Georgia FHA Home Loans - (& Opinion)

One of the more frequently asked questions from new investors and real estate agents is, "What is hard money?" The answer is much less mysterious than when and why to use hard money. Hard simply means it is tied to a "hard" asset such as real estate, gold, silver, etc. For our purposes it will be tied to ... real estate.

Hard money, since it is tied to real estate and not so much the borrower, is generally loaned at a lower LTV (Loan To Value) than conventional funding but does not place as much weight on the borrower's strengths. It is not generally true, however, that "just anyone" can get a hard money loan.

Hard money lenders, like me, want to know these things:

(A) Is the value in the property real?
(B) Does the borrower have any history in real estate investing and rehabbing?
(C) If the borrower defaults will I be able to take over the project and make a profit?

That, in a nut shell is what we look for. Let me add that it may be easy to fool conventional lenders on price if you can get an appraiser to play ball but on most hard money loans the lender will actually drive out and look at the property, compare the construction cost estimates to their own knowledge and make the determination of values and the lending decision on their own. While we do employ professional appraisers even then we will drive the property ourselves.

Hard money costs more than conventional money for several reasons not the least of which is that this is a high risk lending game. While some lenders, such as my Novation, will lend for as little as two points (percent of the loan amount) and then interest only payments of prime plus one percent. That is bottom pricing - it goes up from there based on risk. Generally for an applicant to qualify for the type of hard money financing listed above they would need to be prequalified for a "back end take out" or "take out" loan (industry terms for refinance) as well as have a decent credit score (640 or higher middle score - not BEACON ... MIDDLE) enough assets to pay the payments for six months, etcetera. However for qualifying applicants the loan can go as high as 100% of the acquisition and rehab costs so long as that number is not higher than 80% of the ARV (after repair value).

Many hard money loans require as much as five or six points at inception and the interest rate is as high as 15 or 16 percent interest only. Those loans generally do not require as much borrower qualification as they do property qualification. They also are limited, generally to 70% or even 65% of the ARV - but that lowers the lender's risk and the lender is more likely to make the loan if they know they can recover the property and still stand to profit.

Who are hard money lenders? A hard money lender may be your next door neighboor who works for the Fire Department or the couple down the street who retired and have a strong credit line. Hard money is generally borrowed from a bigger lender, like my Novation, and then re-loaned to the investor who wants to make a small purchase/rehab for flipping.  Even you can be a hard money lender if you have a line of credit or HELOC of at least $250,000 or more. I do have a seminar on Becoming A Hard Money Lender.

When you really need the money fast and you may not qualify through the bank or the property/project may not qualify through the bank you can consider hard money. Hard money, the higher cost loans, generally requires much less paperwork than conventional lending and does not generally go through an extensive underwriting and quality control investigation. The lending decision is usually made by the person who answers the phone when you call. This can speed the process.

Hard money lenders generally do not care if the property is in terrible shape and will need to be completely rebuilt but they may require building permits, insurance policies and builder resumes. The more the lender can limit their liability the more likely the borrower is to get the loan.

As a real estate agent you should always know a hard money lender you can trust - and one with deeper pockets. A line of credit of $1,000,000 or more is much better than $250,000 (duh) because the latter can be loaned out in a matter of days. Then the lender has to wait for the loan to be repaid, generally in six to twelve months, before they can relend. Hard money loans are generally not sold secondarily and the lender "holds the note" until the loan is closed.

One major disadvantage to most hard money loans it the time period. Many lenders will only lend for 90 or 180 days and if you do not repay they consider the loan defaulted and seize the property. Since you cannot refinance a vacant, incompleted rehab with the vast majority of banks and conventional lenders you either have to (a) refinance your primary and pay of the hard money loan, (b) find a secondary hard money lender who will lend enough to repay the initial hard money loan (c) beg the lender to re-originate the loan or (c) just give the property to the lender. Most hard money lenders really do not want the property ... they just want their money ... so chances are even the lender who is playing "hard ball" will allow you to re-originate and extend the loan period another 90 days or more.

If you cannot find a hard money lender in your community you just need to search a little farther. Be careful of national level hard money lenders who say they are lending at two points and prime plus one. What you will often discover is that they are charging two points inception fee in addition to regular closing costs which may include another two points origination. But if you really need the money and the deal is a viable profit opportunity pay the piper! You either use your own money or someone else's and unless you have bundles and bundles it almost always makes sense to use someone else's. Why? Because if you spend yours (bury in the walls of an investment property) you just limited your ability to make subsequent acquisitions!

If you know of a hard money lender in your community please let us know who they are. If you have any questions about hard money please post them so others can have the answer too!

I do not recommend hard money if you know you are going to keep the property long term unless it needs major rehab. Small rehab costs may be handled "out of pocket" costing you less in the long term than short term hard money acquisitions costing thousands in inception and interest fees. If you aren't sure ASK! Even if I'm not your lender I will still advise you on any investment deal. 

Do not start looking for acronyms 1 through 11 here on ActiveRain just yet. This is acronym #11 from my staff sales meetings in 2006. It just ocurred to me today that a wider audience may also benefit from or add to the power of acronyms and power phrases we use regularly around my office. So please do so! I love hearing from you fellow Rainers.

