About Hard Money

Making Sure You Hard Money Loan Will Fund

2009-07-31T12:11:00.000-07:00

Numerous hard money loans do not fund because borrowers do not know what to expect, they do not understand what a hard money loan is and have no clear exit strategy. In addition, because of the financial crisis and the shortage of available capital, underwriting criteria have been more demanding. Numerous loan applications are not complete enough to provide funders with the information needed to make a determination.

To successfully close loans it is important for the borrowers to understand what are the terms, conditions and costs of private money loans. These costs are going to be significantly higher than conventional loans both in terms of processing fees and origination. Hard money loan should be considered temporary thus no longer than 24 months, in some cases they can be extended for longer periods. We are seeing exceptions in these terms, because buyers of investment properties are getting them at low prices (REOs), some of our investors are willing to put together longer terms.

Exit strategy becomes more and more important, as we all need to make sure it is realist so that we can get back our capital. Borrowers’ in numerous cases need to understand that offering a make sense and clear exit strategy will provide them with an advantage. In some case it could be to refinance in another hard money especially in low loan to value loan. But this is something that needs to be thought through carefully. A lot of times when I receive a call and talk with brokers this is something that we spend time looking into. Most loans funded have reasonable exit strategy, the one that are not it is because neither the borrowers nor us can see the way out. Foreclosure is not an option anymore, as most of us are not interested in taking over properties. This works both for commercial and residential properties.

Information is the big reason for loan not to close. One of the problem is that borrower do not understand that they need to be accurate. In the case of hard money it is better to get more information than not enough. As funders of private notes we want to understand who the borrower are, their intention and if they are realistic. In numerous case deal do not close because the initial information provided was in accurate or because once the complete pictures has been established a loan does not make sense anymore. In other cases, the problem is that the information is not complete thus we cannot structure a loan in a way that is both acceptable to us and the borrower. When we have the information half of the time is too late.

There is money for hard money in today’s environment, so let’s funds those deals.

Available Private / Hard Money And The Need For Capital

2009-06-29T12:28:00.000-07:00

It is always surprising to know that borrowers want to borrow money and that there is available capital but that both cannot match. Here we will take an initial look at why this is happening and what can be done about it. In general, one of the primary reasons for a loan not to get funded is that expectations are not aligned for borrowers and investors. Another important reason is that there is not a clear exit strategy outlining how the loan will be paid off. Addressing these issues and others will most likely improve the chances of loan getting funded.

Understanding the lending market is key to success. Here I am not thinking about the ins and out of the financial market, but more about how much money is available from funds and / or private investors. A number of us have seen our 401ks and IRA divided by two in the past year, this loss in value has also affected investors. Private investors are people like you and I who are choosing to make loans in addition to investing in the stock market etc… A number of investors that have invested with us have seen good returns in order of 7 to 8.5% last year but, they have experienced losses with other investments and need their money back. If we apply this behavior on a larger scale then we will see that there is much less money available even from happy investors. Thus we are currently in an investor market. There is MANY more loans requests than capital available. Only the most attractive loans will be funded.

Proper expectations make for loans to be funded. The first expectation is for borrowers to understand that they are in a lender / investor driven market. There is limited or no competition for availability of capital but there is a high demand for loans. Loan costs maybe higher today than they were even few months ago. The actions taken by the federal government in regard to lending do not affect the private lending sector in terms of availability of capital. Private money lenders DO NOT want to take over / foreclose on a property this is not what they do. Underwriting criteria are more demanding than before. On residential and commercial properties income or potential income will be considered. Credit quality is becoming a factor even for private lending. Overall borrowers should expect a more difficult environment.

Expectation and then exit strategy is the other issue. If a private lender does not know how and when the loan will be paid off then most likely it will not happen. Private lenders have in general a good idea of financing and market conditions. If they believe that the borrower will not be able to pay them back then most likely either the loan will not happen or the amount loaned will be drastically reduced. Thus if the borrower cannot repay the loan then another private lender could offer at a later date to make another loan and still meet general underwriting criteria. Having a carefully thought and documented exit strategy will contribute to a loan being approved or denied.

Private / hard money not crazy money

2009-06-23T13:54:00.000-07:00

Maybe this is cyclical but every three to six months, since the downturn of the real estate market started, I have been receiving calls either from borrowers or real estate professionals who are looking for hard money for 100% of purchase price. The argument is that they are buying properties at such a discount price and that the “real value” is higher than the purchase price, thus there is no risk in financing 100% of the purchase price from the bank. In those cases buyer are acquiring REO properties either residential or commercial ones.

Let’s look first at what is a property’s value. In general we should consider the property’s value the value at what it transacts for, with couple of nuances. For example in today’s market you need to be able to anticipate if the area you are in is at its bottom or not. If when you buy you are not at the bottom you property could lose an additional 10% to 15% in value. More importantly if you buy properties in bulk from banks the price has to be right. Here is a way a lender would look at it, if an individual can buy a REOs at $0.30 per $1.00 of previous value from a bank, this set a precedent for other properties in the immediate area. Also, this means that a bulk buyer needs to buy at a higher discount something like $0.20 and $0.25 per $1.00.

The role of private lenders is to provide loans secured by real estate, whatever type of real estate they deem will work. Until the early 1990’s most real estate financing was underwritten full doc by banks and they were requiring 20% down payment. When I first looked for a loan that was the standard. With new financial markets developed and until late 2007 you could get 100% financing for the real estate you were buying. This was limited to residential real estate financing. You were never able to get 100% financing on commercial the maximum you can get is 90%. Private money lenders are in the business to make loans to project and borrowers that most likely were turn down by banks, meaning that the risks of theses financing are higher than what the banks are comfortable with. To mitigate these higher risks levels private lenders will structure loan differently. One of the ways to structure these loans is by reducing the amount of the loan in relation to the property value. This is why most private lenders will not make loan higher that 65% and in some case 70% of the property value.

Getting back to property values across the nation residential real estate has lost value. In places where there are numerous foreclosures the exchange value of the property is going determine by the exchange price of foreclosures. In places where less foreclosure are taking place then the value will be established by the price at which a property is going to be sold within 90days of being on the market. Any other values are speculative as they don’t represent the market. Asking a private lender financing above 70% of a property value will most likely be turn down. Anything above this LTV should be considered more like joint venture financing, which is not what most private investors would consider.

Last factor to consider in today’s posting is buyer's exposure. Another reason why private investors will not provide higher level of financing is because they want buyers or owners to have some skin in the game. Put another way they want buyers to have some financial or cash exposure into the project. If there is 90% to 100% financing then the exposure is for the private lender. If there is a problem with the project then the private lender will have to deal with it rather than the buyer of the property.

Defining Hard Money Loan – Part 2

2009-04-20T09:22:00.000-07:00

In my previous post on the subject, I mentioned that hard money loans are based on available equity. Or the amount of loan requested vs. the property value. In addition, I mentioned that estimating the value of a property was not easy but that using the 90 days rule, combined with income potential or actual would help. Clearly for commercial properties, income will be the way to go for valuation. While these criteria give us a good insight on hard / private money loans

A hard money real estate loan, for both commercial and residential properties, is a loan that does not meet the underwriting requirements of conventional lending institutions. Another way to look at it, hard money loans are customized to the specific conditions of each application. Customization could be related to the property, the borrower the terms of the loans, the market etc… An argument could be made that a hard money real estate loans are all loans that are not funded under conventional underwriting standard and are more expensive.

In addition, to equity and property valuation here are few more criteria defining what hard money loans are. Loan costs are significantly higher. Borrowers will pay anywhere from 3 pts to 6 pts in fees. One point is equal to 1 percent of the total loan amount. This reflects the costs of doing loans that are customized. Loan costs also reflect the perceive risk that a lender is taking. The higher the perceived risk from the lender’s perspective the higher the costs of the loan will be.

As part of the loan costs the interest rates charged per loan will be a component of defining a hard money loan. In general interest rates charged will be above 10%. You can find in some cases lender offering loans between 9% and 10%. These programs are really limited and very specific to certain transaction. Anything below 9% will be more of a customized conventional loan that requires a little underwriting flexibility.

To summarize a hard money loan is defined by its primary underwriting criteria, available equity. Its costs in terms of points and the interest rate charged.

Defining Hard Money Loans

2009-04-15T12:45:00.000-07:00

More and more I am getting questions about hard loans from borrowers and/or brokers who have never contemplated getting one or originating one for their clients. Some of the questions are related to underwriting and some to costs. Other questions are about ltv, property types, terms etc… Here I want to start addressing these questions and continue to provide insight on hard money or private lending. One point that I would recommend to keep in mind all private lenders have slightly different ways to underwrite and approve loans. This is good for borrowers as they can be turned down by one lender and approved by another one.

Let’s looks at some of the criteria that make a loan a hard money one. The primary criteria that all private / hard money lenders will agree on is that these loans are based on available equity in the property or loan to value (LTV). However, conventional real estate lenders both for residential and commercial properties have for primary criteria credit. In regard to the LTV, If the loan amount requested is too high in relation to the value of the property then the loan will be turned down. Hard money lenders today do not fund loans above a 70% LTV. In general depending on the area of the country and within states, it will be no more than 60% to 65% of the property value.

Going back to credit and Fico score. If a borrower has good credit it does not mean that his/her hard money loan will be approved. Good credit is only one of the criteria of the approval process. Also, this will not improve the rate that the borrower will get it just makes it more interesting. Today, as we have discussed in previous post, most hard money borrowers have good credit.

In today’s real estate market the property value is really crucial no matter if you try to finance a property through conventional means or through private-hard money sources. Again this both affect commercial and residential borrowers. Commercial valuations are in a way more accurate than residential ones as they are normally based on income. As with everything else there are always exceptions to the income valuation. Residential real estate is valued mostly based on its "perceived” exchange value. This is for most people the main sticking point nobody can really agree on what that means. I would recommend as a basis to think in term of 90 days. The value of a property can be based on its exchange price, if it had to be sold within 90 days. If the real estate industry was to ask appraisers to provide valuations based on this criterion, we all would have a much better idea of a property value.

More and more we are seeing values for residential properties based on the income they would generate if rented out. This is becoming a very important factor when approving financing for residential investment properties.

Difficulties In The Upper End of The Residential Real Estate Market!

