What is the Difference in Real Estate Investing and Note Investing?

 What is the Difference between Real Estate Investing and Note Investing?

When investing in notes, you are buying the debt secured by a piece of property, the promise of repayment, and (generally) the right to foreclose and recoup your investment if the borrower fails to meet obligations or make payments. You just do not own the physical real estate.

Real estate investors gain full access to a property when they purchase it. A note owner does not have the rights to use or enter the property unless outlined in the loan agreement.

When you own a real estate note, the payments you receive are fixed according to the note. Vacancies, rent collection, or market forces should not impact what is owed.

Under normal circumstances, as the note investor, you are not responsible for collecting rent or dealing with “tenants, toilets, and trash.”

Real estate investors are impacted when a property’s value goes down, tenants do not pay, or capital improvements are required. Note investing mitigates property-related losses.

On the flip side, note investors do not benefit from property appreciation. As a note investor, you trade the potential speculative appreciation for set payments with a defined schedule, interest rate, and term.

When you invest in real estate, you have the right to undisturbed use of the property. If you have leased the property, you have the right to collect rents while your tenant has the right to “quiet enjoyment.”

If you have borrowed money to buy the property, then in addition to your rights of use, you have obligations to pay your loan and maintain the property to prevent it from falling into disrepair.

As a real estate investor, you enjoy both the rewards of appreciation as well as the risks of price correction. If the property’s value goes up, all the appreciation goes to the property owner, not the lender.

If the property’s value goes down, the note is unaffected, the amount owed stays the same, and the same payments must be made regardless of occupancy, rent collection, and market forces.

Dennis  Dahlberg Level 4 Funding LLC
DennisLove.com
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

How to Buy and Sell Mortgage Notes

How to Buy Mortgage Notes A step-by-step walkthrough of how to buy notes. Real estate notes are the most popular notes for investing. This guide to buying mortgage notes is a comprehensive resource designed to help investors navigate the note-buying process.

We refresh the guide regularly as we field questions from our subscribers, interview experts, and evolve with the world of real estate note investing. Bookmark this page and check back often to stay up to date.

What are Mortgage Notes?

Definition of a Mortgage Note A mortgage note is a borrower’s written promise to maintain lender repayment terms. Also known as a promissory note or real estate notes, mortgage notes are legal documents, though lenders do not usually file them as public records.

The Different Types of Mortgage Notes

A mortgage promissory note is categorized by loan type, loan provider, lien position, performance, and asset class. Knowing the differences helps when it’s time to buy loan notes.

LOAN TYPE

Secured

When a tangible asset, like a property or a vehicle, is tied to a lien, it is called a secured loan. A lender typically offers better interest rates and increased spending limits on secured loans since they have legal rights to sell the asset if the borrower defaults on the note.

Unsecured

When a lender issues a loan without a tangible asset and bases approval on a borrower’s credit history alone, it is called an unsecured or signature loan. Unsecured loan interest rates are higher, and credit score requirements are more rigid than asset-backed secured loans.

LOAN PROVIDER

Private Loans

Loans issued by private organizations or individuals are called private loans or private money. A private money loan does not always follow traditional lending guidelines and offers borrowers flexibility in some cases. Investors may find private lenders with notes to sell, though the buying opportunities are usually limited to one per private seller.

Institutional Loans

Loans issued by credit unions, banks, and other organizations in the loan-writing business are called institutional loans. Institutional lenders follow strict guidelines with minimal flexibility but issue a lot of loans. Note investors working with institutional lenders benefit from recurring note availability, as opposed to the one-time private seller scenario.

LIEN POSITION

Lien position, aka lien priority or lien seniority, is the order in which the debt is paid in the case of default.

Debtors place liens (legal claims) on the property to secure re-payment. Lien positions are established by order of recorded filing date. Usually, the mortgage lender holds the first priority, and other liens tied to the property hold junior positions.

Typically, investors focus their investing either on “first position” or else on junior liens commonly referred to as “seconds.”

What Happens to Lien Positions During Foreclosure

If a foreclosure happens, the more senior the lien (first position), the more likely you are to be paid off and recover your investment because liens are paid off in order.

The trade-off in note investing is that while you pay much less for junior liens (often pennies on the dollar), you do not enjoy the same security as senior lien investors or investors in the first lien position.

ASSET CLASS

Real estate asset classes categorize property types with similar attributes. Note investors can buy a broad range of notes across asset classes, including:

• Commercial
• Multifamily
• Residential
• Construction

When you are starting out in mortgage note investing, the safest play is to invest in asset classes with which you are already familiar.

