Tuesday, February 2, 2021

Has your tenant or borrower filed a BK? Are you Screwed?

I have recently had a borrower file a bankruptcy one week after the loan was completed. Now what? I have called my attorney David and asked him what is going on? He said the person filing the Bk is a “serial filer”. He sent me this explanation on the rules and regulations. I am not an attorney and get confused with all this legal jargon. So here is what he said. I have added my comments in Blue.

My recommendation if you are facing a BK proceeding that you work actively with a good attorney, (like David Knapper) and get ahead of the problem.

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A Common Misconception About Bankruptcy

By Attorney David Knapper

Many people assume individuals can file bankruptcy only once every several years. Wrong!

Generally speaking, if a debtor suffers a premature dismissal of a bankruptcy (either because the debtor does not dot all his legally required “I’s” and/or cross some “T’s” or because the debtor voluntarily requests his bankruptcy be dismissed), but then files another bankruptcy, the later bankruptcy invokes an 11 U.S.C. § 362(a) automatic stay commanding almost all actions against this debtor be ceased, and with all actions taken in violation of this stay being not only void, but possibly triggering the violator responsible to pay serious monetary sanctions. It just can’t be ignored that upon the invocation of a § 362(a) stay, any landlord or lender of the debtor is, on most occasions and to their dismay, going to be stuck in the mud. (So what does this mean? It means if a deadbeat that files bankruptcy and screws it up and the court kick it out, (dismissal of bankruptcy) then the deadbeat can turn around and file it again, get dismissed, and file again get dismissed, and again, and again.)

This explains, in part, why in the years 2010, 2016, 2017, 2018 and from January 1 through May 31, 2019, 41,579 (has anyone yet forgotten the “Great Recession”?), 14,657, 15,296, 15,742 and 6,792 bankruptcies were filed in Arizona, respectively.

This also explains why there are serial (not the breakfast cereal type of) bankruptcy filers who abuse the Bankruptcy Code by filing one bankruptcy after another to thwart their landlords and lenders. In fact, this author encountered a debtor (a disbarred attorney) who had filed more than 15 bankruptcies. (This happens a lot.)

Yes, pursuant to 11 U.S.C. § 727(a)(8), a debtor who has secured a discharge order in a Chapter 7 (liquidation) will not qualify for receiving another Chapter 7 discharge until 8 years following the commencement of the earlier bankruptcy. However, § 727(a)(8) only applies when a discharge order was entered in the earlier Chapter 7, and doesn’t prevent a debtor from then filing a “Chapter 20” by initiating a Chapter 13 (consumer reorganization) immediately following successfully completing a Chapter 7. Thus, opportunistic debtors are prone to file multiple Chapters 7 (and/or Chapters 13) wherein they intentionally suffer premature dismissals before discharge orders are entered and/or embark on Chapters 20. Then, do not forget the filing of Chapters 11 (business reorganizations) is also a possibility. (So if they get a Chapter 7 completed, the debtor can turn around and file Chapter 13 and the lender and landlord are screwed again.)

Bottom line: while the Bankruptcy Code does prohibit debtors from securing discharge orders in Chapters 7 more than once every 8 years, only under limited circumstances will the Code keep bankruptcy serial filers in check.

The Bankruptcy Code was amended by the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCA”), which President George W. Bush signed on April 20, 2005 and became effective October 17, 2005. The BAPCA has significance here because it included the adoption of 11 U.S.C. § 362(c), and with § 362(c) designed to deal (although this author respectfully submits, inadequately) with bankruptcy serial filers.

According to 11 U.S.C. § 362(c)(3) and In re Reswick, 446 B.R. 362 (9th Cir. BAP 2011), if a 2nd bankruptcy is filed within 1-year of a previous bankruptcy being prematurely dismissed, then the aforementioned § 362(a) automatic stay only lasts for 30 days from the date the 2nd bankruptcy is filed, unless the debtor proves during this same 30 day period by “clear and convincing” evidence (note: not a simple preponderance of the evidence, but not as onerous as a “beyond a reasonable doubt” evidentiary standard) that the 2nd bankruptcy was filed in good faith, plus if your this debtor’s landlord or lender, you’re adequately protected. (So if they file, the stay is only good for 30 days. What Happened on day 31? So they are just buying some more time to screw the lender? It dies unless they provide clear and convincing evidence?)

