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September 21, 2020 by Scott Griest 0 Comments

Why A Hard Money Loan Can Be Worth The Cost

Part 2 Of Coastal Capital’s Blog Series: Introduction To Private Mortgages

Why are real estate borrowers willing to pay higher rates to borrow private money also known as a hard money loan? With hard money loan interest rates around 12% plus points added in, the borrower is paying a premium. It’s obvious why this is a great deal for the private mortgage investor/lender and the broker. Why are real estate investors be willing to pay these high rates when conventional mortgage money costs 6-8%? There reasons are many, but generally all tie to four advantages:

Speed of Closing the Transaction

Mortgage money from banking or institutional sources usually takes between 45 and 90 days to fund. Institutional lenders need to not only obtain appraisal of the value of the property. Then, require a detailed examination of the borrower’s credit history and current financial status. Finally, financial statements and tax returns for the property securing the loan are needed. And lastly all other properties, business interests owned by the borrower are examined. 

Coastal Capital and other hard money loan lenders can usually complete a transaction within 5 to 15 days. The property value itself is the main criteria used in determining loan eligibility. Less information on the borrower and the borrower’s other properties is required, resulting in a fast approval process. Coastal Capital is protected by lending at a much lower loan to value ratio, 65% is typical vs. 80% – 90% for an institutional lender. Further, private mortgage lenders can make a decision within 24 hours of receiving an application. Institutional mortgage money must receive the approval of a loan committee that may meet twice a month.

Real estate investors often need immediate financing to take advantage of an opportunity to purchase a property below market price. In many cases a motivated seller being forced to sell and the borrower has to act fast and a hard money loan is a good choice. Sometimes its possible for an investor with quick financing to purchase the property at 70-75% of market value. Especially when it’s a foreclosure opportunity. Conventional or institutional financing takes too long (according to Zillow the average is 30 to 45 days https://www.zillow.com/home-buying-guide/how-long-does-it-take-to-close-on-a-house/?106724136213dsa-588695699669459688491291 ).

Real estate investors wanting to take advantage of an opportunity either needs cash liquid or utilize the services of Coastal Capital. With so much profit potential, paying a premium is a small price to pay for completing the transaction. If the real estate investor keeps the property, he can start refinance with conventional money right after closing. If the investor in the above example seasons his property, (owning it for 6 months to 12 months), it often appraises much higher than the purchase price. Then the entire purchase amount can be financed with a conventional mortgage. The end result is the investor owns a cash flowing property with no net money out of his or her pocket.

Sometimes, real estate owners are in temporary financial trouble, and need a loan to avoid losing a foreclosure. At just such a time conventional lenders back away. Coastal Capital can provide refinancing, providing a lifeline to the property owner to avoid foreclosure. This gives time to regroup and reestablish credit then refinance at a later date with conventional financing. So when time is of the essence a hard money loan is often used for:

  • Closing on an opportunity when a quick close to purchase a property well below market value; then immediately refinance it through a bank
  • To quickly secure a property and remedy cash flow issues in the mid-term to secure a higher appraisal and cash out in six to 12 months
  • Save a property from foreclosure and expensive tax liens giving the borrower breathing room

Borrowers May Not Want or be Able to Provide Personal Financial Information

Unfortunately, many borrowers fail to keep good financial records. This is especially true for small business owners. They often manage the businesses financial success based upon the business’s checking accounts balance.  Often people are tardy on filing tax returns or accountants are behind in preparing financial statements.

Institutional lenders demand detailed accounting of the real estate investor’s personal and financial life. This is all important and required to the institutional lender. It’s making a loan based upon the credit of the borrower and the value of the property. Not being able to provide complete and detailed personal financial information causes major issues. Often it negates or at least severely delays getting an institutional mortgage. It has no effect on the borrower’s ability to obtain a private mortgage loan. 

Many borrowers simply do not want the hassle of filling out applications. Then providing financial documentation, producing profit and loss statements which can be painful. Finally going through credit checks, explaining minor credit issues, and providing tax returns. Many of our hard money loan borrowers buy multiple properties each year. Unless they plan to hold a property for the long term they either use bank pre-approved credit lines or private mortgage financing. This saves time and hassle and provides assurance to the seller that a transaction can be completed on time.