LOAN PERFORMANCE

Note investors, in addition to understanding lien position and asset classes, need to evaluate loan performance. Loans may be classified as non-performing, under-performing, performing, and re-performing.

Non-performing note: A note that is 90 days or more past due.

Under-performing note: Borrower has a history of being periodically late with payments.

Performing note A note being repaid on time and according to terms. Investing in performing notes is sometimes referred to as “clipping coupons” because the investor typically enjoys modest returns paid back at regular intervals.

 Re-performing note: Borrower had missed payments, perhaps even went non-performing, but is now back on track. Sometimes these loans have been modified either by extended amortization, principal reduction, or interest rate reductions. One strategy note investors employ is to buy non-performing notes and get them re-performing and then selling the re-performing notes after seasoning (a period of on-time payments).

The biggest discounts for note investors usually come from non-performing notes, which are attractive to note investors for the steep discounts and multiple exit strategies. Performing notes are the most secure and offer the note investor reliable monthly payments backed (collateralized) by real property.

Dennis  Dahlberg Level 4 Funding LLC
DennisLove.com
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

Why Invest in Mortgage Notes?

 What are the advantages of buying mortgage Notes? Why Invest in Mortgage Notes?

Purchasing mortgage notes can be an excellent investment for someone looking for passive income secured by real estate. As with any investment, you should fully understand what you are buying before you dive in.

Regular Monthly Income

When you buy a note, you become the bank. Buy a performing note, and you can expect payment on time by a credit-worthy borrower. You are getting some of your money out plus a little bit of interest, and it is all secured by that real estate, making it an attractive way to invest in performing notes.

Capital Stack Security

The various levels of financial sources funding a property build the capital stack. Equity is at the top, homeowner association (HOA) and maintenance fees are at the bottom, and first and second mortgages rank in priority between them.

When real estate prices correct and come down, the equity gets cut out first. Mortgage holders maintain their position within the asset, but mortgage note investors are not impacted in this scenario. Note investors will not enjoy potential appreciation benefits, but the note investment remains secure.

EXAMPLE OF CAPITAL STACK LOSS:
Property Investment: $100,000
Money Down: $20,000
Mortgage Balance: $80,000
Property Value After Market Correction: $70,000

What Happened? 
The property owner lost $20,000 and is now deeper in debt by $10,000, called a deficiency. The lender has not lost anything but retains foreclosure rights on the property. However, to recoup the deficiency, a lender may wait until the market works in its favor.

Other factors to consider when evaluating whether buying a specific mortgage note is a good investment include:

The Seller – Sadly, there has been a scourge of hucksters and fly-by-nights who have sold a variety of bad assets with false promises. Make sure you are dealing with a trustworthy seller.

The Property – Since the property is the collateral for the note you are buying, you must have a reasonable understanding of the property’s value and the prospects of future value.

The Borrower – Although as a note investor, you have remedies for non-paying borrowers if your investment is concentrated in a single asset, you need to have reasonable assurance that the borrower is unlikely to damage or destroy your collateral.

The Market – Since the market, including the foreclosure laws and timelines for the municipality, may impact the value of the collateral or the costs to recoup your investment in the event of non-payment, you should be comfortable with and understand the market where your collateral sits. 

With properly aligned goals, education, and expectations, buying mortgage notes can be a great investment.

How Do Mortgage Notes Make Money?

Making money on a real estate note investment depends on the type of notes you buy and the acquisition strategy.

HOW DO PERFORMING NOTES MAKE MONEY?

If you buy a performing real estate note, you receive payments according to the payment schedule, term, and interest rate. You accept those payments while enjoying the security of having your payments backed by the real estate.

HOW DO NON-PERFORMING NOTES MAKE MONEY?

There are other ways to make money with real estate notes. Note investors buying non-performing notes employ a variety of advanced strategies, including:

Loan to Own – Some investors will buy a non-performing note to exercise the power to foreclose and take possession of the real estate.

Loan Modifications – Private investors often have more flexibility than institutional lenders in the options they can offer delinquent borrowers. Some investors buy a non-performing note at a discount to provide more favorable repayment terms to the borrower. The note is then re-established as performing, and the investor enjoys regular payments.

Selling Partials – The note investor sells payment portions to a third party for a margin above what was originally paid.