2009-04-10T13:27:00.000-07:00

We are continuing to see important fluctuations in these markets. The financial markets are moving widely, 10 days ago the Dow Jones index was below 7,000 and yesterday it closed above 8,000. The residential real estate market is stabilizing in some areas and in some other areas it is just starting to experience major decline. In a Bloomberg.com article by Oshrat Carmiel “Hamptons, N.Y. Home Sales plunge 67% in First Quarter”, the author outlines the difficulties that the higher end of the residential real estate market is experiencing. Not only the number of transactions went down significantly, but prices declined by an average of 30% for the first quarter of 2009. The author was using the Hamptons, N.Y. market as an example. On the lower end of the market first hit by pricing decline 24 months ago, we are seeing more mixed results and even an increase in demand.

More and more private / hard money lenders are receiving request for financing for the upper end of the market. It is pretty common today to get request for loans on single family residence and condos for properties with values above $1M, with numerous financing requests for loans above $1M. The difficulty is to fund these loans especially if borrower cannot justify their ability to make monthly payments. Hard money lenders don’t want to have to foreclose on properties that are this expensive and get stuck with them.

Three factors are affecting the upper end of the real estate market. The first factor is the lack of capital available in general in the banking system. The second factor is that banks are making it very difficult for borrowers who need loan above $650k to get a loan. Basically it is very difficult to get a loan unless you don’t really need it. The third factor is that numerous people in the upper income bracket have and are losing their jobs. This means that either they have to put their property on the market, or they can’t upgrade reducing the demand for these properties. The upper end of the market may be affected until 2010. In the following article from Reuters “U.S. recession to end in H2 but unemployment to rise: survey”, economist surveyed are saying that while the economy will improve by the end of 2009, unemployment will continue to increase until mid 2010.

From what I have seen in the past few years in both the financial and real estate markets, hard money lenders are going to continue to see a demand for financing for the upper end of the residential real estate market. This will come in addition, to an increase in demand for financing for commercial real estate and the lower end of the residential market. My advice to real estate professional would be to make sure you have strong file when contacting a private lender. My advice for borrower: be flexible when looking for financing.

In our next post we will consider some of the challenges that hard money lenders are facing with funding loans.

The Changing Nature Of Hard Money Borrowers

2009-03-27T12:34:00.000-07:00

Not only has the way hard money loans are underwritten and funded changed but borrowers too. Until 18 months ago hard money borrowers were in situations so difficult that they could not get financing from banks. At the time, up to mid August 2007, subprime loans were available and only a limited numbers of borrowers needed access to hard money loans. These loans were mostly bail out loans or sometimes for “special” properties.

For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.

The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.

The Changing Nature of Hard Money Lending

2009-03-12T09:51:00.000-07:00

Just this week a broker whom I work with regularly asked me why do we need some type of income documentation from her client? If we go back to what was Hard Money lending even a year ago this is a legitimate question. Remember when the only documentation that was needed to approve a loan was a breathing borrower, a 1003 and a property, today it’s a different world. Investors and lenders have learned that caution is the norm and that property can loose value. To illustrate theses changes here is an article from the AP, "When economy bottoms out, how will we know?" by Alan Zibel, Christopher Leonard and Tim Paradis, Business Writers

A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.

The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.

Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.

In our next few posts we will continue to address these issues.

Part 4 – Last Post on Property Values… For Now

2009-03-01T14:03:00.000-08:00

As we continue to get reminded on a daily basis property value is about location. Availability of capital is the other major factor of value and valuation. To conclude this serie of posts on values lets take a final look at markets behaviors and numbers. One article from Forbes, was quite interesting this week "10 Best and Worst US Housing Markets". I will not give everything up, but based on Forbes analysis the best market was New York City and the worst one was Las Vegas, NV. If you want to know about other interesting markets such as Florida or Arizona, just check out the article.

While looking at number, let me encourage you to keep in mind that it is about capital and location. The New York City market is down year over year 10%, however, on Manhattan most neighborhoods are stable or even up. In the San Francisco market the most stable neighborhood is Russian Hill with a drop of 5% while the highest drop is in the Bay View Area. Continually we private money lenders are keeping tab on the state of the market as we are lending today but want to make sure that our capital will be returned when the note is due. The inference of these numbers is that the “best” neighborhoods have up to now managed to keep their values.

What about tomorrow is really the question? As we have continued to discuss we should anticipate a new vague of price decline. As an indication of the relationship between location and capital, I was looking at values, prices and sales in the greater Sacramento CA. 18 months ago the lower market crashed and for the past 6 months investors have been buying properties at $0.25 on the dollar. 12 months ago the middle classes neighborhood got hammered and for the past three months investors are picking up properties at $0.30 to $0.35 on the dollar. Sacramento is a vibrant real estate market at very reasonable prices.

Lets address the second components to this valuation review capital. Today the funds needed to invest into real estate do not come from “conventional” lending institutions. Most bank have stopped lending and they have continued to tighten their lending criteria. Even the Federal institutions are making it more difficult to borrow. Money comes today from private funds and sources that were not exposed to real estate. New private investors and equity group have raised capital to take advantage of the low values. One limitation to these sources of funds, they are not big enough thus driving up the borrowing costs.

The silver lining is that once markets have achieved the “right” pricing they stabilize. Capital will come back in. An argument can me made that the market approach to real estate works.

Part 3 – Looking at Values and Silver Lining

2009-02-24T21:05:00.000-08:00

Let start with the potential first “good” news of the year for most of us, the recession may end by the end of the year. According to Ben Bernanke Chairman of the Federal Reserve and outlined in this article from the AP, “Stocks up on Bernanke remarks; focus now on Obama” by Madlen Read and Tim Paradis, while the economy is in deep trouble, we could see some significant improvements by the end of the year.

In Part 2 of our current review of values and markets and in previous post we acknowledged couple of points. Real estate markets with low medium credit profile crashed first and now we are seeing stabilization. Location, is becoming even more important in today’s lending environment, both for commercial and residential properties. From a Hard Money perspective it is one primary factor for approval.

Expending on location in addition to the credit quality of borrowers the quality of the urban planning of the market in which a property is located will make a difference. Maybe because I grew up surrounded by architects, discussing urban planning and quality of life, I pay attention to these details. A striking example is downtown Sacramento CA. The city in the past 15 years or so has seen great improvements, its downtown area has been well upgraded. While values are falling, downtown Sacramento is steel very appealing. However, neighborhood further out, requiring families to have 2 or more cars are seeing accelerated losses in values.

Markets with low and medium credit profiles are starting to get out of the wood, while markets were borrower had what is considered A+ credit rating are now tumbling. They started to get depressed during the 4th quarter of 2008 and I would predict that 2009 will be one of the most difficult year ever for these markets. I believe that we may see lost in values ranging from 25% to 50% depending on location, regional economic factors etc… These markets are just starting to get affected. They are suffering from the lay offs of white collars employees. The silver lining is that most likely we will see these markets behave the same way as the medium and low credit profile markets. With this in mind we can anticipate a beginning of stabilization by the end of 2009. Interestingly, our real estate timeline correspond with the timeline of Mr. Bernanke to get out of the recession.

We need to keep in mind that this analysis primarily applies to residential real estate. Commercial real estate, will behave differently and in part in correlation to residential. Today hard money lenders understand well the values of properties in these low and medium credit markets and approve loans quite easily. However, in A+ credit markets we are seeing more uncertainties.

Values Are Down But There Is a Silver Lining – Part 2

2009-02-23T10:15:00.000-08:00

What has been the motto of real estate location, location, location is truer today than ever. Location both affect commercial and residential real estate values in ways not seen before. In this post today, I want to start reviewing how location affects properties values and the state of the market in these different locations. For private lenders it is a crucial element of approving loans even more so since “conventional” banks are giving location a higher importance in their approvals.

Private lenders are in general regional lenders in a number of cases we are able to fund nationally. In part this is due to lending regulations, however, it is also due to our ability to understand markets. We could make the argument that one reason today we are in the mess we are in, is because the same lending and underwriting criteria were applied across then United States. Thus market differences and nuances were not taken into considerations.

Before moving forward with location, lets go over one crucial elements, the availability of capital. We have learned since August 2007 that if there is no money available to borrow and buy in this case real estate, then no transaction will happen. No Transaction means, no demand, no demand means prices are going down. Until buyers comeback with capital to buy properties value are not going to stabilize. Once enough buyers start making buys then a bottom has been achieved.

Different locations represent different types of borrowers and different market profiles. If we stay within the residential market we are able to see a couple of interesting patterns. The real estate markets first touched by the down turn are now starting to stabilize. These markets are in general in the blue collar neighborhoods. Properties in these markets are trading in general at 25% to 30% of their former market values. Borrowers did not have the best credit profile, they had lower reserves and lower paying job. When credit started to tighten they did not have the reserve needed to survive a change in lending policies. These markets have been depressed now for 18 months. Based on what we are seeing, I believe that we are starting to see price stabilization. Numerous investors are moving in and buying properties at 25% of their former values.

Even in these markets, there are differences. The markets that are seeing stabilizations are the ones that are closer or within larger metropolitan areas. Markets that are further away are not yet at the bottom. The way to measure this is by realizing that no investors are interested in buying properties that are further away at current prices. In addition, no private lenders are interested in making these loans yet. This may change when property are being exchanged at 15% or 20% of their former market values. Something we will follow.

Values Are Down But There is A Silver Lining: Part 1

2009-02-17T10:47:00.001-08:00

A few days ago, I went to a real estate investors meeting to better understand what small investors are looking to buy and the information they were receiving. One of the primary topics of discussion was about foreclosures, values and how to buying bank owned real estate or REO. Bank owned real estate value is currently one of the primary indicators of property values, thus an important topic.

Before countinuing, let me pass this little tip. I met a property auctioneer and for few minutes we talked about the process and what was happening at auctions. One of the most interesting pieces of information was that most properties auctioned are never bought. Banks, put properties though auctions but in 99% of the cases they repossess them.

Private money lenders are concern about property values 100% of the times. Not only they have to look at the value of properties today but they need to think about values few years later when their loans expire. This is in part a reason why when we approve loans the property valuation will be more conservative than a government sponsored lending institution. Keeping a close tab on what the real estate market is doing, where it is headed, is one important task of private lenders. To value a property we all have slightly different approach methodology. We use a combination of different tools, such as appraisals, automated valuation systems etc.. in addition our experience and understanding of local markets will be complimentary tools.

Numerous reports in January came up with the following pieces of information, property values dropped on an average 18% year over year. California has 4 of the top five markets that lost the most values. Number of sales of properties that have been previously owned has increased. The question is why are we seeing an increase in sell but a decrease in value. The answer is investors and in some cases first time home buyers leveraging low interest rate. Current home buyer are not upgrading or downgrading as it is a really bad time to sell a property.

More about valuation and market in our next post.

Getting a Hard Money Loan Is Not Easy

2009-01-27T06:37:00.000-08:00

Such as everything in today’s lending world there is reality and there is fiction and there is borrower’s reality. Recently I received an email from a broker, asking me if we were really funding loans ?. At first I thought that this was a weird questions, however, giving it a second thought I realized that this was an important concern from brokers and their clients. Today, I will try to go over why loans are approved and funded and why some are not approved and funded.

Because of low barriers to entry into the real estate industry there are a number of people with limited experience who follow the band wagon. Today some of these activities are Hard Money / Private Money lending, Loan Modification, REO Investments etc.. The lack of experience creates difficulties for brokers and their clients, as brokers realized that what was promised will not be delivered. Another issue for brokers is that to lock a potential deal, they are being quoted rates and points from funding sources before a loan has been reviewed. Once the loan is underwritten, different terms are being given.

Loans are approved and funded if:
- Borrower(s) understand that they need to be flexible
- There is limited rate shopping as the solution is more important than the rate
- There is a package well put together
- Broker, Borrower and Funder work well together
- Borrower(s) are realistic

Loans are not approved and funded when:
- Borrower can not make monthly payments
- Properties is not well kept
- Ltv is high
- Borrowers have not realistic idea of value

The bottom line if a financing you requested is approved just take it.

What About Commercial Financing?

2009-01-14T19:17:00.000-08:00

My first post of the year was optimistic and I continue to be looking forward to 2009. However, it does not mean that this year is not going to be really difficult. As 2008 was the death year for residential real estate 2009 maybe the year for commercial real estate. A good friend of mine, a hard money lender, made the point yesterday that he believes 2009 will be dramatic for commercial real estate. He believes that commercial properties have been over valued and with company failures numerous properties are going to be in default.

In an AP article “Down we go again: Faint…” the reporters goes over the most recent financial news and numbers and it does not look good. Bad results mean that companies are not going to expend and in numerous cases are going to contract. When companies need less space for offices, retail etc.. less income is being generated thus properties ability to service debt is reduce. More property owners are going to find themselves in difficulties and may decide to let their investments go.

Commercial real estate is in part regional and in part based on national trends as we are seeing a general downturn, we should expect a general downturn in commercial real estate. However, some regions maybe much more affected than other and in some cases for different reasons. Clearly Michigan is going to suffer tremendously even if the different auto companies stay in business. Areas with more diversified economy may see a smaller downturn than areas that are less diversified.

Commercial hard money lenders are going to be very selective with the type of financing they are approving. Not only we are going to be more demanding in regard to the general quality of the deal but, it is going to be more and more difficult to finance properties that are in distress situation. There will be still some flexibility available, however, this is not something that we should be expecting. In addition, as the demand for private money continues to increase, we should all be expecting that the financing process to move at slower pace than what we are used to.

On A Positive Note

2009-01-05T09:58:00.000-08:00

We know that numerous factors that are influencing our life are not great this beginning of the year, however, there are positive sings for 2009. The first positive news of 2009 is that capital is getting circulated in the economy. While credit is going to continue to be difficult to obtain the different investments programs that have been created at the end of 2008 are moving forward. We are just now starting to see the effects of these programs and as we enter 2009 we are going to see more effects of these investments.

A New president. While, I don’t like to talk about politics it is important to note that Mr. Obama has been aggressive in working on the economy. It seems, from what we know so far, that he is ahead of the curve and has gathered a strong team of financial and economic advisors. It appears that within a few days of taking office he will take actions and launch a new economic program that will help employment and liquidity. Most likely we should start seeing the positive effects of the program in Q3 and Q4.

The bottoming out of the real estate market. In 2008 we were hoping that the markets will bottom out at some point. It appears based on initial numbers that we are starting to see that bottoming out. It may take some markets until the end of the year to see this bottoming, however, it is clear that other markets are now reaching the bottom. The media is always late in recognizing trends and thus you should no see stories on that subject for another 6 months. However, looking at numbers then we are seeing the right signs, which allow us to anticipate the future.

Recognition of the problems. It took, I believe, more than a year for both the private sectors and the different levels of government to realize that we had problems. 2009 may still be a difficult year, but once problems have been acknowledged then they are possible to solve.

From a lending and a Hard Money lending perspective this means that money is going to be tight in 2009. Demand for capital is going to be higher than availability thus increasing the costs of borrowing. However, we should hopefully see some improvements in the second part of the year.

Happy New Year!!

2008-12-31T11:04:00.000-08:00

While 2008 Has Been Difficult Lets look forward to 2009 as a year of opportunities. Have Happy and Prosperous 2009.

How Much More Decline Are We Going To See?

2008-12-31T11:00:00.000-08:00

This will be the last post of the year and I wish the news were more positive than what we are seeing. Today was release the latest S/P Case-Shiller update on home prices. The report provides additional information on how values of real estate markets have moved in the past year and it is not pretty. On average in the 20 major metropolitan areas prices have declined by 18%. I am expecting as we have discussed in a previous post to see a continuing decline in 2009 across markets.

If we look at the San Francisco market as a whole the market saw a decline of 31% on average. For a number of people that I know and who are in San Francisco, this may come as a shock as the San Francisco market has the reputation to be strong. As everything else, the real estate market reality is different from perceptions.

Where to go from here, from a commercial perspective, I believe that we are going to start seeing significant decline in values. Commercial real estate has not been affected the same way as residential. Most commercial properties were underwritten and lending was approved based on property’s income. This was providing the commercial real estate market a better sense of reality. However, due to businesses closing and companies going out of business more commercial properties will loose revenue and potentially go into default. In addition, the lack of financing available makes it more difficult to complete transactions. The commercial real estate market is going to go down and in areas where prices were not correlated to propertyies' income higher drop will be expected.

For residential markets its going to continue to go down, however, the biggest down turn is going to happen in area that are just starting to experience a slowdown. In areas such as the California Central Valley, the blue collar suburbs etc… where price have declined up to 80% maybe there will be a further decline but to a much smaller extent. In the middle to upper end of the market we can expect to see 15% to 20% further decline. In the blue collar markets maybe an additional 5%.

Residential Values by Market Segments – Here it is!

2008-12-26T05:34:00.000-08:00

A few months ago, we were looking at real estate property values and the state of the financial industry and thinking that values were going to continue to go down. In the past few weeks, we wrote about this subject again. Now, we are going to look at real estate values in terms of the different market segments. As the data is showing, property values are going down overall, but, looking at the numbers more closely, we are starting to see noticeably different trends in different market segments. Despite these differences, though, it is still the case that all markets and market segments seem still to be negatively affected, regardless of whether you are looking at the upper end or the lower end of the market.

The good news is that some markets have, I believe, reached the bottom. In a post earlier, we were mentioning an economist from UCLA’s Anderson School who said that some markets might have bottomed out. DataQuick’s numbers appear to confirm this trend and also show new ones. Although the entire country is showing some similar overall trends, regional markets still exhibit distinctive characteristics. For example, Detroit may be seeing far more severe problems than Boston as its primary industry is going through difficult times. Similarly, the New York City metropolitan area had held up fairly well compared to the rest of the country until the financial storm decimated local jobs, whereas the San Francisco area has experienced a more nuanced downturn.

The lower market, considered the market for “blue collar” homes, had borne the brunt of the sub-prime market debacle, but it is now stabilizing in regard to prices in some places. These markets have lost up to 75% of their values. The good news is that these markets have started to see a significant increase in the number of transactions in some places. Numerous buyers (including some investors) are flocking to these markets and acquiring properties. However, this increased buying seems centered primarily in the surrounding areas of major metropolitan cities that have not experienced major economic problems. For example, in the San Francisco Bay Area’s Contra Costa and Alameda Counties, we are seeing increased buying, as indicated in the San Francisco Chronicle article.

The middle and upper markets have now been hit too, as illustrated by the article in the Boston Globe and the previous SF Chronicle article. Most of these markets were stable until late September and even early October, but with the repercussions of the financial crisis, they are now also suffering. These markets are going to experience sharp downturns within the next 6 to 9 months, because white collar workers are losing their jobs and the net worth of many of these individuals have been halved (partly because dramatic stock market losses have lead to major drops in 401k plan holdings or IRA portfolios).

Looking at 2009, there is hope because we are seeing the beginnings of a bottoming out.

Today’s Secret to Hard Money

2008-12-21T21:05:00.000-08:00

Getting a hard money loan is evolving as the rest of the market is changing. What was considered a loan for a hard money lender 6 months or even 3 months ago is not the same today. Until recently, most loan officers and real estate professionals were considering hard money for people who could not document income, had bad credit and/or needed special consideration. As long as enough equity in the property was available then the loan was most likely funded.

In the last three months everything has changed, the economy has taken a sharp downturn and fewer banks are offering financing for both commercial and residential real estate. The lack of available capital to be lended and the economy have made hard money lending one of the primary sources of financing for real estate. Loans that were considered a perfect fit for hard money lenders a few months ago are not anymore. In addition, because of a significant increase in demand the cost of hard money loans has increased by at least one percent on the rate and one point. Were you had 3 points loans today a borrower will pay 4 points.

Due to the increase in demand for hard money, lenders are becoming more and more demanding in regard to the quality of the files they are looking at. For investment properties either commercial or residential property’s income is becoming crucial. Most lenders are now looking at a property real or potential income. Other factors that are going to make a difference are borrower strength you are starting to see more and more files with borrowers that have great credit sometimes above 700. In addition, a property location is going to be important, the better the location the better the LTV.

While, getting hard money is more difficult than it was it is not impossible. Borrowers are realizing that there is a cost for money and that they have to adjust to the new financial reality. The good news is that if you (loan officer, real estate professional) work with a lender that has experience and is flexible most likely you will have an increase chance to make a financing happen. Also, I would recommend for all the party involved to be flexible hard money lending has guideline, but everything is about flexibility.

