One of the most consistent issues that borrowers, brokers and hard money lenders run into these days is that of determining value. Gone are the days when lenders will provide a loan amount that's equivalent to "a percentage of whatever the property appraises for." Those days are sorely missed by many, but especially by mortgage brokers that depended on the predictability that this lending model presented. 

Valuation is particularly relevant when it comes to hard money loans (collateral loans). Whether these lenders are region specific or they're a nationwide hard money lender, many of them are going to underwrite their loans with a heavy preference for collateral-based qualification. Some will even be purely collateral-based which means that the property value is the single most important item that a lender is considering when deciding whether to lend or not. So how do hard money lenders determine what a property is worth in today's marketplace? The answer isn't simple, and there are a number of pros and cons to every valuation method.

1. Appraisals

Appraisals are the longest-standing and most recognized source of property valuation, so it would surprise most borrowers and mortgage brokers to know that an appraiser's opinion can be taken with a grain of salt nowadays. For private lenders, appraisals simply aren't the authority on value that they once used to be. Everybody knows that appraisals are opinions of value from licensed individuals, but what they sometimes forget is that property is only worth what somebody is willing and able to pay for it. In today's marketplace value is becoming less about what buyers are willing to pay and more about what buyers are able to pay. With a lack of credit available and most entities around the country carrying less cash than they were in their heyday, real estate transactions suffer. So, what property should sell for versus what it actually will sell for can vary widely. 

2. Tax Valuation

Sometimes a tax valuation can present a benchmark for valuating property. When performing an initial value check on a new file lenders will often refer to the local tax assessor's value to get an idea of what they're dealing with. However, tax values often lag in both directions, positive and negative, for a couple of different reasons. First, tax valuations don't necessarily occur every year. Some counties assess property only once every 4 years, but even the counties that assess every year don't necessarilly make large adjustments for actual property value appreciation or value loss. When property value goes up the assessment is generally adjusted throughout the county at a similar rate. When it goes down, the same applies. In a down market property owners often have to appeal their assessments in order to have them adjusted to a realistic level. Naturally, counties don't want to lose the tax revenue from a higher valuation. Therefore, they don't make accurate adjustments until they have to. 

3. Broker Price Opinion (BPO)

The Broker Price Opinion is one of the more economical ways to ascertain an estimate of value and really comes in handy when you need a local expert's quick advice. However, the issue with a BPO is that it's often a conflict of interest. A real estate broker's job, generally, is to bring together a buyer and a seller for real property. Their job is also, in most cases, to maximize the eventual sale price of real property. This can often lead to an unwelcomed optimism about the real estate market - lender's aren't interested in the best-case scenario, they're interested in the worst-case scenario. Nonetheless, BPOs can often be used in a pinch for specific purposes. 

4. The Common-Sense Method

You've probably never heard of this one, and there's good reason for that - it hasn't been utilized for years. But now more than ever, lenders are starting to subscribe to this line of thinking. What we're calling "the common-sense method," in conjunction with one or two of the previously described valuation methods, is not only "old school," but it's also simple, quick, and reliable. The common-sense lender will ask itself questions like, "In a worst-case scenario, do I want to own this property?" or "Would I buy this property for the amount that I'm being asked to lend?" And while that may seem overly simplified, there is a contingent of hard money lenders that are actively looking at deals this way - it cuts through the mundane details and gets right to the heart of what collateral lending is all about.

So while there's no cut-and-dry answer to the question, it will undoubtedly help to understand where lenders are coming from when they reject, accept or modify a loan scenario to make it fit their collateral guidelines. Not all property is created equally and valuing it can often times be more of an art than a science. Unfortunately for borrowers and brokers this may lead to some unpredictable dealings with hard money lenders, but at least it should alleviate some of the frustration when no lender seems to exist that will lend 65% of "whatever the property appraises for."

Nationwide hard money lenders get hundreds of loan requests on a monthly or even weekly basis. What separates the good from the bad and the fundable from the disposable can be somewhat of a fine line, but there are some broad characteristics that can shift a loan request from one of these categories to the other. One of the most common loan request types is the "100% financing purchase money loan." Real estate investors across the country are attempting to buy investment property for what's believed to be pennies on the dollar from their peak values, but sometimes they get a little bit lost when it comes to sourcing the capital to complete the deal. Aside from the fact that a 100% loan is a risky venture for any lender, there are some philosophical reasons why 100% financing just doesn't make sense.

