Buy Now Hard Money

Underpromise. Overdeliver.

Browsing Posts in Tips, tricks and FAQ’s

Hubzu and Auction.com have hidden pitfalls!

Online auctions are a popular source of deals, but they are not without their challenges.  Here is a common one:

  • Once you win the bid, you must send in your deposit  within a few days.
  • You also must sign their contract.
  • They typically agree to provide insurable title, and frequently they will even pay for that title work

Here is why, if you have the option, I think you shouldn’t take the bait, er…I mean the free title insurance:

  • If there are clouds on the title, their title insurance company will provide insurance that excludes those issues.   It’s insurable, but not “marketable”.  Why is that a big deal?  You want to sell to an end buyer, and that end buyer’s lender probably won’t find those acceptable.  You’ll be stuck cleaning up the title when you have no leverage.  The bank that sold it to you has no incentive to cooperate: they have your money and they wash their hands of it.
  • If you have the option, use your own title company

Ok, how does that relate to the deposit?  

  • If they have agreed to provide insurable title, and you are borrowing money to finance the deal, your lender won’t close if the title is not “Marketable” but is simply  “insurable”.  That is a legal definition that I’m not qualified to discuss, but trust me, your attorney (and mine) understand it very well.

Now what?  You’ve put your money down, and you can’t get financing! 

Normally, a title search is done by the closing attorney after you have secured financing and are moving toward close.  I recommend getting the search done right away.  Once you win the bid, and before you send in your earnest money deposit, order a title search.  That way you’ll know you won’t have that problem before you send in your hard earned bucks.

If your attorney can’t move that fast, know that mine can.  You can get the results before you have to write that check.  You can move forward in the deal with confidence.  And if you call me for funding, our conversation will be easy peasy. 🙂

The short answer?  Never, it’s a loan.  The “how it works in real life” answer?  It depends. 

A few short years ago, a “cash” offer meant “This offer has no financing contingencies, so if I can’t close due to the inability to find the money, you can keep my deposit.” 

However, sellers, including REO bankers, found that a buyer who couldn’t close with their own money tied up the property, while the seller was thinking they actually had the funds to close.  This problem (for the sellers) became worse over time as many newbie investors tried to tie up properties to assign the contract.    As a result, many sellers began requiring a proof of funds to show the money was in the buyer’s account.   

There are many listings on auction sites and MLS that say “Cash only.”  Some say “Cash or rehab loan”, which is helpful.   The online auction houses like Hubzu and Auction.com  (which are simply marketplaces for the REO bankers) require that the name of the buyer and the name on the bank account be the same. 

Is this universally the case?  No.  Some sellers consider that a hard money loan, without the hoops and requirements of a residential loan, is good enough.  Some sellers either aren’t aware, or don’t care, about the distinction between cash (your own) and hard money (someone else’s cash). 

So how does this apply to you?   You can try submitting your offer with a hard money approval.  If it works, great.  If it doesn’t, the seller (or the seller’s listing agent) will tell you that they need an actual proof of funds in your name.  Do not expect the hard money lender to provide a bank statement for you, it won’t happen.  An approval is probably the best you are going to get.  Sometimes you’ll be surprised and your offer will be accepted, and sometimes it won’t.  But you know the saying “You miss 100% of the shots you never take.”

When you, as a real estate investor or rehabber, take out a construction or rehab loan, you are probably going to come across the phrase: Draws taken in arrears of construction.

I think this needs some elaboration, because I think this is one of those phrases that says a lot in a few words. Borrowers may not understand all the implications and how it will effect their transaction. Sort of like “Time is of the essence.” Sounds innocuous enough, but has a huge impact if you don’t get it.

First, let’s outline a scenario. You are buying a property in disrepair to fix up and resell to an end buyer. You borrow from a bank (unlikely these days) or a hard money lender (more likely these days) the funds to acquire and fix up the property. You probably had to put down a significant downpayment towards the purchase, and then you received the rest of the purchase money at closing, with the repair funds held for future disbursement. They are usually disbursed “in arrears of construction”.

So you close on the loan, and the next day you call your lender and the conversation goes something like this:

You: “I need a construction draw to purchase materials and start the rehab.”

Lender: “Sorry, your draws are in arrears, as outlined in the commitment and loan docs.” (Lender is thinking “Did you actually read anything I sent you?”)

You: “What do you mean? How can I start the project without money?” (You are thinking “Boy, I should have expected this loan shark to screw me over.”)

Now you are both in a bad position: You have a project you can’t start, and the lender has a borrower who can’t deliver as promised.

So here is what you need to know: “In arrears of construction” is exactly the opposite of “in advance of construction” – it happens after that portion of the construction is complete. Usually you will do a part of the job, then get reimbursed for that part of the construction after it happens. Then you do the next part of the job, and get reimbursed for that next part of the construction after it happens. The final draw is usually disbursed after the certificate of occupancy is issued, or whatever formality you get from the building inspector in your area. You will need to supply lien waivers from your subcontractors and copies of invoices/receipts and sometimes photos.