The Competition for Money

2008-12-16T16:43:00.000-08:00

In my last few post, I started to address the subject of capital availability. The picture is not any prettier today; in fact, it’s actually getting worse. This week, I was made aware of a number of new lenders that have stopped lending either because they are out of available capital to lend or just because they are shutting down programs. Professionals are roaming all over the world trying to drum up sources of capital to invest in American real estate.

During the past 30 days, a number of factors have made capital less and less available. More and more banks have restricted their lending abilities in the residential real estate markets. Numerous banks do not make any more such loans, while others are ceasing operations. A good source for this type of information is the blog Mortgage Lender Implode. What was once limited to the residential market is now also affecting the commercial market. More and more lenders in the commercial market are also not lending anymore either because of a lack of funds due to an increase in defaults or because they are going out business.

The lenders that are still lending are currently overwhelmed by the demand for funds. Today, lenders that have money are in the driver’s seat, and it may stay this way for the next 6 to 12 months. What was once considered expensive or excessive lending terms are today considered normal. In addition, if loan applications are not put together well, most likely financing will be denied.

My recommendation for professionals and borrowers alike is to do your homework. Don’t try to be clever if you have reasonable loan terms for today’s environment; just accept them. Make sure the information you provide is consistent and accurate. Be prepared to document information and to be as reasonable and precise as possible regarding values, incomes, reserves, etc. Be engaged and proactive in the process and cooperate with the lender. Have reasonable expectations. A loan approved today may not be available tomorrow. The situation is not likely to improve any time soon and may worsen.

Appraisals and Values -- Getting it Right

2008-12-15T09:45:00.000-08:00

As usual this week, most news relating to finance or the economy was not good or just depressing. However, some hope was provided to us via an interview in the California Report from Jerry Nickelsburg, an economist with UCLA’s Anderson School. Jerry mentioned that some real estate markets might have started to bottom out. These markets are the ones that have already seen a drop of up to 75% in value or more. Other markets are now seeing the effect of the lack of capital and might bottom out in 2009.

It is clear today that property values are linked to the economy in general and the availability of funds. If there is no money to borrow, then properties are not traded or traded only at lower prices. If people are losing their jobs, then they are not able to make their mortgage payments, thus starting to default, which increases the number of properties being foreclosed, etc. If people do not buy products in stores, then companies will start closing stores and laying off people, which worsens the downward spiral and directly affects the demand for commercial real estate. Bad economic times imply lower property values, especially in today’s environment. If you are wondering what the value of your real estate is, most likely it has gone down during the last year, even in popular resilient up-scale markets, like the good neighborhoods in San Francisco.

Knowing what we do about market conditions, it is surprising to still find appraisers, real estate owners and real estate professionals who believe that the market is doing better than it is. Every week, I come across numerous appraisal reports or property valuations, which for one reason or another show an increase in market values. How can we take these reports seriously? This week, an appraisal I received was so out of touch with reality that I took the pains to go over it in detail with the loan officer.

Today, we can only close a transaction if we make sure we understand the realistic current value of the property. This applies both to commercial and residential properties. Most of the loans that are funded now are funded because the loan officer and the borrower have a clear understanding of what the property value is. Serious and meaningful appraisal reports are very valuable, but difficult to come by. Since there are so many tools available today to estimate property values, there is no excuse for getting it wrong and for having inaccurate expectations. My recommendations are to do your homework thoroughly before you start any real estate financing process and to be conservative in estimating property values

Property Values Are Gone

2008-12-01T10:53:00.000-08:00

A friend of mine who is also in real estate went to a professional conference last week. One of the speakers was from the California Association of Realtors. This speaker told the attendees that, based on the Multiple Listing Service (MLS) value, single family residences in California have lost, on average, 46% of their value. The speaker added that, on the coast, the values were a little stronger than inland. This means that, in some areas of California, single family residence values have dropped as much as 75%. From what I am seeing, even property values in areas where single family residences have held up reasonably well so far are now starting to decline.

In the hard money world, there is starting to be a noticeable shortage in the availability of funds as numerous borrowers who cannot qualify for agency loans have turned to us. This shortage of funds and the decline in home values have made securing a loan from private money sources much more difficult than it was even a month ago. This lack of funds has also driven up the cost of money. On average, the cost of money has gone up by 1% for the interest rate and by 1% in points. This trend may continue for the next six months and may even worsen.

In today’s environment, getting financing for borrowers who need private money is difficult. As a loan officer, broker or borrower, be aware that if you want your loan to be funded, you need to make it as easy as possible for the lender. As a start, you need to make sure that the estimated value of your property is reasonably accurate - be realistic with estimating property values and make sure that the value you are using can be easily supported without being merely a figment of your imagination. While, in the past, hard money loans were typically provided on the basis of stated income, this has changed in today’s environment such that many borrowers are now expected to provide full documentation.

To succeed in this lending environment, borrowers, brokers and loan officers need to work well together and be realistic. Brokers and loan officers especially need to make sure clients understand the challenges that currently exist when funding loans.

The Belt Is Getting Tighter

2008-11-26T12:40:00.000-08:00

An informal survey of numerous loan officers around the country shows that the belt is indeed getting tighter. There is money available, but it appears that the money is staying on the sidelines. With Fannie Mae and Freddie Mac’s reported losses (see the following AP article by Alan Zibel “Freddie seeks gov’t aid after $25.3 B loss”
), the tightening of lending will most likely continue and may worsen. Loans insured by the above-mentioned companies and the Federal Housing Authority (FHA) will see increased scrutiny. Both property owners and borrowers will continue to be under the microscope.

At all levels, the demand for alternative financing is increasing, which makes approving and funding hard money loans more difficult to some extent. Today, hard money lenders see borrowers with 700 FICO scores or higher. These borrowers have properties with strong values and lower LTVs. The typical hard money borrower, who, a few months ago, was able to get any money needed, will find getting a loan funded today much more of a challenge.

Getting a loan today from a hard money lender will depend not just on the property but also on the overall picture of the borrower. An important component to successful funding will be the exit strategy - how a loan will be repaid. Borrowers, loan officers, and account executive need to be willing to work closely together in order to make financing happen. Once you have a loan approved, move forward quickly to close the loan, as it may not be available tomorrow.

There Is Money, but the Loan Don’t Close

2008-11-19T21:25:00.000-08:00

The interesting contradiction to think about is that there is money available to lend, with hard money lenders especially wanting to make loans, but loan don’t close. Everyday, I am surprised by this situation. In a tight lending environment, you would think that when lenders want to lend and borrowers want to borrow, a match would happen. More often than not, it does not.

One of the major reasons I see for loans not closing is that borrowers do not have the right expectations. Borrowers think that if they have a decent credit and property profile, loans will be funded. That is not good enough in today’s environment.

In addition, borrowers don’t understand why private loans are so expensive. The primary factor is that the capital used to fund a loan is not insured by any federal agencies and not resold to other investors. If a loan is not repaid and the value of the property goes down, the lender assumes all of the losses. The interest rate charged to the borrower reflects the combination of this estimated risk and the availability of funds. Once the right balance between these two components has been found, the pricing will be determined. The number of points charged by the lender is a reflection of origination costs, loan management costs, an amount to cover the estimated risk anticipation of potentially having to foreclose on a property, and maximum the APR allowed by law.

Borrowers and real estate professionals should understand these different aspects of pricing a hard money loan. This will allow them to be better prepared (i) to get a loan approved, and (ii) to provide the best application possible to get better pricing. In addition to the two components mentioned above, other issues that will be considered are Loan to Value (LTV), property location, and property type. Each factor will have a potentially large influence on final pricing. If a borrower expects a first quote to be definitive, then this most likely will kill the deal because, with hard money lending, every detail counts and will influence the final price. Moreover, today more than in recent years, lenders are able to dictate what a loan looks, and borrowers and real estate professionals need to adjust their expectations to this major new reality or else like their loan won’t close.

Good Loan, Think Again!

2008-11-11T20:01:00.000-08:00

A friend of mine who has great credit, great assets and money in the bank can not get a loan today because she has to go stated. My friend a self employed person who has a track record of over 10 years with a national bank does not meet the guideline anymore. Instead, this person has to find a local bank that will be willing to make an exception. That exception is going to cost a lot of money.

A loan described above once was considered an A++ loan, today it can only be funded with a lot of difficulties. This situation applies to all the areas of real estate lending. When meeting your borrowers and after taking an application you may think that you have a loan even if it is a hard money one, just think again. In today’s lending world there is a limited number of funding sources for in regard to the demand. When there is limited product availability in relationship to the demand normally prices increase. In today’s lending world prices are not increasing, per se, a lot of people are just not going to get funded.

Until recently, if you thought that you had hard money loan and that you had done your homework, the likelihood that the loan would get funded was high. The same loan today may or may not get funded because investors, lenders, funds can pick and choose the deal they want. What 6 months ago was considered a decent hard money loan will not get funded today or with difficulty. The cost of a hard money loan is the same in reality as before but the type of loans that are getting funded are not. Today loans that are getting funded with hard money were until few months ago financed by banks under their standard programs. Today hard money lenders can fund loans where borrowers have 700 plus credit, money in the bank, but for a reason or another can not get a bank loan. Other loans well get second priority.

My recommendation to all of you borrowers, loan officers and real estate agents get to know few hard money lenders. Understand their strength, how they go about underwriting the type of property they look at then you will be successful. A hard money lender is interested in working with people who have a good understanding of their files. Shopping in most cases is counter productive to having a loan close.

Cristal Ball – The Future Of Credit

2008-11-09T17:49:00.000-08:00

It is interesting to take at this time a quick inventory of where we are today in term of lending and the real estate market. In terms of banks and funds only the ones with conservative underwriting have been able to survive the turmoil. In regard to the market it seems that it is starting to price real estate portfolios values from banks and how much they have lost and will loose. With 12 months of data analysts are starting to be able to anticipate what can happen. In regard to real estate while we are going to continue see value to go down and a soft market as discussed previously Investors are making moves. Personally, I believe that we may see more problems but we may have seen the worst.

Today most of loans approved are FHA or agency loans secured by the Federal Government. In term of residential real estate very slowly lending is going to open up. However, I anticipate that next year is going to be a tight year. In regard to commercial real estate lending, while it is still happening, I also anticipate that its going to continue to be slow. Hard money and private funds that are able to take more risks will be an important source of financing for numerous borrowers.

