Buy Now Hard Money

Underpromise. Overdeliver.

Browsing Posts tagged real estate investor

As a private lender, I work with real estate investors only, not with home buyers.  The nature of my business is such that there are tight timelines for closings, and frequently borrowers initiate the loan process with only a week or so to go before a mandated closing date.  As with many real estate transactions, everything happens at the last minute, and it can be a pressure cooker in the hours before a closing.

All of our loans are contingent on clear and marketable title. Title defects are a show-stopper.  Because many of the properties we are lending on are short sales and REO’s, title defects are common.  In fact, they are the norm. Seldom does a title search reveal no issues at all.  Most of the time they are paperwork issues that are easily resolved with a little extra time.

Recently a title defect was discovered a few days before closing on a deal where the real estate investor buying the property planned to rehab and then resell.  His construction crews were waiting to start, but had other work lined up, and were going to move on to the next job if they couldn’t start soon.  Losing a construction crew meant that the investor might have to wait weeks or months to get them back, and time is money in rehab deals.

The details of the title defect aren’t important, but it involved documentation provided by the selling bank regarding assignment of the mortgage.  Since the seller is responsible for curing, and the seller was a bank, it was important that the defect be cured before closing.  The seller has little incentive to cure AFTER a closing.  The investor/borrower wanted to close without curing the defect.  He said he was ok with it.  Are you kidding me?

He may have been “okay with it”, but his plan was to sell the property to an end buyer.  This end buyer would probably get a conventional mortgage.  The end buyer’s bank would most certainly not be “okay with it” and would refuse to close.  The investor would be stuck trying to get his original seller to clear a title defect long after they had sold the property.  How quickly do you think that would happen, if at all? The investor would be stuck with a property he couldn’t sell, and we’d be stuck with a short-term loan with no exit strategy.

The interest clock would keep ticking, the investor would have big expenses, and the deal would go south in a hurry.

There are investors who specialize in buying properties with title defects.  They almost always buy with cash, and they are very experienced and have good attorneys on their team.  Sometimes they ARE attorneys.  The average investor should not be “okay with it” when a title defect is discovered.  The time to cure is BEFORE a closing, not afterwards.  It will save grief and money in the long run.

I have a favorite saying.  Lack of proper planning on your part does not constitute an emergency on mine.

At the same time, one of the reasons that real estate investors use hard money is speed.   If you find a great deal – let’s say it’s bank owned – and the seller will give you a great price if you can close in 10 days, you need either cash, private funding from friends and family, or probably hard money.

Assuming you don’t have cash or wealthy family, you might need hard money.  Here’s what you should do.
  • Don’t wait until 3 days before closing to call a hard money lender.  That reason should be obvious.
  • Make sure you have electronic photos of the property ready – you should have taken them when you first visited the property, both inside and all exterior shots.  If you don’t buy the property, then delete them, but if you are buying the property, you have saved a trip to take photos.  It will also help you document your improvements later if that becomes necessary when you resell.
  • Have a brief bio of your investing experience all ready.  Who you are and what you’ve done as an investor is important.
  • Have signed versions of P&S contracts and addendums all scanned in and ready to send.  If you’re in a hurry, why are these items unavailable?  They are critical to the closing.
  • Know your rehab budget by line item.  Be ready to explain why x improvement is needed but y improvement won’t help your resale.   Better yet, explain in your executive summary.  Have the budget in a spreadsheet that is easy to read.  No long difficult to read paragraphs that ramble.
  • Pay attention to the lender instructions for getting the deal done – they have a process they’ve done over and over, and they need to do due diligence.  Make it easier for them and it will be quicker for you.
  • Be available.  Nothing is more frustrating than working hard to pull the pieces of a deal together only to have the borrower regularly ignore his cell, or not read and answer email.  If you are in a deal that requires speed on the part of the lender, than you need to make yourself available so as to not hold up the process.  Yes, we all need down time and family time.  And if you are in another appointment, of course you need to wait to answer or reply.  But if you’re not available quickly, then you are the one holding up the works.  It could cost you a deal.  
Ask me how I know.  🙂

I saw a post the other day from an investor who was told he had to get the contract (deal) before he could get funding. Another poster disagreed, and told him that wasn’t true. In the interests of not hijacking the thread, I thought I would post some information that might be useful.

It is very desirable to line up funding for your deal before you sign and contract and put up your earnest money. If you are using conventional residential funding for that deal, it is easy, since pre-approvals are the norm in the conventional residential financing world. If you have a private source of funds – an equity partner or a private lender you have worked with – it might also be easy because of the one-on-one relationship you have developed.

If you are being told you have to get the deal before you can get the funding, you are probably hearing that from hard money lenders. With a few specific exceptions, I don’t know any hard money lenders who will look at and actually approve a deal until there is a likelihood of it actually becoming a deal. And here is why:

I get sometimes a dozen calls in a day from people who want me to approve the deal before they’ve made the offer. Remember, this is a hard money loan based on the property, the amount of cash in the deal (skin in the game) and the experience level and exit strategy of the borrower. In order to tell if I’m likely to approve a deal, I have to know all about the cash available, the rehab plan, and then I have to pull comp sales to figure out the ARV. I have to decide which sales are true comps and which skew the results. I then look at the available houses on the market that are going to be competition based on the projected selling price and location, and time of year. And all before the buyer has even made an offer! In the best of circumstances, this takes about 1/2 hour if I have no interruptions, sometimes up to an hour depending on the deal. If I did nothing else all day, there goes 6 hours of my day. And of these inquiries, maybe one in 30 or 40 actually becomes an accepted contract.

I can spend my entire day looking at deals that never happen, or I can spend my day approving funding for deals under contract where the buyer needs to close quickly. If you are a buyer who needs to close quickly because the clock is ticking on your deal, which would you rather?

An exception that was referenced above would be a repeat borrower that I have done business with already. In that case, I of course will look at a deal while they are in negotiations.

We all have to make decisions on how to prioritize our time, but the above illustration is to explain why you may be told that you need to get the deal before you can get the funding. If you can get true project approval before you sign on the dotted line, all the better, but if you can’t, this may be why.