Bank Loans Are No Longer the First Choice For Real Estate Investors – What’s Working For You?

Question

Particularly in the California and Arizona real estate markets, where bidding wars for investment properties are the norm, real estate investors can’t rely on banks to fund new purchases. Although some real estate investors can still qualify at the bank, the best deals in real estate can’t wait for a bank loan to fund. This is the primary reason why hard money and private money loans are more frequently used by investors, to move fast on the purchase of investment properties.

Although all borrowers would prefer a bank’s loan terms over the terms offered by a hard money or private money lender, most have decided that going to the bank is not even worth the time. Because some real estate investors are making multiple offers per week, a bank simply doesn’t have the flexibility or the ability to work quickly enough to take advantage of an accepted offer and close fast.

On the flip side, private and hard money lenders have answered the call of real estate investors and can respond and act quickly on new deals presented to them. For this reason, many real estate investors are going first to hard money lenders to obtain financing, even if they do still qualify at the bank. One local real estate investor in Arizona, Tiffany Giddeons, commented: “By the time my banker looks at the loan application, someone from Canada has already bought the property for over the asking price! In this market you’ve got to move quickly on the good deals or they’re gone.”

Are you using your own money or other people’s money to finance your real estate investment purchases? Please share what is working for you.

Account Closed · Answer

I've always wondered why investor buyers (and agents) think a hard money loan offer is a cash offer.  Cash is not HML funds.  I got a half a dozen offers on my last re-sale, they all said cash.  But when I talked to the agent for the buyer with the highest offer he told me the buyer was using an HML.  I accepted the offer because I knew who the hard money lender was and I was sure the deal was fundable per his lending criteria.   And it was.  But the buyer didn't like the lender's fees so went and found another lender late in the game.  I gave that buyer a couple of extensions and threatened to keep his deposit if he didn't close.  A true cash offer would have had that money in escrow sooner (or not) and would have closed sooner or have been cancelled.  I'm with BofA on this one.

Jeff S:  what's your solution as a lender on this one? Are you willing to front your borrower cash to purchase and execute the note and DOT after the purchase escrow?

Jason Grote · Answer

We have used a local bank to fund quite a few deals, and we currently are funding two properties.

Fishing for deals on the MLS is a lot of work!  You are rarely, if ever, in the driver's seat with the seller, so cash hopes to give you a leg up on your competition, which appears to be fierce!

My question is this:  Why don't you market directly to sellers and eliminate the competition?  Only one time have I had to pay cash instead of financing with the bank due to the seller's preference for a cash offer.

Eliminate your competition and you eliminate your dependency on cash deals!

Jeff S. · Answer

Corey Dutton
I know no one who charges up-front fees or anyone crazy enough to pay them.  Rip a few people off around here and no one will go near you.  In #4, I’m talking about 100% of the purchase price plus 100% of the rehab costs and in #5 I referred to what you alternately called a “back-end equity split,” which also covers 100% of all costs.

In spite of a recent thread, where many wanted to define the difference between a hard and private money lender (as if it mattered), it’s really a continuum.  There are the larger lenders who loan among many states, never see the borrower or the property, and of-course have to be conservative.  There’s your doctor who might have enough money to fund one or two local properties.  And, there are many in between who only loan locally based on their relationships and experience with any number of borrowers.  I can’t tell from your profile, Corey, but I suspect you’re the former (sorry if I’m wrong).  I know I’m in the latter category and there are many of us out here.
  
We can’t satisfy as nearly much demand as the larger lenders but we’re often able to better compete on speed, cost, and reliability and I know we take risks a large lender can’t (or won’t).  Our lending terms would probably horrify you.  In these cases, we won’t loan less to an unknown borrower or increase our rates to make up for the risk; we just won’t do the deal.  Frankly, I’m a lot more comfortable loaning 90 or 100% to a local full time borrower I’ve grown to know well, than 65% to someone I never met, in a state I’ve never visited.

We’re just getting our feet wet with shared appreciation mortgages (your back-end equity splits) but many flippers I know in the area have well healed “sugar daddies” and only do these. From the few I know, they tend to be well heeled professionals but it’s hard to generalize.   Sometimes the terms are a percent interest plus a profit split, and there are some that just split the profit.  There’s a lot more lender risk but a greater profit potential and many active flippers we know have access to this money.