What makes acronyms so powerful is that, when they are accurate and not just cute, they help you remember a process or a pattern which has led others or yourself to previous success. Power phrases we find are more for getting yourself excited or getting your prospects on board where the acronyms we use are generally for remembering processes.

Acronyms That Work #11 is certainly no acception but it is not a true acronym in the sense that it does not use a word broken down into individual words using each letter of the acronym as the initial letter of the words in the list. Not exactly, that is, but in a method it does play off on 4D.

4D should be better than 3D, right? They tell us now that we no longer live in a 3D world but rather a multi-dimensional plane of existence. All of that really doesn't matter unless you depend on one of the "unknown" dimensions to function. Perhaps the ActiveRain dimension?

Ken, you're babbling, get on with the show!

THE FOUR-D METHOD

Discuss - have an open dialogue with your prospect. Ask questions that lead to the answers you need to know. Be prepared to listen but avoid questions which require an essay to answer. MAKE NOTES! I use an Olympus digital recorder and I say, "Instead of bothering you with my slow note taking, do you mind if I record what we say so I can transpose it later? I don't want to miss anything important."

Determine - after having listened to your prospect determine what you will recommend to them. If you are a loan officer you should have a good idea of which lenders and which programs you are going to recommend to the prospect. If you are an agent you will likely need to do your homework before you get back to your prospect with choices.

Decide - let your client decide which direction they want to go based on the information you have given them as a result of the first two steps. If they cannot make a decision they may just need more time or you may have to revisit step one and maybe even step two.

Deliver - now that you and your prospect have discussed their needs, you have determined which solutions to offer and they have decided on which way to go it is your time to really step up to the plate. If you have successfully completed the first three steps then it should be simple to deliver the service to your prospect who is now your client.  

Often my writings include inverted viewpoints and inverse thinking to prove the positive side of the same issue. Normally motivational speakers and authors present facts from the positive side. In doing so repetitively and with great frequency some readers may have become numb to the power phrases heard regularly. So here is a bit of inverted thinking from the opposite side of sales motivation. While I am a lover of "do's" I am also guilty of "do not's".

1. Do not return phone calls or emails. This works. If you really want to blow an opportunity just fail to communicate. Yes, I have had success in killing opportunities using this method. Like most methods this does not require any special skills, tools, education, or practice.

2. Challenge your contact on their conversation points. The louder and more boisterous you can do this the more accomplished you will become at this method. Again, I have been guilty of this method and it worked superbly. One very busy afternoon I received a call from a man identifying himself as Dr. Such So. When he asked what we do I began my diatribe on how no other team compares with mine and adding, in fact, none come close. Talk about a home run! He thanked me for my time and disconnected the line never to return.

3. Purposefully provide misleading information. Loan officers (not you, of course, you are a part of Active Rain) like your competitors regularly quote rates or closing costs even prior to accepting and evaluating an application. Many times we have lost applicants to other companies only to have them return two or three weeks later because our seemingly higher costs and rate were accurate.

4. Continually be late with meetings or communications. There was a former employee at Novation whom I truly liked. He was very outgoing and loyal to the company. His favorite technique for killing deals was to return calls two days later instead of two hours later. This method is effective of killing deals but it is slow and painful.

5. Lie about what you can do or what you have done. This method differs from item number three as demonstrated in this example: Having forgotten to meet a client at a specified time tell them you in fact were there but you must have been on the other side of the restaurant. This has happened to me where someone I had been scheduled to meet did not show. They still call looking for my business. 

6. Turn the deal over to your new assistant who has no more business handling the client than I do flying the Space Shuttle. Here again yours truly is guilty of having done this. In the end I was able to save the client although it was too late to save that deal. 

7. Talk the prospect into a state of dazed confusion. The most effective application for this technique is to talk over your prospect or to answer with a story length response having little or nothing to do with the required response.

8. Meet your prospect at the local bar and get blasted. While many have employed this method it is a great way to kill any deal. While not guilty of this myself I have seen it happen. This means during working hours, after working hours and even, heaven forbid, before working hours!

9. Curse, tell off color jokes, downtalk your co-workers, talk about religion or politics. This method is really one method with multiple techniques each of which may be very effective. Even if your prospect is engaging in these tactics you leave them alone.

10. Threaten your prospect. Not too many years ago there was a real estate agent from a certain very large brokerage with a highly recognizable national name which soars above the rest who not only threatened a mutual client but threatened my wife. The client still works with me, by the way.

If you want more methods for killing deals just try a few on your own time.  

It is true. Active Rain has changed my life.

I joined back in July and immediately fell into the community spirit. Since then I have spent at least 30 minutes of every day reading postings and checking to see who the new members are and if there are any from my area.

I've spoken to a few other members on the telephone, received emails and phone calls from non-members who have read my posts and even met a few members in person. There have even been members and readers who have attended my seminars and for that I am grateful.

Since joining AR my other blogs have suffered because I've posted here almost exclusively. Please don't take this the wrong way but this is a great forum for testing content for articles I submit to print publications and even a wonderful testing ground for seminar content.

