Summary:

It’s crucial to understand that skin in the game is not just a concept, but a significant factor for real property lenders.  If a Borrower has little to lose, they could walk away from the transaction, leaving the lender to manage the property as a real estate-owned (REO) asset. Therefore, a substantial capital infusion by the Borrower is necessary.

Article:

John, the Borrower, called a lender with a loan opportunity.  He explained that he had just lost his equity partner and wanted to purchase the property himself as part of his portfolio. This situation raises questions about the concept of ‘skin in the game,’ which refers to the level of personal investment a Borrower has in a transaction.

John presented various market metrics and the reasoning behind his transaction.

He expressed his bullish outlook on San Francisco, citing the city’s efforts to address homelessness and drug issues as potential catalysts for business revival.  His optimism about the emergence of AI start-ups in need of commercial spaces was particularly intriguing.

His “once in a lifetime opportunity” looked like this: the Purchase of a vacant 3,000-square-foot commercial building at $400 per square foot, or a purchase price of $1,200,000.  He was sure that the property was worth $1,300 a square foot, so, in his mind, he would reap a significant profit the day that he closed escrows.

In the strategy of purchasing value-added real estate, searching for excellent deals is a great strategy.  Reaping a profit on a Borrower’s books may be beneficial, particularly when the property is released and has a stabilized cash flow.

However, what is lacking is that the Borrower is attempting to secure a 100% purchase price loan with no financial stake.  Lenders are not interested in becoming joint venture partners, as they would bear all the risk.