With the recent influx of bank owned properties, there are a lot of new real estate investors looking to create their own ‘fix and flip’ business. We do rehab loans for these types of transactions, and while the time seems right for this type of business, it is very important to have some fundamentals in place to ensure you are working with a winning transaction. The core fundamental we are going to look at today is your after repair value.

An after repair value, or ARV, is the price you expect to be able to sell a property for once you have completed your rehab. If your after repair value is not accurate, chances are your profitability is going to suffer.

Having a great real estate agent working for you can help a lot in figuring out your after repair value. They should know the area well, and have a good pulse on the local market. In addition, they can likely put together a market analysis for you with comps that can give you a good idea of your after repair value. With that being said, however, this number is so very important to real estate investors that you should not rely on any single third party. Instead, you should also know how to do your own research.

To get a good after repair value estimate, you need to see what has sold in the area recently. The more recent the data is, the better. In today’s market, I would not use any comps that are over six months old. Less than 90 days is even better. In addition, for most properties you want the comparable sales to be nearby your subject property. Within a half mile is best, but looking up to a mile away sometimes is required.

Next, you should be comparing the size of the home and the bedroom/bathroom count. If possible, you should be comparing homes that have the same bedroom/bathroom count as your subject, and that are within 10-20% of the square footage of your subject property. This is not the lot size, but the actual living space square footage count.

Once you have a list of properties that have sold within these parameters, you need to do your research. The best way to do this is to actually drive these comps. Look at the neighborhoods, are they similar? Find out if these sales were private party sales or distressed sales. Is there HOA fees for some properties? Is there other factors that could impact value, for instance power lines, busy intersections, schools, etc? These are all important things to know, and not all of this information will come to light by simply looking at comps on paper.

Once you have driven the properties, you should have a good idea as to why each property sold for the price it did. This type of hands on valuation process is vital to choosing winning properties that you can make money on. Don’t shortcut this step!

Finally, once you have looked at all the above data, take a look at the days on market for the properties. How long are these properties sitting on the market before selling? If you have properties selling very quickly, say less than 30 days, that is a good indicator of a healthy market. If, however, you see properties sitting on the market for long periods of time, 6 months to a year, you may want to discuss the reasons for this with your agent.

Working closely with your agent is important in this business. Being able to rely on your agent, while also doing your own research, is going to give you the best combination of successful strategies to make sure you get it right!

For information on our loan products, or to contact me directly, please visit our hard money loans page.

Here are the top ten reasons to consider hard money loans for your financing needs:

1) Banks won’t lend to you because you currently own too many properties.

2) Banks won’t lend to you because of credit issues, foreclosure issues or short sale issues.

3) Banks won’t lend to you because you are unable to document your true income through W-2′s.

4) You are purchasing properties in need of rehab (so the banks won’t lend to you).

5) Your commercial property does not meet the debt coverage ratio required by the banks (so they won’t lend to you).

6) You are not a US citizen, but would like to purchase property in the US.

7) You are purchasing a distressed income producing property that is not stabilized and you need a short term bridge loan to stabilize the property in order to obtain traditional financing.

You want to finance any type of construction or construction completion.

9) You want to finance any type of land purchase.

10) You have other unique situations in your credit history, ability to document income or are securing the loan with a unique property type.

Of course, there are many other reasons why you may want to use hard money to finance your real estate transactions, but these are the top ten we hear about these days. If you are in a situation where the banks won’t lend to you, call us today at 877 462 3422. Usually we can let you know if we can potentially help finance your project with a five or ten minute phone call.

So everyone believes that housing always goes up. History tells us this is true, but is it really? How much history do we really have to back up that claim? Let’s take a look at some historical numbers and compare them to what is going on today.

In looking for numbers to compare, there are two main components we want to concentrate on. The first is the average home price, and the second is the average annual income. These two numbers should be related, as income dictates how much house someone can afford.

We went back to 1975 for our data. In 1975, the average home cost $42,000. The average income was $8631. In 2010, the average home price was $270,500, and the average income was $40,711. Over the past 35 years, using these numbers we can see that the average home price has increased 544%, while the average income has increased 372%.

This inequity is worrisome. These numbers are taken not at the top of the housing market, but after the fall. If we used numbers from the top of the housing market, this inequity would be even greater. What this tells us is that housing has increased 68% more than incomes over the past 35 years.