According to 11 U.S.C. § 362(c)(4) and In re Nelson, 391 B.R. 437 (9th Cir. B.A.P. 2008), if a 3rd bankruptcy is filed after 2 earlier bankruptcies were prematurely dismissed within the past year of the third, then there is no § 362(a) automatic stay, not even for the first 30 days of the 3rd bankruptcy. However, a debtor can still petition the bankruptcy court in this 3rd bankruptcy to invoke the automatic stay, thereby requiring an evidentiary hearing. (If they are doing a 3rd, does this mean that 1-2 were premature dismissal of bankruptcy because they screwed up? Or How was it dismissed.)

State court judges and justices of the peace, and constables and sheriffs too, handling evictions may not grasp the significance of 11 U.S.C. § 362(c), but thankfully, § 362(j) entitles landlords and lenders to secure “comfort orders” from bankruptcy judges adjudicating no 362(a) automatic stay exists, provided a § 362(c) scenario exists. Moreover, Section 105(a) of the Bankruptcy Code also supplies bankruptcy judges with discretion to issue comfort orders. Compare Marrama v. Citizens Bank of Massachusetts, 127 S.Ct. 1105 (2007) (recognizing broad authority granted to bankruptcy judges to take necessary or appropriate action). (How do you file a comfort order? Does the lender have to hire an attorney and argue before the judge? If the comfort order is granted does this mean the landlord can now evict or the lender can foreclose? How hard is it to get a comfort order?)

Additionally, we also have Local Arizona Bankruptcy Rule 1017-1(e), which states a bankruptcy judge may dismiss a bankruptcy, with prejudice, by prohibiting a debtor from filing another bankruptcy for 180 days, and automatically assigning to the same judge any new bankruptcy filed in violation of this prohibition.

It also can be argued that 11 U.S.C. § 105(a) and/or a bankruptcy judge’s “inherent power” permits a judge to practically do whatever he feels is necessary to end abuses of the Bankruptcy Code, provided that which they do does not violate any explicit provision of the Code. See Law v. Siegel, U.S. 134 S.Ct. 1188, 1194 (2014).

But again, individuals definitely can file bankruptcies, and use them for their benefit and to the detriment of their landlords and lenders, several times more than just once every 8 years. Moreover, this author has found that rarely will a bankruptcy judge enter an order keeping a serial filer in check without some landlord or lender having to not only request the judge intervene, but also, incur substantial attorneys’ fees while establishing this request warranted. (So, if they are a serial filer, the deadbeat can do it over and over and over again. How long does it take to get it premature dismissal of a bankruptcy and who requests this action? Once dismissed the deadbeat can walk in again and file it again and have another 30 days. Get dismissed and do it again, and again? And even if you get a judge to do Rule 1017-1(e),..they can do it again in 180 days?)

A landlord whose tenant and a lender whose borrower, has previously filed bankruptcy should not be surprised if they end up embroiled in a subsequent bankruptcy.

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You would think that the deadbeat would occur come costs from doing this over and over again, if they do it yourself what is the cost? But if they hire an attorney, they will cost them more and more. I had a borrower who did it themselves, but failed to pay the fees, Dismissed, so could she filed file it again and not pay the fees get dismissed, and do it again?

You can contact David Knapper at 602-252-0809

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

About: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years. © 2020 Level 4 Funding LLC. All Rights Reserved.

Friday, January 29, 2021

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.

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.

Wednesday, January 27, 2021

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.

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

Saturday, January 23, 2021

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.

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:

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.
Flexibility: Terms can be negotiated with hard money lending loans since you are dealing directly with individual investors. Banks are not as flexible.
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.
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.
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.
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.
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.

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 Company LLC
Arizona Tel: (602) 529-4800

www.dennislove.com

Thursday, October 15, 2020

Home Building Frame Plans Home Construction Fix and Flip

Tuesday, September 29, 2020

Best Strategies For Raising Real Estate Capital

Techniques & Strategies For Raising Real Estate Capital

Owning real estate has become synonymous with the American dream, and for good reason; almost anyone can do it. What is more: real estate is one of the best investment opportunities for individuals wishing to achieve financial freedom. The housing sector has continued to perform at a high level, and there are no reason people cannot get it on the action. All you need to get started is the right amount of passion, due diligence, and a sound real estate education. The last element missing from that list is capital. Have you ever wondered how to raise capital for real estate?

