All Forum Posts by: Corey Dutton

Loan borrowers in need of fast loan fundings when purchasing investment real estate, often seek out private money lenders. This is because banks are simply unable to perform under the tight funding deadlines that are often required when purchasing investment real estate. Because the speed of funding can make or break a real estate deal in some cases, investors cannot afford to wait for slow lenders. Although the stakes may be high in real estate transactions, there are some borrowers who still fail to grasp the relationship between the cost of loans and the speed of funding.

A shorter timeline for funding a loan means less time to evaluate a loan, and therefore increases the overall risk of the loan. With increased risk also comes a higher return to the investor/lender and this equates to a higher interest rate. For example, if it takes a lender about 2 weeks to close a loan, and a borrower wants to close a loan in 4 days. In this case, the time to underwrite, or evaluate, a loan is less, which increases the risk and thus increases the cost of the loan.

Another reason that faster loan fundings equate to higher cost loans is because of opportunity cost. For example, let’s say a lender is preparing to close a loan in a given week. If another borrower comes along and needs to fund another loan that same week, the lender would have to put aside one of the loans to make room for the other. The opportunity cost of letting the other loan go to the wayside equates to a higher cost loan in some cases. For a lender to put aside other loans to fund one loan in such a short timeframe, this may increase the cost of the loan.

There are many circumstances where high stakes, or unique situations, create a need for fast funding loans. Loan borrowers must understand that a faster loan funding always comes with a higher cost. 

No it's not. That's my humble opinion...

Unfortunately, depending on the area, you may need to pay someone to sleep there and they arrive at dark and leave in the morning at light. It's been a problem in rehabs we've funded in the past and this solved the problem. It's actually cheaper or the same cost as a lot of alternatives.

Thirty-three states in the U.S. saw increases in foreclosures over the 3rd quarter last year. The U.S. as a whole saw a 3 percent year-over-year increase. This increase in foreclosure activity is partly due to the backlog of foreclosures in States with legal red tape. This has held much of this foreclosure activity back for many years in several U.S. States. In States like New Jersey, with foreclosure timelines of over 1,000 days, there is a large backlog of foreclosures. This has put New Jersey at the top of the list of States with the highest rates of foreclosure in 2015, along with some other States with the same legal red tape as New Jersey. So what U.S. States had the highest rates of foreclosure this year?

1. New Jersey
2. Florida
3. Nevada
4. Maryland
5. Illinois

Many of you reading this were probably not surprised to see these States on the list. Some other States on the list are New Mexico, Ohio, and Georgia. 

After between 2011 and 2012, many real estate investors started picking up rental properties with their own cash. Those who had primarily focused on purchases for quick resale leading up to 2011, began to shift focus. Once competition among “flippers” spiked in many U.S. markets, demand increased in the buy and hold category. Many real estate investors have begun to build their rental property portfolios, primarily making purchases with all cash. Three years later, these same buy and hold investors are now seeking loans to refinance or ‘cash out’ their rental property portfolios.

Loans for rental property having been growing in demand in the last couple of quarters. The majority of these loans are refinance loan requests from real estate investors seeking to cash out on their rental properties in order to buy more. Because the demand for loans for rental property has increased in the past 6 months, this has also made the process of obtaining these loans a daunting task for real estate investors.

Looking to obtain a loan for a rental property can be similar to taking on a part-time job. For real estate investors seeking rental property financing, whether for a purchase or a refinance, seek out as many different lending sources as possible. Particularly on a purchase where time is of the essence, many real estate investors will go the way of private money or “hard money” loans. Real estate investors, particularly on fast closings, commonly use hard money loans. On a refinance, because there is no pending deadline, one can afford to seek out more alternatives for financing.

Lending standards have not loosened up, particularly on rental properties. Banks, credit unions, and portfolio lenders have a variety of loan programs and each has its own requirements. For this reason, make sure you meet the initial requirements of any loan program before you take the time to fill out a lengthy application. If you are denied for a loan, study those items that are required and begin to govern your business activities according to these standards. For example, make sure you are filing your tax returns for the business entity that holds title to a rental property, as a bank will request them as part of the underwriting of the loan. And lastly, create a good relationship with a reputable mortgage broker in your area of real estate. A broker who understands the unique requirements of each loan program can save you an enormous headache in the process of obtaining loans for rental property. Similar to finding rental properties to purchase, approach the process of obtaining a loan with a strategy and use qualified professionals around you to assist in your search.

In the Spring of 2015, a newbie real estate flipper named Terry approached me for a loan on a rehab. Formerly a contractor, this real estate investor desired to enter the “flipping” space and had identified a great candidate for his first “flip.” Before meeting Terry at the house he intended to buy for his first real estate rehab, I decided to drive around the neighborhood first and look at the comparables to the subject property. Pulling into the driveway of the subject property, my first impression was that the property had a long way to go to be close to the comparables I had just seen. There was a carport that was falling down at the end of the driveway, and next to it, an old garden shed that was also pretty dilapidated. The yard was full of weeds and there was a huge, overgrown lilac bush in front of the house that was completely blocking the front door. The entire house needed repainting and the yard certainly needed some attention. Luckily, the interior of the house was very clean and needed mostly ‘lipstick’ and some staging. I had definitely seen worse rehab houses than this one, but started to wonder if this “former contractor” would be able to transform this house into something like one of the comparables in the neighborhood without breaking the bank.

