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.
Friday, July 31, 2009
Monday, June 29, 2009
Available Private / Hard Money And The Need For Capital
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.
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.
Tuesday, June 23, 2009
Private / hard money not crazy money
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.
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.
Monday, April 20, 2009
Defining Hard Money Loan – Part 2
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.
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.
Wednesday, April 15, 2009
Defining Hard Money Loans
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.
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.
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