New Year Resolutions For Hard Money Loan

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 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

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?

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?

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

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.

1. 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.


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


3. 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.


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


5. 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

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.