Usually a lender will inspect at each draw,or sometimes send an inspector.

This is not particular to hard money lenders, this is a process that happens everywhere in construction, both residential and commercial, if there is a construction loan involved.

Occasionally, if you paid actual cash for the property, the first draw can be disbursed when the construction loan is closed, because there is enough equity, and “skin in the game” to give the lender security for that first draw. But your second draw will be made after you have done the first part of the construction, and then some more, to bring you to where the lender is reimbursing you for construction already done, not advancing you funds to buy materials and labor before it happens.

And usually these draws are taken by line item. For example, if you have allocated $10,000 to electrical, and only the rough-in is complete, you will only be disbursed a portion of that $10,000. And so on for each line item.

Your application includes your rehab budget, and the draw worksheet. You input budget items and the dollars allocated for each item. Then as you request a draw, you input the amount of that item that is complete, and the spreadsheet shows the total of each draw request and the balance you have left to draw for that item. You can send this spreadsheet to the lender with your draw request, and it makes you look professional, and gives you both a common reference.

What tips the scale on your Griefometer?

I heard this term for the first time last week and liked it enough to bring it to you.  If I’m a little obscure, the Grief to Revenue ratio refers to the concept of a person, product, deal, business or whatever that causes you more grief and aggravation than it is worth in revenue.  To you, anyway.


For example, the whole hassle of tenants and toilets is too much grief for some.  No big deal for others.


For me, grief to revenue ratio on rental properties is low enough that it’s worth it to me to have the income.  If those same units were a 12 hour drive, I would not feel the same way.  But take that same 12 hour drive, apply it to a commercial office building, and my ratio flips around again.  It’s worth it to me.


I’ve also spent enough years fine tuning my system so that I have reduced the grief and increased the revenue in rental properties.  Here are some suggestions:


Reducing Grief:
 


First, don’t do things that you hate.  If you hate to clean or paint, then don’t be the one who does the apartment turnover and cleanup in your buildings.


Second, improve your tenant screening system.  There are tips all over the web for how to find the best tenants.


Third, learn from your mistakes.   If you leap at an offer from an applicant to pay a years worth of rent in cash in advance, you might learn something from that when it all plays out.  You might learn that having a drug dealer tenant will clear out the rest of your apartments in a hurry.  So improve your Griefometer antenna by paying attention and thinking it through.  If it sounds to good to be true, it probably is.  Unfortunately.


Fourth, set up either a property manager or a maintenance man.  My personal preference is to manage the tenant showings and screenings myself, since nothing is more important than good tenants.  I pay for a regular part time maintenance guy, even if he sits on his tookus half the time.  It’s worth it to me, and the tenants are taken care of.  He also does trash removal, grass and snow, so most of the time he has something to do.  And I don’t get the calls.  🙂


Increasing Revenue:
 

Look for additional income streams.  For example, can you rent out garages separately for storage?  Add a coin-op washer/dryer?  Rent out washer/dryer hookups?  Add a bedroom to a unit for increased revenue?  Log the timber from a rural property?  You get the idea.


Consider investing in commercial properties.  While the risks are WAY higher, the revenue frequently is higher also.   Lower grief, too.  Ask me how I know.


So what tips your griefometer?


    • Is it sitting on the phone on a short sale for the 12th time waiting to speak to the loss mitigator?
    • Is it trying to deal with sellers in denial?
    • Is it dealing with contractors?
    • Having your end buyers get buyer’s remorse the day before closing?
If you are investing in real estate with any frequency, sooner or later you will be required to put actual cash into a deal.  If you are investing using other people’s money, then it is their money that is at risk, and this applies to them.  If it’s your money, then your money is at risk.  Either way, you need to understand how equity can evaporate, who gets paid first, and how to protect your capital.

 

Buying all cash
 
If you buy a property all cash, then the amount of equity is impacted by values going up or down, tax liabilities and utility liens, and your maintenance of the property.  Tax and utility liens, if allowed to accumulate, are first in line to be paid before you, as the owner, are paid when you sell the property.  If you are under insured, and have a catastrophe, then your inability to rebuild also has an effect.

 

Buying with a down payment and a mortgage
 
All the above applies, but the mortgage holder is in line before you, the equity investor.  The mortgage holder also gets the insurance proceeds before you do.

