We are continuing to see important fluctuations in these markets. The financial markets are moving widely, 10 days ago the Dow Jones index was below 7,000 and yesterday it closed above 8,000. The residential real estate market is stabilizing in some areas and in some other areas it is just starting to experience major decline. In a Bloomberg.com article by Oshrat Carmiel “Hamptons, N.Y. Home Sales plunge 67% in First Quarter”, the author outlines the difficulties that the higher end of the residential real estate market is experiencing. Not only the number of transactions went down significantly, but prices declined by an average of 30% for the first quarter of 2009. The author was using the Hamptons, N.Y. market as an example. On the lower end of the market first hit by pricing decline 24 months ago, we are seeing more mixed results and even an increase in demand.
More and more private / hard money lenders are receiving request for financing for the upper end of the market. It is pretty common today to get request for loans on single family residence and condos for properties with values above $1M, with numerous financing requests for loans above $1M. The difficulty is to fund these loans especially if borrower cannot justify their ability to make monthly payments. Hard money lenders don’t want to have to foreclose on properties that are this expensive and get stuck with them.
Three factors are affecting the upper end of the real estate market. The first factor is the lack of capital available in general in the banking system. The second factor is that banks are making it very difficult for borrowers who need loan above $650k to get a loan. Basically it is very difficult to get a loan unless you don’t really need it. The third factor is that numerous people in the upper income bracket have and are losing their jobs. This means that either they have to put their property on the market, or they can’t upgrade reducing the demand for these properties. The upper end of the market may be affected until 2010. In the following article from Reuters “U.S. recession to end in H2 but unemployment to rise: survey”, economist surveyed are saying that while the economy will improve by the end of 2009, unemployment will continue to increase until mid 2010.
From what I have seen in the past few years in both the financial and real estate markets, hard money lenders are going to continue to see a demand for financing for the upper end of the residential real estate market. This will come in addition, to an increase in demand for financing for commercial real estate and the lower end of the residential market. My advice to real estate professional would be to make sure you have strong file when contacting a private lender. My advice for borrower: be flexible when looking for financing.
In our next post we will consider some of the challenges that hard money lenders are facing with funding loans.
Friday, April 10, 2009
Friday, March 27, 2009
The Changing Nature Of Hard Money Borrowers
Not only has the way hard money loans are underwritten and funded changed but borrowers too. Until 18 months ago hard money borrowers were in situations so difficult that they could not get financing from banks. At the time, up to mid August 2007, subprime loans were available and only a limited numbers of borrowers needed access to hard money loans. These loans were mostly bail out loans or sometimes for “special” properties.
For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.
The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.
For the past 18 months hard money borrowers profiles have completely changed. Today bail out loans are not being approved anymore except in cases where there is so much equity that the lender cannot loose. Hard money borrowers, today, are investors with good credit or first time borrowers who need to go stated income and who are buying REO properties. Today if a borrower has a credit score below 590 the likelihood that their loan will be funded is low. However, such as everything in private lending there are always plenty of exceptions.
The typical borrower today will be most likely a buyer. In general this borrower will be open to put 30% to 35% down and in some markets up to 40%. The average Fico for current hard money borrower is 670 and up. We see numerous borrowers with Fico above 700 and sometimes above 750. Most borrowers have assets in excess of the down payment and closing costs. However, for first time home buyers there is less reserves than for investors. Finally most borrowers are employed or can show income. This apply primarily to residential borrowers. For hard money commercial borrowers the same apply.
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.
Sunday, March 1, 2009
Part 4 – Last Post on Property Values… For Now
As we continue to get reminded on a daily basis property value is about location. Availability of capital is the other major factor of value and valuation. To conclude this serie of posts on values lets take a final look at markets behaviors and numbers. One article from Forbes, was quite interesting this week "10 Best and Worst US Housing Markets". I will not give everything up, but based on Forbes analysis the best market was New York City and the worst one was Las Vegas, NV. If you want to know about other interesting markets such as Florida or Arizona, just check out the article.
While looking at number, let me encourage you to keep in mind that it is about capital and location. The New York City market is down year over year 10%, however, on Manhattan most neighborhoods are stable or even up. In the San Francisco market the most stable neighborhood is Russian Hill with a drop of 5% while the highest drop is in the Bay View Area. Continually we private money lenders are keeping tab on the state of the market as we are lending today but want to make sure that our capital will be returned when the note is due. The inference of these numbers is that the “best” neighborhoods have up to now managed to keep their values.
What about tomorrow is really the question? As we have continued to discuss we should anticipate a new vague of price decline. As an indication of the relationship between location and capital, I was looking at values, prices and sales in the greater Sacramento CA. 18 months ago the lower market crashed and for the past 6 months investors have been buying properties at $0.25 on the dollar. 12 months ago the middle classes neighborhood got hammered and for the past three months investors are picking up properties at $0.30 to $0.35 on the dollar. Sacramento is a vibrant real estate market at very reasonable prices.
Lets address the second components to this valuation review capital. Today the funds needed to invest into real estate do not come from “conventional” lending institutions. Most bank have stopped lending and they have continued to tighten their lending criteria. Even the Federal institutions are making it more difficult to borrow. Money comes today from private funds and sources that were not exposed to real estate. New private investors and equity group have raised capital to take advantage of the low values. One limitation to these sources of funds, they are not big enough thus driving up the borrowing costs.
