MA Private Lenders Beware! Division of Banks Coming Down On Certain Hard Money Loans.
2013 – Low Inventory, Less Opportunity, But…Better Hard Money Lending Terms
Spring 2012: Time to for investors to flip that rehab!
Hard Money & Rehab Loans
Hard Money Lending Changing in Massachusetts
Hard Money 101 – If it sounds too good to be true it usually is.
Bridge Loans – What exactly are they?
Valuation is Paramount
A colleague and good friend of mine Christopher Agostino, an attorney at a reputable Boston law firm, just published an interesting piece on how the Division of Banks intends to penalize MA private lenders “who have written residential mortgage loans without first obtaining a mortgage loan originator license.” As threatening as the headline may appear, a careful read of Attorney Agostino’s article seems to make clear this assertion of power by the Division of Banks only applies to hard money lenders that lend on owner occupied properties. Massachusetts General Laws previously had permitted Massachusetts private lenders to write up to four “residential” mortgage loans in any given twelve-month period. However, these new regulations further restrict private lending exemption rights and make lending on owner-occupied real estate even more risky than ever before. This course of action taken by the Division of Banks is not surprising. Unfortunately, regulatory bodies and government agencies do not always understand the importance of alternative financing, also known as hard money lending. While I believe it very important to protect an unknowing and unsophisticated borrower from predatory lending practices, the fact is, conventional underwriting guidelines presently make it extremely difficult for borrowers to obtain traditional financing. Couple that with fact that many Massachusetts residents have still yet to recover from the economic collapse; thereby, leaving them with no other means to access credit. Therefore, it is critical that alternatives provided by private lenders in Massachusetts not be suffocated by additional regulations and restrictions. We can all agree that hard money loans on owner occupied property should only be used when traditional financing is not an option or when fast access to the equity in one’s home is essential for a borrower. That being understood, it is my opinion that the present statutory language sufficiently addressed the matter and protected against any one particular private lender from exploiting borrowers with only their primary residence to pledge as collateral. How this is to play out is yet to be seen. As you will see in Attorney Agostino’s article there is some ambiguity on what private loans issued on owner occupied properties will fall under the auspice of the Division of Banks but many hard money lenders may decide that the risk far outweighs the reward.
Click here to read Attorney Agostino’s complete piece copy and paste the below into your browser.
Greetings Massachusetts Investors: It has been awhile since I’ve had the opportunity to write a column for all of our hard money lenders, borrowers and investors here in Massachusetts. Things have been very busy here at MPL and I am sure the same can be said for all of you buying, rehabbing, building, flipping and selling real estate in MA & RI. The real estate market has been strong to very strong in most Massachusetts towns as a result of historically low inventory during the bulk of the 2013 buying season. I know, first hand, that single family homes in Marshfield were scarce and multiple offers were made on any property listed between $300,000-$500,000 with bidding wars resulting in some cases for the first time since the collapse.
I understand the real estate market on the South Shore coastal towns of Massachusetts may not be representative of the real estate market of the entire Commonwealth but I do know that the market has changed and the same opportunities to buy properties at a fire sale price have become increasingly scarce. Regardless of the town, whether Worcester, Leverett, Chelsea, Plymouth, Kingston, Dighton, Mattapoisett, Lynn, Wareham, Hyannis, Fall River or Somerville, the fact of the matter is prices have gone up, thereby making it all the more important to make intelligent and calculated decisions when purchasing a property to rehab and flip.
Equally important in making an intelligent and calculated decision to submit an offer to purchase is drafting a cold, realistic profit and loss balance sheet that includes not only the purchase price, closing costs, and all rehab costs, taxes, insurance but also broker fees to sell, carrying costs and fees and costs included in closing a hard money loan from a private lender. All of my successful borrowers incorporate all financing fees and costs in addition to all other fees and costs in determining profit margins.
The good news when it comes to maximizing profit margins is the cost of hard money loans has gone down over the last 12 months. Hard money lenders have reduced their interest rates as s result of an increased number of “private lenders” and “private lending” options. Around 2011, many “new” private hard money lenders entered what had previously been a small, “old boy” network and some offer what appear to be better rates, terms and conditions than the “establishment”. Regardless of whether these new lenders are actually lending on better terms and conditions, the sole important fact is that all legitimate hard money lenders in Massachusetts have either reduced their annual interest rate, reduced points due at closing or increased their maximum loan to value ratios. All of this is good news for borrowers and real estate investors as the cost to obtain a hard money loan has decreased, thereby hopefully increasing profit margins.