That fact by itself may not be cause for worry, but let’s also take a look at wages. From 1975 to 1985, wages almost doubled. From 1985 to 1995, they increased by almost 50%. From 2000 to 2010, that increase was less than 25%. With the economy where it is today, it seems doubtful that we see any significant wage increase when talking about the average American. Wages are stagnating, plus unemployment is still incredibly high. Couple this with loan programs that are very stringent with regards to qualifications and it gets easier to see how we may not see housing continue to appreciate as we have over the past 35 years.

With all that being said, however, we are still not done. Take into account our current interest rates. We are at all time lows when talking about interest rates tied to 30 year mortgages. Right now, a 30 year mortgage can be had for less than a 5% rate. Compare this to the 1980’s when rates were fluctuating between 10-15%, and you see that we are having housing adversity despite ultra low rates. What happens when these rates go up (and they will)?

Let’s look at the numbers. For the San Francisco Bay Area, the median household income is $76,476. Using a 5% interest rate, 20% down and zero monthly debt, this could allow someone to purchase a home for between $319,000 and $414,000. The median house price for this area today is $337,250, right within range. Remember, the large range we used was for someone who has no debt, and is putting 20% down. Just to give a point of reference, that same household who has just $600 per month in debt obligations and puts down only 10% would qualify for somewhere between $260,000 and $322,000.

Now things start to get interesting. Using the same numbers as above, but adjusting the interest rate to 8.5%, we get a range of $236,000 to $307,000 for our 20% down and zero debt borrowers, and $195,000 to $241,000 for our 10% down, $600 per month in bills borrowers.

Let’s go one step further and bump that rate to 12.5%. Using the same borrowers from above, our 20% down, zero debt borrower can qualify for $177,000 to $231,000, while our 10% down, $600 per month in bills borrower would only qualify for $147,000 to $182,000.

How far out of the box is it to believe that current incomes stagnate, and interest rates rise back to historic levels here in the near future? This does not even take into account that homeownership levels are still at historic highs and likely have to shed a couple percentage points to come back into line. Nor does it take into account that there is a little over 9 months of housing inventory on the market right now. It also does not account for the homes currently facing foreclosure, the homes the banks own but have not put on the market, nor the homeowners who will be in foreclosure or short selling their homes. Finally, this does not account for the change in attitude that many will have if their home continues to decline in value.

When all the intangibles are added into the mix, along with the hard and fast numbers based on current wages, it seems very unlikely that we see housing recover anytime soon.

I have been talking a lot about loan modifications lately, and will be posting more information and tools for those looking to do it yourself. This is a listing of loss mitigation contact phone numbers for a number of lenders. For additional resources, you can also view other articles I’ve written about loan modifications.