While capital is necessary to invest in real estate, there is no rule to suggest the money must come out of your pocket. You do not have to invest any of your own money at all. It is entirely possible to invest in real estate solely using other people’s money, or what I like to call OPM.

Having said that, if the money is not yours, to begin with, you must devise a strategy to attract investors who may be interested in funding your real estate ventures. To do so, you must learn to sell respective investors on yourself as much as the prospective property you are trying to take on.

The reality is venture capitalists are ready and willing to lend their money to those who can give them a solid return. Your mission, should you choose to pursue real estate investing, is to convince these investors that you can provide a solid return. Often, venture capitalists will gauge the viability of investment on one thing, and one thing only: you. As the person asking them for money, you must be ready to convince them beyond a shadow of a doubt that you are worth their time and money. Keep reading to learn more about how you can raise capital for real estate.

What Are Real Estate Ventures?

Real estate ventures are exactly what they sound like: entities that play an integral role in the development and financing of most large real estate projects. Joint real estate ventures, on the other hand, will witness two individual parties’ team up to take on a single project.

Investing in real estate ventures is one of the most profitable businesses among global investors. Real estate ventures can provide you several benefits including:

ü Equity for the future

ü High return on investment

ü Cash flow for retirement

ü Strategy for college funds

ü Hedge against inflation

ü Depreciation tax breaks

ü Property appreciation

ü How To Raise Money For Real Estate Investing 6 Different Ways

Real estate ventures need one thing, perhaps more than anything else: funding. Raising money for real estate deals is of the utmost importance, and it can be argued that it is the foundation of every deal. Therefore, investors must familiarize themselves with the most efficient ways to not only receive appropriate funding but also gain access to it in a moment’s notice. Note that learning how to raise capital for real estate is not as hard as it may seem — you just need to know where to look.

While there are plenty of ways to secure working capital, there are six sources investors have come to rely on more than any others:

ü Private & Hard Money Lenders

ü Self-Directed Accounts

ü Private Placement Memorandums

ü Wholesaling

ü FHA Investment Loan

ü Peer-to-Peer Loan

ü Private & Hard Money Lenders

Hard money lenders are organized semi-institutionalized lenders who are typically licensed to lend money to those in need. Private money lenders, on the other hand, are individuals with access to capital and a penchant for investing it. While these two types of lenders exercise subtle differences, they are unquestionably the most popular source of funding for today’s real estate investors. If for nothing else, these alternative sources of funding have become the easiest and most direct source of capital for real estate investing.

As their names suggest, private and hard money lenders are not associated with institutionalized banks, and therefore are not subject to nearly as much “red tape.” Instead, these lenders tend to work for themselves and are usually actively looking to lend out their funds to those in need. Thanks to their alternative nature, these lenders can award investors with short-term, high-rate loans based primarily on the subject property. Otherwise known as asset-based lending, private and hard money lenders will base their decision to lend money out on whether the property in question appears like a worthy investment. That means investors do not need to have a perfect credit score to receive approval, but rather a good work ethic with an even better subject property.

In return for granting access to their capital, most private and hard money lenders will ask for approximately twelve to fifteen percent in interest, and perhaps even a few additional points (a form of prepaid interest). Understandably, their rates are much higher than traditional banks (nearly three times higher), but these lenders can award investors with almost immediate access to capital. Banks, on the other hand, may take a long as one to two months to provide funds. In the time it takes to receive money from a bank, most opportunities are already lost. Therefore, the speed of implementation granted from private and hard money lender has made raising capital for real estate deals much easier than in years past.

Self-Directed Accounts

As perhaps the most overlooked—and perhaps even underutilized— source of capital, retirement accounts have served as an incredibly trustworthy source of funding for many of today’s real estate ventures. If for nothing else, far too many investors are unaware that they can even use their 401(k)s and Individual retirement accounts (IRAs) to invest in real estate. For what it is worth, the Internal Revenue Service (IRS) allows qualifying account holders to self-direct their savings into real estate investments without any sort of early withdrawal penalty. Of course, the account must be held by a custodian that allows account holders to self-direct their assets.

In the event their account can be self-directed, investors may use the funds in their retirement accounts to buy real estate. That said, any of the profits made must be returned to the account from which they originated. However, the profits will be permitted to grow tax deferred. Therefore, investors will not be able to spend the money immediately, but the resulting tax shelter can increase their profits.

