Wednesday, November 30, 2011

Hard Money Lenders: Some things you should know

Hard money lending in California is just as popular as it is in most other areas, particularly with property buyers. You might wonder why credit seekers would likely decide on private hard money lenders over traditional loan associations. You may often hear or read that private funders demand extra or that they are known to be a last option for funding.

The truth is that California hard money lenders offer many services that the banks cannot or will not. They approve more loans, in a timelier manner. They understand the needs of the investor, since most of them have invested in real estate. Many of them still do. Some of them are even considered specialists, a good choice for the rehabber or reseller. The fees that they charge are reasonable, for the most part, but to get the best deal, you should shop around.

You see, some states have regulations in place that protect consumers from unreasonable interest rates and penalties. There are a number of laws that affect the practice of hard money lending in California, but there is no cap on the interest they can charge; no maximum limit on fees. Once you start shopping, you will see that there is a wide range of charges. As with most other things, the easiest way to compare is online.

You will find that California hard money lenders are competitive. They want your business, so they advertise. One of the best ways to choose a provider is to simply evaluate their website. Look for the ones that detail their approval process, repayment plans and additional services. The more up-front they are about what they have to offer, the more likely it is that you have found a reliable legitimate source of funds.

You probably want to avoid anyone that charges an early repayment penalty. If you are reselling houses, your goal is to get the repairs done and find a buyer quickly. You lose money when a house is sitting empty. If you are doing rehab projects, you should look for a California hard money lender that specializes in rehab funding. They can provide funds for purchasing, closing costs and repairs, if the loan to value ratio is right.

Finally, you do not need to limit yourself to hard money lending in California, specifically. For many years, most private financiers only operated in small regions, so that they could drive to the property if they wanted and take a look around. Today, there are great companies that make loans nationwide.Check them out. They might be the best choice for financing your future projects.

Saturday, October 22, 2011

Trust Deed Investing vs. The Stock Market

Stock Market Trust Deed Investments
Collateral is
Secured by a Recorded
Deed of Trust
Collateral is
Collateral is Fully Inusured
Returns are Unknown Returns are Fixed
by Contract
"Paper" Serves as Collateral Tangible Asset Serves
as Collateral

Simple enough?

Tuesday, March 1, 2011

We Need More Foreclosures.....Unfortunately

Current rental prices are unsustainable with middle class income being driven down. This does not just apply to residential properties but, more importantly applies to commercial properties. Rents have leveled off and gone down some, but not enough. For every cent you pay per square foot, the prices that you charge have to change accordingly, mostly on the smaller end. If you walk down the street and into a flower shop, the flowers will be more expensive, mainly because of the rent that the owner must pay. The inflation rate is low, right? Prices are going up, not necessarily because of inflation, but mainly because of rental prices. Loan values were pushed up, property values were pushed up, and now the only way to force these prices down are foreclosures.

When a borrower obtains a commercial loan, the main factor that is looked at is the debt service coverage ratio. The basic principle behind this is, for every dollar that goes out, how many dollars come in? This is calculated using the net operating income (NOI). Here is a sample:

$50,000 gross income
$5,000 property taxes
$1,500 property insurance
$2,500 vacancy allowance (5% of gross)
$41,000 net operating income (NOI)

The vacancy allowance line-item has been historically 5%, but it has been ever-increasing, especially with retail or office space due to the fact that there are many vacancies. Some investors would require a 20% vacancy allowance, but for the purpose of this example, we're using 5%.

The typical debt service coverage ratio requirement is 1.25. For every dollar that goes out, $1.25 comes in. Using this example, the maximum gross mortgage payment on this property could be $38,500 per year which, at a 5% interest rate. A commercial bank would allow a maximum mortgage balance of $550,000.

This goes a bit deeper as the value is typically based on the capitalization rate of the property. The capitalization rate is a tricky number to determine, but a rule of thumb in the private money world is right around 8.0%. In the conventional commercial financing world, it would be 7.0% or less. To determine value using the capitalization rate, you would divide the NOI by the capitalization rate which, using an 8%, gives us a value of $512,000. Obviously no one would do a loan of $550,000 with a property valued at $512,000. Using a 7.0% capitalization rate, which would give us a value of $585,000 and an 80% loan to value (LTV) loan would be roughly $470,000.