I breathed a sign of relief when I opened a folder that he brought to our meeting that contained a portfolio of similar projects he had completed in recent years. Some of Terry’s previous projects were remodels for homeowners. We discussed the possibility that he may go over budget on this project. I explained to him that this project was not a “retail remodel” that he was used to doing for homeowners, but rather a “low cost remodel.” He assured me that he was going into this rehab project with eyes wide open, and this meant saving costs. We gave him a hard money, rehab loan and he closed on the property within 3 business days. The weekend following the closing, Terry had already started the demolition.

Four months later, I received a call from Terry and he had completed the rehab project and invited me to come and see it. When I pulled into the driveway, I just about fainted. The house looked nearly identical to one of the comparables I had seen four months prior in the neighborhood. The color schemes, the clean landscaping, and the staging on the interior really made this house stand out. After being listed for only 7 days the house was under contract with two back up offers! Just love how this “first rehab” turned out, and so proud of Terry for transforming that house. What a success story!

Posted by Corey Dutton, Hard Money Lender

For real estate investors seeking to buy rehab properties, to be underfunded on a rehab project, this is a bad place to be. By “underfunded,” I mean that one discovers that there are not enough funds to complete the rehab project to the desired, or required, specifications. So what do you do when you find yourself in this precarious position of being underfunded in a real estate rehab project? The more important question is, how does one avoid this situation altogether? Never start a real estate rehab project unless you know for certain that you have enough funds to complete it.

Many a real estate deal was lost, or ended up making no return, due to the mere fact that the deal was not properly funded to start with. Many real estate investors will start a project on a hope that another form of financing will come through to finance the repairs. They will purchase the properties, in most cases only to find that this “other” form of financing needed to complete the repairs never comes through. Once you own a property the clock starts ticking, particularly if one takes out a loan such as a private or hard money loan to purchase an investment property. If a partner, friend, or family member offers to finance your project, ask for proof of funds from this individual before you complete the purchase. If this individual cannot, or will not provide a proof of funds such as an account statement, this could be a red flag. Although there are many possible exit strategies for an underfunded project, be aware before you start about the dangers of being underfunded.Does anyone here on BP have any stories to share about one of their projects that was underfunded? Please share.

Thanks @Fred Sams

Steve, I like your points, as they are laid out very clearly and straightforward. However, this is just one piece of the puzzle. I know you realize this, as we are only focusing on the "lending" piece. I did not intend to say that it was the FHA loans that were the downfall of the market, by no means. Nor did I intend to say that they will be the cause of another financial crisis. Please don't take me wrong. All I am saying is, let's compare our low down payment, bad credit loans with a possible European counterpart. In the U.K., the lower your credit, the higher the interest rate will be, and the larger the down payment req will be. In my humble opinion, a 580 minimum credit score req for FHA loans in the U.S. is just silly when coupled with a low down payment. And a low interest rate? This is non-existent in the UK. I am not saying that, by making these types of loans, that our economy will go into another tailspin as in 2008. I'm just saying if prices do go down substantially again, and hedge funds start selling SFRs, where will it leave these types of homebuyers?

Why are homebuyers in the U.K. obliged to put down more on a home purchase than in the U.S.? Because in Europe, home ownership is still considered a privilege and not a right. The government-backed, FHA loans offered to home buyers in the U.S. with an average down payment of only 2.9%, these are nearly 100% financing loans. With such a small down payment, there is no commitment from home buyers. How easy is it to walk away from a down payment of 2.9% versus the average down payment of 17% in the U.K.?

But many people in the U.S. would argue that the new stringent qualification standards for FHA loans will keep these new loans from going "bad," like they did in 2008 and 2009. But what makes them so sure? With the new credit score requirements for FHA loans being pushed down to as low as a 580, how is this any better than the loans that were made prior to the crisis? Yes the stated income loans are a thing of the past, along with the negative amortization loans that were so popular leading up to the crisis. But FHA loans prior to 2008 were never stated income loans, nor negative amortization loans, so why is everyone claiming that the qualification standards are so high now?

The U.S. government is just continuing to push forward an agenda that home ownership is a right and not a privilege. Why do you think mortgage lenders in Europe require higher credit scores and larger down payments? In Europe there is no agenda being pushed to make people believe that home ownership is a right. Europeans know well that it is a privilege for those who can afford a down payment and for those who have good credit. Many reading this will argue that FHA loans give people a chance to rise above poverty. But with no real monetary commitment from the buyers, and with such low credit score requirements to qualify for FHA loans, what will happen when home prices collapse again in the future? I see just another wave of FHA loan foreclosures that we the taxpayers will bail out.