Sometimes life situations dictate the willingness of a borrower to provide details of their financial life. Some of our clients have perfect credit and could have easily secured a much lower cost via conventional financing. However they might be going through a divorce or involved in a lawsuit. Keeping their financial matters private is sometimes the upmost concern.  So when financial information or disclosures cause an issue many use a private mortgage. Examples include:

  • Borrower cannot produce proper financial documents or is behind in preparing statements and tax returns
  • Risk of improper financial documentation delays closing with bank so the borrower chooses private money to ensure closing
  • A borrower is unwilling to disclose financial documents due to a myriad of reasons

The Borrower and/or the Property Does Not Qualify for a Conventional Mortgage Loan

This can be anything from low credit scores, already having too many mortgages or the property does not produce a sufficient enough income. Further, the property itself may not support the type of loan the borrower wants. If major repairs or rehabilitation is necessary, institutional investors will not be interested (especially if it’s a small project) and the borrower has an extensive track record. In these cases, a private mortgage may be the only resource to the borrower. At Coastal Capital the borrower’s credit is not an issue.

Professional real estate investors, entrepreneurial individuals who buy, lease, manage, build and sell real estate full time, often reach a point in their career where conventional financing is hard to come by. Somewhere between ownership of four small residential units where qualification is based on personal credit, and ownership of large office buildings where qualification is based on the property’s cash flow, all real estate investors run into a financing problem. They have too many properties to qualify as a small investors but the property’s cash flow won’t qualify on its own strength.

Further, the professional investor will not have a steady income from a job or other verifiable income. It is at this point that the investor must make a decision; take on partners or pay the high interest and fees for private mortgage. Ask any successful entrepreneur and all will saw that borrowing is always less expensive than paying a partner equity (plus all the potential headaches that come along with managing a partnership.) To summarize the reasons why a borrower or a property can’t qualify for conventional financing and borrowers choose a hard money loan:

  • Borrower has credit issues or like many entrepreneurs and small business owners cannot provide verifiable income in the form of payroll
  • Successful real estate investors often acquire too many properties to quickly and banks are uncomfortable lending to one individual with over five mortgages in their name
  • Many investors gladly trade a higher interest rate from a private lender versus taking on a partner and giving up equity in a property
  • The property itself may need repairs or upgrades prior to qualifying for conventional mortgage financing

We specialize in private mortgages (hard money lending) over the past 12 years. Coastal Capital’s experience has seen countless iterations of the reasons above in lending situations.  We are constantly financing properties just like the borrowers and are comfortable with the scenario. In addition, Coastal Capital is a direct lender and NOT a syndicate. Syndicates issue an approval and then send out the loan to a network of investors hoping to raise the money for the deal.  Instead, we are a private fund, where investors pool their capital. Then invest in hundreds of mortgages to diversify across borrowers and properties.  We usually close a transaction in a week. So we can’t issue an approval without having the cash to fund the loan.

Coastal Capital built its stellar reputation since 2007 with borrowers and brokers by following through and closing on time.  You can count on Coastal to put a smile on your borrower’s face. Please visit us at CoastalCapital.com to learn more.

September 4, 2020 by Phil Guertin 0 Comments

Getting Turn Downs For A Business Purpose Loan?

Often securing financing for your clients for business purposes or on an investment property is a challenge in the best-case scenario and nearly impossible with lots of pain points only to get a denial in with worst cases.  Nothing is more frustrating for borrowers and brokers than getting turned down by a bank! A private mortgage also known as hard money loans may be the best option (especially for business purpose loans.)

The Process Of Getting A Mortgage

Usually the process goes something like this over three months trying to get your client a mortgage:

  • Gathering all the personal, business and real estate financial information, for not only the property you’re trying to finance but for all his business and property interests.
  • Creating projections, forecasts and read through mountains of paperwork.
  • Putting together a loan package, sent it to numerous commercial mortgage lenders, only to find out each one needed the same information on their forms.
  • Spending countless hours transferring information to each application.
  • Chasing all the “additional information” requests from each potential interested lender and submit them for review.

