Real Estate Talk:
Using a B-lender

The pros and cons of using a sub-prime lender

By Joseph Marovitch

August 15, 2024

B-lenders or sub-prime lenders are private lenders or corporate institutions that lend capital to those who usually do not qualify for a mortgage at a tier-1 bank, also known as an A-lender. There are other reasons to use a B-lender such as a buyer does not want to borrow from their company, or they wish to avoid taxes. Another reason to use a B-lender is for a short-term loan or bridge loan while waiting for mortgage approval. This permits the buyer to meet the financial condition and not lose the property being purchased.

B-lenders or sub-prime lenders are private lenders or corporate institutions that lend capital to those who usually do not qualify for a mortgage at a tier-1 bank, also known as an A-lender.

There are pros and cons to using a B-lender.

Pros

1. The qualification for a loan is less stringent than the terms of a regular tier-1 bank
2. Low credit scores, past bankruptcies or proposals are not significant considerations to B-lenders.
3. B-lender terms are more flexible with a range of products including customizable products

Cons

1. Interest rates are always higher than tier-1 banks. Whereas a tier-1 bank mortgage with a term of 5 years and an amortization of 25 years may be 4.5%, a B-lender can and will charge anywhere from 2% above prime, up to 15% or more.
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2. B-lender terms tend to be short such as 4 years or less as opposed to a tier-1 bank with a term of 25 to 30 years.
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3. The reason credit scores and bankruptcies are not major considerations to a B-lender is that they use the purchased property as collateral.
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4. There may be less stringent terms to attain a loan from a B-lender, but the terms to maintain the loan can be extremely stringent. The loan agreement is always in favour of the B-lender with terms such as:
   – One missed payment can allow the B-lender to repossess the purchased property without notice
   – Terms are short
   – Interest rates are high
   – Minimum down payments are higher
   – B -lenders have more control over the property and financing than regular banks
   – Using a B-lender is like acquiring a partner

Generally, if a buyer does not qualify for a tier-1 bank, chances are they are at much higher financial risk with a B-lender. Therefore, the buyer not eligible for a regular mortgage should probably not be using a B-lender.

‘B-lenders are good for short bridge loans or companies that require quick cash for investment purposes. B-lenders are not good for personal long-term loans. They are too costly and the risk of losing one’s investment is high.’

B-lenders make money in one of two ways:

1. Via the high interest rates
2. Repossession of the property, which they either sell at a profit or renovate and use as an income property

B-lenders are good for short bridge loans or companies that require quick cash for investment purposes. B-lenders are not good for personal long-term loans. They are too costly and the risk of losing one’s investment is high.

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Next article: Brokers staying on top of things

State of The Market

According to a recent RBC report, rate cuts have not stimulated the real estate market enough. The report notes that inventory has risen but demand has decreased. More rate cuts are needed, and more new construction is required to resolve the housing crisis.

There is another reason sales and demand have dropped. Current municipal evaluations are based on pandemic prices and do not reflect the market value. During the pandemic, property sold way above its market value due to little supply and massive demand.

‘According to a recent RBC report, rate cuts have not stimulated the real estate market enough. The report notes that inventory has risen but demand has decreased. More rate cuts are needed, and more new construction is required to resolve the housing crisis.’

What has not changed is seller expectations. If one looks at sales for the past year on Centris, one will find many homes have sold below their municipal evaluations. However, sellers expect their homes to sell at least above the valuations. Therefore, sellers opt to wait rather than place their homes on the market and accept what is perceived as a loss.

Other sellers leave their homes on the market for a long time with no results. The longer the property sits on the market the lower the value becomes as the property is perceived to have something wrong with it though it is simple enough to find out if the property is actually too high-priced. The broker can print out how many views the listing received on Centris and compare the hits to the number of inquiries and offers that occurred.

If the listing shows many views on Centris but few inquiries, this means there is interest in the property, but not at its current price. Then the seller must decide to either lower the price or take the property off the market until the market is more favourable.

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