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.
Saturday, October 25, 2008
Thursday, October 23, 2008
The Death Spiral
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
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
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.
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.
Wednesday, October 22, 2008
ZERO New Home Constructions For The Next Year
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 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.
Friday, October 17, 2008
The Hangover Is Going to Hurt
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.
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.
Tuesday, October 14, 2008
It Is About Understanding The Financing
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.
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.
Saturday, October 11, 2008
Trends Since THE Bailout
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.
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.
Tuesday, October 7, 2008
Property Valuation: Residential
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.
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.
Wednesday, October 1, 2008
Understanding Private / Hard Money Lenders
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.
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.
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