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Why Gap Financing Sometimes Fails (And Why We Don’t)

How do these gap financing benefits sound?

  • Safe returns
  • Stable returns
  • Returns that beat the market

If you’re a skeptical investor, they sound too good to be true.

And that’s the right attitude to take. There are a lot of lenders out there. Many of them are actively seeking investors. A lot of them like to talk about all the great benefits gap financing investment offers. But not a lot of them like to talk about the risks involved.

Here’s the truth.

When it comes down to it, gap financing is an investment.

And all investments carry some risks.

Now, our gap financing investments do have a perfect track record of obtaining full repayment. We have made money—for ourselves and our investors—on every deal we’ve made.

But that’s NOT because every single gap financing deal out there turns to gold. Lots of gap financing deals fail. We’ve just learned how to identify bad deals before we invest money—ours and yours—into them.

You Always Know if an Investment Might Fail

The fact is, every failed gap financing deal fails for an identifiable reason. And once you know the most common reasons deals fail, you can spot a risky deal ahead of time.

Gap financing deal might fail because:

  • The borrower is over-leveraged. Some borrowers take on as many gap financing loans as they can. Often, they are just stacking debt to build personal cash-flow as quickly as possible. This puts them in a very fragile financial position. Each loan increases the chance they won’t be able to pay back any of them. We only loan to fundamentally sound borrowers (with more responsible motivations).
  • The deal terms are defined by an inaccurate property value. If the borrower gives the wrong property value, then you can’t set an accurate deal value, and you can’t really determine if the deal will be profitable. We use independent property valuations to avoid this problem.
  • Actual fraud. No surprises. There’s a lot of money in real estate. And there are people out there who intentionally game the system. They take on gap financing loans that they never intend on paying back. But a lender can only really fall for one these fraudsters if the lender doesn’t perform due diligence. (It often happens when the lender themselves are just looking to make a quick buck off the fraudster.)

These common reasons for gap financing failure all have one thing in common—the lender invested in a risky deal. They chose to invest in a deal with fundamental structural problems. But that’s not investing—that’s gambling.

Their Risk = Your Liability

The problem is: sometimes the gamble pays off. Fundamental structural problems only mean that a deal can fail. But they don’t promise that the deal will fail.

This creates a gap financing market with some reckless lenders. These lenders are happy to take on a lot of risky deals because they know that even if some of their risky deals fail, enough might squeak by to make a profit.

And guess who really gets hurt in this business model…

Investors.

Gap financing lenders who gamble on fundamentally unsound deals are taking risks with your money. They don’t really care if you lose your money in one of their bad deals. The lender knows they will close on enough of their other deals that they will survive. Even if your investment does not.

We don’t like this segment of our market. We don’t want you to get stuck with one of these lenders. And we built our firm around a few core principles to avoid putting you at risk:

  • We have skin in the game. Our principals invest in all of our deals. If you lose your money, we lose our money. And we don’t like to lose our money any more than you do.
  • We only take 5% of deals that come to us. We don’t just turn away bad deals. We also turn away a lot of good deals. Why? Because we’re looking for perfect deals. That’s the only way we can maintain our perfect track record.
  • We care about D.C. This is the first thing you learn when you join our community. Yes, we’re a business, and we care about creating a healthy profit. But we also want to create affordable, sustainable neighborhoods in the process. We write about it all the time. And our lending choices reflect it.
  • We’re in it for the long haul. Our team has decades of experience in real estate lending, finance, asset management, and residential development. We’ve been here before the market turned so hot. And we’ll be here after the market inevitably enters a cool stretch. This isn’t a quick opportunity for us. This is who we are.

Investing in gap financing can offer all the benefits you’ve heard.

You can diversify your portfolio.

You can secure your investments with real-world collateral.

You can earn safe, stable returns that beat the market.

But gap financing investment is not a magic bullet. And you need to invest with the right partners—people who share your values, financial or otherwise—to invest with confidence.

If you think we could be those partners, get in touch. Either email us at info@nullevergreenprivatefinance.com , or give us a call at 202.713.9072—and let’s talk about whether our gap financing investment options are right for you.