Irrationality of HML rates -- one size fits most?

21 Replies

      By way of background, I've bought 8 SFRs in the last 18 months, 4 with conventional loans and the other 4 in cash.  These properties are worth approx. $2.5mil, and I owe less then $700k  on the mortgages, so net equity of $1.8mil.  I have very generous cash-flow.

I am having trouble getting additional conventional loans, so have been exploring hard money options. I've been really surprised to find that the rates are essentially the same regardless of LTV, and regardless of my other personal assets I am willing to guarantee.

While I realize at it's core HML is asset-based, it's crazy to me that the rates don't adjust much or at all, based on the LTV and net-worth and credit worthiness of the individual guarantor.

Someone who is relatively new to the business, has a 650 credit score and is borrowing at 70% LTV appears to get the same HML lending rate as someone like me with a 700+ credit core,

It feels like there's a market to be made charging lower HML rates for lower risk investments given the above, no? Why would HML's not lend at a significantly lower percentage for much lower risk investments/individuals?

The true definition of HML is strictly based on the value of the asset. I personally do HML and here is what I require: equity. I don't do credit checks, applications or application fees, appraisals, etc. Everything is strictly asset based. On those premises, I don't negotiate terms. A traditional lender will take all other factors into account, and if they don't like what they see then they simply deny the loan. A true HML doesn't care because the RE is guaranteeing the loan, not the borrower.

@John D.

you can find HML in CA that will have tiered term sheets for those with EXPERINCE and higher net worth's.. PM me I can refer you to a couple that will do this

and congrats on the huge equity build up over such a short time.. also nice part of the world you live in... I used to hang there in the 80's I built out the last phase of Wildwood.. you know the one that died in the early 90's along with my net worth   LOL...

Is a portfolio loan not an option for you? I would think it would be a good solution for you before you start going for HML.

LOL, Jay might refer you to himself...

No HML has unlimited funds, they can't borrow fed funds, so if they can obtain the business goal of some out landish rate, why would they use their "limited inventory" of money at a lower rate?

I'm thinking too that you may be using some creative accounting declaring the value of your deals with that liability unless you made up the difference with cash in the deals. Anyway, you need to network with higher asset folks and go with private money, people you know and have relationships with. You can sweeten deals with individuals who don't seek to make mortgage loans. All you need to do is beat their alternative investment rate and give them plenty of security so they sleep well. Good luck :) 

Have you looked into a portfolio lender? I think Safe CU and Golden Pacific will lend in your area. They appear to be a better fit for what you are looking for than a hard money lender.

@Bill Gulley

  not me Bill, if he PM's me I was going to refer him to a few SF based firms that would probably help him and they have tiered loan pricing structure for experience and well collateralized borrowers.. And depending on what he is looking for the two top based CA crowd funding portals could be an option as well as they roll out new product.

both of them have just gotten very large investments from the VC community fund to fund type infusion.. they will be players in the industry for many years..

I had a talk with my X CFO this week about this very same thing.. she is now CFO at one of PDX bigger HML they are about 50 million.. and they are cognizant and worried about how they will compete against the CF.

I was instrumental in getting both of these crowd funders properly licensed in Oregon. which is a Red hot market for a lender ...

So its the good ole American way adapt for die.

@Bill Gulley

HML companies are not worth much its all transactional..

@Jay Hinrichs

Can't duplicate talent, it's like stock brokerage or financial planning firms, all about human skill sets :)

Search for Private Mortgage Lenders instead of HML. Find a broker that can go beyond 4 conventional mortgages. Search the forums for he broker that discussed "overlays," as he should be able to write your fifth mortgage and beyond. Show your portfolio, equity, and net worth to a local bank and see what they will do.

If I was a HML which I am not but if I was first of course I would want to lend to whoever shows the ability to pay and is the lesser credit risk. However I would be in business to make money period. I would not care how great you are with credit or assets. I would still be looking to make X dollars on my money.

Conventional lenders have guidelines that play the credit worthiness game and reward those with good credit and high net worth. As a HML I would still be looking for the best deal but not less of a return on my money. If a person earning $30K a year earns me 12% on my money why would I care if a person earns $1M a year? I still want to earn 12% on my money.

I am not saying HML think like this but if I was a HML I might think of using HML as a way to pick up properties on the cheap with equity in them by foreclosing on those that failed to pay. If you show to be very strong financially then chance of me foreclosing on you are slim and I would at least want to earn my 12% or whatever interest I would be charging.

Hey @John D.

PM me if you like.  I work with lenders/brokers who should be able to get you the conventional loans you seek.  If they can't get you conventional loans, nobody can.  Next best option would be portfolio loans, which us doable and based only on the performance of your asset.  If that fails I know hard money lenders who employ a tiered system and may be able to get you a better than standard rate, but @Dan Schwartz is correct. Private $ is a better option than HML.

@John D.

I am in a similar situation in terms of needing something unique because my risk profile is a lot less and having trouble finding it though your situation is much better.

First I would listen to @Jay Hinrichs

no one on here has more HML experience as far as I know.

Second, most lenders have a process and a product. It is rare that they deviate from this process/product any more than you could walk into McDonalds and want them to cook you a steak. Unless you reach someone who understands risk in detail they will only lend their own products. Also, most HMLs either have investors or borrow at x and lend at Y. So if you promised your investors or borrowed at X you need to earn Y and as such would not be interested in this kind of option

Third, I am not sure why you need an HML. This is a refi loan from the sound of it. There are plenty of lenders who will cash you out at better terms. If you want I am going through this now and happy to talk.