Credit is going to continue to be very tight for 2009. Concretely this means that underwriting guidelines are going to be more specific with limited exceptions. This will apply across all the different lending categories. The most affected areas are going to be the stated programs and in particular self employed people are going to pay more for credit. Overall, while credit is going to be available its going to be more costly and more difficult to get. Working with lenders that are able to be flexible is going to be important. When working with hard money lenders loan officers and their client will benefit from their ability to be flexible.

Reality OR Fiction – Is Lending Happening?

2008-11-04T15:52:00.000-08:00

Everyday I am still surprised even astounded by borrowers. Recently, I received a request for a second position loan on a commercial property from two different brokers within couple of days of each other. I thought, I had the deal figured out with the first broker, but in reality the borrower was shopping. I am always struggling in such cases deciding if I should approve the financing or not. Brokers know that there are limited loan options today and that once they have a lender interested, they should stick with it. However, it seems that borrowers are still in a state of denial, they are acting as if money was flowing in freely. Borrowers do not appreciate that interest rates are now starting to reflect a combination of risk and availability of capital.

In the following article from the New York Times “Bank Survey Shows Credit Is Growing Even Tighter” going over a survey by the Federal Reserve, it clearly indicates that there is less credit / capital available. On a more anecdotal note, loan that are not insured by government institutions are significantly more expensive. As an example the residential jumbo loan 30 years fixed from Wells Fargo, full doc, was around 9% plus or minus recently. These are loans that will not be bought by either Fannie Mae or Freddie Mac. In the capital market for commercial properties, investors are limiting the number of loans they purchase by increasing significantly interest rates.

As a result while the federal government is supporting banks and financial markets there is still very limited liquidity and access to capital is restricted. I believe that this situation is going to go on for another year or so. For Private / Hard Money lenders this means that there will be a continued increase in demand for the capital that we have available. Because we have a limited amount of capital we will choose the “best” deals. It also means that both on the commercial and residential side of lending capital will be in short supply. For borrowers it implies that if they need financing and that they get an interest from a lender that is acceptable, not great, they should take it. Most likely, also borrowers and real estate professionals should get use to the idea that getting loans done is going to be more complicated and more expensive. Today lenders are in the driver seat not borrowers anymore, a NEW Reality.

Best Investment: Residential Real Estate Part – 3

2008-11-04T15:30:00.000-08:00

In our previous 2 posts we discussed what are the markets where to buy properties and why these markets are great. Here I will go over a number of reasons why I think they are going to become some of the best investments ever. If you are able to become an investor at this time it can be very exciting.

Appreciation:
Today, as discussed earlier, banks do not provide loans to most borrowers that were and are interested in buying in these markets. In addition, banks do not provide investment loans anymore, or stated income loans, or more than 4 loans per borrowers etc.. the pool of available buyers as dried up severely. We could argue that banks are over reacting in the other direction before they were over lending, now they are under lending. By not lending they by default depreciate price even further allowing investors to buy at price that are arguably undervalued. Once lending restart at more “normal” level, values will by default increase providing investors some appreciation.

Lender:
Borrowers who once where qualified to have bank loans will not be able to qualify for a number of years. As the owner of a property, investors will be able to become lenders by selling the property at a new market value and holding the note doing an owner financing. It is clear that owner financing is going to become very popular. Here are the math:
- Investors: bought property for $100 with $30 down and having a loan for $70
- 2 years Later: Investor sells property for $130, asking for 20% Down Payment and carrying a note for $104. Doing so investor recoup initial investment and now is a lender.

Income:
This is a great solution as well. Investors buying at low price are able to rent properties and get positive cash flow which was much more difficult few years ago. As financial conditions improve investors will be able to get new financing on their property at lower costs increasing their cash flow per property. Properties define as Single family residence, condos etc.. are becoming stable and good source of revenues.

These reasons and other make hard money lenders interested in working with investors. Trust deed investors will see their capital more protected than before.

Best Investment: Residential Real Estate Part - 2

2008-11-02T19:00:00.000-08:00

From a hard money perspective, we have established that some markets are now becoming very attractive for investors. Buying properties in such areas, may be one of the best investments investors will be able to make in a life time. Identifying these markets and the properties that make sense to buy is going to be a factor of success. Here are some pointers:
- Markets first touched by the foreclosure wave
- Markets with a lot of foreclosure currently
- Property rent can cover mortgage payments

These markets are at or close to the bottom. They were the first market touched because the primary home owners had limited or bad credit history and limited or no down payments. Home owners bought properties they could not afford speculating on property value increasing. These past home owners can not today qualify for any type of financing and are becoming renters. Some of these markets have lost 50% of their values or more.

Today investors are buying in these markets at rock bottom prices and some time at below value. In this case the “value” would be defined as costs to build even if you had the land for free. As hard money lenders we like to work with investors in these areas as we know our loans are better protected. In these markets, we would be lending in general up to 70% of purchase price.

Best Investment: Real Estate - Part 1

2008-10-25T16:20:00.000-07:00

Today there is nothing better as an investment than real estate. In this down economic cycle real estate has been the first sector of the economy to suffer. The downward spiral started in mid summer 2007. We are in mid fall 2008 while most other sectors of the economy are being hit hard by bad results, there are signs that while not yet at the bottom the fall is slowing. In my previous post The Death Spiral, I outlined two cycles and the bottom. I believe that we are in the second cycle at this time.

There are signs that investors are grabbing properties for dirt all over the country. In late summer, investors who how to recognize a bargain whey they see them, started to acquire foreclosed properties in numerous markets. In September home sales have started to increase see the following article from the AP “September existing home sales up 5.5 percent”. Most the increase is due to two primary factors, a number of buyers on the fence are making moves and investors are buying foreclosed properties. In addition, banks are becoming more proficient at selling their foreclosures.

Properties that are now being bought for 25 cents to 35 cents on the current dollar are not going to go down much more. These markets are starting to see a bottoming out of property values. These are the market first touched by the foreclosure wave. Investors who know to identify the right properties and market have started to acquire them and rent them out. Once the market is stabilized and financing again available, properties will see significant increase in value.

For hard money lenders working with investors in these markets offer great opportunities. While there is still a risk for values to go down, we believe that this risk is limited and the upside more significant. This mean that the cash invested is more secure today.

The Death Spiral

2008-10-23T19:13:00.000-07:00

First Cycle:
Banks restrict lending a little, borrower can not borrow as much, real estate market stabilize, mortgage default start, slow increase of foreclosure, banks continue to tighten credit / lending, borrower decrease borrowing real estate market goes down, mortgage default rise, foreclosure rise, lending stops (except for best bank clients), real estate market crash (first crash).

Second Cycle:
Market has crash banks are trying to stabilize, managing first cycle losses. Now stable borrowers realized that their property has lost value, they can not sales of refinance, they start defaulting, bank continue to tighten credit even with their best borrower, foreclosure on stable borrower starts, barker start a second depreciation, bank provide only limited lending, markets continue to go down (second smaller crash). There is only so much down that we can go.

The Bottom:
Fresh capital comes into market, investors grabs property for dirt value, tax dollars backed bank lending, market stabilize, bank make loans, borrower can borrow a little, more properties are getting sold, market get support, value slowly start making some gains.

For us hard money lenders everything is based on values. To get a loan today from us we will have to ascertain the value and try to protect ourselves and our investors as much as we can. We also recognize that there is a unique opportunity to make good loans. So be prepared to negotiate, be flexible and you will get funded

Use Of Funds or Blowing Equity

2008-10-23T19:07:00.000-07:00

For us it has been important to understand why borrowers were borrowing money and what will they spend it on. This is going to become even more crucial as the economy continues to tighten and there is less sources of funds. As Hard Money lenders, understanding how the capital provided to borrower once the loan was funded has been a constant priority. In our group, we were even more stringent on documenting use of funds.

In most cases borrowers have been using funds to pay debts and to make upgrades to the property we were lending on. In a number of financing, we controlled part of the funds to make sure properties upgrades were done. Today, most of the cash-out we will approve has to be related to re-investing in the property or new investments. We will reduce cash-out amount if they have no justifications.

The use of fund is crucial because I believe that in part this is why we are in the mess we are in. If banks, financial institutions, funds, etc… had paid closer attentions to the use of funds when borrowers cashed-out, maybe we would not be where we are. In the following article “Stocks Tumble on worries about earnings forecast” from the AP, the reporter writes about company performances. Basically people in the U.S. have reduced their consumption of goods, big and small tickets item it does not mater, all have been curtailed.

As numerous loan officers and real estate professional realized, borrowers were using their property as piggy banks. Funds were used to pay down consumer debt, then to buy bigger tickets item such as cars etc…. Every 14 to 18 months numerous consumers where coming back to the well, refinancing their properties. Not all property owners were doing this, but a big enough number were, so when banks stop approving new loans the system went bust. Since there is no money for consumption anymore, companies’ performances are going to continue to be terrible eventually stabilizing. For us Hard Money lenders we will continue to take a close look at use of funds as we believe re-investing in real estate should be the priority.

ZERO New Home Constructions For The Next Year

2008-10-22T10:54:00.000-07:00

It is surreal for me that we are continuing to build new homes today and that analysts were surprised that new home constructions fell sharply in September “Home construction falls sharply in September” by the AP. I am just amazed that new homes are being built. There is a disconnect between the reality of the market and what industry do. Are we going to have to bailout the big developers as it was done in Germany?

The current residential market is terrible in numerous markets around the United States. In some specific locations, San Francisco, Palo Alto, Downtown Boston, Manhattan etc… property values are barely holding or declining at a much slower pace. But in most other places in the US, markets are plummeting. So why should we continue to build new homes except to keep some people in business. More properties on the market mean that prices are continuing to go down. It also means that banks who were thinking to sell their portfolio for $0.35 / $1 now will sell for $0.25 / 1$. Thus more loses, it has to stop at some point.

Let’s stop building for a period of time. This does not mean stop making plan for future buildings and developments but for now we need to stop. Everybody in the development industry should take 6 months vacations. Another way should be to pay developers not to build for 3 to 6 months.

Continuing depreciation of property values is a problem for hard money lenders. Lost in values could make hard money loans even more difficult to get. Less money available would make the situation even more challenging than it already is.

The Hangover Is Going to Hurt

2008-10-17T14:15:00.000-07:00

Today I was reading in an article from Time.com, “The Bank Bailout’s Side Effect...” that one of the side effects of The Bailout is a rise of mortgage costs. By that the author means that interest rates on mortgages are increasing. One can ask what are interest rates representing? What are mortgage costs? This is relevant because I believe that it address a fundamental issue that nobody really discuss what should be the cost of borrowing? Or how to determine what interest rate we should be paying to borrow money?