 

Being the mortgage holder
 
If you are putting money into a project, either as a lender or an equity investor, you should understand the differences and who gets paid first.  Generally, the 1st mortgage holder is paid before the equity partner.  But taxes and municipal liens are paid before the mortgage holder.  And if you are listed as mortgagee on the insurance policy, then you are paid the proceeds of any insurance claim before the equity investor.
So here is the rough order of who gets paid when.  There are circumstances that affect this, and if any of you want to jump in with comments about special circumstances, please do, it will make for an interesting discussion:
  • Property Taxes
  • Condo fees – (thanks to Alan Segal and John Holroyd for this update)
  • Utility Liens
  • 1st position mortgage holder
  • Mechanics and medical liens (The contractor you didn’t pay, Medicare, etc)
  • Additional liens
  • Equity investor
Remember, mortgages and other liens, except for taxes and utilities, are paid in the order that they are recorded in the registry.  That’s what creates a 1st mortgage over a second mortgage – the 1st mortgage was recorded first.  So it’s important that any liens are cleared before you take title or lend money, as you can end up paying them yourself.
If you are investing in someone else’s deal, you should understand the order of who gets paid first.  Although sometimes the owner (equity stakeholder) makes big money, that’s not always the case.  So understand your place in line. That’s why some investors choose to be lenders rather than equity investors. Another reason is the hands-off nature of the investment.  You aren’t in the trenches with the contractor.
Disclaimer:
 
I am not an attorney or accountant, and this is not to be construed as legal or tax advice.  This is solely for the purpose of generating discussion about real estate investing and lending.  Please consult an attorney and/or accountant when making any investment.

I want you to begin your deal at the end – yes, do it all backwards!

Why? Because how can you know how much to pay for a property, if you don’t know how much it’s worth at the end?

An investor sent me a deal the other day, and said he was purchasing a property for 80K, putting 30K into it in rehab, and planned to resell for 240K. Sounds pretty good, doesn’t it? Even with carry and acquisition costs, there was still room in the deal for profit.

 The first thing I did was pull sold comparable properties that had closed within a few months and were within a small radius of the property. Nothing had sold in that area for over $140K for months. Whoa! Those numbers don’t support a selling price of $240K.

So I asked the investor why he thought it could sell for 240K if the comps were selling for 140K. They hadn’t thought to look at sold comps. Ouch! That could have cost them a bundle.

 So, the first place you start when looking at a deal is the end value! It all starts from Z and works backward to A.

 Here are some of the costs of acquiring and holding a deal that you may not have thought of:

 

  • Closing Costs (buy & sell – this means some of them you will pay twice!)

– Transfer tax / points / attorney fees / recording fees/ title search/ title insurance / deed prep / environmental assessment / appraisal if conventional deal / inspector / etc

  • Carry Cost

– Taxes / insurance / mortgage interest & principal / electricity / heat / water & sewer / snow / lawn / leaf cleanup/ association fees / accounting / inspection fees if a construction draw / etc.

There are lots more, but you get the idea.

The question I get all the time is: If I’m paying such high rates, why won’t the lender fund 100% of my purchase price plus all of the rehab construction, plus the points and the interest?

Well, they might. If you have a long relationship built over a number of successful transactions and you delivered 100% and never tripped up. Or if your deal qualifies for transactional funding.  But most of the time that’s not the case, so here is why, or why not:

First, the high rates and points. Almost always, these deals don’t qualify for bank or conventional financing. They are the highest risk deals. If I had a fund  that did these loans, I think it would be a junk bond if it were traded publicly. So remember, an empty multi or a house with no roof (or kitchen, or septic, or whatever) is considered a very risky deal. You are paying high rates because of the risk in the deal. The lender is compensated for his/her additional risk with higher rates, because if the deal goes bad, it is very expensive to recover. Ask me how I know.

Now for the 100% question. When you are engaged in a project, emotionally, intellectually and financially, you will do everything you can to make it successful. If the deal goes bad, because of declining property values, or other reasons, and you have no money in the project to lose, well guess what can happen? You can choose to walk away. Homeowners are doing it every day. So can investors. We want to make sure you are fighting to get the deal done and sold. We don’t want to have to finish the project. If we did, we’d be doing rehabs ourselves. (Did I tell you I’m really awful at managing contractors?) So, once again, here’s the explanation without sugar-coating. The borrower has to have a stake in the outcome.   Skin in the game.  If you don’t have the cash, you can also provide that “skin” by cross collateralizing another property.  Talk to us about this.

What about paying monthly interest payments? Having to pay the monthly payments keeps that outgoing cash flow right in front of you. It’s too easy to forget how fast it builds up if you’re not paying it. And the project can drag on. Which costs a lot of money. We want you to make money, and we want you to make lots of it. You should make lots more than the lender makes.

So I hope this is helpful. It may not make it easier to swallow (without the sugar-coating) but at least you know why. And if you have more to offer the lender, tell him/her so. They may consider modifying the terms somewhat if you provide them with additional security. “An educated consumer is our best customer” as an old tv commercial used to say.

 

In this financial climate, credibility becomes more important than ever.