Disclosure:This above is for information and illustrative purposes only and is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are my own and not represent the opinions of my firm. In addition current opinions as of the date appearing in this material only and are subject to change without notice.

Originally posted by @John D. :

Did the bank give any reason why they are nervous about making more conventional loans? Hard money lending, especially for rehabbing, often is extremely risky or could be. 

The HMLs primary focus is on how sound the project is, profit margin (should they have to execute a timely foreclosure) and the demonstrated capability to service the loan -- down payment, cash reserves etc. Some forms of equity isn't always easily accesible.

A project with razor thin margins but from an applicant with an almost perfect credit score, doesn't necessarily soothe the nerves of the hard money lender.

Account Closed

If I am borrowing $100k on a property I own free and clear that is already rehabbed, worth $200k today (and there interests are further backed up by my other personal assets), I am not sure of the risk to the HML.

      Right now, loans 5-10 from a conventional perspective require a 720 score which I am just shy of.  Portfolio lenders -- some won't do cash out refi, and some have trouble qualifying my income (capital gains from sale of stock, and now $10k+ in rental cashflow that is recent however and therefore doe not show up on previous tax returns).  Further complicating things is that many of my properties are manufactured homes which some banks will not lend on (despite the fact they are beautiful homes generating $2-3k in rent per month each).

     I think I'll find a good private lender / portfolio lender fit, I've had some excellent responses here.

Originally posted by @John D. :

@Greg F.

If I am borrowing $100k on a property I own free and clear that is already rehabbed, worth $200k today (and there interests are further backed up by my other personal assets), I am not sure of the risk to the HML.

      Right now, loans 5-10 from a conventional perspective require a 720 score which I am just shy of.  Portfolio lenders -- some won't do cash out refi, and some have trouble qualifying my income (capital gains from sale of stock, and now $10k+ in rental cashflow that is recent however and therefore doe not show up on previous tax returns).  Further complicating things is that many of my properties are manufactured homes which some banks will not lend on (despite the fact they are beautiful homes generating $2-3k in rent per month each).

     I think I'll find a good private lender / portfolio lender fit, I've had some excellent responses here.

Sorry to hear. Unfortunately, sometimes the more you try to rationalize and make sense to the HML regarding how riskless the deal is, the more you either make the deal 'seem' risky or the more they get 'psychologically turned off'. It being a mobile home might also having something to do with it. A private non HM lender may be a solution.

@John D.

  as you further explain your situation.. this is a perfect time for you to establish a relationship with your local community bank.. one that is owned and run by those in the community were you invest. You establish a relationship with your banker and then grow.

I have been with my community bank for 22 years same banker.. And he has provided me credit facilities for:

1. funds to buy at court house steps ( large unsecured LOC) once purchased we would then flip the property over to my other line he created which was a secured line payoff the unsecured rinse and repeat.

2. He provided me with a 7 figure line to purchase Timber.. The bank will take a timber deed or assignment of my logging contract along with a UCC filing.

3. When I would do some owner carry back on the logged over timber ground the bank would hypothecate the notes to give me cash to buy more timber and timber ground

4. Large 8 figure LOC for HML we make a loan and back fill it with bank at 80%

5. A and D loan to build housing subdivisions  we currently are doing a 27 lot one now.

6. Vertical construction loans.

7. Funded a storage facility that I bought and condo platted and resold.

8.  Funded a MHP that I bought repositioned and resold.

9. Funded a 700 acre Tree farm that I bought and had for 11 years and sold last year to Stimsom lumber.

So you get the idea a GREAT community bank will fund all your deals as long as they have confidence in you ,, you have some liquidity and have high character.

My first loan with them 22 years ago was for 100k  and that was to go buy timber.

It did not happen over night but I have borrowed probably close to 50 million from this one bank over the years.  good luck    PS these assets were all in their lending footprint and that is important these days.. they want to help the community.

Thanks @Jay Hinrichs I've worked with Rabobank and their portfolio product to finance one home, but have found them to be more rigid then a conventional lenders every inch of the way. I've called a couple dozen other local lenders inquiring about their ability to finance manufactured or part site and part manufactured (on a permanent foundation, really nice homes), vacant land, and other situations without success regardless of value, LTV, rate, or term. The manufactured homes in particular are interesting because everyone will finance them owner-occupied, but I can't find any terms on them as an investment -- given they are definitely liquid to owner occupants I find this odd and perhaps a glitch in the matrix. Perhaps I just need to set up in-person meetings with a nice package on myself and my portfolio, and see if I get another answer.......

@John D.

  well now you have explained it your talking Manufactored homes.. the most difficult to loan on.. the government forced lenders to loan on them for Owner occ. that's why they get the loans.. for you its going to be tough.. you defiantly need a private banker who can make loans outside the box

The issue is often manufactured, or otherwise odd properties (i.e. a 1,900 SF 2 bed 1 bath with big open concept, where most of the comps are 3/2s or 4/3s  --- or a tiny house on a huge lot where most of the value is in the land).  But even on "normal" properties, I'm still getting quoted the same rates as someone with higher LTVs and fewer personal assets to back up the loan.

When I do a HML loan, I am getting the money from private investors at 7%. Because of this, it makes no sense to go below 9% and 2 pts for seasoned vets that are repeat borrowers. For all the work underwriting, that discounted is barely even worth it. For most borrowers, it would be 12% and 4 pts. Are your properties free and clear? If you have a free and clear, you can borrow from a private person at 6% secured by a first position mortgage under 70% LTV. I am sure many would be interested in that.

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