There's a common acronym that floats around investor circles, and most people are familiar with it: O.P.M. It stands for "Other Peoples' Money." It's widely preached that you don't have to necessarily have any of your own money to purchase investment real estate (which is somewhat true in certain situations, but we're talking in a general sense for the purpose of this article). If you don't have it, just use somebody else's! And guess who the "somebody else" is that pops to the front of everyone's mind - hard money lenders. After all, a hard money lender will just look at the value of the property and as long as it's being purchased at a big discount from yesterday's value then they'll provide all the capital needed to complete the project, right? There was a time when the answer was "yes," but it's just not that way anymore. 100% financing was a monster that was created by the real estate boom and here are the reasons why 100% financing doesn't work for today's established hard money lender. 

1. Cash-in is Equivalent to Risk

Say that two investors purchase a property together with cash and each one contributes 50% of the capital required to complete the deal. How much risk has each one taken in the project? The answer is that each one has taken 50% of the risk because they each have an equal stake in the project. Now say that an investor brings a project to a hard money lender for funding and the hard money lender provides 100% of the cash necessary to purchase and complete the project. How much risk has the lender taken in the deal? The answer is 100%, which means that since the lender took on all of the risk then the investor must have taken on 0% of the risk. They had nothing to lose in the deal because they never contributed anything in the first place. Does that sound like a good deal for the hard money lender?

2. Hard Money Lenders are Investors Too

Often times, borrowers think that hard money lenders are like banks. Investors think that they're just big computers that spit out money when a loan scenario fits into an equation, and that's just not the case. Hard money lenders are investors, and generally very savvy ones at that. If there are such great deals to be purchased, why would they lend a borrower all of the money to buy it and let the borrower keep all of the profits? They wouldn't. A hard money lender would go find their own deals to purchase, keep control of the transaction, and realize all of the profits.

3. 100% Financing isn't a Candidate for a Secured Loan

On the other hand, let's say that a borrower does have hold of a very attractive deal and is looking for the capital to make it happen. A hard money lender sees the value in the deal and thinks that it has some nice profit potential. Do you think that just because the lender sees value in the deal that they're going to go through with it? The answer again is "no, they're probably not going to lend the money." The reason is simple and relates to number 1 above: a hard money lender isn't going to take all of the risk in a transaction for a borrower. However, what they may propose is a joint venture - a structured partnership whereby the lender will take over certain control of the transaction, as well as a hefty share of the profits. A hard money lender knows that with risk there should come reward. A joint venture project is significantly more risky than a well-secured loan, and if they're bringing in all or even a large portion of the cash required for the deal then you better believe that they're going to want most of the profits. 

4. The Market isn't Right

Hard money loans, like any other product, are subject to the market forces of supply and demand. In 2006, the market dictated that if hard money lenders wanted to stay in business they had to make 100% loans. Borrowers could get access to capital just about anywhere and for just about any reason, so if a lender wasn't willing to lend 100% of a property's value then it's highly unlikely that anyone would borrow from them. Supply was extremely high and more than sufficient to meet demand. Today's market is very different. There are very good lending opportunities that aren't being funded simply because there aren't enough lenders to fund them. Demand is high and supply is very low. A 100% financing request isn't a desirable loan scenario for any hard money lender. So, if your loan scenario is generally undesirable you can bet that there are other loan scenarios available to fund that are more attractive than yours. Which one is going to get the money? Here's a hint: not yours.

It's easy to believe that just because there are good deals available in the real estate marketplace that money will just be thrown into borrowers' laps because they're able to find them. Unfortunately, that line of thinking can lead to a lot of wasted time and even more frustration. Investors need to approach hard money lenders with one of two things: capital to contribute (skin in the game) or other collateral to offer (also skin in the game). If investors don't have anything at risk in the transaction then it's simply not a winning scenario for a hard money lender - philosophically any way.

So why is it so difficult to communicate with hard money lenders? They're a tricky bunch because almost none of them are the same. What works for one lender won't necessarily work for another, and they interpret information in a myriad of different ways. Going around in circles with private lenders can make your head spin and eventually make you think that getting approved for a hard money loan is more difficult than finding a needle in a haystack. But what if you could greatly increase the odds that your loan request will not only get a favorable look from almost all hard money lenders but also increase your overall odds of getting an approval? 

There's a phrase that floats around the private lending arena: "character counts." The reference is to the character of a borrower, of course, but what constitutes character is defined a number of different ways. For some lenders it means knowledge and experience. Does the borrower seem to have the know-how to move their project to fruition? For other lenders it means mortgage history. Has the borrower ever chosen to walk away from a loan? And for others it almost literally means character. Does the borrower seem to be upstanding, moral and willing to accept responsibility?

We can't discern what character is going to mean to every lender, and we can't change who the borrower is. However, there's an aspect to the term "character" that seems to be nearly universal in the world of hard money loans that you absolutely can control. You have the power to determine how private lenders are going to perceive you or your borrower, whether they consider you to be "a hassle to deal with," or if your files come across with promise and potential. The trick is to know how to communicate with private lenders, and while some of these tips may seem trivial, not accounting for them can be the difference between an approval and a rejection.

