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.
Showing posts with label Private Money. Show all posts
Showing posts with label Private Money. Show all posts
Tuesday, June 23, 2009
Thursday, March 12, 2009
The Changing Nature of Hard Money Lending
Just this week a broker whom I work with regularly asked me why do we need some type of income documentation from her client? If we go back to what was Hard Money lending even a year ago this is a legitimate question. Remember when the only documentation that was needed to approve a loan was a breathing borrower, a 1003 and a property, today it’s a different world. Investors and lenders have learned that caution is the norm and that property can loose value. To illustrate theses changes here is an article from the AP, "When economy bottoms out, how will we know?" by Alan Zibel, Christopher Leonard and Tim Paradis, Business Writers
A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.
The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.
Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.
In our next few posts we will continue to address these issues.
A different lending approach is being developed in the hard money world. Today you could define Hard /Private Money lending as flexible lending. Until mid August 2007, Hard Money lending was pretty much borrower’s bail out lending. When you could not get money from banks you were going to a hard money lender. Two primary reasons at that time either you were so desesparate as a borrower or the property was in such a bad shape that no conventional or subprime lenders could approve the financing. Here I am referring to residential lending as the commercial market was a little more reasonable.
The assumptions made by “most” private lenders at that time were that property values will continue to increase and that other sources of funds would be available to take out their loans. Since then the lending and financing world as radically changed. Values have collapsed and there is no capital available to do financing. Assumptions made are no more valid, thus private lending had to take a different approach.
Today private lending is more of flexible lending than bail out lending. Bailout loans are still being considered but at very low loan to values. Most of private lending today is done for investment properties and commercial properties that can not get bank loans. Banks do not approve loan for more than 4 residential properties. No more stated income loans, so self employed people are suffering, especially self employed investors. Hard money loans for borrower with low Fico (below 600) will be more complicated to get. In addition, more and more lender want to make sure that the borrower can make the mortgage payments.
In our next few posts we will continue to address these issues.
Tuesday, February 17, 2009
Values Are Down But There is A Silver Lining: Part 1
A few days ago, I went to a real estate investors meeting to better understand what small investors are looking to buy and the information they were receiving. One of the primary topics of discussion was about foreclosures, values and how to buying bank owned real estate or REO. Bank owned real estate value is currently one of the primary indicators of property values, thus an important topic.
Before countinuing, let me pass this little tip. I met a property auctioneer and for few minutes we talked about the process and what was happening at auctions. One of the most interesting pieces of information was that most properties auctioned are never bought. Banks, put properties though auctions but in 99% of the cases they repossess them.
Private money lenders are concern about property values 100% of the times. Not only they have to look at the value of properties today but they need to think about values few years later when their loans expire. This is in part a reason why when we approve loans the property valuation will be more conservative than a government sponsored lending institution. Keeping a close tab on what the real estate market is doing, where it is headed, is one important task of private lenders. To value a property we all have slightly different approach methodology. We use a combination of different tools, such as appraisals, automated valuation systems etc.. in addition our experience and understanding of local markets will be complimentary tools.
Numerous reports in January came up with the following pieces of information, property values dropped on an average 18% year over year. California has 4 of the top five markets that lost the most values. Number of sales of properties that have been previously owned has increased. The question is why are we seeing an increase in sell but a decrease in value. The answer is investors and in some cases first time home buyers leveraging low interest rate. Current home buyer are not upgrading or downgrading as it is a really bad time to sell a property.
More about valuation and market in our next post.
Before countinuing, let me pass this little tip. I met a property auctioneer and for few minutes we talked about the process and what was happening at auctions. One of the most interesting pieces of information was that most properties auctioned are never bought. Banks, put properties though auctions but in 99% of the cases they repossess them.
Private money lenders are concern about property values 100% of the times. Not only they have to look at the value of properties today but they need to think about values few years later when their loans expire. This is in part a reason why when we approve loans the property valuation will be more conservative than a government sponsored lending institution. Keeping a close tab on what the real estate market is doing, where it is headed, is one important task of private lenders. To value a property we all have slightly different approach methodology. We use a combination of different tools, such as appraisals, automated valuation systems etc.. in addition our experience and understanding of local markets will be complimentary tools.
Numerous reports in January came up with the following pieces of information, property values dropped on an average 18% year over year. California has 4 of the top five markets that lost the most values. Number of sales of properties that have been previously owned has increased. The question is why are we seeing an increase in sell but a decrease in value. The answer is investors and in some cases first time home buyers leveraging low interest rate. Current home buyer are not upgrading or downgrading as it is a really bad time to sell a property.
More about valuation and market in our next post.
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