What happens when lending liquidity dries up?

Question

Recently attended my first REIA meeting yesterday and was excited about hearing from the speaker and that I recognized a lot of the concepts from my 2 months of study. The concept of an unlimited ROI was intriguing (using a hard money loan to pay and fix a buy-and-hold property and refinance after completion with essentially no money down).

My questions are:

1-"What happens when loans dry up such as during a recession?"

2- "Is this a realistic concern?"

A hard money loan charges a high interest rate and is meant to be short term financing. I'm fearful of the worst case scenario of buying at the market top and not having money to pay off the hard money loan. Thank you in advance!

Account Closed · Answer

exit strategies are an important part of hard money loans . The best is to prepare for the worst, talk to a lender now pre=quality for a refinance ,make sure of your numbers when buying the asset

David Weintraub · Answer

The instructor is correct, but to be fair, it doesn't matter what scenario you are in - if you buy at the top of the market you're gonna have problems in a variety of ways, be it with a HML, bank, investor, or otherwise.

65% is the magic number for us, but occasionally we see deals that do allow up to 70%.  Those aren't likely going to be in "C" neighborhoods, but it does happen.

If you want a second set of eyes on your deal let me know.

John Canque · Answer

@Michael Plante Keep in mind this is being filtered from my brain and I am brand new to this. The instructor mentioned that this strategy is all about getting a great deal on a property. This particular lender covers up to 65% ARV. The are properties in C neighborhoods in NJ that you will be able to buy and renovate and force the price higher.

Anything over the 65% that the hard money lender will lend will have to come out of pocket. At the end of the rehab you refinance into a conventional loan and technically if you priced everything right you didn't pay anything.

The instructor did seem to know a lot about the subject and claims that if he can get a deal at 45% of ARV (very rare), he'll buy right away. Eventually those discounts go away and he is now settling for getting a 20% discount because he has a higher cash position.

Let me know if I explained anything wrong or if you have any questions.

Michael Plante · Answer

I have not gotten a hard money loan

How do you get the purchase price plus money for rehab with nothing down?

John Canque · Answer

Thanks @steven. I was originally opposed to the use of a hard money lender because rates can be so high, but seeing examples of ways to implement it makes sense and I wish I payed more attention when reading/hearing about them. The advice on exit strategies is to have several, but I always thought that was in regards to a property and now it makes sense to be prepared for a high interest short term loan. Great advice!

Account Closedundefined

Daren H. · Answer

In reality, you are in the drivers seat IMO should the market crash during your HML. You have the choice to pay or not pay. The HML has a choice, take the property from you at a reduced market value or work out something more favorable with you. Everyone has risk  when sh*t goes bad :)

John Canque · Answer

@Andrew Johnson What a great point on calculating cash flow in case of higher interest rates. That is a scenario I didn't think of because I figured that hard money loans already have the highest interest rates possible. In terms of lending liquidity, I guess we'll cross that bridge when we get to it. It is a smaller likelihood event in the grand scheme of things.

David Weintraub · Answer

@John Canque I can't believe how many friends I have/had who were responsible for allowing that to take place.  :-/

Everyone I have ever spoken with who had anything to do with it says, "Well, if it wasn't for the appraisers...if it wasn't for the lenders...if it wasn't for the government...if it wasn't for the bankers...If it wasn't for fannie..."

I say, "You know what?  Own your OWN SH!T  Take responsibility for what YOU DID.  And stop blaming someone else for what they did...."

It's unbelievable how people justify their own ethical lapses based on someone else's behavior.

John Canque · Answer

@David Weintraub I will definitely take you up on that offer. I hate to sound like  a doom-and-gloom investor because I don't believe we are headed for a correction anytime soon.

I'm just trying to think of all the scenarios that can affect my investment. I can't believe that people were getting loans that were worth more than 100% of the value of their homes in the run-up to 2008.

What happens when lending liquidity dries up?

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