Most private lenders are going to require some sort of executive summary from you, which means that you're going to have to do some amount of explaining as to why you or your client deserves a loan and how the loan structure will provide a win-win scenario for borrower and lender. Not providing information that's clear and concise can be an absolute deal breaker, especially when the deal is more complicated, as many commercial scenarios are. Information that isn't specific, is ambiguous, or is directly in conflict with other information that you're presenting causes a lender to have to ask questions (assuming they don't just turn you down). When a lender has to ask questions to decipher your information it takes up their time. The more time they have to take just to understand your information the less time they have for everything else. The less time they have for everything else the less productive they are. So the result is that they're more likely to brush over your loan request or just reject it all together, assuming that it probably wasn't worth their time in the first place.

Check Your Facts 

No matter how busy you are, you have to find time to completely understand the loan request that you're submitting to a hard money lender. If your file gets reviewed and you're asked follow up questions you're going to be expected to know the answer to anything basic. If you don't know the answer already your credibility is going to take a hit. The lender is either going to perceive you to be a "paper pusher" or a disinterested participant. You may not have any real motivation to see the deal through other than for the prospect of a commission. The result will be a whimsical second look at your information that will probably result in a rejection. After all, why should the lender spend their time if it clearly wasn't worth yours? Lenders accept files from brokers because they provide a valuable service: an initial screening of borrowers' files that categorizes them as either having potential to be funded or not worth the time. Make sure that you don't forget to do your job, because nobody is going to do it for you in this market.

Package and Label

There's a big difference between handing someone a stack of papers and asking them to read through it and handing them a tightly bound file with labeled tabs that allow them to easily access the information that they're interested in. If you tend to do the former, you're greatly decreasing your chances of success with private lenders. Nobody wants to sort through information, they want to have it presented to them. Consistently packaging and labeling your information in a professional manner goes a long way in determining how you, your borrower and your loan request are received. 

Don't Info Dump

Private lenders aren't banks, so the information that they require you to submit is going to change from firm to firm. While many basic items may be similar, every lender will have a different flavor that they like. If you simply fire around the same information to a list of private lenders, most of them will receive it and immediately think that you didn't both to take the time to look at their loan submission criteria. They'll wonder if you're lazy, if you're throwing things around hoping that they'll stick somewhere, or if you just weren't intelligent enough to understand what information it was that they typically request. What's worse is that all of that unnecessary or improperly presented information will just get in the way of the good information and it will take a lot longer for the lender to get through it, again taking more of their time. If their review team isn't in a good mood that day they may never even get to the good information and you'll receive a rejection before your loan request ever had a chance.    

Doing the little things doesn't ever increase the quality of your loan request, but it improves a lender's perception of you. When they feel like you're worth their time you're not only more likely to get the attention that you deserve, but you're also more likely to have lenders help you find solutions. When hard money lenders consider you to be a straightforward, reasonable, organized and trustworthy person they'll do their best to find a way to get you funded (assuming there is one). Becoming one of the best at communicating with hard money lenders can literally transform your ability to get loans funded. Take the time, do the work, and the results will come. 

Sometimes it can definitely feel like it's "Hard to Get Money," that's for sure. With all of the inconsistency in the private money industry, sometimes it's hard for brokers to tell the difference between a good loan and a bad loan, and which files are worth spending time on and which ones aren't. So naturally we were intrigued when we saw that someone had written an article describing why even private money is tougher to get a hold of these days. The article is from the July 2010 issue of The Niche Report and it's titled:

Is It "Hard Money" or is it "Hard to Get Money?"
 

As it turns out, the article is more of a primer on a multitude of different facets of private money lending and gives readers a basic overview of the ins and outs of who private money lenders are. Although the article didn't drive home the point that we were hoping that it would, there are still some interesting takeaways from this in-depth analysis of the functions of a private money lender and what they can offer your clients. Let's examine some of the highlights in detail - 

Who are these Hard Money Lenders?

We're flattered that the author believes that we're all well-educated and savvy. Unfortunately that's not the case for all private lenders. It's also not the case that every "entrepreneur lender" is earning handsome returns on their loans. The fact of the matter is, almost anyone can be a hard money lender and the range of experience from lender to lender can scale the spectrum from novice to expert. The author definitely got one thing right though: hard money is here to stay and it's going to become more of a practical solution for more and more borrowers as time goes on. 

