Would You Lend to Greece?

Question

I had a borrower come to me with a request for a hard money loan this week. We are asset based lenders, so we lend primarily on the value of the property, and not on the ability of the borrower to pay us back. However, there are some things we look for as red flags on a bad borrower.

Namely, judgements, tax liens, and or consecutive mortgage lates. A short sale on the credit doesn’t really bother me, as I understand the situation many people have been in over the last several years with being upside down on a property.

The borrower who came to us this week had a great deal that we really liked a lot. The property is exactly what we look for when making a loan and the comps checked out. We did a drive by the property and it looked good. But, when my portfolio manager checked the credit of the borrower to look for judgements or tax liens, he saw that he has loans on 3 investment properties he owns. Every one of those loans had consecutive mortgage lates, he hasn’t paid on time not once on those 3 property loans.

Now, why would we turn around and give this borrower a loan on another investment property, when he isn’t paying on time to the other lenders on the 3 he currently owns?

Would you lend to Greece?

Loc R. · Answer

Good due diligence on your part.

I would say "lend to him" only if you want the property, because that's what the most likely outcome on this deal is.

J Scott · Answer

Yes, but only if I could get a first lien on the country...  :)

Joel Owens · Answer

He should have a bunch of money then from paying all those 3 loans late to pay an advance reserve on his payments to you!!

................................ :)

Ann Bellamy · Answer

Jeff S, a couple of comments on your post:

First, check the laws in your lending state(s).  In MA and NH, we are not allowed to charge interest on accrued interest.  On Points and principal, yes, but interest on interest, no.  You don't want the courts to invalidate your note/mortgage if you end up in court.

Second, when you accrue interest you are effectively increasing the payoff at the end, and therefore your LTV based on total exposure.  If there is no problem, it's great.  I've had a repeat borrower who did deal after deal, suddenly fall off the planet and stop in the middle of several projects.  We are in the process of foreclosure, unfortunately.  It can still happen and could be the result of illness, divorce or getting hit by a bus.

Jeff S. · Answer

I can’t tell if this is a short or long term loan Corey Dutton. If long term, you might end up with the property.  If short, this is our approach:

One of our favorite borrowers is an extremely skilled flipper with whom we participate in as many deals as we can.  He’s great guy we love to death, but initially found he’s awful at paying us in a timely manner.

Rather than chase him each month for checks (I’m convinced he used it as an excuse to buy lunch for my wife), we just write our loans with him to pay everything, points and payments, at the end of the loan when his deal sells.

We charge interest on the total unpaid balance each month (i.e. interest on the monthly interest and points) which very slightly increases our ROI but is in no way punitive and maintains our very healthy relationship.

This obviously won’t work with a long term loan but almost everyone we do business with now prefers this arrangement.  It seems to be the trend around here and is always one of the questions we’re asked by prospective borrowers.

Jeff

…first lien on the country… Funny J  Scott

Bill Gulley · Answer

If you're going to get "creative" check the laws carefully, paying interest up front or refinancing interest can change the type of lender you are and if not properly registered/licensened that means trouble. I suggest you check pay day loans, pawn shops, auto loans as to their structure in your state. Saying commercial loans keeps you out of RESPA and related issues but you also have the Uniform Code to deal with. Any costs to the lender to get a loan will apply to the APR for any usury laws. Just be careful...

Check your bank for the auto-pay, I had a small fee.

Corey Dutton · Answer

Bill Gulley I love that idea of the auto-pay arrangement.

I've also known other lenders to take all the interest payments upfront in lieu of points charged as a loan fee. So for a six month loan, he will collect all payments upfront.

Bill Gulley · Answer

Ann, thank you, I could have sworn I said check with your state law, but obviously the thought didn't get to my fingers.

That is absolutely true as to circumventing the process....:)

Wayne Woodson · Answer

I would lend to borrowers depending on what assets they had. Cash isn't always king.

Ann Bellamy · Answer

Check with your local attorney on the above, Corey Dutton.  My attorneys are telling me that the above will not be held up in court, at least not in my states.  So holding the QC deed or any other type of deed in escrow when making a loan is viewed as circumventing the foreclosure process, and is dealt with harshly.  It may be different in Utah.

Would You Lend to Greece?

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