Lenders who in the past would lend strictly on the equity in a property, are now looking at the character of the borrower more and more. Being clear about what you plan to do, and delivering on what you say are important. Not just for your next deal, but for all your future deals.

Here are some tips:

Provide full disclosure about the property and your situation. In performing due diligence, if a lender finds you have been less than forthright with some particular aspect of the deal, it calls into question everything else you have presented.
Be prepared to take pictures of everything. Even the worst parts. If you leave out a photo of a boiler that is ancient, rusted and asbestos wrapped, and the lender sees it on a site visit, he’ll wonder what else you didn’t disclose. We understand rehabs. That’s why you got it at a huge discount. So show it and what your rehab plan is for fixing it.

There is a fine line between “fake it til you make it” and just faking it. I’ve had many conversations with a borrower that go something like this:
Borrower: “We buy at 40 cents on the dollar, all cash, close quickly and sell at 80% of value to our buyer’s list of first time homeowners.”

Me: “Great, how many of these transactions have you completed this year?”

Borrower: <Silence>……………………”Well, we haven’t actually completed any, yet, but we’ve read alot and taken FortuneBuilder courses.”

So save the sales pitch for the motivated seller. The lender knew you were still new at this before the end of the first sentence. Emphasize your strengths, such as a partner who is a licensed contractor, or the fact that you are a real estate broker, or whatever. But don’t lie about it, it will come out anyway.

If you run into a snag that is going to impact your ability to deliver the project on time, be straight about it, and be able to explain your solution to the problem.

Trust is earned over time. And is part of relationship lending. Starting with a few of the basics above will get you on your way to a productive and profitable relationship.

Man, that sounds only slightly less boring than watching paint dry.

 

But if you are trying to buy a property – whether a short sale, probate, or whatever – and sell to an end buyer on the same day, then listen up.   Ages ago,  title companies would allow you to contract a property, find a buyer, and buy the property from the original seller using the end buyer’s funds to fund your purchase from the seller.
But everything has changed in the world of real estate investing.  And simultaneous closes are no exception.  Now the title companies are requiring the following:
Seller A sells to you, person B.  You must have your own funds to close or the title companies won’t insure title.
Then you, person B, can turn around and seller to end buyer C, and of course end buyer C is typically using conventional owner occupied financing.
We can fund that with transactional funding, a one day source of funds to satisfy the title companies.  It costs less than typical hard money, and we provide 100% of the amount needed if you meet the criteria.  The requirements are pretty strict, but if it works for you, it’s a solution to a problem.  Call us.

The other night I received 3 emails from the same person, but through various sources – my website, and two networking sites – as well as a voice mail on my 800 number, all at about 1:30 in the morning.  (That would be 10:30PM Pacific time – and no, I wasn’t up working,  I was dead asleep.)

The caller had the last name of “Buys”, which made me think “scam”.  I won’t reveal her first name to try to protect her privacy in the event she is a victim.  According to her emails, she was from a state on the west coast.  (I lend money in Massachusetts and New Hampshire, and no where else).  She had had numerous phone conversations with two people at a company she found on the internet, and  had sent an advance deposit in the amount of $1200 to secure a loan from a company called “Hard Money Lender”.  This company had the same business address as mine in Tyngsboro, MA.  Including the suite number.  She sent the money to an address in Canada.  CANADA?!?!!??

Then, according to the emails,  they stopped returning her calls as soon as she sent the money.  She grew frantic.  She started researching.  ( Now, she starts researching – what happened to before she sent the $1200?)  Anyway, she found my website, by googling the address and hard money, I guess, and was asking for my help to get her money back.  Could I walk across the hall, or was I affiliated with them?  She said she hoped I could talk to them and help get her money back.  At this point I was sure it was a scam. 

But then I listened to the voice mail, and wasn’t so sure.  I returned her call, and explained that not only was there no other hard money company at my address, there was no other mortgage company at all.  I also explained that most of my customers know me through networking before they apply for a loan.  She said it was a personal loan.  (This gets better and better, since I don’t make personal loans.)  She had notified the Attorneys General in Massachusetts and in the state where she lived.  I said fine, if they call me I’ll be happy to tell them what I know, which is just about nothing.  She said I sounded legit (ya think?) and was simply hoping I could help her.  

I explained that I couldn’t, that anyone could scrape an address off of my website, and that I had no affiliates on the west coast or in Canada, and that my website is plastered with “Massachusetts and New Hampshire” and “First position mortgages only”.  She asked me “Aren’t you concerned that someone is using your address”?  Concerned, yes.  That’s a risk you take on the internet.  Anyone can say anything they want, or use any information they find for any purpose they want.  Can I do anything for her?  No. 

So what do you think?  Was she trying  to scam me, or simply desparately looking for any help she could get?

PS:  This is a good example of why self-employed people should not use their home address on their websites or marketing materials!!!