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.
Tuesday, September 30, 2008
Sunday, September 28, 2008
Commercial Hard Money
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.
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
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.
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.
Tuesday, September 23, 2008
It Has Been A Long Time!!
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.
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.
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