ABM AMRO Mortgage (800) 783-8900

Accredited Home Lenders (877) 683-4466

AMC Mortgage Services (Ameriquest, Argent) (800) 211-6926

American Home Mortgage (877) 304-3100

Ameriquest Mortgage (800) 211-6926

Aurora Loan Services (800) 550-0508 or (866) 521-3828

Avelo Mortgage LLC (866) 992-8356

American Servicing Company (866) 480-5004

Bank of America (800) 846-2222

BB&T Mortgage (800) 827-3722

Carrington Mortgage Services (800) 790-9502

Central Pacific Bank (800) 342-8422

Charter One (800) 234-6002

Chase (800) 446-8939 or (800) 854-4613

Chase Home Finance (800) 848-9136 or (858) 605-2181

Chevy Chase Bank(800) 933-9100

Citi Financial Mortgage (800) 753-3673

Citimortgage (800) 283-7918 or (866) 357-0615

Countrywide (800) 262-4218 or (877) 744-7691

Comerica (800) 437-5822

Countrywide (866) 880-1232 or (877) 744-7691 or (800) 669-0102

Ditech (800) 852-0656 or (800) 449-8582

Downey Savings & Loan (800) 824-6902

EMC (800) 723-3004 or (866) 275-6095

EverBank (800) 669-7724

Equity One (866) 361-3460

First Horizon (800) 489-2966

First Franklin (800) 622-5035

Fifth Third Bank (800) 375-1745

First Merit Bank (888) 728-9931

Flagstar Bank (800) 968-7700 or (800) 945-7700

Fremont Investment (866) 484-0291

GMAC (800) 850-4622

GreenPoint (800) 784-5566

Green Tree (877) 816-9125

HFC / Beneficial Finance (800) 333-5848

Homecomings (800) 850-4622 or (800) 206-2901

HomeEq Servicing (866) 822-1471 or (800) 414-0969

Household Finance (800) 333-5848

Household Mortgage (800) 333-4489

HSBC Mortgage (800) 338-6441 or (888) 648-3124

Homecomings Financial (800) 206-2901 or (800) 799-9250

Huntington National Bank (800) 323-4695

Indymac (877) 736-5556

Irwin (888) 218-1988

Key Bank (800) 422-2442

Litton Loan Servicing (800) 999-8501 or (800) 548-8665 or (800) 247-9727

National City (800) 367-9305

Nationstar Mortgage (888) 480-2432

New Century (800) 790-9502

NovaStar (888) 289-1231 or (888) 743-0774

Ocwen (866) 513-2947

Option One (888) 275-2648

PHH Mortgage Services (800) 750-2518

ResMae (877) 473-7623

Saxon Mortgage (888) 325-3502

Select Portfolio Servicing (888) 818-6032

SkyBank (800) 290-3359

Suntrust Mortgage (800) 443-1032

U.S. Bank (800) 365-7772

Wachovia (800) 282-3451 or (866) 642-8608

Washington Mutual (866) 926-8937 or (866) 488-5449

Waterfield Mortgage (800) 957-7245

Wells Fargo Bank (800) 678-7986 or (877)-216-8448

Wendover (800) 934-1081 or (800) 436-1022

Wilshire Credit Corporation (888) 952-7339

For more information on loan modification, visit my home site, or browse other articles in the “loan modifications” category.

What is cap rate, and how do you calculate it? Cap rate is a good way to evaluate a property and that property’s value. In a nutshell, the higher the cap rate, the better the investment that property may be.

Cap rate is used for a number of reasons. For our purposes, we are going to look at what a hard money lender looks at when evaluating a potential loan. First things first, how do we calculate a cap rate? With some basic information, it is not terribly difficult. First you need to know the net operating income for the property, or NOI. NOI is the income minus the expenses of a property, not including the debt service for the existing mortgage. So if your property brings in $100,000 per year, and expenses amount to $40,000 per year, your NOI would be $60,000. NOI should be expressed as an annual number for this calculation.

Next you need to look at the value of your property. Divide your NOI by the value of the property and you will have your cap rate. In the example above, a $1,000,000 property with an NOI of $60,000 would have a 6% cap rate. When evaluating a property, the higher the cap rate is, generally speaking, the better investment that property would be to purchase. A $1,000,000 property with a 6% cap rate would generate $60,000 per year in net operating income. That same property with a 10% cap rate would generate $100,000 per year in net operating income. Pretty basic.

Where it gets tricky is when you look at where your numbers come from. For a cap rate to be a beneficial number to look at, it is very important to know that your numbers are accurate. If you have inflated income numbers, or understated expesnses, your cap rate is not going to be accurate. Like anything else, if it is not accurate, you cannot rely on it.

In the lending world, we use the cap rate in a backwards fashion from how I have explained it above. When looking at a property and making a decision on whether or not to make a loan against it, valuation is paramount. Cap rate is a good, quick way to estimate this valuation. If we know the NOI for a property, and know the cap rate for comparable properties in the area, we can quickly calculate an estimated value.

Using the same example as above, if we have a property with $60,000 net operating income, and we know the average cap rate for comparable properties in the area is 8%, we can divide $60,000 by .08 (8%) to arrive at an estimated value of $750,000 for that property.

That is cap rate in a nutshell. If you have questions or would like to talk with me about obtaining a commercial loan here in California, please call me today. You can always reach me at 877 462 3422, ask for Chris!

Cross Collateralization is a phrase used when we encumber two or more properties under a single blanket loan. It is a good tool to use if you do not have the equity that hard money lenders require in the subject property, and can also be used to help purchase property with little or no cash out of pocket.

Hard money lending is changing all the time. With the recent downturn in the markets and bad news on most economic fronts, guidelines for hard money have tightened up along with the rest of the credit markets. A good example of this is the loan to value on which a loan can be made. In today’s market, that number is in the 60-65% range. What that means is that for every $100,000 in property value, you can borrower a maximum of $60-$65,000. When you factor in the declining real estate market, one can see how borrowing money can get difficult.

This is where cross collateralization comes in. If you own multiple properties, we can take a look at more than one, and add the total values of those properties together. The loan to value still must conform, but if you need a certain amount of cash in hand for a project or business purposes, the power of cross collateralization can help get you there.

