Wheres The Money? Whats Next For Real Estate Investors
Investors who have previously been able to qualify for 100 purchase financing to acquire investment properties are now facing much different conditions in the investor loan market place. Programs for investor loans have literally evaporated under the pressure of the subprime mortgage debacle. Many investors who formerly depended on subprime mortgage programs and ARM loans are now seeking hard money loans for real estate purchases and rehabs. Demand for hard money loan programs nationwide has steadily increased. Real estate investors are discovering that hard money lenders are funding both residential and commercial investments.
According to Wikipedia: A hard money loan is a species of real estate loan collateralized against the quicksale value of the property for which the loan is made. Most lenders fund in the first lien position meaning that in the event of a default they are the first creditor to receive remuneration. Occasionally a lender will subordinate to another first lien position loan; this loan is known as a mezzanine or second lien. Hard money lenders structure loans based on a percentage of the quicksale value of the subject property. This is called the loantovalue or LTV ratio and typically hovers between 6070 of the market value of the property. For the purpose of determining an LTV the word “value” is defined as “today’s purchase price.” This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one to fourmonth timeframe. This value differs from a market value appraisal which assumes an armslength transaction in which neither buyer nor seller is acting under duress.
Chairman Ben S. Bernanke who testified Before the Committee on Financial Services U.S. House of Representatives on September 20 2007 regarding subprime mortgage lending and mitigating foreclosures stated “Markets do tend to selfcorrect. In response to the serious financial losses incurred by investors the market for subprime mortgages has adjusted sharply. Investors are demanding that originators employ tighter underwriting standards and some large lenders are pulling back from the use of brokers. The reassessment and resulting increase in the attention to loan quality should help prevent a recurrence of the recent subprime problems. Nevertheless many homeowners who took out mortgages in recent years are in financial distress.”
Tighter underwriting standards for investors mean that fewer investors will qualify for loans without substantial down payments generally in the 20 to 30 range. These strict underwriting requirements for real estate investors will also lead investors to pursue more creative real estate funding options such as seller financing carryback and hard money funding for purchase or rehab “fix and flip”. While the markets are correcting real estate investors are already gravitating to programs where they can obtain readily available funding to purchase investment property.
Many hard money lenders are willing to loan up to 100 of the purchase on a property given the fact that the property LTV is approximately 70 or lower. These lenders are also willing to loan money for “rehabbing” the property and even structuring the loan so no monthly payments are required for 3 to 6 months. These features make hard money loans very attractive to the investor especially during times when property inventory is increasing and properties can be purchased at substantial values. At the present time rates for hard money are in the 10 to 16 range and hard money lenders are charging “points” typically 13 more than a traditional loan which would amount to 36 points on the average hard money loan. Commercial hard money loans range from 4 to 10 points. Investor credit may or may not factor into a hard money loan due to the fact that the funding is based on the “hard” asset value of the property collateralizing the loan.
About the writer: Gary Zaccaria is a Sr. Financial Consultant with OpmCredit.com on the topic of Hard Money Loan options for real estate investing. He has marketed real estate investment training programs for Trump University Dolf De Roos Robert Allen and AD Kessler.
Related posts: