Are 100% Financing Loans for Rehabs a Scam?
Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes
Are 100% Financing Loans for Rehabs a Scam?
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
14yIt doesn't sound so much like a scam to me as marketing gimmick to get business. I would fund a deal 100% if it was good enough. But "good enough" would be a mighty tough standard to meet.
43 Replies
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Most of them are claiming to offer 100% financing. As soon as they get an upfront fee from the client, they can fund whatever they want. 65%, 75%, 90%, whatever. As long as they do one of the 100% financing deal in a year, they can still claim they offer 100% financing...
This is usually how the scam works. Are there are companies that anyone knows about that claims they offer 100% financing but are really a scam? - Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes14y
Yes there are. I've used them (not sure if I can name, but starts with an R and ends with an A) on about 6 or 7 of my deals so far and its true 100%, no money down financing.
The only catch is that they cross collateralize against other properties you own - including your primary residence.
But they close and are very thorough.
Their appraiser and rehab inspectors are very good too. They'll catch things you might miss.
You'll pay in points but the interest rate is pretty good (9.5%). What I really like is that its a 9 month term instead of 6 compared to most HML's.
When I look at how much I pay in points with them, I definitely wouldn't say its "too good to be true". But it really is a great way to maintain your capital.
Oh, btw, my aunt also does 100% financing and she only charges me 7% and 3pts. She heard what the HML was doing and had a nice HELOC at under 2% sitting there going unused and she decided she'd use the bank's money (the HELOC) to make the float (5% diff plus the 3pts on every deal.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Mike,
If they are crossing primary residences this is prohibited. They could be fined or shut down by the Division of Mortgage Lending. Hard money lenders are basically prohibited from lending on a primary residence under Dodd Frank unless they have a special licensing. I'll bet these guys don't. Sounds shady...In other words, instead of bringing in cash you're putting up equity, nearly the same as cash. This is not 100% financing...I am referring to NO CASH, no cross collateral, NO MONEY DOWN. There's a ton of these programs out there there are making these claims.
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes14y
I have done 100% financing, but with borrowers I have significant history and business relationship with, and for a piece of the profit. My short list is very short.
I have also funded 100% on transactional deals, but that's where there is a solid end buyer already in place.
I also have a source that I broker to who does 100$ financing, but the program is so expensive that there are few takers.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
Like Ann, I have done many 100% rehab loans so it's not a scam so much but it could be the old bait and switch stuff or grab a fee and reject.
You need to see what the track record is of any lender, do they close do they usually switch programs or whatever???? Local Realtors will tell you their experiences. Title companies can give some insight as to who you do business with. Search the lender for deeds of trusts and you'll see if they do business.
BTW, any entity that offers or requires a participation in profits that is a lender is looking for trouble, this type of deal should not be made from the position as a lender but as an investor through a non-lending entity or individually.
- Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes14y
Jon K.
Terms are 15% interest
4 1/2 points
$2900 participation fee
25% of profits
Loans up to 70% ARV
Inspection fees of $225 per drawThere is more detail on my website under Hard Money Terms>100% Financing if you are curious, but the program has a very limited geographical scope. Like I say, it's not my program, but they approached me to help them market it, and since it doesn't compete with what I do, and since I have lots of requests for 100% financing, I posted it as available. I have yet to close a deal with it, although the lender says they have closed some successfully.
Bill Gulley, this is exactly what you are talking about above saying the lender is looking for trouble. What kind of trouble are you referring to exactly? Legal trouble? And what sort and why?
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Bill, you wrote,
"BTW, any entity that offers or requires a participation in profits that is a lender is looking for trouble, this type of deal should not be made from the position as a lender but as an investor through a non-lending entity or individually."
Yes, agreed.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
I can't believe they are charging hard money rates and then want a split of the profit....! Like Bill said, that's asking for trouble.
- Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
Originally posted by Ann Bellamy:
Bill Gulley, this is exactly what you are talking about above saying the lender is looking for trouble. What kind of trouble are you referring to exactly? Legal trouble? And what sort and why?Hi Ann, like you, when it's my money or my responsibility, I'm a controlling type as well, but where you might walk away only giving suggestions, I sometimes hang around longer....
The problem is that if you have say XYZ Mortgage or XYZ Capital Lending as a lendinging entity, making loans, you're considered a lender, not a real estate partner investor. If you make a loan to someone in their name or company you're clearly lending, requiring additional fees, profits or anything else to be paid, in the beginning of the loan or at the end, such can be viewed as a loan expense, and it would be if the fees are a condition of the loan. As a lender you must prepare estiamtes for loan expenses, profits would be unknown, so they can't be disclosed under RESPA and your APR calculations will be off by much more than one tenth of one percent, so there can be another violation as a lender and usury law may apply as well. If you are primarily a lender you can't really contract your way into another position and avoid that lending position.
Other issues come up when a lender takes a management role in the operations of any borrower. Specifying colors, tile, cabinets or anything else in a rehab is directing the borrower. If the deal falls apart and the borrwer can't sell for the expected amounts or can't repay the loan, this conflict of interest as a lender can cost you. A lender may not attempt to influence the operations of a borrower except for the collection of amounts due.
You can certainly partner, simply have XYZ Capital fund a loan to your Rehab LLC partnership and go at it, the LLC will be on the note with you as a principal.
But as a lender, avoid getting involved with any borrower as you will likely get some blame when things go badly. You'll be viewed as having influenced the borrower and causing the loss, if you attempt to foreclose it then may appear that you did so to take a property. All kinds of calims can arise.
Small banks use to do this before such practices were regulated and many got in trouble in attempting to influence a borrower, thus the regulation. As a broker or principal lender you have the same conflicts of interest. S&Ls use to partner in housing developments, same issues applied.
So, don't get involved as a lender, make the loan and contract outside the lending entity where you have something at risk as well in order to share profits is my suggestion.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Bill,
What about the Division of Mortgage Lending? Wouldn't they frown on such practices as well? I'm not bashing it...I just tend to agree with what you've said. - Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes14y
Corey, it well could be an issue with the regulators as they will see it as a requirement to make the loan and doing so opens the door to the issues I mentioned and perhaps more depending on state laws.
Additionally, this may not be a subject to take up with most RE attorneys as financing conflicts are really not their bag, ask an attorney who represents banks or lenders.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Bill,
Thanks for your comment. - Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes14y
Originally posted by Bill Gulley:
As a lender you must prepare estiamtes for loan expenses, profits would be unknown, so they can't be disclosed under RESPA and your APR calculations will be off by much more than one tenth of one percent, so there can be another violation as a lender and usury law may apply as well. If you are primarily a lender you can't really contract your way into another position and avoid that lending position.Other issues come up when a lender takes a management role in the operations of any borrower. Specifying colors, tile, cabinets or anything else in a rehab is directing the borrower. If the deal falls apart and the borrwer can't sell for the expected amounts or can't repay the loan, this conflict of interest as a lender can cost you. A lender may not attempt to influence the operations of a borrower except for the collection of amounts due.
You can certainly partner, simply have XYZ Capital fund a loan to your Rehab LLC partnership and go at it, the LLC will be on the note with you as a principal.
But as a lender, avoid getting involved with any borrower as you will likely get some blame when things go badly. You'll be viewed as having influenced the borrower and causing the loss, if you attempt to foreclose it then may appear that you did so to take a property. All kinds of calims can arise.
Small banks use to do this before such practices were regulated and many got in trouble in attempting to influence a borrower, thus the regulation. As a broker or principal lender you have the same conflicts of interest. S&Ls use to partner in housing developments, same issues applied.
So, don't get involved as a lender, make the loan and contract outside the lending entity where you have something at risk as well in order to share profits is my suggestion.
Bill Gulley, three points in response to the above.
First, you mention Respa etc. That applies to residential lending, but no one I work with does any residential lending, it is all commercial, including the company I mentioned in this thread that takes a percentage of the profit.
And you seem to assume that by taking a percentage of profit that there is any participation in management of the project. There is no specification of materials or direction of the borrower.
I can certainly see why you would assume that taking percentage of profit implies particiopation in management of the project, but I personally don't agree that taking a percentage of profit in lieu of interest constitutes influence in the project, nor have I ever seen it happen. I have no doubt it COULD happen, and perhaps does, but I've never known of it.
Thirdly, in my opinion, funding 100% of the project constitutes significant risk and warrants a percentage of profits, without assuming any responsibility for further downside.
I do see the risk that you point out, though, and I"m going to have additional discussions with my attorneys who have significant experience with private lending.
- 14yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
Mike Hasemann, ReCasa is a good company, I have worked with them in the past on their loan portfolio. The primary residence lien is "boot equity" and functions as a guarantee but is more of an incentive to encourage project completion. When I worked with them, they were extremely reasonable with their borrowers when credit was not available to figure out working solutions, which steamed from the due diligence and experience they did on the borrowers.
Corey Dutton, DFA does not prevent HML on primary residence, it does put rules around loans as they relate to primary residence. Which none of those are violated by Mike's lender. They are extremely smart, well capitalized and well educated on regulation. IMO, they run a very respectable operation.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
I am not a mortgage person but the "bait and switch" in the business is called "re-trading a loan".
My contacts get this a lot.Some company touts they can do a rate for xx with little to no down.
They collect a bunch of fees and then right about when closing they say something happened and have to move to a new higher rate.
Don't believe the HYPE!!
If they cannot guarantee and lock that rate in signed and in writing you have nothing but a promise which is worthless.
NEVER pay upfront fees especially for a promise.Almost 100% of the time it is a scam.
- Commercial Real Estate Broker · Omaha, NE · Member since 2012 · 5 posts · 4 votes14y
As a public service I'll share my pre-biggerpockets experience with one of these "100% lenders" I attempted to use one of these lenders, Quickfunding LLC out of New York. I got a pre-approval and sent in 7k as a due diligence deposit (before I learned to NEVER do that). An appraisal was done and of course it came in low. Instead of getting 100% financing, I would have only ended up with a couple thousand in hand for repairs. Obviously I couldn't do that so I backed out and requested a refund of the DD deposit less the cost of the appraisal. Unfortunately I got a statement saying that I was being charged several different fees including the underwriting fee as well as a site visit fee (they never came to visit site). Out of my 7k deposit I was told that I was only getting 1k back. I sued and won, but have yet to collect anything from this deadbeat. Lessons learned I guess.