Private Placement Memorandums

Easily the most misunderstood strategy for raising capital for real estate investing, private placement memorandums are, nonetheless, a great source of funding. As their name would leave many to believe, private placement memorandums are like private offerings. More specifically, however, a private placement awards real estate entrepreneur the ability to raise capital by selling securities to other investors.

Wholesaling

While not traditionally viewed as a source of funding, the practice of wholesaling has developed a reputation for awarding savvy investors with relatively quick funds. Perhaps even more importantly, utilizing the assignment of contract strategy may not even require any upfront funds. Executed perfectly, it is entirely possible to make money on a wholesale deal in as little as a few hours without using any of an investor’s own money. That said, wholesaling is an exit strategy, and is by no means guaranteed, but with proper knowledge of the industry, a promising subject property, and a dependable buyers list, wholesalers may be able to flip a few properties and invest the proceeds in a rehab. While not a traditional source of funding, wholesaling will certainly help investors interested in raising capital for real estate deals.

FHA Investment Loan

FHA loans are backed by the Federal Housing Administration and were created to help low to middle-income Americans purchase houses. Given their original purpose, you may be wondering: can FHA loans be used to invest in real estate? The answer is yes. FHA loans can be used to invest so long as the property serves as the applicant’s primary address. Essentially this means using an FHA loan to buy a multifamily property and living in one unit while renting the others. These loans can provide a unique opportunity for buyers willing to live on-site to begin generating rental income. As far as specifics go, FHA loans do require a credit score of at least 580, as well as a down payment of around 3.5 percent.

Peer-to-Peer Loan

A peer-to-peer loan is exactly what it sounds like: one investor loaning funds to another. This setup has become increasingly popular in recent years as more and more investors try to reap the benefits of real estate investing. Peer-to-peer lending typically takes place in an online marketplace setting. With most forms of real estate capital, the loan amounts, interest rates, and requirements will vary from lender to lender (and in this case platform to platform as well).

There are a few things to keep in mind as you learn more about the various platforms available. Always research data security, origination fees, and payback periods when considering your options. Research the details carefully to find the right platform and investor for your deal. Some examples to help you get started including Fundrise, Realty Mogul, Groundfloor, and Fund That Flip.

How To Secure Real Estate Investment Capital

Raising capital for real estate deals requires investors to know more than where to find sources; it also requires them to know how to secure the money once they know where to get it. Consequently, once investors have learned where to find the money they need, they must then learn how to appeal to those who have the money the need. Again, there are countless lenders simply waiting to lend their funds to today’s investors. However, it’s up to the investor to prove they are worth the investment.

Let’s take a look at some of the most important characteristics venture capitalists and private money lenders look for in those who want to raise capital for real estate ventures:

Show off your experience

Define your team structure

Explain the benefits of the opportunity

Seasoned Experience

It should go without saying, but the more investors are comfortable investing in you as a person, the more likely you are to receive capital. Experience goes a long way in establishing credibility, and therefore in raising capital for real estate investments. Nothing can instill confidence in those parting ways with a large sum of money than experience; the peace of mind it creates cannot be underestimated.

However, experience is not something every investor has the luxury of boasting. New investors, for that matter, have essentially no experience to offer at all. With that in mind, how can new investors compensate for a lack of experience?

It is important to note that even the most successful investors were once “green” behind the ears; nobody can boast years of experience right out of the gate. New investors are therefore advised to compensate for their lack of experience with preparation, knowledge, and acute attention to detail. You would be surprised at how far a little due diligence and drive can take even the most inexperienced investors. At this point, you must carry yourself with confidence; do not let your experience, or lack thereof, take centerstage on a given deal.

Venture capitalists and money lenders are looking to work with those that they feel comfortable giving their money to. If you cannot convince them with years of experience that you are the horse to bet on, do so by giving them peace of mind. Prove to those you are looking to borrow from that you have done your homework.

Team Composition

The best investors know real estate is a people business. Every single transaction requires the cooperation of at least two parties, if not more so. That said, if you want to learn how to raise capital for real estate ventures, you must work well with others, especially your team.

Private money lenders will place an emphasis on the rapport you have with your team, and for good reason. A competent team with the right leader is capable of just about anything. But what makes a competent team? What will money lenders look for in your team before they decide to give you the capital necessary to fund a deal?