Selling Re-Performers – The note investor buys the non-performing note at a discount off the unpaid principal balance (UPB). Next, the investor works with the borrower to get the loan re-performing, and finally, the investor sells the now re-performing note to another investor at a markup.

Flipping or Brokering Notes – The highest value task in the note investing business is finding the note. You can profit from flipping notes, even if you don’t have money of your own, by finding real estate notes for investors who have the capital.

Foreclosure – It is true. I had a client who bought a commercial property note for a pretty steep discount. Since the original lender, a community bank, had already begun the foreclosure proceedings, my investor client assumed the role of the foreclosing lender and hired us to market the asset for a foreclosure sale. The result was a profit of well over $300,000 in a matter of weeks, having sold the property at the foreclosure sale to a third party. My client never got in the chain of title and only owned the paper for about six weeks from start to finish.

I am sure we will hear from seasoned investors about additional ways to make money with real estate notes. If that is you, let us know in the comments below.

What is the Risk of Investing in Mortgage Notes?

Real estate note investing, when done right, should be LESS RISKY than real estate investing. Just as investing in bonds is considered safer than equities or stocks, the same is true for investing in real estate notes vs. investing in real estate.

As a note investor, you are trading the upside potential of appreciation in exchange for limiting the downside risk. This is not to say that there is “no risk.”

The amount of risk in a note investment depends on the loan underwriting, the Loan to Value (LTV), the position (senior, junior) of the debt, the good faith of the borrower to some degree, the locale’s regulatory environment, and the quality of the documents, assignments, and allonges.

There is, of course, always risk in any investment, and as an investor, it is up to you to evaluate the risk for any investment you make.

Dennis  Dahlberg Level 4 Funding LLC
DennisLove.com
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

How to Buy and Sell Mortgage Notes

 Are You Interested in Learning How to Buy and Sell Mortgage Notes

When it comes to buying mortgage notes, there are not a lot of hard-and-fast rules about the process and how it has done. In fact, you can even buy notes with no money.

Buying a home is very standardized while buying notes is reserved for investors. Standard real estate transaction procedures and regulations do not apply when buying the real estate’s mortgage note.

A transaction’s participants largely determine the note-buying process, so details will vary with each purchase. In the end, you need documents that transfer lender rights to you.

Ready to begin on the path to note ownership? Use our simple, 5-step process. You will be buying mortgage notes in no time.

Step 1: Find Real Estate Notes to Sell or Buy

Finding real estate notes is easier when you know where to look. Your business strategy and experience determine where you should buy notes. Investors can buy mortgage notes online, build a lender network, or acquire notes from multiple sources, including:

Private noteholders, usually seller-financed property, or business sales

A hedge or private equity funds that buy in bulk from banks and servicers and then resell.

Note exchanges and marketplaces.

Special servicers

Banks and credit unions

Step 2: Note “Tapes”

A “tape” is simply a spreadsheet with a note’s loan numbers and other relevant information.

Once you have received a tape, you will have the note details you need to start the due diligence process.

Step 3: Note Buying Due Diligence

Mortgages note due diligence processes closely correlate with the note buying strategy you are pursuing. In all cases, you will want to see a title report.

Buying a multi-million dollar “loan to own” single, small-balance commercial note on which you intend to promptly foreclose requires a very different due diligence process than 100 non-performing junior liens that you’re buying for six cents on the dollar and plan to “rehab” and modify.

Want to shortcut the note due diligence? Contact our expert residential note evaluations partner, Dennis Love, who will do it for you. You’re welcome.

Step 4: Making an Offer to Buy Notes

Due diligence should also be part of the “Making an Offer” phase. Sometimes you will get a tape first, evaluate it, and then make an offer on it. Sometimes you will have to make an offer and then do your due diligence; often it is both.

You should always have an attorney involved in your note purchase. We are the property and note-buying experts, not attorneys. We are not qualified to offer you legal advice, but we can shed light on how to buy notes from banks.

IF YOU’RE BUYING DIRECT FROM A BANK

The bank will usually hire an attorney for the note sales process. If you are involved in a transaction without a bank attorney, it is probably because you are buying the note(s) with a non-negotiable contract written and approved by the bank’s attorney.

The workout, or special assets, or secondary marketing manager that you are working with represents an organization worth between ten million and hundreds of millions (maybe billions) of dollars. These organizational reps are not shooting from the hip on legally binding contracts.

Dennis  Dahlberg Level 4 Funding LLC

Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

When To Use Hard Money For Real Estate

Though hard money lenders will often issue loans for almost any type of property, certain types of property investments were absolutely made for hard money. Rehab projects, construction loans, and land loans were made to be financed through hard money.

