Are Hard Money Loans Risky?

The whole concept of hard money loans just sounds risky, doesn't it? After all, you're dealing with borrowers that usually come to you because they can't get a bank loan, and if a bank won't work with them, they must be a bad risk. While there's a kernel of truth in this argument, it also ignores a larger truth. 

Hard money loans don't have anything to do with risky buyers or risky properties. They're just a loan that is made in a non-traditional way and that, sometimes, has non-traditional collateral. In and of themselves, they're no riskier than any other loan. Furthermore, if you make them the right way, they can actually be safer than other loans.

Borrower Profile

Traditional lenders turn borrowers away because they fail to meet a rigid set of criteria. While the criteria are developed to keep unqualified borrowers from getting loans, highly qualified borrowers frequently fall through the cracks. While many of those unqualified borrowers turn to hard money lenders, other people who are qualified but fall through the cracks also do. For example, if nine years ago, a borrower with 760 credit lost his job and health insurance and had $250,000 in medical bills from unexpected heart surgery and filed bankruptcy, a bank would probably turn him down since the bankruptcy would still be on his credit report. Even if he's been financially responsible for the last nine years, his only option might be hard money loans. 

Loan Profile

Hard money lenders frequently come into play on non-traditional loans. In a tight lending environment, many loans that would normally be considered safe won't pass muster with a bank or mortgage company. For example, investors looking to buy distressed homes as a discount, fix them up and resell them frequently can't find a bank loan, even if the property has significant upside. Making hard money loans on these types of properties is a relatively safe investment.

Underwriting Profile

Correctly underwritten hard money loans should be safer than traditional ones. Hard money lenders are in a position of power since the borrower is coming to them knowing that he or she doesn't have another option. Because of this, the lender can demand terms that reduce his risk. For instance, if banks make loans at 75 to 80 percent LTV ratios, hard money lenders could require 30 to 40 percent down because the borrower has no other option. 

6 Reasons to Invest in Trust Deeds

It almost goes without saying that real estate is an excellent investment. But many property investors miss an entire class of opportunities. Many of them focus exclusively on the equity side of the business. By doing this, though, they're ignoring where the money actually sits in real estate -- on the debt side. You can participate in this part of the market by being a trust deed investor and making loans secured by trust deeds. Here are some of the benefits of trust deed investing:

1. Regular cash flow. When your money goes into equity, it gets tied up as a down payment and you have to wait to sell the property to get your equity and profit back or you have to wait until the property is stabilized to start getting monthly income. Until then, you're either not receiving anything or you're continuing to invest. As a trust deed investor, you receive a predetermined payment every month and get your money back on a set date.
2. Clean hands. When you invest in trust deeds, you're not going to have to fund a property, do the work to rehabilitate it or find a tenant. You won't have to deal with vendors, inspectors or renters, either. Your only job is to provide up-front capital and receive monthly payments.
3. Healthy returns. While your rate of return can vary, you can usually count on high-single digit or low double-digit interest rates on your loans.
4. Relative security. Done correctly, investing in trust deeds can be relatively safe. If you focus on borrowers that have a good strategy and have a strong personal net worth, you can mitigate a great deal of risk. Requiring a large down payment also protects you by motivating them to pay you off and protect their investment.
5. Frequent (but not too frequent) turnover. Most private mortgages last for 6 months to 3 years, letting your money work for you for a reasonable period of time but also giving you the opportunity to pull it out.
6. Back-end protection. When you invest in trust deeds, the hope is that everything will go well. If it doesn't, your borrower's large down payment means that, if you have to take the property back, there should be enough equity to make you whole.

Forgery... A Cause for Alarm?