The silver lining is that once markets have achieved the “right” pricing they stabilize. Capital will come back in. An argument can me made that the market approach to real estate works.
While looking at number, let me encourage you to keep in mind that it is about capital and location. The New York City market is down year over year 10%, however, on Manhattan most neighborhoods are stable or even up. In the San Francisco market the most stable neighborhood is Russian Hill with a drop of 5% while the highest drop is in the Bay View Area. Continually we private money lenders are keeping tab on the state of the market as we are lending today but want to make sure that our capital will be returned when the note is due. The inference of these numbers is that the “best” neighborhoods have up to now managed to keep their values.
What about tomorrow is really the question? As we have continued to discuss we should anticipate a new vague of price decline. As an indication of the relationship between location and capital, I was looking at values, prices and sales in the greater Sacramento CA. 18 months ago the lower market crashed and for the past 6 months investors have been buying properties at $0.25 on the dollar. 12 months ago the middle classes neighborhood got hammered and for the past three months investors are picking up properties at $0.30 to $0.35 on the dollar. Sacramento is a vibrant real estate market at very reasonable prices.
Lets address the second components to this valuation review capital. Today the funds needed to invest into real estate do not come from “conventional” lending institutions. Most bank have stopped lending and they have continued to tighten their lending criteria. Even the Federal institutions are making it more difficult to borrow. Money comes today from private funds and sources that were not exposed to real estate. New private investors and equity group have raised capital to take advantage of the low values. One limitation to these sources of funds, they are not big enough thus driving up the borrowing costs.
The silver lining is that once markets have achieved the “right” pricing they stabilize. Capital will come back in. An argument can me made that the market approach to real estate works.
Tuesday, February 24, 2009
Part 3 – Looking at Values and Silver Lining
Let start with the potential first “good” news of the year for most of us, the recession may end by the end of the year. According to Ben Bernanke Chairman of the Federal Reserve and outlined in this article from the AP, “Stocks up on Bernanke remarks; focus now on Obama” by Madlen Read and Tim Paradis, while the economy is in deep trouble, we could see some significant improvements by the end of the year.
In Part 2 of our current review of values and markets and in previous post we acknowledged couple of points. Real estate markets with low medium credit profile crashed first and now we are seeing stabilization. Location, is becoming even more important in today’s lending environment, both for commercial and residential properties. From a Hard Money perspective it is one primary factor for approval.
Expending on location in addition to the credit quality of borrowers the quality of the urban planning of the market in which a property is located will make a difference. Maybe because I grew up surrounded by architects, discussing urban planning and quality of life, I pay attention to these details. A striking example is downtown Sacramento CA. The city in the past 15 years or so has seen great improvements, its downtown area has been well upgraded. While values are falling, downtown Sacramento is steel very appealing. However, neighborhood further out, requiring families to have 2 or more cars are seeing accelerated losses in values.
Markets with low and medium credit profiles are starting to get out of the wood, while markets were borrower had what is considered A+ credit rating are now tumbling. They started to get depressed during the 4th quarter of 2008 and I would predict that 2009 will be one of the most difficult year ever for these markets. I believe that we may see lost in values ranging from 25% to 50% depending on location, regional economic factors etc… These markets are just starting to get affected. They are suffering from the lay offs of white collars employees. The silver lining is that most likely we will see these markets behave the same way as the medium and low credit profile markets. With this in mind we can anticipate a beginning of stabilization by the end of 2009. Interestingly, our real estate timeline correspond with the timeline of Mr. Bernanke to get out of the recession.
We need to keep in mind that this analysis primarily applies to residential real estate. Commercial real estate, will behave differently and in part in correlation to residential. Today hard money lenders understand well the values of properties in these low and medium credit markets and approve loans quite easily. However, in A+ credit markets we are seeing more uncertainties.
In Part 2 of our current review of values and markets and in previous post we acknowledged couple of points. Real estate markets with low medium credit profile crashed first and now we are seeing stabilization. Location, is becoming even more important in today’s lending environment, both for commercial and residential properties. From a Hard Money perspective it is one primary factor for approval.
Expending on location in addition to the credit quality of borrowers the quality of the urban planning of the market in which a property is located will make a difference. Maybe because I grew up surrounded by architects, discussing urban planning and quality of life, I pay attention to these details. A striking example is downtown Sacramento CA. The city in the past 15 years or so has seen great improvements, its downtown area has been well upgraded. While values are falling, downtown Sacramento is steel very appealing. However, neighborhood further out, requiring families to have 2 or more cars are seeing accelerated losses in values.
Markets with low and medium credit profiles are starting to get out of the wood, while markets were borrower had what is considered A+ credit rating are now tumbling. They started to get depressed during the 4th quarter of 2008 and I would predict that 2009 will be one of the most difficult year ever for these markets. I believe that we may see lost in values ranging from 25% to 50% depending on location, regional economic factors etc… These markets are just starting to get affected. They are suffering from the lay offs of white collars employees. The silver lining is that most likely we will see these markets behave the same way as the medium and low credit profile markets. With this in mind we can anticipate a beginning of stabilization by the end of 2009. Interestingly, our real estate timeline correspond with the timeline of Mr. Bernanke to get out of the recession.
We need to keep in mind that this analysis primarily applies to residential real estate. Commercial real estate, will behave differently and in part in correlation to residential. Today hard money lenders understand well the values of properties in these low and medium credit markets and approve loans quite easily. However, in A+ credit markets we are seeing more uncertainties.
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