Bidders Turn to Hard Money Lenders

Those of you who have been getting into purchasing properties at the trustees’ sales now know that the third party action has been increasing dramatically during the past months. From a variety of sources, money is flowing to the high bidders in higher and higher volume. More properties are now being uncovered with equity added when lenders offer properties at steep discounts below the amounts due those lenders. It is said that the foreclosure market is a cleaning process—removing bad loans and properties that accumulated during the recent “real estate bubble”.

You probably already know that you cannot go to a lender and ask for money with which to make a cash bid on a property coming up at a trustee’s sale. Hopefully, your own pockets are deep enough that you can buy at the sales with your own money. This is not true for most of us, particularly when buying first (usually larger) loans. We can then seek other varying amounts of cash from other knowledgeable real estate investors who are willing to start and continue on a long term basis in the foreclosure business.

Personally, however, I think that the consistent and most successful bidders today are those who associate with hard money lending working with real estate investors having limited capital. These financiers do not seek to add to their capital worth through property retention and appreciation but through the multiple amounts of money offered at attractive rates (for the lender) to these investors. Those investors agree to a short term loan with which to pursue those unique properties offered at a discount at the trustees’ sales.

The hard money lender is a not an uncooperative lender since his short term loans have attractive interest rates and loan fees. I understand that such loans today (early 2010) are available at 12% interest with loan fees around 7% of the amount of the loan. The short term defaults on these loans seldom occur since such loans are available only on properties with proven equity. Although there is no such thing as a risk-free real estate investment, the hard money lenders come close to approaching that ideal.

Understanding that purchase money often is available through hard money lending to buyers of properties at the trustee’s sales solves the initial investment need of the investor. It does not, however, ease the problems buyers face when financing the rehabilitated property purchased later from that investor.

The casual lending days which existed prior to the recent financial disaster are a thing of the past. No-doc and low-doc loans are an anathema to most residential, consumer lenders these days. The number and heights of the hoops residential borrowers must jump through to get even an expensive loan are impressive and discouraging to many buyers. Not only will the potential lender carefully examine the borrowers credit but also current and future income capabilities and existing liquid cash available to meet emergencies which could affect the ability to meet payments when due on the accompanying promissory notes. No stone is left unturned, and no slight of hand related to the loans will be tolerated—now. This, of course, is the antithesis of the lender’s position until the financial meltdown. (Who was responsible for this catastrophe? It really looks like the lenders and borrowers themselves!)

The residential lending system seems intent on not stepping into the deep morass into which they stepped recently. Of course, the legislature is working hard to make it difficult to repeat the recent fiasco, yet it seems that current laws appear in time to fix old problems.

Since it is difficult for the consumers to qualify for residential loans, the real estate investor with a variety of money sources available with which to purchase properties at the trustee’s sale now encounters a second problem. Where do the buyers of the properties purchased at the sales find the money with which to purchase the rehabilitated properties? Money is tight. Lenders are stingy. Restrictions on borrowers are at an unprecedented level. Do you see the anomaly that I see here? It will be interesting to see how current loan modifications and restrictions are altered to allow the consumer to begin the residential buying process with confidence.


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