- 14yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
Re-trading a loan has nothing to do with Bait and Switch. Bait and Switch is offering a loan program knowing that will not be the qualified program. Sometimes this stems from using brokers who have to go shop for loans and do not fully qualify a project prior to issuing a term sheet or a borrower not being fully truthful about themselves or project. Re-trading a loan would necessitate a loan is present/originated not the case in bait and switch since that occurs prior to funding. Unfortunately, some companies like the old Kennedy Funding created some bad press for upfront fees but I don't subscribe to all fees are "bad".
Upfront fees relative to the project and depending on the project are not abuse in my opinion. Before you pay a fee, you should know what that fee pays for and if it is refundable or credited towards closing. In commercial finance fees cover the cost of appraisals, title work and Dunn & Bradstreet reports, etc, etc. I would shy away from fees being charged for the sake of being charged where the use of those fees can not be detailed. Some more straight forward commercial finance will not have upfront fees as well, it really just depends.
In residential finance, more often than not, the only upfront fee should be the third party cost of an appraisal. As such, most of the time the borrower can pay that direct to the appraiser. There are new rules about collecting fees that are not a function of delivering a bona fide mortgage loan.
Moral of the story, there is a difference between operating a business based on fees and operating a business that charges reasonable fees as a function of doing good business. Protect yourself with knowledge about your counter-party whether it is a broker or lender and certainly shop the market to ensure your terms are fair and consistent with market trends.
- 14yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
The interesting grey area that seems to arise is lenders only lending on investment properties under the auspice of commercial lending.
Without commenting on the actual practice above, to underwrite a residential property regardless of the lender's delineation of commercial or residential program is the same sort of costs for the most part. A residential property is just that, a residential property.
The cost of a residential appraisal is the cost of a residential appraisal, its really that simple. Credit reports on individual principals are rather inexpensive and title abstract and examine are not more than a couple hundred dollars. None of that on any residential property that I can think of approaches $1,000 let alone more than that (more like $500 tops).
If my property was residential in nature, I would seek a residential in a nature fee structure. Pay the appraiser outside of closing when he/she shows up and that is likely it. If that program requires some underwriting fee it should come from closing not upfront. IF the company spends a bunch of money underwriting loans that don't close the company needs to do a better job of taking on loans which will close, which frankly is not my problem.
Certainly there is mezzanine loan structures where the lender participates in both equity and debt. That equity is usually participated in as an offset to debt service. Whether you take on a loan structure in that fashion is certainly up to the borrower.
As you seek financing, spend some time to try and understand your position as the borrower along with your risk and the risk of a lender if you were the lender. If you can be objective you will find loan programs from lenders that make sense for you and make sense for the lender.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
Dion, you wrote:
"The interesting grey area that seems to arise is lenders only lending on investment properties under the auspice of commercial lending."
You're exactly right. That's exactly how HMLs are avoiding the licensing requirements in some States as imposed by Dodd Frank. By lending on "investment properties under the auspice of commercial lending" as you said.
Dodd Frank applies to Residential Properties, 1-4 units, and is related to how the properties are classified (zoned), and not whether or not they are being used as "investments." If it's not 5+ units, it's NOT a "commercial" property, plain and simple. You can call it whatever you want...
But regulators in most States are just pursuing private lenders who are lending on primary residences anyway, so most HMLs are probably ok to keep on doing what their doing, "under the auspice of commercial lending."
- 14yDion DePaoliPro MemberReal Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
Corey I believe the additional text in DFA calls for the property to be used as primary residence or secondary home. Consumer protection does not include non owner occupied property.
- Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes14y
It is by whatever State you're in. Each State has to make up their own mind how they will treat it. In Utah, for example, it applies to any residential property 1-4 units. This is cited from Utah law:
The Act does not just apply to mortgage brokers. Section 61-2c-201 states "a person may not transact the business of residential mortgage loans without obtaining a license."
Section 61-2c-102 broadly defines "Business of residential mortgage loans" as follows:
(g) (i) "Business of residential mortgage loans" means for compensation or in the expectation of compensation to:
(A) engage in an act that makes an individual a mortgage loan originator;
(B) make or originate a residential mortgage loan;
(C) directly or indirectly solicit a residential mortgage loan for another;
(D) unless excluded under Subsection (1)(g)(ii), render services related to the origination of a residential mortgage loan including:
(I) preparing a loan package;
(II) communicating with the borrower or lender; or
(III) advising on a loan term; or
(E) engage in loan modification assistance. - Engineer · Wichita, KS · Member since 2012 · 396 posts · 36 votes14y
Just got done reading the entire thread, so what is the conclusion who are the reputable lenders with a closing track history that can be verified that lend 100% without charging an arm and a leg to good qualifiers with good credit and income?
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