This doesn’t mean that other types of investments should not be financed through hard money. If you, the buyer of a property, have credit issues, or you need to act quickly on a deal before it disappears, the speed and convenience afforded by a hard money loan can be worth its weight in gold.

Finding Hard Money Lenders For Real Estate Investing

Many new investors fret over how they will find hard money lenders to get moving on the financing of their project. But here are a couple of simple ways to approach this:

• REIA or MeetUp MeetinDennis "Love" Dahlberg
  Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
  9133 W Plum Road | Peoria | AZ | 85383
  gs: Often hard money lenders will speak at local real estate events. If not, ask fellow members to see if they know any trustworthy lenders.
• Real Estate Agent or Traditional Lender: Ask that realtor, or mortgage broker, in your real estate network if they know a hard money lender you could do business with.
• Google “Hard Money Lender”: Just be careful, there are some unscrupulous individuals out there. Be sure to ask for references and talk to fellow investors to get their opinion.

How Does Hard Money Lending Work?

Given that these are private individuals, every hard money lender is different. As stated above, these lenders come with their own requirements, which include the process they need to close the transaction.

To give you a general idea, this is the usual course hard money lending takes:

• Find a hard lender near you. Do not let the rejection of a bank loan drive you to desperation. Research and make sure the lender can be trusted. Do they have a legitimate website? Are they in good standing with their own investors? Do they have pending lawsuits over bad loans?
• Arrange a meeting with the lender. This is also the time when you can inquire whether they specialize in a kind of investment property or if they have worked with projects previously that mirror yours. Assess the time frame specified for the loan and see if this is something you can work with.
• Prepare a contract. Make sure that you are offering a good deal with a sound financial plan.
• Inform the lender of your contract price. Most lenders are willing to fund 60 to 70 percent of the property’s ARV. The remaining 30 to 40 percent is up to you. You will increase your chances of getting approved if you already have this at hand.
• Get the property appraised. The lender will either send a list of their trusted appraisers or have their own.
• Prepare additional documents needed. Some lenders may require that you present other documentation, like W-2s, bank statements, pay stubs, etc.
• Wait for the lender’s approval. If it is a deal that the lender finds satisfactory, then they will inform you of the amount and terms for payment.
• Consult with a lawyer. Make sure that you are legally protected, especially after getting the lender’s counter offer.
• Close the loan. This will be done typically at a title company or a lawyer’s office. The lender will then put the money into escrow at the title company. The title company would make sure all paperwork is completed, and that checks are issued to all parties involved. Additional costs may include any closing fees and property insurances.

More often than not, lenders grant money to properties that will not be in the market for long, that have good selling potential. Make sure your team budgets ample time to complete renovations. There’s no sense in coming up with unrealistic projections. This cannot only set you back financially but possibly burn a possible future relationship with your hard money lender.

Summary

Using hard money lending for real estate acquisitions has become commonplace in the housing sector. If for nothing else, a hard money loan gives investors an edge over those using traditional financing methods. Not only should hard money borrowers be able to secure capital faster, but sellers will also favor their offers because they are made with cash. That said, if you are looking to fund a deal, you may not want to ignore hard money; it could be the one thing that gets you what you need.

Have you ever bought an investment property with hard money? What was your experience like? Feel free to let us know how things went in the comments below.

Dennis  Dahlberg
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

Arizona Hard Money Lending For Real Estate

 

Understanding the basics of hard money lending represents the first step of breaking down real estate financing. Hard money loans are, after all, a real estate investor’s best friend; they are the quickest path to securing a deal. Nonetheless, hard money lending can get complicated quickly, so you need to realize what you are getting into before making any decisions for yourself.

When exploring real estate hard money lending, you need to comprehend several questions: What are the pros and cons of such a strategy? When should you use private financing for real estate? Where can you find hard money lenders for real estate? The more you know about hard money, for that matter, the better. This guide should serve to lay a solid foundation for everything you need to know about one of today’s greatest sources of capital.

What Is Hard Money Lending?

Many investors looking for alternative financing that does not involve their local bank may have heard the term “hard money.” They may have even asked themselves a simple follow up question: what is hard money lending?

Hard money lending is a short-term loan obtained from private investors or individuals, at terms that may be stricter than a traditional loan. Though the terms of this creative financing option may be stricter, this form of private financing for real estate generally has more lenient criteria.

