Contributed story from: Arcstone Real Estate Lenders
The term “hard money lenders” – which has been around since the 1920s – sounds like an ominous group of credit collectors visiting your doorstep if you don’t pay up, when in truth, the modern private lender in today’s real estate news is an American corporate identity that facilitates real estate transactions that a bank can’t or won’t provide. Since the mortgage meltdown of the recent past, this type of “alternative financing” has become very popular with investors. There are a number of different financing names under the umbrella of “non-bankable” private equity loans including: bridge loans, stated income refinancing, bad credit commercial loans, mezzanine financing, and foreign investor loans.
The main challenge with hard money lenders and achieving non-bank financing is having enough equity in a property. Typically bad or poor credit is not an issue, it is, for a stated income loan but we will get to that later. The equity or collateral in the property is what they are after. The equity or asset based financing allows for purchases; cash out refinancing or rehabilitation of an existing investment property.
Here are a few aspects of non-bank financing to consider:
Bridge Loans for Commercial and residential properties
Bridge loans, or “swing loans” in the typical fashion of the term, allow you to go from one property to the next and “bridge the gap” in between. This application would mainly be suited to residential properties that you live in; however there is a caveat there. To get a residential bridge loan enabling you to buy a new property while you are selling the one you are in is an “owner occupied loan”. The usury laws are quite different for investment property hard money loan and home mortgage financing for a property you live in. Trying to get a residential owner occupied loan from private hard money companies may be difficult.
California the hard money real estate star
Using nationwide data, there are more hard money lenders in California than anywhere else in America. Why is this so? First, there are a lot of unique qualities in California real estate that are intrinsic to a state of this size. There are more housing sales, commercial developments, foreign investors and general buying and selling activity than the other states. New York, Florida and Texas come in as the next contenders for residential rehab home flippers and commercial real estate investments. There are over 700 lenders nationwide however; most of these are not direct private hard money lenders, but brokers.
Brokers & Hard Money Loans
If you find you are talking to a broker about a deal, know who you are working with. In every business there are good and bad services or individuals. Beware of brokers that ask for upfront fees, or excessive points. That is the first sign you are dealing with a shady enterprise. Look out for the plethora of unlicensed brokers that “have nothing to lose”. Many unlicensed brokers try to command a lot of points on a deal and that is a real issue. If you find a licensed broker/direct lender that will get you the loan at a great interest rate, he/she may be worth the 1-2 points to “make it happen”. Ask whoever you are dealing with if he/she is a licensed broker as there is some protection if you need to go to the DRE or real estate board later.
The professional licensed broker may know of specific private lending entities that you will not find anywhere on the internet. Remember, behind every “direct hard money lender” is the true investor with the real money. This is the “hedge fund contributor” and you will never get a chance to talk to these high net worth individuals. Many are huge real estate investors, sports stars or high net corporate investment companies. Even when you call a “direct lender” you are still talking to someone on the phone that will make a point or two commissions! This is what most investors do not understand about brokers vs “direct lenders”. Look to the bottom line, how much do I have to pay is the goal!
What about the huge home rehab flip market in California? Home flippers and rehab builders that are investors can make a nice profit using “other people’s money”. The rates and terms of an investor rehab loan are typically higher than a private hard money loan but the term is short. A short term rehab loan means even if you are paying 12% at 2-3 points you will only be making six payments for a six month loan. Some residential and commercial hard money lenders may offer 100% financing if you cross collateralize an existing property. In reality, you are really just putting up your property for a down payment. If you don’t pay the monthly fee, you may wind up forfeiting your investment property to the private lender.
Stated Income Loans Cheaper than Hard Money
Stated income loans are not what they used to be (thankfully). As this was the main cause of the market meltdown hence stated income had a bad name in financing. Stated income is back in 2014 and soon 2015, but has been redefined for borrowers with better credit. A stated income loan for those who are self-employed could be called a “cheaper than hard money loan” for those with decent credit. So as we wrap up the story on the facets of private lending, like any business where you put down your hard earned cash, make sure you know who you are dealing with.