Property Values Are Gone

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.