It is a good time to be a commercial real estate borrower in California if you have performing property. Prices are static for the first time in ages, the private commercial lending market has prospered, and loan-to-value (LTV) ratios are up. New consumer protection regulations have come out in your favor, and a new administration may mean more proactive borrowing rates and relaxed property taxes. The blip is the Fed’s slightly increased interest rate which raised mortgage from 3.8 percent last year to 4.5 percent the coming.
The advantage that the alternative money lenders have is that they offer more convenient proceedings than the banks, faster turnovers, more flexible terms, and an underwriting process that is easier than ever. Add to that the slew of recent protection laws passed in your favor by California’s federal government and consumer agencies and you may be in luck.
Looking to buy a home, do some flipping, or conduct some renovation? Look no further. If you live in California, hard money loans are a feasible alternative. Best of all, local lenders are competing for business and offering more aggressive terms and skinnier pricing than ever.
Housing prices are slowing
California Association of Realtors (CAR) showed that prices are finally slowing for the first time in decades. Five years ago prices jacked up from $300,000 in 2010 to tipping $500,000 this coming year with only a slight drop in the first two years. If you have a home that cost you $43,000 ten years ago, you could sell it for double that price this coming year. In fact, 2016 is a good time to not only sell but also to buy since house prices are only slightly lifting their head – by a mere percentage or two. Wait longer and CAR warns that global economic uncertainty and predictable higher Fed rates may toss prices out of your reach.
The fact that prices are slowing does not mean that prices are affordable. Far from it. The California housing market has a reputation for home prices and rents that are higher than anywhere else. But if you’ve been turned away from your bank, need the loan to fix or buy, and have a promising property in mind – a hard money lender may be a promising solution. He or she evaluates the worth of your property rather than your credit history and grants you the money accordingly.
California’s alternative lending market
For those who are familiar with banks or other alternative lending institutions and nought or little else, the hard money lending niche may come as a pleasant surprise. Originally notorious due to its high prices and low loan-to-value rates, this market has divvied up its competition and caused lenders to outbid one another with more aggressive terms, faster proceedings, higher LTV, and skinnier pricing.
A fleeting look at a hard money lenders‘ directory in California (BiggerPockets.com), for instance, shows 578 listings. Approximately 65% of these offer LTVs that reach 80 to 100%. Five years ago, you’d be hard pressed to find any such attractions. Most offered around the 50%-60% range. Looking at that Directory, you’ll also find lenders who offer all kinds of loans from residential to commercial to business and in-between. Worried about the amount of money that you can borrow? Many private lenders pair up with organizations or individuals so that they can offer you loans that range from $100,000 upwards (mean loans seem to hover at $150,000). Most promise a fast handover so that you can complete your fixing or flipping in the shortest time possible or jump to the front of the que in bagging that home. As comparison: Banks take at least 60 days to process your papers. You’d need to provide forms, signs tons of forms, pay to have them scrutinize your FICO and credit history as well as all related matters. And at the end of it all, you may not receive your loan. Hard money lenders do all of this at the fraction of the time – within a week at most – and barely review your credit history. It is the value of the property that remains important.
The Directory at BiggerPockets.com mentions that hard money lenders typically lend for only very short terms, usually between 6 and 24 months. But actually rates, fees, terms, and schedules vary amongst individuals since each lends from his or her own pocket.
Shortfalls, of course, are the high price – double that of the regular mortgage – and the fact that the lender may pocket your property if you fail to make repayments. (Fees usually range between 8 and 15% depending on the loan amount and term length. When taking out a hard money loan, you will usually pay a fee ranging between 3 and 10 % of the loan amount; this fee is also known as paying “points”).Those are points that you will want to consider.
Loan-to-value rates are up
Properties have their equivalent in money.So, for instance,if your property is worth $80000 you would get $1000. Hard money lenders are notorious for paying glaringly low percentages that tend to hover around 50-60% of the collateral value. This also dissuaded borrowers. But in 2015 this changed. Hard money lenders in California expanded their LTVs from the usual 65% to 75% of the appraised value to more attractive rates. A cursory look at the latest reports from online LA lending agencies show that one or two individuals or organizations even offer LTVs at 100% of the appraised value. Given the tightness of the housing market, this may encourage more people to buy and sell homes and certainly makes for a more optimistic future for hard money lenders who live and conduct their business in California.
Consumer protection regulations are in
Here are just some of the laws:
- Law 6500 of Consumer Protection on balloon loans – FDIC created law 6500 on Consumer Protection which restricts balloon loans so that they cannot mature in less than 5 years. In some cases, such loans are even banned. This prevents them from becoming too excessive and beyond your means of repayment.
- Negative Amortization Bans – Negative amortizations refer to cases where the interest rates are so massive that the individual is unable to keep up with repayments. As a result, the borrower slides further into debt despite making repayments. The Government bans negative amortization.
- Government checks your ability to repay – Federal laws on consumer protection insist that lenders must conduct some sort of credit check or income verification before issuing a loan. A lender who proceeds without checking the borrower’s financial ability, or knowingly lends to a low-income borrower performs what consumer protection calls, a predatory loan. A judge can render such a loan unlawful and dismiss it if it occurs.
- Upfront payments – Federal laws stipulate that the lender can ask for no more than two reasonable sized prepayments although the number and amount depends on the structure of the loan.
2015 also saw the TRID which requires that the lender release his calculations and show you all details of the transaction. This gives you time to reflect and to question or restart the process if you want.
Seeking to tighten protection, California’s Department of Business Oversight (DBO) recently surveyed the Marketplace Lending (P2P) industry to see how they could intensify protection. This P2P industry includes all private, non-government based lending individuals or organizations. DBO Commissioner Jan Lynn Owen stated that the purpose of her survey was to “protect” consumers from fraud and exploitation. The DBO intends to tighten the scope and conditions of its lending structure so that fewer lenders – and only those more qualified and honest – will be able to practice.
So far, the DBO surveyed fourteen Marketplace Lending platforms in California requesting a five-year trend data about their loan and investor programs. The results of the survey are still to come in.
All of this slows down the lending process, but wouldn’t you rather that your money be safe?
Healthy housing market
Prices are high but that’s another factor. Demand for housing itself remains strong (though most prefer to rent). Plenty of people in California are looking for affordable houses. California remains as desirable a place to live as ever. If you have the money and want to buy, you can still find affordable homes on market. If you want to sell, experts say that now may be a propitious time. Private lenders (such as hard money lenders) are aware of that fact and are only too keen to help you. Market conditions spur private commercial lenders to find promising clients and if you seem to be one, they may adjust their rates for you accordingly.
Finally, although not definitely, there are rumors that a new administration may relax property tax and curb rising housing prices. We cannot rely on these predictions, but wouldn’t it be great if so…
How can you improve your rate of success?
Approach the commercial lender as you would the bank. Craft your petition as a business proposal. focus on the value of the property; demonstrate how much it can give him in the long run and how it would profit him to invest. Secondly, affirm your historical success with real estate and your knowledge of the market…
If you succeed in highlighting the value of the property, you may well walk away with money within 24 hours that can help you move forward to achieving your goal.