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Hard-equity lending, consider these creative techniques
| | Wednesday, June 28, 2006 @ 11:51 AM EDT
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Contributed by: John Michael
John Michael Properties
Read more archived articles about Credit and Finance
hard money funding is often used to finance projects that are considered by most to be unconventional!
Most call it Creative real estate investing!
The reality of it all is that Creative real estate investing techniques is not creative at all as they are commonly used by professional and commercial investors!
Creative real estate investing is a phrase or should I say a marketing ploy to appeal to the lay man.
Typically, "TRUE" hard moneylenders will lend based upon a percentage of the value of the property regardless of the sales price. They will typically close loans in a matter of days. Credit scores and income are often overlooked by hard moneylenders, but they may ask to see a business plan or exit strategy for the project.
They may ad points!
Typically, interest rates of 10 to 20% per year are common!
Many want an equitable interest. These will vary based on the size of the project and the agreed upon contract.
Hard moneylenders are collateral based and typically require first position on the property.
To boil it down "A hard-equity loan is flexible and quick. Because most hard-equity lenders are private individuals and not large multistate lenders, they have more flexibility. They can also close more quickly, usually in as few as one to three days. Moreover, most take a quick look at the real property. "
hard money is not the only way to used "Creative real estate investing" but can be a great source of funding for you to get the deal or you can use some of the other methods listed below:
No-doc and low-doc loans.
Seller-carried second mortgages.
Land contract. Called "contract for sale" or Owner finance.
Credit cards.
Retirement accounts.
Friends and family.
Note buyers.
Get a loan on other property.
Partnerships.
Just to name a few!
There are many creative hard-equity programs and techniques such as:
Low starting interest rate = Hard-equity loans have higher interest rates than conforming loans. A hard-equity loan, however, can have a lower starting interest rate for a certain period, from three months to five years. With a reduced payment for a time period, so you can catch up with other bills.
Long-term loans = Most hard-equity loans are made for five years. The monthly amortization period may be for 15 years or 30 years, or it may be interest-only. Hard-equity loans can also be for longer terms, such as 15, 20, 30 or 40 years with no balloon payments.
No payments for a time period = Sometimes you need a break from making monthly mortgage payments. This program may allow you not to have any payments for a number of days at the beginning of the mortgage. This can range from 60 days to the first year. Alternatively, you can have a provision that defers one or more monthly payments to the end of the mortgage. This allows you to use the money for other debts.
Tailored payments = Most mortgages allow for equal monthly payments for the entire mortgage. At maturity, the mortgage balance is zero or a balloon payment is required. Hard-equity mortgage payments can be tailored to satisfy your needs rather than the lender's matrix. If you have seasonal employment, then the payments can be larger during the "feast" period and smaller during the "famine" period.
Loans with a lump-sum payment = You may benefit from having one lump- sum payment at the end of the mortgage. Use this program if you are likely to receive a large sum of money in the future. On these loans, the interest accrues, and the accrued interest and the principal are due at maturity.
Second and third mortgages = Hard-equity loans can be a first, second or third mortgage. As long as the loan to value (LTV) and the superior mortgage to subordinate mortgage ratio.
Wrap mortgages = The benefit of a wrap mortgage is that underlying first mortgage is available when the wrap mortgage is satisfied. The advantage to lenders is that they are assured that the first mortgage will be paid. The interest yield on the transaction also can be enhanced.
Cross-collateralized loans = In many cases, the subject property does not have enough equity to support the proposed hard-equity loan. But you may have other real property to pledge as additional collateral. With the additional property, a hard-equity lender will close the loan because the collateral is adequate. Sometimes, assets other than real estate are acceptable.
Lines of credit = A hard-equity line of credit can be established more easily than a line of credit at a bank. The hard-equity line of credit can be used and repaid based on needs. It provides money that you can borrow and repay repeatedly under the terms of the mortgage. The interest on the mortgage would be payable monthly. The borrowing and repayments could continue until the mortgage matures.
Future advances = Often, a loan closes and you need more money soon after. Some costs can be eliminated if the first closing takes into account the possible need for additional money. The mortgage can provide for a future advance from the lender for an additional amount that is agreed to at closing.
Portable loans = When you sell a home, most generally buy a new home. Both homes probably have a mortgage. If the mortgage could be transferred from the old property to the new property, you can save time and money. A hard-equity lender may let you transfer the mortgage from the old property to the new property.
Combination mortgages = Hard-equity loans can be as creative as you can make them. A hard-equity loan may contain elements of two or more of the above techniques.
I suggest you read "HOW TO BE A SUCCESSFUL hard money BORROWER" Download your free copy at http://trice84.tripod.com/gifts/Jones0804.pdf />
A great search tool for "hard money Loans" can be found at:
http://www.scotsmanguide.com/default.asp?ID=1223 />
Good luck on your success as a real estate investor!
John Michael
Note: John Michael is the author of many guides that can help you become more successful as an investor. See http://www.thecreativeinvestor.com/ChanPart-JohnMichael.html
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