Hard Money Lending FAQs

The Big-Picture Of Hard Money Lending

• Hard money lending is another way an investor can finance their real estate projects outside of the traditional mortgage means. This is a short-term loan secured from private investors or individuals instead of other traditional institutions like banks or credit unions.
• Hard money lending is often used by investors who aim to improve or renovate a property and sell it. Given that you can usually get a loan in a matter of days (as opposed to weeks from banks), this is a fine choice for house flippers and real estate developers. This is also an option for investors who only need to do quick fixes to raise a property’s value, then secure another loan based on the new value to pay off the hard money lender.

Hard Money Lending Vs. Other Lending Types

The main difference between hard money lending and other types of loans is that this type of financing does not focus on your credit history or income as collateral. Instead, lenders will see the property’s value as the determining factor, emphasizing its after-repair value (ARV). ARV is the worth of the property once your renovations are done.

Other differences include:

• Hard money lenders do not invest in primary residences. Owner-occupied residential properties are subject to many rules and regulations, thereby increasing the risk for lenders.
• Hard money lenders do not sell loans to Freddie Mac or Fannie Mae. Often, lenders use their own money or raise it from a pool of investors. The amount they loan is based on their property specialization (if there are any) and the risks they are comfortable taking.
• Hard money loans are short term. You will not have the luxury of 15 to 30 years to repay your loans. Hard money loans are typically needing to be repaid anywhere between 6 to 18 months.
• Hard money lenders have their own lending criteria. A private lender, for example, could be your friend, family, or business associate. As such, they may not have any preset criteria before lending you money, giving you more flexibility in negotiating terms. Hard money lenders, on the other hand, come with a specific set of upfront points, interest rates, and defined durations.

The Pros and Cons Of Hard Money Loans

I maintain that hard money loans represent one of the single most advantageous funding opportunities for investors to take advantage of. Few sources of capital, if any, can compete on the same level as hard money and offer the same competitive edge. It is hard money loans, after all, that many investors must thank for acquiring their deals in the first place. That said, hard money is not without its own caveats. Despite its superior benefits, there are downsides to hard money that warrant the consideration of every investor.

Let us look at the pros and cons of hard money so you can weigh the pros and cons yourself.

Pros

Securing financing with a hard money lending loan offers you a number of benefits, including:

1. Speed: The Dodd-Frank Act is financial reform legislation enacted in the past decade. It came with new regulations on mortgage lending, which means a lot of time (often, months) is needed for an investor to close a loan. On the other hand, hard money lending is fast, as you can secure a loan in days or weeks (depending on negotiations). Time is essential, especially for large development projects, and hard money lending can help speed that process along.
2. Flexibility: Terms can be negotiated with hard money lending loans since you are dealing directly with individual investors. Banks are not as flexible.
3. Collateral: With hard money financing, the property itself is your collateral for the loan. Some lenders even accept other assets, like your retirement account or residential property under your name, as a basis for starting a loan.
4. No “Red Tape”: Getting a loan for an investment property with a traditional mortgage is difficult, if not impossible. Traditional borrowers need to worry about credit score, LTV ratios, debt-to-income, and several other indicators they need to meet criteria for. However, hard money lenders function as asset-based lenders who are more concerned with the property than the borrower’s credentials.
5. Convenience: There is something to be said for the convenience of being able to close with cash. Having to supply a lender with bank statements, income documentation, tax returns, and leases can become overbearing and consume your focus and energy. Hard money, on the other hand, cuts out the middleman and a lot of the headaches.
6. Volume: Hard money lenders allow investors to leverage other people’s money. That means investors could potentially fund more than one deal at a time. Traditional loans will do no such thing. If you want to fund multiple deals at a time, you should really consider a hard money loan.
7. Competitive Edge: Hard money allows investors to beat out the competition, or at least those using a traditional loan. If for nothing else, sellers prefer the two things hard money offers: cash and a timely transaction.

Cons

There are, however, certain disadvantages to using hard money for real estate investments:

• Cost: The convenience that comes with hard money lending may be its primary benefit; however, it is also its main drawback. Given that hard money lenders are at higher risk than borrowers, many may demand up to 10 percentage points higher than traditional loans. Interest rates range from 10 to 15 percent. Expect other fees to be also at a relatively increased rate, including origination fees and closing costs.
• Short Repayment Schedule: A shorter repayment period is the price to pay for being able to get a property listed on the market ASAP. This can be anywhere between 6 to 18 months. Make sure that you can sell the property and profit in the soonest time possible.

