the extra cost more than worth it.
Bridge loans are currently very difficult to get, as are all real estate loans at this point. If the bridge loan were to become a more viable option, more home owners would find themselves willing to start their search for a new home, and therefore eventually put their current home on the market. This would put more homes on the market and alleviate the housing shortage; San Francisco real estate market Saved!
We have spoken with lenders to give an idea of what they are looking for when offering Bridge Loans.
Hard Money Lender:
1) Cross collateral both properties (current house and new home purchase) at 30% LTV so loan amount is $470k ($800 current +769 purchase X .30 LTV)
2) Rate of 7.85%, amortized 12 years, payments $5,049. Down payment required $300k
3) Cost is 5 Points for loan origination. If the properties appraise for less, so that the loan amount
4) Exceeds 30% combined LTV the rate will be 8.35%.
1) Loan against existing property only.
2) Estimated value $800k and can go to 55% LTV so loan amount is $440k cash out.
3) The rate is 9.95%.
4) Everything else is the same (12 year amortized and cost 5 points)
Note that we have to do this type of financing under rules for owner occupied residential loans. Private counsel has already been consulted on this unique situation for these borrowers. This lender usually makes these loans with a 2 year prepay penalty of 2% the first year and 1% the second year (on a 30 year amortized loan). In order to meet legal ramifications (to treat all borrowers equally) the lender will shorten amortization in order to legally compensate for waiving the prepay penalty. So this is a unique bridge loan.
A Private Equity Mortgage Advisor:
Here are the parameters for the bridge loan, keep in mind they are case by case:
- Max loan amount of $350,000
- Combined liens can not exceed 80% of the value of the property
- Credit score 720+
- No pre-payment penalty
- Rate is case by case, but expect it too be around 7.00% with 1 point.
- The payment (interest only) is collected when the loan closes. No payments are due until the home is sold. The term of the loan is 1 year.