Forgery is the crime of falsely and fraudulently making or altering a legal document. It is a felony punishable by imprisonment in a state prison. It is also an act which may cloud title to property and may result in protracted legal proceedings.   The incidence of forgery is escalating, and the victims are innocent property owners. Title industry figures reveal that over the last decade forgery losses tripled, accounting now for over 20% of all losses paid by title insurers. These statistics indicate that the consumer's chances of becoming a forgery victim are the greatest ever. Forgeries affecting real property are created in a number of ways. A deed may be forged by someone, often a family member or associate, in an attempt to transfer legal ownership of the property without the knowledge of the true owner. A lender's recorded security agreement for a loan may be eliminated by a forged instrument falsely indicating payment of the secured debt, thereby allowing another loan to be fraudulently obtained. A note and deed of trust may be forged by a person who then sells the note secured by the deed of trust and disappears, leaving an unsuspecting homeowner to discover the cloud on title when the purchaser of the note commences foreclosure proceedings for the nonpayment of the debt.   A fraudulent document may be notarized by either a person impersonating a notary or a legitimate notary who fails to ascertain that the person signing the document is not the person whose name appears on the document. The mounting trend in forgery has received serious attention. No longer may title companies concentrate only on removing risks arising from inadvertences or errors in recordings; instead, they now have the additional responsibility of contending with criminal acts. The title industry is reevaluating its title and escrow practices and strengthening notarization processes, hoping to close loopholes which forgers might otherwise exploit. In addition, special incentives are being offered to company employees who detect forgeries during the process of title examination and escrow closings.   The title insurance industry is also working with law enforcement agencies, providing them with assistance in the prosecution of forgers by making available industry expertise and offering results of their investigations. The California legislature has responded to widespread public concern by raising the penalty for forgery so that it now is a felony punishable by up to three years in state prison, and, in the case of multiple forgeries or repeat offenders, severely limiting the granting of probation. For forgeries affecting homeowners, a fine may also be imposed of up to $75,000. Through improved practices and cooperation with enforcement agencies, the title industry has moved vigorously to reduce the incidence of forgery and lessen the opportunities for forgery.   But, what can you as a property owner do about forgery? While you may not be able to prevent a forgery, you can be protected. Title insurance provides protection against forgeries in your title which may have occurred prior to the issuance of your title insurance policy. Without this protection, you would single-handedly face the uncertainty and expense of resolving legal issues.   Your local title company will be happy to provide additional information.

The Value of Experience

NEW RESIDENTIAL SALES RISE IN APRIL

Sales of new single-family houses increased 2.3 percent in April to a seasonally adjusted annual rate of 454,000, according to estimates released jointly by the U.S. Census Bureau and the Dept. of Housing and Urban Development. This is 29 percent above the April 2012 estimate of 352,000.

The median sales price of new houses sold in April 2013 was $271,600; the average sales price was $330,800. The seasonally adjusted estimated number of new houses for sale at the end of April was 156,000, representing a supply of 4.1 months at the current sales rate.
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Consumer Confidence Index Improves in May

The Conference Board Consumer Confidence Index, which had improved in April, increased again in May and now stands at 76.2 (1985=100), up from 69 in April. The Present Situation Index increased to 66.7 from 61, and the Expectations Index improved to 82.4 from 74.3 last month.

Consumers’ appraisal of present-day conditions improved in May, with those saying business conditions are “good” increasing to 18.8 percent from 17.5 percent, and those stating business conditions are “bad” decreasing to 26 percent from 27.6 percent. Consumers’ assessment of the labor market also was more positive. Those claiming jobs are “plentiful” increased to 10.8 percent from 9.7 percent, while those claiming jobs are “hard to get” edged down to 36.1 percent from 36.9 percent.
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Home Prices See Strong Gains in Q1

Data through March 2013, released yesterday by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices showed that all three composites posted double-digit annual increases. The 10-City and 20-City Composites increased 10.3 percent and 10.9 percent, respectively, with the national composite rising by 10.2 percent in the last four quarters. All 20 cities posted positive year-over-year growth.
In the first quarter of 2013, the national composite increased 1.2 percent. On a monthly basis, the 10- and 20-City Composites both posted increases of 1.4 percent. Charlotte, Los Angeles, Portland, Seattle, and Tampa were the five MSAs to record their largest month-over-month gains in more than seven years.
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Top Ten Reasons to be Optimistic about the Housing Market

Interest Rate Update

Interest Rate Update

Interest rates continue to remain low. There is a chance rates could even go lower if the current administration has their way. Lower rates will help heal the housing market which helps the economy.

30 Year Fixed up to $417,000	3.50% to 3.75%
30 Year Fixed "Agency" up to $625,500	3.75% to 4.0%
30 Year Fixed FHA up to $417,000	3.25% to 3.50%
30 Year Fixed FHA "Jumbo" up to $729,500	3.50% to 3.75%

No Doubt About It


No doubt about it. It is definitely time to buy a home. Case-Schiller index reported once again a strong increase in home prices nationwide. Here in Southern California prices are up over 10% from a year ago and more in certain areas. We are all seeing the results of a strong demand for housing coupled with a lack of inventory. That makes for a perfect storm of increasing prices.


How Does This Affect You ?


I have spoken to several buyers who have been unable to get offers accepted in this crazy market. A couple of them are thinking of giving up looking for a home to buy until the market sta-bilizes and more inventory becomes available. My opinion is that would be a mistake. Yes the market will stabilize at some time but at what price point. Waiting could only increase the prices to be paid later. I believe it is better to buckle down and keep making offers and keep looking. Based on the latest report, prices are still moving upwards.