Dennis  Dahlberg
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

www.level4funding.comArizona Tel:  (623) 582-4444

 

So, you want to be a Trust Deed Lender?

 Following is some basic information on being a Trust Deed Lender. This information was learned over the past 40 years of real estate investment and some items were learned at a high cost. The guideline provides tips and good advice about how to go about investing in Deeds of Trusts and earning high yields on well-secured first position Loans. Remember, it is your money, you can walk from the deal, and there are plenty of deals out there.

Are you certain that no one needs to ask for a little more cash down payment, and or even some additional real estate equity or additional collateral to adequately secure this Deed of Trust? Ask if they have any other assets to use as collateral for the loan. Motor home? Jet plane? Gold? Diamond? You will be surprised at the answer and sometimes the answer is yes. If they have additional collateral GET IT!

How is the borrower going to pay off the Loan in 6-24 months? What is their exit plan to get out of the deal and pay you back? Sometimes the borrower will say that when the home is finished, they plan to move in and make it their primary home. Will they do a refinance and pay you off? Can they do this?

Ask yourself, can the borrower complete the deal or pay the Loan? Really, do they have the income and cash to complete the deal? If the borrower is in the fix/flip business do they have the experience to get the home completed? Are they going to do sweat equity and do it their selves? Do they have the necessary skills to fix up, market, and sell the home? Where are they getting their money from?

Everyone wants to be in the real estate business of buying and selling homes for profit. It is on TV, radio, and their weekly seminars that will show you how to make big bucks in the real estate market. New investors will go out and buy the property and want you to be the lender on the deal. They want you to be their dream cash provider. As the lender, you need to make certain that you do not get caught up in the hype of making money deals and protect your investment.

Following are some Do not:

• Do not lend to inexperienced individuals. What is experience? Real Estate License, prior flips, contractor license, amount of education (did they graduate from college?)
  Do not’ lend unless they have their OWN cash in the deal. If you are lending 60% where is the reaming 40% coming from? If they need to make improvements, where is the cash coming from? Ask to see bank statements. Maybe they are going to borrow the money on a credit card. Do not lend to them.
• Do not lend if you do not like the property. When you get a bad feeling about this, it is your Guardian Angel talking to you. Listen to the Angel and do not do the deal.
• Do not lend to bad people? What are bad people? The best indication of the quality of the borrower is found in the credit report. Get one and read it. But what is bad? Look at the report and see what is causing the low score. A foreclosure on the record can be scary, but the borrower, maybe starting to improve. When you are looking at the investment, more weight is placed on the Loan to the value and condition of the property. And with a good LTV ratio, you should be adequately protected, but you need to go beyond the credit report. Try to evaluate the ‘moral fiber’ of the borrower. Foreclosure is bad, but are there other items on the report? Did they try to resolve the credit issue or did they ‘skip and run’? Who did they burn? A foreclosure or short sale is common but skipping out on credit cards not paying Pizza Hut for a bad check, or not paying a $25 phone bill, is an indication of someone who really does not care and won’t care about you. Do not lend to low ‘moral fiber’ people.
• Do not lend unless you Google their name. You will be surprised as to what you find.
• Do not lend to relatives or friends. Do not do it.
• Do not lend unless you are certain that the combined total of all real estate Loan proceeds plus any other financing or and other money being released to the buyer in this transaction does not exceed what you would be willing to pay for that property EXACTLY AS IT SITS TODAY??
• Do not lend on Future Value. The future may not come as you expect it. Only lend on current value, not someone’s future dream. What will your equity position be if no improvements are never made to the property? What is value? It is the value of the property? The value of the property is its current value as it stands NOW. Do not be sold on the future improved value. Only lend on what is -- not what will. Borrowers will say for example that when the home is completed the value is $500,000 based on an LTV ratio of 60% so you can lend $300,000. However, as the home stands today, its current value is $100,000.
• Do not lend on future value. Never lend on a promise to do something.
  Remember it is our money you are lending, and you always must consider the worst-case scenario from the borrower. You must be prepared to foreclose and take the assets back to protect your investment. You need sufficient cash reserves to complete the foreclosure and resell the property.

 

Dennis "Love" Dahlberg
Broker/RI/CEO/MLO NMLS 1057378 | AZMB 0923961 | MLO 1057378
9133 W Plum Road | Peoria | AZ | 85383

Dennis Love Company LLC
Arizona Tel:  (602) 529-4800

www.dennislove.com