The first confusion when talking about mortgage costs, is fees, points etc.. vs interest rate. Most news media and common borrowers do not understand that there is a significant difference between these two “costs”. One is the cost of producing the loan (fees, points etc..) the other represent the risk taken in combination with the availability of capital. If we look at capital as a product the more capital there is available, the less expensive it should be. The less capital available for borrower, or bank or anybody the more it will cost to borrow.

Nothing is free!! Well until recently most of the world was looking to get money for free. This was especially true in the United States were the real cost of borrowing was never completely factored or presented into loans that were funded. Numerous lenders were promoting, no interest credit card, free home loans, etc… which was never true. Today after a party that lasted 7 years borrowers are waking up to the real cost of money/capital/funds. The hangover is going to hurt.

Hard Money lenders know this to well, money is not free. If you really want to know what real loan costs are, ask a Hard Money lender. Within minutes they will be able to tell you both the loan cost and risk levels.

It Is About Understanding The Financing

2008-10-14T19:46:00.000-07:00

There is so much to blog about these days that it is quite difficult to know where to start and where to end. I am always thinking that the first priority for all of us is to make a financing happen. So here is more information on what will make a hard money loan close. As we discussed previously, we will attach enormous importance to value, this will be our number one concern. But there is more to it than just value, it is also about the complete picture.

A Hard Money loan will be approved based on the ability that the lender has to understand what the loan is all about. A Hard Money lender is only as good as the file and the information that he has. In general you will find that we end up knowing all the details of the financing one way or another. The more we know the more we are able to put together a loan that makes sense. Don’t be afraid to communicate with your loan rep or lender they will help you structure the financing.

In today’s market the more there is in a file the more likely we will approve the financing. As I mentioned in my previous post there is a huge demand for financing but a reduce pool of fund. Make sure your borrower understand that loan applications are competing for the limited dollars available not the other way around. Be as much educated as possible on the file and the borrower real needs, then you will close more loans. In addition, very early on you will realize which one have a chance to close and which one have not.

Trends Since THE Bailout

2008-10-11T14:42:00.000-07:00

So the bailout happened and nothing changed in term of availability of capital. More to the point the financial market got worth and even a country, Iceland, is going bankrupt. In addition, banks are continuing to tighten their landing practices. Citi just cut its wholesale division.

On the hard money front this means that more and more borrowers are coming our way. This week we have seen a significant increase in demand for loan from investors. Until now numerous investors were buying residential properties using conventional bank financing as long as they were qualifying. The maximum limit was to buy 10 residential properties. Starting this week the number moved from 10 to 4 properties. While this will cost increase investment costs for investors, it seems to make sense.

With the stock market going down private investors have less capital available. In addition, there is a significant increase in demand for private money. This means that to qualify to get private money the financing need to be stronger than before. Borrowers can not believe that they have much room to negotiate financing terms. Yes there are hard money lenders however, we are all becoming more and more conservative.

The new reality is lenders are in the driving seat. If you have a financing approved take it as tomorrow the loan may not be available.

Property Valuation: Residential

2008-10-07T08:59:00.000-07:00

Property valuation is the conner stone of any Private Hard Money loan. For lenders making the correct valuation is the difference between making a profit or loosing significant amounts of capital. Hard Money lenders' loans will not be re-capitalized by any governement agencies if the valuation is not correct.

There is not one way to valuate properties because there are as many way to valuate properties as there are Hard Money lenders. However, there are general principals that you will find applied accross the board. The more these principals are understound the better it is for real estate professionals, borrowers and lenders. In addition, to correct valuation a loan will be approved more easily if the reasons for the loan is clear.

The value of a proeperty is established by its transaction value. It is really difficult to understand why in today's market appraisal are giving properties potential values. It is miss leading for borrowers and only make the process more complicated. Hard Money lenders are quite sofisticated in their property valuation and only rely partly on appraisal. For us if we don't order an appraisal, we do an appraisal review no exception.

In market where there are numerous REOs a property value is going to be established by its REO value. Why buy a property at full price when next door there are 10 of them at a 30% to 50% discount. Another way to look at this is what would be the value of the property if we had to put it on the market and sell it within 90 days. The 90 days rule is for me the best indicator of a property value. When you ask an appraiser to provide a valuation based on this principal you will have a more accurate valuation of your a property.

REO prices, 90 days rules are two good ways to get an idea of a property value another one would be the income it generate. If you buy a property and the income it generates can cover mortgage payments then you have a good price. This is especially true if the mortgage is a Hard Money loan. Taking into account these three approach should help all of us make better valuations and more accurate decisions.

Understanding Private / Hard Money Lenders

2008-10-01T16:33:00.000-07:00

In a previous post, I started to explain how Hard Money lenders see the wolrd. The more they are understood the more likely a financing will be approved. There are a number of miss appreciation, miss understanding about Hard Money lender one of th most famous one is that they will be happy to take over a property. In general this is not the case and is a complete miss understanding of a Hard Money or Private Money lender's objectives. As with everything, there are always exceptions but in 95% of the case Hard Money lenders do not want to take over a property.

Hard / Private Money lenders are either individuals and/or organizations who provide real estate financing to borrowers who can not secure the funds through conventional channels. Hard Money lenders are interested in getting return on their investment based on the rate they are receiving. They wants the loans to be pay back so that they can make new ones. In general they prefer to invest in loans throught Trust Deeds that will be paid back within 6 months to 24 months.

Hard Money lenders invest based on property values. Risk valuation is made on their understanding of what the real estate market is doing, the likelyhood a borrower is going to default and loan amount vs the property value. They are sceptical of appraisals and valuations they have not ordered.

A Hard Money lenders know that it may have to take over a property. It is part of the risk that they are taking, however, they don's want to because the capital is not active during that time. If the take over / foreclosure of the property goes smoothly and there is enough equity, the lender will recoup its investment plus fees and missed payments. If the take over / foreclosure does not go smoothly it can become very expensive for the lenders. In case a profit is generated from the sale most of it will get back to the owner who was foreclosed. If the property could not be sold the lenders need to start managing it. Hard Money lenders are not in the property management business.

Bailout or No Bailout does it matter?

2008-09-30T11:35:00.000-07:00

The Bailout will happen and it is not going to change how banks lending practices. The press makes us believe that this will stabilize the financial world, open the gates to new loans and make everything better. While, I think that it will provide some stability to the financial world, the rest will not happen. We are not yet at the bottom, we have 6 months to a year to go.

You could ask how being philosophic about the financial world relate to hard money lending. I believe that the better we understand what's happening in conventional banking the easier it will be for real estate professionals, investors and borrowers to work together. Hard money lending can only happen if the different parties involved can find a middle ground. The other important aspect of this discussion is that the less conventional (bank) money is available the higher the demand for private hard money.

Going back to the Bailout, I believe that it will happen one way or the other. It has already started as the federal government as allowed the transfer of a number of financial institutions by gauranteing part of their debt. The BAILOUT is just another component of all of this. Currently there is a lot of political posturing. In an article i red today that the representant who are in a tight race (no matter which party) mostly voted against it. The other voted for it. So it will happen once everybody is done posturing.

Being realitic, the bailout is not going to change much about current lending practices. As banks and financial institutions have received a beating and will continue for some times, credit will become more difficult to get. For people in the hard money world this means that:
- Need for hard money will and is increasing
- Due to higher demand rates on hard money will increase
- Lender even for hard money loans will be more selective
- Documentation and lending criteria will be more demanding
- All the parties working well together is a primary requirement

Your comments and feedback are most welcome. Do not hesitate to post hear or contact me.

Commercial Hard Money

2008-09-28T15:26:00.001-07:00

For numerous people understanding how a commercial hard money is approved is a mistery. In reality there is nothing simpler. A hard money lender wants to be confident about proeperty values and the income it generate or could generate. The rest is not as important.

Let me debug an hurban legend: A hard money lender does not want to take over a property. Foreclosing is not in the best interest of a lender it cost money and prevent the lender to re-invest its capital. When a property is foreclosed its then sold at auction any extra money generated is turned back to the former owner. When a lender keeps a property its in general because nobody else wants it.

Commercial Hard Money loans are going to be approved based on property income actual or potential. A lender wants to acertain the ability the property has to service itself. The net income generated from by the property should cover the loan monthly payments on an interest only basis. The Loan To Value is not as important as the income. There will be more or less flexibility based on location. For example a downtown building will command more exception than a building in less desirable area. Hard Money Commercial lending is all about understanding what the financing is all about.

Be Realistic

2008-09-28T14:49:00.000-07:00

Today, more than ever, the only way to get any project funded is to be realistic on what your orbjectives are and what the project is all about. In addition, a borrower should expect to pay if he wants to have flexible borrowing options. When the fed lower interest rates, it does not affect hard money lending. Today, there is less money available to finance project. The most attractive project will be financed the other will not.

A big NO NO!! Regularly, we are still getting calls from either brokers or individual who tell you the following "I am buying a property for $1,000.00 but its real value is $2,000.00". Well if the real value was $2,000.00 it would be transacting for $2,000.00 not $1,000.00. This is for Single Family Residence up to 4 Units. In REO areas this even more true. The value today of an SFR is what it will effectively transac for within 90 days. It does not matter if the property is owned by a bank or if it is the current owner who will sell it.

Here is what I am saying, REO prices are current market value and this will not change for a while. Look at it another way, if you want to buy gas and two stations ooffer it one offer the gas .50cents lower than the other one. The only thing to do to get the lower gas is to go accross the street, what will you do? Personally, i am going to go accross the street. Same for houses, because there are so many properties owned by bank, only in certain areas such as San Francisco, Downtown Boston, Manhatan etc... you will pay a price that is not as discounted. However in places such as, Miami, California's Central Valley, Phoenix AZ etc... you will buy property at great discount prices.

It Has Been A Long Time!!

2008-09-23T19:12:00.000-07:00

Since my last post the bottom has fallen but it has not yet stopped. I will predict that we are going to see the bottom go down for another year. In some places it may be a little softer, but anybody who expect values to get better may find themselves in a lot of trouble. So what does this means on the hard money front.

