Archive for July, 2009

Obtaining Real Estate Loan Prequalification Letters For Investment Properties

Monday, July 27th, 2009





In nearly every city or town in America there are a few different types of real estate agents and brokers. Some of these professionals deal primarily in single family homes for individuals, others deal with commercial real estate transactions, and yet a third type deal primarily in investment real estate. If you are looking to invest in the real estate market, you will want to find a real estate agent or broker who deals with investment properties and the unique needs of real estate investors on a day-to-day basis.

The Investment Real Estate Specialist

The reason for dealing with a realtor who specializes in investment properties and transactions specifically with investors is simple; they understand what we do for a living and how we handle our transactions differently than other real estate buyers.

For example, real estate loan prequalification letters have become the norm these days for anyone who wants a realtor to show them available property. And, if you think about it, this does make sense for the realtors. Why should they bother spending their valuable time with buyers who cannot ultimately qualify for a loan? They don’t want to. So, they pretty much all require home loan prequalification before they will deal much with a buyer these days.

The good news is that for those of us who are investors, and who often use creative financing in one form or another on our deals, we are able to do business with the investment real estate agents without having to produce mortgage loan prequalification letters and lots of other documentation. All we have to do is let them know that if they can find us the deal, then we can get it financed one way or another.

Hard Money Lenders and Real Estate Loan Prequalification Letters

If you will be using hard money for your investment transaction, then it is possible for you to get a hard money lender to write you a mortgage loan prequalification letter. The hard money lenders deal with realtors as well, and they understand that some of them can be pretty insistent on mortgage loan prequalification.

Ultimately, if you deal with an investment realtor and try to avoid those who do not thoroughly understand our business, you should be able to minimize your document and prequalification headaches.

Understanding Real Estate Loans

Sunday, July 26th, 2009





When you start shopping for real estate loans, you will probably be overwhelmed by the immense variety of mortgage loans offered. While this gives you the opportunity to choose exactly the type of loan that will be the best for you, it can also get extremely confusing. The three most popular types of real estate loans or mortgages are: Amortized Loans (AL), Adjustable Rate Mortgage (ARM) and Hybrid Loans.

Amortized Loan (AL)

If you take the amortized loan (also known as a level-payment fully amortizing fixed-rate loan), you will pay equal monthly installments for its entire duration. The installments consist partly of principal and partly of interest – the proportions between them shift gradually from interest to principal, but the monthly sum you have to pay stays exactly the same. This kind of loan is very predictable and thus safe for the borrower, but because it lacks flexibility, the interest rates are usually a little higher when compared to adjustable rate mortgages.

Adjustable Rate Mortgage (ARM)

Adjustable rate mortgage (ARM) is the most popular type of real estate loan. Just as in the case of the amortized loan, you will pay a monthly installment that consists of both principal and the interest. Your installment amount, however, may go up or down because the interest rate changes through the term of the loan, depending on the changes of index rate(s) it is tied to. The most popular index rates are the prime rate, LIBOR (London Interbank Offered Rate), COFI (11th District Cost of Funds Index) as well as various Treasury Bill and Certificate of Deposit rates. To add some safety, most ARM rates have both annual and lifetime caps. These caps limit the amount interest rates can exceed yearly and during the entire life of the loan. Some adjustable rate mortgages offer reduced initial payments, but that’s not the rule.

Hybrid Loan

Hybrid loans earned their name from the fact that they can be converted from amortized to adjustable rate loans and vice versa, depending on your decision. This adds a lot to the safety, as in the case of a market crash you can convert your ARM into a fixed rate loan or do just the opposite in the time of prosperity. Unfortunately nothing is perfect: most of the time hybrid real estate loans have either higher than usual interest rates or they can be converted only if certain conditions are met. Some of the conditions that need to be met include: an initial period of three years or longer (during that time the loan can’t be converted), the current interest rate amount and/or the need to pay an additional fee for converting your loan.

The choice between these three types of real estate loans depends mostly on your preference and comfort level. If you want stability and you are able to pay extra for it, go for the amortized loan. If you want to pay as little as possible and you want to risk a little, apply for the ARM or hybrid loan. Just remember to check the annual and lifetime caps or you may find yourself in trouble at some point during the life of the mortgage.

Is Weak Management Causing the Non-Performing Real Estate Loans?

Saturday, July 18th, 2009





Even if the real estate market is strong, the cause of the non-performing loan status may be directly related to a weak management policy or “home work”. Management can make decisions, which in the short or long term can increase expenses and reduce the level of net operating income, thus increasing default risk on loan’s periodic payments. There can be different reasons for this.

