Landmines versus Gold Mines I have been the subject of numerous articles in foreign real estate industry trade magazines that have placed an emphasis on our financing program which was refined and implemented in 2013. And why not? After a while, most foreign investors give up on financing because US lenders won’t touch them unless it is with a garbage loan NOT worth a hill of beans. But we have set the new standard and want to renew your trust in foreign investment in U.S. real estate. In almost every one of these articles I state that “Atlas is the ONLY Company that provides internally underwritten 30 year fixed rate loans for foreign investment in U.S. real estate”; So let’s examine what I mean by making this claim. I believe it is an important dialogue to have because I have seen some predatory loan products out there and have heard more than a few horror stories from foreign investors who either did not understand what they were getting involved with, or did understand and chose to roll the dice. Let’s look and get a better idea of the loan products available for out of country investors and where these products might be detrimental to the investment benchmarks investors hope to achieve. LANDMINE- The 3/1 and 5/1 ARM I spoke with a small group of individual investors from Australia a few months back who had all found themselves in a pretty bad predicament. They had all obtained financing through a U.S. lender 3 years ago. They were given a rate of 8.25% on a 30 year note and they were satisfied with the returns based upon the rate and terms of the note. However, each year the debt service had increased and the yield had decreased. In fact, a number of properties were actually in a negative cash flow situation. That is because they did not understand the loan product they had signed for because the dirtiest detail was buried deep inside of the 40 page closing documents package. They had all signed on to a 3/1 ARM, or Adjustable Rate Mortgage and had no idea what they had gotten themselves into. ARM’s and the adjusting interest rates are the equivalent of a drive-by colonoscopy. Where the rates readjust to, EVERY year for THREE years (or FIVE years if you’re on a 5/1) always go UP and never down. After all, does anyone think that banks are going into speculative long term loans without the deck stacked in their favor? There is a little known tool that banks use called LIBOR, or London Inter Bank Offer Rate. It is the benchmark rate that some of the world’s leading banks charge each other for short-term loans. It serves as the first step to calculating interest rates on various loans throughout the world and always go up. The “forces that be” can draw on any industry changes, anywhere on the planet, to adjust the LIBOR whether that is a downward change in the Venezuelan Sheet Metal industry or the Guano industry in the Galapagos. Either way, if you are on an ARM you are in trouble unless you have a LOT of yield and can afford to lose a large portion of it. Why take the risk with your foreign investment in U.S. real estate? LANDMINE- Balloon Payments I’d like to paint a picture. Let’s pretend that you are going to the store to pick up a gallon of milk at the end of the day. You go the counter and speak with the proprietor, and he says the milk costs $4.00. Now you have the $4.00 in your pocket or purse but the proprietor offers you an interesting proposal. He says “Let’s do this- give me $1.00 today. Then give me a nickel every month for the next three years. And then at the end of three years give me $3.00” I cannot think of one person who would buy that gallon of milk under those circumstances, but believe it or not there are real estate investors that do this every day with real estate which, last time I checked, is considerably more expensive than a gallon of milk. It’s insane (or at least I think it is) but for some reason investors use these tools for long term investment properties and are happy to get the “loan”. Balloon loans typically require a pretty hefty down payment and even considering this, are amortized at 20-30 years which means that for the life of the loan you will be paying interest on the loan amount and very little if any principal. At the end of the term when the balloon goes up you will be paying off the entire loan amount or darned close to it. Better to pay for the whole gallon of milk than to use this worthless loan product! Keep an eye out for these balloon payments if you’re thinking of foreign investment in U.S. real estate. LANDMINE- 50%+ Down Payments Okay, so…… This one is very easy. The industry standard here in the U.S. for loan fees is 2-4% origination fees (of the loan amount) and about $1500 in servicing/underwriting/doc prep/ fees + closing costs. When all is said and done you will actually be at around SIXTY-FIVE PERCENT! And of course NONE of these scenarios above assist in providing for professional loan servicing, insurance escrows, or anything else. I suppose I could do another “gallon of milk” parallel but I think we all get the idea here. Pay attention to fees when you’re considering foreign investment in U.S. real estate. GOLD MINE- 30 year, fixed rate loans As I had mentioned above the goal of Atlas Capital and Asset Management is, has been, and will continue to be in providing legitimate, 30 year loans to foreign investors from around the globe. At closing our investors have the security in knowing there will never be an adjustment in their rates and there will never come a day, before the expiration of the 30 year note, that the loan will be called. We are the only company that is providing the same leveraging opportunities to foreign investors that American citizens get to enjoy. We have leveled the playing field foreign investors! All underwriting takes place on the same desk where this article was written. There is no broker daisy chain where promises are made but never fulfilled. We are your property provider, your lender, your property manager and a true partner for the next 30 years. We have as much skin in the game as our investors do so you know you not only have a US lender but a true partner for the long haul. Please visit our website at the link below or email me to schedule a time to so we can further discuss your investment goals. I will be happy to answer any questions that you have about foreign investment in U.S. real estate.
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