Hard Money Lending Philosophy

The author has picked out a lot of truths about the hard money lending process. To some degree "gut feel" is a part of our lending philosophy, but that comes from having years of experience and knowing a good deal when you see one. It's also true that we're not "underwriting engines" like banks' computers are - we do operating with a degree of subjectivity and the borrower's character and experience can definitely play a role in the approval process. While hard money lenders don't just make loans to borrowers that they like, lenders can definitely be deterred from making a loan if the borrower doesn't show substantial business acumen or they lack the ability to develop a solid plan. 

The one area that we disagree with the author's take on philosophy is in that of personal control. Borrowers aren't necessarily at the mercy of hard money lenders at the moment, especially because of the need for disclosure and transparency within the industry. Fraud and scandal have pushed the "play it close to the vest" lenders out of the industry and there's a new type of private lender entering the game that can survive in an arena where everyone demands to be able to see them for what they are. 

What Properties Qualify for Hard Money

All properties qualify for hard money because a private lender can lend money to whoever they wish so long as they follow licensing and regulatory guidelines. However, it's true that investment property makes up the largest portion of properties that are utilized to secured private loans. The reason is simply because there are very few owner-occupied scenarios that actually make sense in the private lending world.  
Hard Money Application Requirements

Unfortunately it's nearly impossible to generalize what's required to apply for a hard money loan because almost every single private lender will require a different quantity and quality of material on your initial request for a loan. This is the area that private lenders are consistently inconsistent, which is why we decided to make applying for an MMG Capital Loan as simple as possible. Borrowers and brokers can save themselves time by submitting a simple summary and some basic financial information. MMG can usually tell whether the scenario is worth pursuing or not just from a quick glance. 

Another good message sent by the author is to beware of traps that exist for those that are searching for hard money loans. There are more than a few brokers out there posing as lenders that are simply trying to get control of as many deals as they can. If your loan request gets circulated to one of these individuals it could cause trouble for you in more than a few ways. There is a lot of debate over whether the business practice of brokers posing as lenders is ethical or even legal Many of these so-called brokers are simply trying to collect fees from unsuspecting borrowers and never have any intention of funding loans. This is part of the reason why the private money industry requires an added level of disclosure and transparency nowadays. 


Thanks to the author for providing a great jumping off point for this article. 
To read the full article from The Niche Report follow the link above. To comment on this article, please visit the MMG Capital Blog. 

 

 

 

An article from the June 2010 Commercial Edition of The Scotsman Guide, the leading resource for mortgage originators, recently caught our eye. The title reads as follows: "Hard-Money Lenders Act More Like Banks - Changing times mean changing structures for deals with cash-poor borrowers." 

Of course, we feel like the concept that hard money lenders are slowly taking the place of traditional lenders in both structure and procedure is worth some examination. There's no doubt that hard money lending is very different than it was in 2006. All lending is very different than it was in 2006. So what exactly is it that makes us more like banks? Among the reasons that the author cites for comparing private lenders to banks are the following:

In truth, it's slightly humorous to look at this list, and not because it's incorrect. It's laughable to think that these things were ever overlooked by hard money lenders in the past and allowed to let fly. These basic, fundamental requirements should have never been abandoned and it's about time that we get used to the fact that hard money lending of 2006 shouldn't have ever been so lenient. Today's hard money requirements aren't more like the bank's, they're just more normal for a time when real estate appreciation isn't out of control as it was in the past.

There is one very distinct difference between private lenders and banks that will keep us from ever being too similar, and that's the fact that almost all private lenders are extremely different from one another.  You can still find private lenders that underwrite on an asset basis and don't have minimum credit requirements while you can also find private lenders that want at least a 650 credit score but will give you cash for any reason so long as you can show the ability to repay. It's a mixed bag in the world of private lending and it probably will be for a very long time. Different scenarios fit different types of lenders. So what's our recommendation to you? Take the time to get to know those lenders that you feel are most reliable. Get to know their strengths, their weaknesses, and their basic underwriting philosophy. When it comes down to it,  you'll have a variety of private lenders to choose from when you need to come through for one of your clients. You can no longer rest in the world of private money just because "you found a private lender." To each lender his own, and you never know when a file is going to be just the right fit. 
 

Upfront fees have become a hot topic of conversation in the private lending industry, and they've also become a thorn in the side of many mortgage brokers. The process of determining when upfront fees are legitimate or not and whether it's advisable to have your client pay them is a long and difficult one. However, when the origin and purpose of upfront fees are understood, the picture gets a bit clearer. Likewise, when the difference between an upfront fee and good faith deposit is understood, brokers will be better equipped to properly advise their clients and close more private money transactions.

MMG Capitla was featured in the June 2010 issue of the Scotsman Guide as an expert author on the topic of Upfront Fees. You can link directly to the digital edition of the magazine below to read the full article as well as other industry-related information.