Presently, my preferred lender/investor is lending at 12-13%, IO monthly payments, no prepayment penalty, 3.5 points on total amount loaned for all loans over $200,000, 100% construction/rehab financed, 25% down by borrower at acquisition plus closing costs, closing within 5-10 business days from receipt of signed commitment letter.
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Over the last month or so I’ve seen the market increase dramatically in all areas of Massachusetts. From the South Shore to Western Massachusetts, young first time home buyers are looking to buy while prices and interest rates are still at all time lows. In the downtown Boston area bidding wars for some luxury condominiums have actually started again and local Realtors are shocked at the amount of interest and traffic they’ve seen so far in this early season.
What does this mean for us? It means this is the ideal time for real estate investors in the market of “flipping” properties to buy a rundown house or multi-family located in an up and coming mid-level town that is attractive to young couples looking to buy their first home. Rehab the property over the next 30-60 days with economical and efficient finishes, lower your profit margins ever so slightly and list the house at a competitive price for a quick sale. There is no reason an investor experienced in flipping homes should not be able to sell 2-3 homes over the next 4 months if they are cognizant of the market, aware of who their target buyer is and make renovations to rehab properties that are simple, clean and cost-efficient.
Remember, buyers are smart these days and know the market well. From what I have heard they have been making extreme low initial offers so it is essential any investor knows his bottom line and his margins when deciding to invest in a rehab project. The days of lavish rehab projects are past and don’t make sense in this market due to Buyer’s wanting a “good deal” over a “dream home”. So make smart decisions, identify that perfect “flip” property and come to MassPrivateLending.Com to secure quick financing for your project. As always no prepayment penalties, so you can “turn and burn”, increase your profit margins and move on to the next project. Good Luck!
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Hard money or private financing is an excellent tool for real estate investors looking to “flip” a property for a quick return on investment. In today’s lending world it is more and more difficult, onerous & time consuming to obtain a conventional loan to finance the acquisition and rehabilitation of investment real estate. Even when the project seems like a “no-brainer” to you, a conventional lender can take up to 90 days to fund and close a loan…if they do at all. The fact is, in today’s real estate world, hard money or private financing is the best tool available for real estate investors looking to make a quick profit by (1) purchasing a property in need of renovations for short money, (2) making the necessary renovations and (3) then listing the property for sale at a competitive “quick sale” price.
A smart, savvy and aggressive real estate investor will see the benefit in paying the higher interest rates and fees associated with hard money financing and will know that by using private financing as an investment tool and strategy there is more money to be made in the long run than waiting for traditional financing to come through.
The most important thing for real estate investors looking to utilize hard money as a tool to rehab and flip properties is to accurately price all construction costs and then build in the proper “buffer” money in the event the project goes over budget. The next most important thing is to know the market; more specifically, know what the property will be worth when the renovations have been completed. This will allow investors to aggressively price their properties to sell quickly. All too often I see borrowers get into trouble because greed gets in the way and either the property is not priced to sell or the construction budget falls far short of the actual cost to properly rehab the property for a fast resale.
Today’s private lending environment is full of lenders with money to lend and if a borrower/investor does his due diligence, accurately prices the cost of renovations and lists the property at 10% under market value to ensure a quick sale there are profits to be had.
As a rule of thumb, you should be prepared to put down 25-30% of the purchase price and should then be able to find a hard money lender willing to lend 100% of construction costs so long as the total loan amount does not exceed 70% of the as-completed value of the property.
As always, I am more than willing to answer any specific questions you may have, just email me at email@example.com
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Over the last six months an interesting shift has taken place within the Massachusetts hard money and private lending world. Six months ago I would have laughed at any borrower who said they had a private lender willing to lend anymore than 75% of acquisition and would have accused any borrower saying they had a lender willing to lend 100% of acquisition*(in these instances it is presumed rehab will be done and the as-completed property will increase value) of lying! Now though, it seems the private lending world is changing and there are a lot of individual private lenders or small syndicates venturing into the hard money world and offering terms and conditions I didn’t think would be seen for years to come.
I still stand by my previous posts when I advise to proceed with caution with these “new and improved” lenders. My concern is that these private loans are oftentimes traps and are basically “loan to own” loans whereby the lender knows the borrower will likely default and they will foreclose and own the property for short money. HOWEVER, I am not just a “hater” because my investors do not lend under these terms. I think the market has changed and I expect even the more embedded and established private money lenders in Massachusetts will become more lenient on the amount a borrower has to put down of their own funds and will be more willing to roll points on to the end of the loan to lessen closing costs.