Say, for example, you own two properties, each with $100,000 in value. You owe $40,000 on one, and $30,000 on the other. You need $50,000 cash in order to expand your business. At 65% loan to value, you will not net $50,000 using either of these properties. If we cross collateralize them, however, you now have $200,000 in property value, and $70,000 in liens. At 65% loan to value, or $130,000 in potential loans allowed against the properties, we now have the room to make that $50,000 loan to you.

Another way to utilize the power of cross collateralization is on a purchase. With the credit markets in turmoil right now, you need to be able to put money down when buying a property. If you own property with enough equity in it, however, we can structure your loan to minimize the amount of cash you must put down in order to acquire the property, using the same principals outlined above.

I get a lot of calls these days from people looking to buy homes below market value here in California, rehab them and either sell or rent them. That is a very viable business plan, and done properly, can make you a decent income. The problem comes when people have no money to bring to the table. In todays market, finding 100% financing on something of this nature, regardless of the “after repair value”, is awful tough to find.

If you have no money to bring to the table, and own no property, this is not the best business to try and get into. You should find a partner, or save some money, before spending too much more of your time looking for 100% financing. If you have some money, say at least 20% of the purchase price, then you start to have some real financing options.

A program that I currently have access to can fund 100% of the purchase price or more. Keep reading though, you still need some cash. This program works on homes that are being rehabbed. Short sales that need new floorings, fixtures, etc. work well. Even properties needing major rehab can work, but the common theme is that you are going to put work into the property in order to improve the value. The investors on these loans like that, but want to make sure it gets done, so in exchange for lending you 100% of the aquisition cost we are going to require the funds to complete this work be held in a builders control account. In addition, you will need to bring the first six months of payments, and cash to cover points and fees to the closing table.

So if you have the ability to bring the cost of rehab, 6 months interest payments and fees to the closing table as cash, we can fund the rest of your project. You have no payments for 6 months, the rehab costs are available and easy to draw, and there is no prepayment penalty. These are typically short term loans, and sometimes we are able to obtain funding for more than the purchase price.

In addition to having some cash to bring to the table, there are some other qualifications. Credit score is not a big concern, but what is on your credit can have a bearing. Recent foreclosures, bankruptcies or major delinquencies will need to be explained, and compensating factors may need to be looked at. Owner occupied properties are also not going to qualify. This type of program is strictly for investment properties.

Loan amounts can vary, but range from $50k on up to $500k or so. Over $500k becomes a bit more difficult, and will require some additional financial and credit strength, but it is available for the right deals. Funding time on these aquisition and rehab loans can be as quick as one week, although a typical transaction can usually be completed in 2-3 weeks. Of course, if there are timing issues involved, we can work with those deadlines. Just be sure to mention those deadlines upfront.

Feel free to contact me with any questions. 877 462 3422. This is primarily a California program, but we can help in other Western US states.

Hard money lending today is a blanket phrase for many different types of loans. With sub-prime loans a thing of the past, and the conventional lenders tightening their lending standards, hard money is still an option for many borrowers, regardless of credit type.

Hard money lenders are loan to value driven. Credit scores, the ability to repay and the overall picture do play a part in the decision to lend or not to lend on a particular transaction, but the largest consideration is given to the property value and the percentage of debt against it. With hard money lenders, this loan to value ratio typically needs to be a maximum of 60%, 65% in a best case scenario, depending on the location and type of property. For example, commercial properties located in San Francisco we may be able to lend as high as 65% on, whereas rural properties we may be capped at even 50-55% of the value (this is as of late May, 2009, and has changed substantially over the past 6-12 months).

Hard money lenders offer flexibility that is needed in today’s market. Cross collateralization of multiple properties is one way that a hard money lender can overcome higher loan to value ratios. Additionally, hard money lenders will work with borrowers on a personal level. You have the opportunity to speak with the individual making the funding decision. With no minimum credit score required, hard money lenders will give you the opportunity to present your individual situation and will then make a decision based on a “make sense” type of scenario. If the loan makes sense for both the borrower and the hard money lender, the deal will typically fund. A good hard money loan is one where there is a solid exit strategy and a clear benefit to the borrower.

Working with a hard money specialist is extremely important when trying to obtain private financing. Structuring these deals is different than putting together a conventional loan package. In addition to properly structuring your transaction, it is equally important that your hard money specialist has the resources available to get your transaction funded.

My name is Chris Goulart, and I am a hard money specialist. I have access to multiple sources of funds, and also have many additional resources should your particular file not fit our guidelines. Please feel free to read more about what we can offer in the way of hard money, or contact me today to talk about your loan scenario. I can be reached at 877 462 3422. This is my direct line.