The Result: You exhaust all possible institutional mortgage sources and still no loan.

Sound familiar? Perhaps you’re new to the commercial mortgage field and are not aware of other sources for private mortgages. Or, you are successful originating residential loans and decided to expand your practice to include commercial and investment property mortgages. Or maybe you already originate commercial mortgages and are successful in obtaining financing for some clients, but feel you just spin your wheels trying to obtain financing for others.

Basics Of Private Mortgages & Hard Money Lending

Key to maximizing success (and commissions) is spending your time productively and understanding when institutional commercial mortgage money is NOT available for your client; there are other financing options available for this same client.

Business purpose loans & private mortgage loans are secured by real estate made by a private lender instead of a bank. Mortgage loans are short-term (ranging from 12 months to three years) asset-based loans for the purchase, rehabilitation or equity cash out of real estate. Often these are referred to as “hard money loans”. This means that the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower’s credit. The security for the loan is enhanced because the loan represents a maximum of 65% of the appraised value of the property. Borrowers can expect to pay interest rates of 9% to 12% in today’s interest rate environment.

Why Do Borrowers Choose Hard Money Loans?

Private Mortgage Loans offers unique advantages for borrowers:

  • Speed of Closing the Transactions
  • Borrowers are Unable to Provide Detailed Personal Financial Information
  • Borrowers Do Not Qualify for a Conventional Mortgage Loan
  • Property Does Not Qualify for a Conventional Mortgage Loan

Coastal Capital continues to build its stellar reputation since 2007 with both borrowers and brokers by following through and closing transactions in both good times and bad times.  You can count on us to put a smile on your borrower’s face and make sure you get paid! To learn about how we support brokers please visit https://www.coastalcapital.com/broker/ Don’t forget to check out all our great reviews https://bit.ly/3i7W2Ch.

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Fix and Flip Financing

Get a loan to flip a house, with the right lender.

Payment Histories Increase Note Values

Want top dollar when selling mortgage notes?
Increase the value with payment histories!

Can I Sell Part of My Mortgage Note?

Owner Financing doesn’t have to mean waiting years or decades to receive money.
Sellers have the choice to sell all or just part of their future payments for cash today.

Safe Seller Financing Tips

It’s a tough time to sell a house.
Hoping to stand out from the crowd, sellers are advertising “Owner Will Finance!”
Accepting payments over time provides buyers an alternative to bank financing. Of course sellers don’t want to trade a house that won’t sell for a buyer that won’t pay.

Use Outside Closings To Sell Mortgage Notes!

When an investor has performed their research and is ready to purchase a private mortgage note they will ask the seller to deliver original documents (note, recorded mortgage, etc.) and sign the transfer package.

What is Seller Financing?

When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing.

This private financing by the seller can take the place of a bank loan or be in addition to a conventional mortgage.

The payment amount, interest rate, and other terms are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the buyer’s down payment and whether there are any bank loans.

Here’s an example of how seller financing works…

  • A property owner advertises his or her house for sale, either on her own or through an agent.
  • A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.
  • Rather than requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage. It could also be a note and deed of trust or a real estate contract, depending on the customary documents for that state.
  • The note spells out the terms of repayment. In this case they agree upon 8.5 percent interest at $1,211.04 per month based on a 360-month amortization. The seller doesn’t really want to wait a full 30 years for payments, so the note requires payment in full, known as a balloon payment, within seven years.
  • A title company or real estate attorney is used for the closing to be sure all parties are protected and the documents are in compliance with and state laws.

Bank Loan Vs Seller Financed Mortgage Notes

Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, installment sale, or owner financing.

The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller can foreclose and take the property back.

When the seller prefers cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor on the secondary market.

Seller Financed Notes and Interest Rates

The interest rate a seller agrees to accept when providing owner financing to the buyer has a large impact on the note’s value. Unfortunately, many sellers overlook this important decision.

Seller Financing – How Much Can The Buyer Afford?

Many sellers accept owner financing without any idea of how much the buyer can actually afford to pay.

The last thing a seller wants is to stress over receiving monthly payments or worse, getting the property back through foreclosure.