My personal lending principles are admittedly more conservative than some new lenders in the game. The reason is, I’ve seen the damage and losses incurred by hard money lenders who got too greedy and too “loosey goosey” with who they lent to and how they underwrote their loans. I think it is important for a borrower to have “skin in the game”, otherwise what is to keep them from walking from the project, property and loan once the going gets tough? That being said, I understand that concessions need to be made in order to stay in the game and when the deal is right myself and my lenders are willing to bend from the hard fast lending parameters of yesteryear in order to make a transaction work.
I applaud the new private lenders getting into the hard money game here in Massachusetts and I respect a lot of the way they are structuring their loans and payments. I think this is good for borrowers and promotes transactions. I also know that some private lenders are working with borrowers and giving loans at 100% of the purchase price and are seeing repeated success and amazing profit margins on principal invested. This is all good for the long term hard money lending environment here in Massachusetts. As I see it either those lenders will get burned and weeded out OR they will be extremely successful and some of the more institutional private lenders here in Massachusetts will have no choice but to reassess their lending parameters or risk being put out to pasture.
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Among the dozens of viable loan candidates I correspond with each month, there’s one statement that always makes me cringe: “Lender X says he’ll do the loan without seeing the property and on better terms than your lender.”
My response is almost always the same: If it sounds too good to be true it usually…no, it always is.
Sadly, in this day in age there are an increasing number of both local and national “hard money” lenders that are more in the business of real estate acquisition then they are real estate lending. Many of these so-called “better options” that borrowers believe they’ve found are actually veiled attempts at one of two things:
- an attempt by a broker, not a direct lender, to convince you they have a lender that is ready, willing and able to finance the transaction with surprisingly favorable terms and conditions to the borrower; or
- an attempt by a “lender” to have you enter into a loan with them in haste only to then realize at closing that the loan terms and conditions are either not what was promised or destined to result in a borrower’s default.
Scenario #1 above is almost always an attempt to get some sort of upfront payment by the borrower with the broker having no real means to close the loan and no real lender in line to close the deal. If there is a lender that they can find to close the loan it will oftentimes be at different rates and different terms then the Letter of Intent issued from the broker’s office. DISCLAIMER: I have in some situations required a payment prior to closing (but never prior to one of my lender’s issuing a commitment letter to the borrower). In these instances, it was a judgment call on my end to take this approach as I felt that perhaps the borrower was not being completely forthcoming and the loan would not close once the lender did his due diligence. As a matter of practice, I am very up front with borrowers and tell them only to represent exactly that which they know a lender will be able to verify on his own.
Scenario #2 above is no better than Scenario #1…in fact it is much worse. There are lenders out there that will issue a commitment letter, take a deposit, prepare to close and at the last minute tack on additional fees or change loan terms knowing you have to close and are in no position to refuse the additional fees or change in conditions. There are also other hard money lenders that employ the philosophy “loan to own”. As I said, if it sounds to good to be true it almost always is in this business.
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A hard money bridge loan is a specific type of real estate financing that is often utilized in commercial or residential real estate transactions by developers in need of a “bridge” or a stopgap measure between selling a finished construction project and paying off a conventional loan. A bridge loan is intended to be paid off quickly and the terms on such loans are usually only 6-12 months. Loans of this type are used most commonly used when conventional financing will take too long to process and the borrower is up against a time limit to consummate a transaction. Bridge loans are also useful when a borrower wants to save a property from foreclosure. A hard money bridge loan is usually provided by a private company, individual or investment group instead of a conventional bank. The downside to hard money bridge loans are typically the high interest rates, short loan terms and high origination and commitment fees due when the loan is funded. However, a loan of this kind can be an excellent financing tool for borrowers in need of alternative financing.
The interest rate for a hard money bridge loan is usually much higher than that offered by banks and the term is usually one year although a certain kind of this loan does not have a specific payoff date. For residential, non owner occupied properties, the amount of the loan does not usually exceed 70 percent of the property’s value and for commercial properties, the maximum loan-to-value ratio is often 70 percent.
A hard money lender may provide a bridge loan to a developer during that period when the permit is still being processed so that conventional loans are not yet available. After the permit is approved, the developer will be able to get a loan from a bank for lower interest rates and repays the bridge loan. Loans of this kind are more difficult to obtain and do not exceed 30-40% LTV.
ALL hard money lenders will do their own independent due diligence prior to funding a loan in order to determine the value of the collateral a potential borrower is looking to pledge. Be proactive, not reactive and use the below sites as a tool in determining what the fair market value REALLY is for your investment property!