Today for borrowers there is two options Conventional financing for borrower with good credit, healthy assets, down payment and steady income or hard money. This applies both to commercial and residential properties. In addition, a number of hard money lenders have lost significant amounts of money and can no more make loans. This means that there is less hard money available. Less means More. Less capital available to invest means higher cost of capital, higher rate. Borrower should expect to pay more.

Values are continuing to go down, since hard money lenders are going to base their loan amount on values then they will be carefull. In today's market values are calculated using REO prices. REO price are the real value, who would by a property at its full price when next door you can have aproperty at $0.45 on the dollar. Another way to look at it, if the property (assuming a single familly residence) was to be foreclosed what would it go for within 90 days? Then depending on the areas financing would be offered between 60% and 70% of the value. As an example downtown Boston, MA would be financed for 70% on the other downtown Bakersfield CA would be financed for 60%.

Keep in mind, money is available for the right financing even if it is more expensive.

Funding Loans In Today's Market!

2008-04-22T17:19:00.000-07:00

Real Estate lending in today's environment could be considered a high risk activity. The valuations are plumeting and exit strategies are becoming difficult to anticipate. In addition, more and more financial institutions are limiting or completely stopping any type of real estate lending. With less capital available the demand for properties is going down thus bringing the prices further down.

Another factor to consider for the continued miss understanding of the issues is the type of information available. In general, there is a lot of wishfull thinking and miss leading or just bad information in the market place. The press does not help much and maybe creats more difficulties.

It is important to try to understand the problem because this allows for solutions. Appreciating the issues enable us real estate agents, loan offiers, bankers etc.. to help the industry recover. Accepting that there is a system wide problem and working on solutions allows us to stay in business.

Loans are not funding because from the borrowers to the investors, everybody has the wrong expectations. A lot of people do not realise that the money available a year ago is not anymore. More to the point, they know it but act like it does not matter. Everybody lost perspective of what a loan is. A loan is an instrument/ tool to achieve an objective. Defining the objective will allow to secure the best loan for the borrower, it does not matter if it is for a residential property or for a commercial one.

Let me conclude here, if an entity wants to have access to real estate financing today and I think in the future, they will need to uderstand the objective of the financing.

Land Financing - Not That Simple!

2008-03-19T08:56:00.000-07:00

It has always been a little more complicated to evaluate land financing than any other real estate transactions. In part because there are much less land transactions so less comparables. In addition, different pieces of lands, even geographically closely related, may have significant different usage. This being said, there is still a need to provide financing for land and land development.

When thiniking of land value here are couple of pointers for you and your clients to consider. If the land is supposed to be developped for residential purpose make sure the final value of the lot make sense. The estimated value of the lot has to be in line with the future value of the completed property. If the land is only used for agricultural purpose, then the valuation is done based on agricultural value. There is a significant difference in value between land entitled and land that is not. However, at this time the difference in value is not at significant as it once was. Finaly, we at this time land for commercial use is in higher demand than residential development.

In term of financing, land values have dropped significantly not only accross California, but in the US in general. The drops that was seen and that we are seeing are related to how fast and high values of improved property had increased in the last 5 years. Land values have drops between 30% and 80% in the past 8 months. When providing financing a lender will look at these issues and then be conservative. On land not entitled LTV will be 25% to 35% on lot LTV will be up to 55%.

Make sure to send me your feedback on this and other post at gui@euroeq.com.

Fast Funding Reality or Fiction?

2008-03-11T12:49:00.000-07:00

Everyday I am contacted because a borrower needs money rapidly. When I say rapidly, I mean within three to four days. While it would be nice to be able to deliver funds this fast in mosst cases it will not happen. For due diligence I contacted a number of other hard money lenders as an informal survey and all agreed that this was not feasible. As you can see I did not say impossible, but realisticaly not feasible.

Hard Money loans are not gambling money, they are loan securitized by colateral which is real estate. The securitization process requires to go through a number of steps. Taking these steps from identifying the property, putting together a loan solution, to recording the loan will take a number of days. In general it is difficult to fund a loan in less than 6 days on average.

As a perspective I have spoken with colleagues that have funded loans in four days. At the same time, I have spoken with colleagues that would not even look at packages unless they have at least 6 to 10 days. If a loan is needed rapidly then but can not be arranged there are a number of alternatives to be considered, from getting an extenssion on a purchase contract and foreclosure to negotiating with different creditors. In most cases this can be achieved succesfuly, only once in my experience this was not possible.

Commercial Apartment Financing and Underwriting

2008-02-12T12:03:00.000-08:00

Each time I speak with a relative in France who is in banking, I am reminded how lucky we are in this country with our financial system. Even in times of crisis, the availibility of funds is greater than in most countries in the world. The trick is to use these funds to do the right investments.

Commercial Apartment Financing is the first type of property that we will be looking at. These types of properties are very comon and in general good investments for buyers. I am referring here, to building with more than 4 units. Up to 4 units, these buildings are considered residential properties and will be subject to residential guidelines. In this post, we will go over the process and time line next post will go over the numbers.

Here is the process either for Refinancing and/or Buying:

Day 1: Loan Application Received by Broker/Bank
Day 2: Initial Review
Day 7: Initial Review completed Bank / Broker express interest
Day 8: Terms and Condition offered to Borrower
Day 9: Terms Accepted additional documentation provided by borrower
Day 13: Conditional Approval Issued subject to Appraisal
Day 14: Appraisal Ordered by Funding entity
Day 30: Appraisal Received
Day 40: Final Approval issued
Day 46: Documents Drawn
Day 47: Documents Signed
Day 50: Loan Funded
Day 51: Loan Recorded

As usual this is only an estimated timeline, subject to changes based on the bank and the time of the year etc... In general a Hard Money lender can fund these types of loan much faster from 10 days to 30 days depending on the specifics. I am seeing and doing this regularly and numerous investors are using hard money lenders because they need short term financing and no prepay.

Second Position Loan on SFR Stated/Stated Just Funded

2008-01-11T16:35:00.001-08:00

Before moving forward with Hard Money Commercial underwrting, I wanted to go over a concrete loan that I funded. From time to time, I will go over real loan cases to move from theory to practice. This loan was funded as a second position, stated income, stated assets loan, interest only with no prepay.

This loan was complicated for a number of reasons:
- Owner Occupied
- No Prepayment Penalty
- Loan Amount
- Loan Position
- Use of Funds
- Employment Status

At the same time they were couple of positives:
- Credit
- Loan To Value

Working with the Mortgage Broker and helping him understand all the potential challenges became very important. Fortunatly, we were able to communicate effectively and enough equity was available in the property to make the transaction possible. Challenges that we addressed:

Employment: One of the two borrower was self-employed for a short period of time. While we don't verify income we want to be confortable.

Use of Funds / Proceeds: Funds would be used to finance the above referred business. The combination of both new business and need for operating cash more challenging to approve.

Loan Position: A second position is not bad, but in this trouble lending times, every aspect of loan becomes important. A first position is always better than a second. However, the borrower was not interested in a new first since they had a loan with a fixed interest rate bellow 6%.

Loan Amount: The loan amount needed was higher than the loan amount of the loan in first position. We would have preferred doing a new first loan, but borrower had a great rate for his first.

Prepayment Penalties: In Hard Money lending prepayment penalties are, in numerous cases, part of a loan. They help provide investors and funds guarantied returns. In this case the borrower wanted to have the flexibility to refinance in 6 months as their financial position will be changing.

Occupancy Status: in some cases it can be an issue due to maximum APR authorized by law. When loan amounts are small and/or interest rates are high then we run on the maximum APR allowed by the law. In addition, we need to be carefull on the number of maximum points that can be charge as they will be included in the APR. As a second position in this case we had to charge a higher rate

Compensating factors wer the LTV after all we ended up making a loan at a 60% LTV. Who would not want to do it? Credit was reasonable for a Hard Money lender, mid 600s.

Commercial Valuation The Golden Ratio DSCR

2008-01-09T18:39:00.000-08:00

Understanding how to value commercial properties is always a challenge. Not only the valuation process will be based on the income that a property generates or should be generating, but also on local and regional factors such as employment and the overall economy. Today, one more factor will be of consequence the availability of credit. Income is the primary decision making factor, all of the other ones are secondary even credit(to a certain extent).

Income is important, because a commercial property is an investment. Investments need to generate return that are performing to a minimum level. Every investment type will have a different expected return the more risky the investement the higher the expected return should be. For example buying a stock in coke will have a lower return than buying a strock in technology start up. The same applies to buying and selling Non Owner Occupied and Commercial properties.

The DSCR or Debt Service Coverage Ratio establish the relationship between income and debt on the property. The higher the DSCR the higher is the level of income in relation to the debt that needs to be serviced.

Debt Service Coverage Ratio = Net Operating Income / Debt Service

Net Operating income = Gross Income - Vacancies - Expenses
Debt Service = Monthly/Yearly loan payments

DSCR >1 Highly desired in most of the country provide best credit

DSCR = 1 Not as attractive but limited number of financing available

DSCR <>Very limited options

What loan at What cost?

2008-01-09T18:29:00.000-08:00

Loans and lending are continuing to be a topic of interest. As the economy slow down providing the best financing possible to borrower is crucial. Until recently numerous borrower thought that they had an understanding of lending. As it appears, numerous mistakes were made. Today as real estate professionals we have the obligation to provide more valuable financial information and advice to our clients. Telling clients that they are getting the best rate does not really address anything and provide very little information.

As your can imagine, as a Hard Money Lender I get he usual your rates are too high from a number of people. This type of comments reflects a foundamental miss understanding of what an interest rate is. A rate represent a risk the higher the potential risk, the higher the rate. It is clear that subprime lenders provided financing solutions at rates that were clearly to low. If they had provided loans at rate that reflected the risks, most likely we would not be in the mess we are in today.

Understanding the intentions of your clients will allow you to help them understand what option they have. Once you are able to establish what your clients need, then your can help them understand the different options and costs associated with each options. I am a firm believer that discussing costs and options is the right approach. Our clients should understand that every loan has a cost, that different types of lenders will offer different products.

