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Do you have a question about financing real estate transactions? Now you can get them answered by Dan Burke, financial expert for Capital Trust. This month, Joe, a plumber, asks about the advantages of using hard money to purchase foreclosed properties.Dear Dan,
Dan, I dabbled in real estate investing years ago and would like to get more involved given the recent availability of properties that will actually cash flow. I have worked hard to put myself in a position to acquire the real estate but realize that I can't get the rehab money required to make the units rental ready. I have good credit and was considered a good borrower not so long ago. Do you have any realistic solutions since the banks are making financing very difficult for a Self-Employed Guy who Understands Excellent opportunity?
Thanks, SEGUE
Dear SEGUE,
Let's start by explaining that you are not the only one who has been surprised by the drastic lending changes we are witnessing. You are like the cork in the raging river of change.
As a direct hard money lender, we at Capital Trust are routinely seeing scenarios where certain properties (particularly foreclosures) are not considered by conventional lenders for a host of reasons: dissolved condo associations, rehabs, etc. Unfortunately, many investors learn of the loan rejections at the 11th hour. Essentially, the banks are changing the rules after the indicative offer has been extended.
Fortunately, we're able to assist and rescue some of these deals because we have a very streamlined process and take only 3 - 5 business days to fund the deal. Of course, the deal itself must meet our basic requirements: 60 - 70% loan to value (LTV), investment property, etc.
A point worth noting is that just because you don't have 30 - 40% of the capital for the purchase, you can use other strategies to meet the desired LTV threshold and secure the deal.
If you have another piece of cross collateral with a strong equity position, this could bolster the LTV and thus require less capital from you. For example, you may have a $175K purchase price on a three-family in Dorchester , MA but need $170K to make that a reality.
Assuming that you have $30K toward the deal (including rehab funds) and an after-repair value (ARV) of $225 - $250K, this would still be a questionable LTV and beyond hard money lender parameters; however, let's say you own a two-family investment property in Somerville, MA worth $275K with a mortgage of $75K.
You could create a blanket mortgage by pledging both properties and improve the combined loan to value (CLTV) to approximately 50%.
Furthermore, you may consider asking a motivated seller to consider holding a small 2nd mortgage. This is particularly attractive for the seller when you have the term sheet in hand indicating a quick closing. This is another advantage in using hard money.
Either way, SEGUE, there are concrete strategies to avoid succumbing to the increasingly rigid guidelines the banks are demanding. While these solutions are not always going to apply to your situation, they certainly give you a Plan B that is much needed in this tricky market.
Let's start by explaining that you are not the only one who has been surprised by the drastic lending changes we are witnessing. You are like the cork in the raging river of change.
As a direct hard money lender, we at Capital Trust are routinely seeing scenarios where certain properties (particularly foreclosures) are not considered by conventional lenders for a host of reasons: dissolved condo associations, rehabs, etc. Unfortunately, many investors learn of the loan rejections at the 11th hour. Essentially, the banks are changing the rules after the indicative offer has been extended.
Fortunately, we're able to assist and rescue some of these deals because we have a very streamlined process and take only 3 - 5 business days to fund the deal. Of course, the deal itself must meet our basic requirements: 60 - 70% loan to value (LTV), investment property, etc.
A point worth noting is that just because you don't have 30 - 40% of the capital for the purchase, you can use other strategies to meet the desired LTV threshold and secure the deal.
If you have another piece of cross collateral with a strong equity position, this could bolster the LTV and thus require less capital from you. For example, you may have a $175K purchase price on a three-family in Dorchester , MA but need $170K to make that a reality.
Assuming that you have $30K toward the deal (including rehab funds) and an after-repair value (ARV) of $225 - $250K, this would still be a questionable LTV and beyond hard money lender parameters; however, let's say you own a two-family investment property in Somerville, MA worth $275K with a mortgage of $75K.
You could create a blanket mortgage by pledging both properties and improve the combined loan to value (CLTV) to approximately 50%.
Furthermore, you may consider asking a motivated seller to consider holding a small 2nd mortgage. This is particularly attractive for the seller when you have the term sheet in hand indicating a quick closing. This is another advantage in using hard money.
Either way, SEGUE, there are concrete strategies to avoid succumbing to the increasingly rigid guidelines the banks are demanding. While these solutions are not always going to apply to your situation, they certainly give you a Plan B that is much needed in this tricky market.
Dan Burke is the manager for Capital Trust, LLC, a Boston, Massachusetts firm that specializes in hard money lending. You can contact Dan by phone at (617) 971-9700 or by email at danburke@ecapitaltrust.com. To learn more about Capital Trust, visit www.ecapitaltrust.com.
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