First of all, even if demand will be strong for a longer period in the real estate market, the cause of the non-performing loan may be related to a real estate developer’s weak ” home work”. Excluding “hog cycle” here, developers, who use raw land as collateral, may stand face to face in a situation, where they will not be able to repay a loan. This may occur for the following reasons:

Poorly done market analysis Miscalculations of the effective demand and the competitive supply in the market area “Bad” location for particular project Wrongly chosen main target group Cost overruns and late competitions Letting risks and voids Miscalculated absorption rates High financial gearing of a company Weak marketing Decreasing population and diminishing export base of local community

Under the circumstances described above, the developer’s income cash flows are arbitrary and prolonged, and income and liabilities do not match. Developer’s default risk is the highest if a building is built for resale without getting a buyer before the project initiation, and if a building is built for lease without getting pre-contracted tenants.

Secondly, every property deteriorates over time.

Functional deterioration is caused by flaws in the structure, materials or design that diminishes the function, utility, and value of the property. For example outdated design, poorly done “the high and the best use” analysis, inadequate property management diligence, lack of financial support, or any combination of the foregoing may increase vacant tenant spaces as a tenant finds that the property is not suitable for his/her business activities. As the market value of commercial property is directly related to totally leased space and contracts’ conditions, the value of the property as collateral and cash flow are diminishing, thus default risk is higher. Consider, for example, an industrial building that was built in the early 1970’s. The structure’s 3.60 m. ceiling, which was the market standard then, might be considered totally inadequate today when 5 m story heights are the norm. Economic deterioration is an impairment of the utility or property due to negative influences outside the property. Because of fixed location, real estate is subject to external influences that cannot be controlled by the property owner, landlord or tenant. Consider a situation, where the property is ready for use in a central business district (CBD) today, but in future it will be located nearby the CBD due to the CBD movement towards more competitive areas. Thus, trough the years the main target group of potential users has been changed, rents and net operating incomes are declined due to changes in the neighbourhood. There is a higher degree of default risk on a loan, especially if the loan is given for long-term. Additionally, cash flows will decrease.

Comparing other reasons for non-performing loans and defaults mentioned above with economic and functional deterioration has a small magnitude of impact to a borrower’s default.

Hard Money Lender Real Estate – Financing Options For Investors and Borrowers With Bad Credit

Thursday, July 9th, 2009





Hard money lender real estate loans provide borrowers with poor credit the chance to purchase a home. These types of loans are considerably more expensive than traditional home loans financed through mortgage lenders. This type of financing is intended for interim use while borrowers rebuild or establish a credit history.

Hard money lender real estate financing is also used by investors to purchase commercial properties or realty intended for house flipping. Investors sometimes use this type of financing to buy properties that are not in marketable condition because this type of realty does not qualify for conventional financing through banks.

Hard money loans are referred to as ‘bridge financing’ because they bridge the gap for individuals who do not qualify for funding through a mortgage lender. Bridge loans can be used in addition to conventional loans and are often used with seller carry back financing.

Seller carry back is a lending option that helps individuals buy real estate by combining bridge loans with conventional mortgage loans. The property owner provides a portion of financing for one to two years and the balance is financed through a bank, credit union or mortgage lender.

For example, the Seller lists his property at $250,000 and offers to carry back 40-percent financing, or $100,000. The buyer obtains a conventional home mortgage loan for $150,000. The buyer has two mortgages against the property. The bank carries the first mortgage and the seller carries the second mortgage. Carry back financing is generally limited to 70-percent maximum of the property’s current market value.

Interest rates applied to bridge loans are substantially higher than interest applied to conventional home loans. Private financing interest rates are regulated by state usury laws. On average, bridge loans are charged an interest rate of 11- to 21-percent. At present, Florida has the highest usury rate which is capped at 25-percent.

Seller carry back real estate contracts often include default clauses which allow sellers to increase interest rates if borrowers become delinquent with loan payments or default on the loan and enter into foreclosure. Default interest rates can soar as high as 29-percent. Buyers can determine maximum hard money loan interest rates at UsuryLaw.com.

The amount of interest charged with bridge loans can vary depending on the amount of borrowed funds, as well as the funding source. Private real estate investors generally charge a lower interest rate than investment groups. Hard money loans for residential property typically carry a higher rate of interest than commercial property loans.

Bridge loans sometimes include a prepayment clause, penalizing borrowers who pay loans off early. One primary goal is to refinance hard money loans through a conventional mortgage lender as quickly as possible. A six-month prepayment clause is tolerable, while a two year penalty clause is unacceptable. It is highly recommended to consult with a real estate lawyer before entering into hard money borrowing.

Overall, hard money lender real estate loans are not the preferred method for financing. However, bridge loans allow borrowers with less than perfect credit the opportunity to buy a home and provide funds to investors for residential and commercial investment properties.