Learning how to raise capital for real estate ventures starts with your team composition. Before you even consider asking for money, see to it that your team exhibits the following qualities:

Passion: The best teams exhibit a passion that is contagious. However, it is important to note that passion starts at the top and trickles down. To lead a passionate team, you, yourself, must be passionate about your future endeavors. Let people know how excited you are about the future of your company, and I guarantee people will be intrigued by the idea of working with you. At the very least, they will know your heart is in the right place.

Tenacity: Not all that dissimilar from passion, tenacity compliments passion and gives entrepreneurs the stamina to see their vision through to the end. Some say tenacity is all that separates a good investor from a great one. While the verdict is still out on that, there is no doubt in my mind that an inherent team tenacity can go a long way in convincing others to work on your behalf.

Flexibility: Entrepreneurs who are not flexible are inherently rigid. That said, rigid investors are more prone to suffering from complications because of their inability to adapt. Flexibility, for that matter, awards investors the opportunity to think on their feet and roll with the punches. The most prominent entrepreneurs of our time have all demonstrated an ability to be flexible; nothing has the power to mitigate risk quite like the ability to adapt to changing circumstances.

Commitment: Few things are more important to an entrepreneur than his or her team, and few things are more important to a team than commitment. Without commitment, even the most talented real estate teams can fall apart. As an investor, it is in your best interest to elicit unwavering commitment from those you choose to work alongside. At the very least, I can assure you potential investors will want to see a certain level of commitment from those they are entrusting their money to.

Teamwork: Otherwise referred to as chemistry, teamwork is essentially the barometer by which most outside investors will make their decision. A team that can work together without getting in its way is a force to be reckoned with, and venture capitalists are more than aware of its power. Prove to investors that you can work well with others, and they will most likely want to work with you.

“Coachability”: In my opinion, if you are not coachable, you are ignorant. For what it is worth, the smartest men are the ones who know they do not know everything. Humility can go a long way in gaining the trust of others. If you are willing to not only learn, but also admit when you are wrong, you will open a whole new world of working in tandem with others.

Knowledge: Perhaps more so than any other characteristics on this list, knowledge is power; it is your most important asset. Knowledge will see to it that everything is in working order. If for nothing else, a sound real estate education is the single most important trait a team can boast.

Opportunity

Again, one of the best ways to raise capital for real estate ventures is to convince money lenders that you are worth their time. For what it is worth, nothing will convince lenders to give you money faster than the opportunities you present to them. More specifically, the deal you are looking to fund should elicit some excitement. Remember, you are the one raising capital for real estate investments. It is up to you to make sure they want to lend you money. The house you intend to invest in should do most of the work. That said, run the numbers yourself and provide lenders with a reason to believe their money is not better off being spent elsewhere.

At this point, you will want to be upfront and divulge your intentions. Tell them how much you are looking for, and what an investment in your business could potentially return. Leave no stone unturned, as smart money lenders will want to mitigate their risk as much as possible. If they are asking questions you do not know the answer to, you have a lot more work to do. It is up to you to account for everything on a deal. If you can prove to them that you have dotted all your I’s and crossed all your t’s, the right opportunity will sell itself.

Investing in real estate successfully will require you to mitigate risk, and private money lenders are no exception. They are not in the business of throwing money away. They will want to make sure the opportunity you present them is a sure thing.

Summary

Understanding how to raise capital is an integral step to achieving financial freedom through real estate investing. Many investors focus so hard on highlighting properties, that they forget to present their strengths. While the property in question is technically what venture capitalists are lending money for, it is only a fraction of the total equation. Learning how to raise capital for real estate comes down to learning how to present yourself and your investing business. The key to financing a deal is demonstrating how you will take care of their money and return it with interest.

Is a lack of funds keeping you

from investing in Real Estate?

Do not let it!

Dennis Dahlberg

Broker/RI/CEO/MLO

Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

Learn To Be A Fix & Flip Investor

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Thursday, October 15, 2020

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Tuesday, September 29, 2020

Best Strategies For Raising Real Estate Capital

Techniques & Strategies For Raising Real Estate Capital

What Are Real Estate Ventures?

Self-Directed Accounts

Private Placement Memorandums

Wholesaling

FHA Investment Loan

Peer-to-Peer Loan

How To Secure Real Estate Investment Capital

Seasoned Experience

Team Composition

Opportunity

Summary

Is a lack of funds keeping you

from investing in Real Estate?

Do not let it!

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