Basics of Commercial Loans

2008-01-04T16:39:00.000-08:00

Commercial loans come in all shape and forms. However, you could identify three main categories:

A Paper Commercial - This is standard commercial lending. To qualify for such a loan a borrower needs to show all documents. Banks will verify property income based on leases and taxes (2years). Profit and lost statement will be required as well as income and expenses statement. Assets will be verified and credit score will be part of the lending decision.
Stated Income Loans - This categorie of commercial lending has been developed recently. The primary difficutlty with these loans for most banks that provide these types of financing is to establish the value. The value of a commercial property is normaly established by the income it generates. If income can not be verified then establishing values and LTVs is more difficult. Bank providing these types of financing will command higher rates due to higher risks.
Hard Money Commercial Loans - This is a little different than Hard Money Residential. Commercial Hard Money is for borrowers or properties that have issues. It does not mean Stated / Stated or no documentation etc... Valuation will be a concern as everything else listed above, however, a Hard Money lender will be much more flexible looking at the documents, credit, reserves, occupancy, leases etc... In addition, loan terms will also be more adaptable.

Hard Money Commercial lenders offer usualy more flexibility than banks and will lend on properties that bank will not consider lending on. Combining a number of these different factors will make a borrower get a Hard Money loan.

Commercial Hard Money Loans

2008-01-03T16:28:00.000-08:00

Commercial real estate transactions are a great way for a number of real estate professionals to diversify their offering and business. Like the residential industry, commercial real estate is being affected by the residential credit crisis. However, a number of options exist for commercial borrowers who need some financing flexibility.

It is important to understand why a current or a potential owner of a commercial property would use a Hard Money / Equity lender:

No Prepayment penalties: most commercial loans and even some Hard Money ones, have hefty prepayment penalties. In some cases, they have a lock out period and a prepay up to 10 years.
Underwriting Flexibility: Hard Money lenders will need as much documents as possible, however, they don't require a perfect situation. An under leased building or low credit borrowers are acceptable situations.
Faster Funding: While banks, even once a loan approved, can take some times to deliver funds, hard money lenders are in genearl a little faster.
Flexible Loan Terms: This is really important hard money lenders are able to customize loan terms to reflect a borrower's need.
Payment Structure: Interest only will be the standard loan payment.
Loan Position: A Hard Money lender is able to offer first and second position loans.

Commercial Borrowers / Corporation do not have the same motivations as residential borrowers. In addition, methodologies, loan documentations and properties valuations are not done the same way as in residential transactions. If as a real estate professional you have not done a commercial transaction, contact a lender or go to a training and read this Blog to learn some of the basics.

New Year Resolutions For Hard Money Loan

2007-12-31T11:58:00.000-08:00

Because of the turmoil in the credit market be aware that to get loans through even with hard money lenders its going to be more difficult. As a new year resolution, I would recommend that you, as a reals estate professional, collect as much documentation as possible. If you are a borrower, try to be as clear as you can on your needs and objectives. The more information available to lenders the merrier in this current lending environment. Investors want to feel confortable that loans are making sense.

This is it for 2007!!

Have a Great Celebration and Enjoy 2008!!

From Chaos To A Renewal

2007-12-30T18:55:00.000-08:00

2007 was a bad year for the U.S. real estate industry. The scale of the problem became clear in the second half of the year. For some of us, by late 2006 we started to see some problems in the credit market. In December 2006, Ownit Mortgage closed its doors. In early January 2007, Wall Street investors restricted some of their investments in mortgage backed securities. With the collapse of New Century Mortgage, the problem for most Mortgage professionals became apparent.

2008 is going to be the worst year ever for the real estate industry in the United States. The banking system is not going to collapse, however, lending as we have experienced it for the past 10 years is gone. This crisis is both affecting the residential and commercial real estate markets. Two type of lending is going to survive, lending offered by large banking institutions to A (best) credit borrowers and lending extended by small and/or large private/equity/hard money investors.

Out of this collapse, a more balance real estate market will emerge. Homeowners, investors, banks and real estate professionals that had a reasonable approach to real estate will come ahead. Most speculators are experiencing and will experience serious losses. The only challenge is to forecast when the return to stability will happen. This stability may not comeback until the end of 2008 or sometime in 2009.

Credit Lending For Early 2008 Does Not Look Good

2007-12-26T17:01:00.000-08:00

A few entries ago, I was talking of a global crisis and this weekend I received another confirmation of it. My sister and brother in law are two French people working in London, England. For those of you not familiar with the role that London play in the financial world, it can be compared to New York but for Europe and part of Asia. Over the weekend, I had the pleasure to speak with both of them and they mentioned that between 15,000 to 20,000 bankers will be loosing their job in the new year.

These lay-oof are a direct result of the lending crisis started by the collapse of subprime lending in the U.S.. This means that numerous banks, many that we may not have heard about, have loss significant amount of capital in the U.S. real estate market. As a consequences, many will stop buying bonds secured by U.S. commercial or residential real estate. Which, I believe means that we may continue to see additional problems in the U.S. lending market.

Personally, I believe that we have not experienced the extent of the problem and 2008 will be one of the most difficult real estate year in the U.S. In addition, we may continue to experience a significant lack of liquidity.

What are residential properties worth?

2007-12-21T14:05:00.000-08:00

Isn't this the $1,000.00 question, what is the property's value? The answer to that question will depend on who you are speaking with and what you are trying to achieve. Because each group in real estate has a different interest, you can find a wide difference of opinions. As a rule of thumb, escpecially in today's market, I recommend everybody to be conservative in their property valuation. Here is what I have seen:

The home owner will want to think that he did a good transaction and so most likely he is going to be somewhat generous in valuating his own property.
The Real Estate Agent in charge of selling the property want the listing and close the transaction. The Agent will try to offer a reasonable but maybe a little optimistic valuation.
The Real Estate Agent in Charge of representing the buyer will want to provide a valuation mostly on the lower side to get the best deal for its client.
The Appraiser will have its own opinion based upon his/her perceived understanding of where the market is at.
The Buyer wants to have a "Good Deal".
The Credit lender will not really care of the value as long as it makes some sense and the borrower qualify for its program. Credit lenders focus more on the Credit quality of their potential borrowers.
The Hard Money Lender will care the most about the value because its the only protection they have for the loan.

Hard Money lenders are the most concerned about property value and here depending on the lender there will different way to estimate. Today for most of us consider appraisals not good enough, because an appraisal does not give us a property price that would reflect a sales of the property within 60 days. As a Private / Equity / Hard Money lender we need to think in term of worst case scenario most of the time.

What to use to valuate a property would be the MLS or multiple listing service. Other tools would be web site such as Zillow, Trulia etc... What information to look for are square feet, property condition, days on the market, number of foreclosure in the area if any, number of short sales in area if any. Availability of capital, if there is money available for loans value would be higher than when there is not enough. Today in the market its difficult to get a loan above $417,000.00 which is the conforming loan amount. The most standard a property is, the easier it will be to sell, the better its value will be.

As you can see, valuation is not an exact science and rely on so many factors. Taking all of this into consideration and sometimes, even more data, will give us an idea where we think the value of a property is. Because hard money lenders will have their own money on the line, their valuation will be on the conservative side. Most Hard Money lenders do not re-sale the loans they make on the secondary market, they keep them on their portfolio.

Loan To Value - Where Are We?

2007-12-20T18:33:00.000-08:00

Hard Money loans are based as we all know on equity protection, or amount of money lended against the total property value. On single family residence, Credit lenders were lending up to 100% of property value and Equity / Hard Money lenders were lending up to 70% and in some cases 75% of property value. Since August, everything has changed no matter what state you are in, lending guidelines are not the same either for Credit or Equity / Hard Money lenders. Here are some ideas of the current Standard LTVs. Some areas of the country may experience slight differences.

Premier Urban Areas (Manhattan, San Francisco, Boston) - good to best locations within these areas Max LTVs 65%. Exceptions to be granted for 66 to 67%.
Premier Urban Areas - standard locations Max LTVs 62% to 63%.
Standard Urban Areas - Max LTVs 60%
Foreclosure Areas - Max LTVs 50%

The above LTVs are for single family residence up to 4 units. They may vary depending upon the area of the country or within specific states but not by so much.

As I always say the more information the merrier. When you come across a Hard Money lender in your area of operation with loan programs that you want to share, send me the info I will put them up.

The Lending Crisis

2007-12-16T16:19:00.000-08:00

As mentioned in my previous post, Hard Money lending is booming because Credit lending is in crisis. As a Frenchman, I am interested in financial news from France and Europe which allow me to have additional perspective on the Credit lending meltdown. For once we can be sure of one thing, we are facing a world wide crisis affecting banks from Europe to Asia. While the crisis offers numerous new opportunities to Hard Money lenders it also create some new challenges. Here I want to outline some of the issues that we are facing so that if you have to finance a loan through a Hard Money lender you will know what to expect.

Property values are declining and nobody know where and when it is going to stop. Since Equity is the only protection that Hard Money lenders have against default by borrowers, lenders are becoming very careful. In a down market equity protection can and may disappear. Until we start to see a stabilization of values be prepare to see lenders only finance the loans that are offering enough Equity protection. In addition, lenders will be very concervative in establising these values.

Appraisal license: We come across this regularly appraisers are doing appraisal that they are not licensed to do.

Clear Exit strategy is going to make a difference, because refinancing without an understanding of what is going happen leads to more foreclosures. As and example, if the property is going to be sold then get a listing agreement with the borrower.

Make sure the costs are reasonable. We should all be aware of the legal limits and ethicaly costs should be reasonable.

If there is a change on the title make sure that all the party involved understand what is going to happen. There is no secret, everything will be disclosed make sure that all is on the up and up.

A Booming Business

2007-12-14T15:37:00.000-08:00

For most of us it is difficult to ignore the challenges that the real estate world is facing. Everyday we are receiving news that a company or a real estate market is not doing well. Even in France, where I am from people have heard of the U.S. real estate crisis. The "subprime" meltdown highlight a very important point of the real estate world, if there is no capital available for buyers / home owner to borrow then no transaction will be completed. Until late July 2007 when capital was easily available no questions regarding financing were asked, today it is a complete different ball game. If you are involved in a real estate transaction and you want to close it, understand financing has become very important. Here we are going to discuss a specific segment of the industry Equity or Hard Money Lending.

Since mid August everything has changed, there is less and less capital available for buyers / home owners to borrow. As banks and financial institutions are tightening their lending criteria and as subprime lending has disapeared borrowers are turning toward alternative sources of funds. Hard Money lending offers borrowers access to capital based on property value and not based on credit. For a Hard Money lender credit is somewhat irrelevant to the approval of a financing. The loan is protected by the "equity protection" available in the real estate property. Today, Hard Money lending is a nitch industry exploding as credit lending is contracting.