All I mentioned are legitimate lenders by any definition.  No up-front fees and no one gets ripped off.  Different strokes…

Jeff

Corey Dutton · Answer

Jeff S - With regard to item #4 you mentioned in your comment:
"4) Everyone with many deals eventually runs out of money. In addition to their own cash, the active flippers now beg and borrow every dime they can for the 100% of the purchase and rehab and they're finding it. "

I know there are some private money lenders claiming to offer 100% financing but it seems few of these lenders are really legit. We do our rehabs at 65% of after repaired value, which can be 100% of the purchase price in some cases. But we still require 20% cash in from the borrower across the total project cost. I really don't know of any legitimate lenders that are offering 100% financing of the total project cost unless they are taking some kind of back-end equity split. Most lenders that advertise 100% financing on rehab are just upfront fee collectors.

Donna Smolinski · Answer

@J Scott
Right on J.... that's the way to do it.  If you don't truly have the cash, then it isn't a cash offer!  You found a good way to go about it LEGIT!

I won't write a cash offer either, if I don't have the funds in the bank.  What I don't understand is.... how are the guys that are getting their funds from HML getting their offers accepted if writing it as cash?  Sellers want to see bank stmts to verify cash to close? ? ?

J Scott · Answer

It's very easy to differentiate a real all-cash offer from a fake all-cash offer.  When I receive an all-cash offer on a property, I generally require 20% in earnest money (unless I know the buyer).  This will almost always eliminate financed offers masking as cash offers, and even if it doesn't, the 20% is plenty of remuneration for a buyer who lies and then can't get his financing.

Btw, I pay all-cash for many of my properties and borrow the money for many of my properties.  But, when I borrow, I do it as a business loan with appropriate collateral and a personal guaranty (not secured by the purchased property), so I actually have the cash in my own bank account at the time the offer is made.

I can then truly offer all-cash, as I have the cash in my possession, even though it's technically borrowed.

Donna Smolinski · Answer

Jeff S
What is your avg pts & rate on a 60% LTV (detached) in good areas with 6-12 month term?

Jeff S. · Answer

I don’t think anyone has illusions that a loan of any sort, hard money or otherwise, is the same as cash.  All-cash offers are a strategy, made to gain a competitive advantage and get the offer accepted – whether the cash exists at the time of the offer or not.  Like it or not, it’s a very common strategy among rehabber community.

Just responding to title about what I see working.  Don’t shoot the messenger.

We spoke to our lawyer about this.  A double escrow with very specific lender instructions is probably the cleanest approach but certainly not the only one.  The note and DOT would be signed in advance.  As investors, we front money in the name of our broker on every deal we do so this is nothing new to us.  We’re very comfortable with it.

Jeff

Donna Smolinski · Answer

ok... I think I understand your comment now.  If a buyer writes a "cash" offer, it better be true cash, not a HML which gets funded at closing.  I didn't realize banks were looking the other way on those kind of deals before.  When we write cash offers, we always have the cash to close.  If we want a HML, we finance it after the close.  But  some REO addendums disallow any financing for 60-90 days after close on cash transactions.  That's part of the deed restriction which can really hinder the leveraged investor.  I've never understood why that restriction has been institued with certain REO lenders (particularly FNMA, FHLMC & B of A).

Jeff S. · Answer

Sorry, I should have been a bit clearer on 6.

6) Regardless of where the money is coming from, all-cash offers on REO’s are still the norm even though the banks (until now?) have looked the other way and allowed the buyer to borrow the money.

It has nothing to do with a deed restriction.  BofA said they would not allow the buyer to borrow the purchase money (at least on a 1st TD) when they said they would pay cash.

Cash, of course, means cash so the bank was within their right.  No argument.  We never experienced this one before though.  Nor had our borrower, who by the way, is the one above doing 18 to 24 deals a month and is no neophyte.

Jeff

Bank Loans Are No Longer the First Choice For Real Estate Investors – What’s Working For You?

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