Enough about the technical data, at least we have a basic understanding of valuations and debt servicing. As foreclosures mount and properties are liquidated, investors who buy these properties demand a higher capitalization rate which drives prices down. Consider this example; you own a property and when you received your loan, it was valued using a 6.0% capitalization rate. This gives you a target price per square foot of $2.00. If the property next to yours forecloses and an investor purchases that property, he has the ability to rent the property for $1.50 per square foot where he can out-compete with you. You must continue to try and rent the property for $2.00 per square foot. This is why we see so many "For Rent" signs on commercial properties, because they're unable to compete. This has driven down prices and forced more commercial owners into foreclosure, but that is not enough and that is why we need more foreclosures in order to get prices down to a reasonable level.

Thursday, February 24, 2011

Loan to own? Or Steady Monthly Income?

During the intake of new investors, we meet many new people with different perspectives. As we put investors together with loans, sometimes it becomes a balancing act. Though our policy is not for the purpose of foreclosing, we have many investors who would prefer us to foreclose and potentially profit on the sale. Other investors would prefer us to be as safe as possible, to generate the monthly check and get paid off successfully. While pooling investors, we have to be cognizant of their individual wants and needs.

We tailor the investment opportunities to our clients while maintaining our integrity with our borrowers. We love to hear new perspectives so that we can more creatively help our clients and generate income for our investors.

investors, trust deeds, trust deed investments

Thursday, January 20, 2011

How to most effectively obtain a hard money loan?

As a hard money investor and money manager, I personally receive and underwrite hundreds of hard money loans per year. In light of that fact, I have observed many good practices and many many bad practices. This article is dedicated to educating borrowers and brokers on the best ways to prepare and submit a loan to a hard money lender and to avoid pitfalls that will end with your loan not being funded.

Having all the facts:
When calling or sending information for your loan, many hard money investors will be turned off from a loan when the broker or borrower does not have all the facts.
Borrowers: We receive countless files from borrowers who aren't ready; no property in mind or it takes days if not weeks to get answers and/or paperwork to very simple questions or requests. When an investor asks for a 1003 application or a credit report or a profit and loss statement, don't wait a week or try and convince the investor to move forward without it. Value peoples' time and it will benefit you in the end.
Brokers: When an investor asks you a question about the property, don't respond with "I don't know, I'll try and find out." Know the deal before you send it in. Lack of knowledge on the deal will turn an investor off. Trying to convince the investor to move forward without it will kill your deal. Most importantly, don't waste peoples' time. If you present a deal, and we show interest, your borrower needs to cooperate, at least some of the time. If we say that we're ready to move forward and we never hear anything again, it greatly damages you credibility for the next loan.

Efficient and thorough paperwork in submittal package:
This is where we see the most egregious problems with loan declines. The best example is when we receive a file that comprises of a 1003 application, a credit report, a profit and loss statement, a rent roll, and ten photos. We'd receive that file separated in twenty separate .tif files. The 1003 application is split into five separate attachments; the photos consist of ten separate .jpg files. It is easy to insert photos onto a word document. It is easy to scan a document into a single PDF. If you're unable to do that, fax it in.

Next, be thorough with what you provide. In our case, we ask for very simple information for the most part; submission form, profit and loss, rent roll, and photos (on some loans). On the scheme of things, that is a very simple request, but we will receive no photos or no submission form, or another form used for submission. If you send us what we request, or any investor what they request, then you will have your file reviewed as soon as possible. If you’re not thorough, time is wasted on both ends, and it delays your file to be reviewed.

After approval:
When we approve a loan, it should take a single day, maybe two for us to receive our conditions. It shouldn't take a week or weeks. If it takes a week or more, then we will re-review the file and sometimes, we decline it with a second look. Don't let this happen to you.

Making your payments:
If your desire is to continue to be able to use hard money for investment purposes then communicate with us and it will greatly reduce a denial on loan #2.

Good Luck!

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