Here I get instant feedback. If I touch a nerve - I know about it. If I hit on a good topic and one of the staffers picks up on it I get a featured posting and I know that's a good subject for one of the magazines or for my own seminars.

Active Rain has restored my faith and confidence in my industry that we can play nicely together. Some other blogs in which I have participated are nothing more than "digital food fights" or worse yet - "digital drive by attacks". Any posting there would almost always result in pages of flaming. Anytime I visited I felt "yucked on" after leaving. In fact every time I posted I would wait two weeks to return so my blood pressure wouldn't go up!

NOT HERE! Not on Active Rain! Oh sure I have had some intense exchanges of ideas with some other posters but it has made me, and hopefully them, stronger in our convictions and more prepared to do our business.

So here's my salute to Active Rain and all of you members and lurkers. Let me encourage you to get involved and post to your blogs because you all have something valuable to add to this community. And be sure to comment on the blogs you read so others can see how they fit into the community. Not posting comments is selfish in a way because we in the business and community really want to know if others who may be more experienced or educated than we agree or disagree with our own viewpoints and why.

Three cheers to you all!

Since comparing everything to Starbucks (affectionately known around my house as Star-yucks) seems to be one of the better ways of getting the message through here it is.

The statement from the client: I know the appraised value is way too low! The house down the street sold for $400,000 and it doesn't have tile floors or solid surface counters! And we have a finished basement. Why is mine only valued at $360,000? I have a nicer home!!!

Picture yourself standing in line at Starbucks looking at the menu. Frozen drinks are one price, hot drinks another, and ice cream and bottled drinks have other prices. Even among hot drinks there are lattes, coffees, espressos, and coffee alternatives like chai latte. Then to really take it to another level you have tall, grande or vente.

Now among espressos there are multiple choices such as straight espresso, espresso machiato and espresso con panna. Why is it that an espresso straight and an espresso with cream or foam is the same price? This is comparable to houses of comparable size but one has solid surface counters and tile floors instead of vinyl. Hint: appraisers don't get to go inside of your neighbor's house - only yours. The appraisers have no idea what the inside of the comparable looks like - they can only go by recent sales. 

One very important thing to keep in mind that is with each drink the larger the size the higher the value although a vente iced white chocolate mocha sells for more than double the price of a vente Tazo iced white tea. Compare this to homes of the same size but different external constructs such as four sided brick compared to vinyl siding. 

Keep this in mind also: In the Atlanta area if any one wall of a room is "below grade" it is limited in the value that can be allowed for those square feet. So if the maximum allowable for "below grade" square footage is (for example) $30 it doesn't make much difference in the overall valuation of the property.

Comparables are considered by (a) most recent sale of the (b) most comparable property in external construct and overall heated above grade square footage and (c) the number of beds and baths. 

So what about Automated Valuation Models? Would you go to MacDonald's and look at the menu to get a price on a Starbuck's menu item? Or would you expect a website with a copy of the Starbuck's menu from 2004 to provide a reasonable 2007 value?

Lenders like Novation depend on credentialed real estate appraisers to provide accurate values based on several tasks which they perform over a several hour period. I recommend you do likewise. If you really want to know the value of your property hire a professional, certified appraiser.

Over the past three to four years the housing boom and the refinance boom saw hundreds of thousands of American homeowners and investors jumping into homes they could ill afford at the time and now that two year ARM and three year ARM loans are starting to adjust upwards these homeowners are feeling more than a little pinch. One time aspiring homeowners and investors who jumped in with ARM or IO (Adjustable Rate Mortgages or Interest Only mortgages) are now completely upside down in properties that are negative cash flowing and in many areas of the country in a price correction downswing leaving them as far as 30% or more negative from debt to value.

For example in Port St. Lucie, Florida, there are literally hundreds of homes with loan payoffs in the 300k to 400k range with actual current values in the 250k to 350k range. If a lender chose to foreclose on one of these properties they would never sell it at the payoff value so would have to take a loss on the market. The down side to the lender is that the lender now has a black eye because it made a loan on which it later had to foreclose.

A little known fact to most people, at least outside of the industry, is that the lender suffers from foreclosing on homes in more ways than one. To fully understand how the lender suffers you need to know what happens on the lender "side of the fence".

Firstly, many lenders are not "Direct Mortgage Lenders" (DML). Instead they make loans from a warehouse line of credit. In order to keep that warehouse line free and clear so they can make more loans they have to sell those loans on the secondary market as quickly as possible. Secondary market buyers include all types of people and companies including DML companies who have enough assets to portfolio (hold) the loans they purchase from other lenders (Countrywide, NovaStar). Other secondary market buyers may include the retirement fund for your local firefighter's union or even the unassuming fellow down the street who drives a 1992 Volvo but holds $2,500,000 worth of Mortgage Backed Securities (MBS). You can even buy a mortgage note if you have the cash to do so.

Mortgage Lenders are rated "on the street" by secondary buyers. A lender who continually sells loans which perform well has a higher rating than a lender who sells loans which do not perform well. Lenders who originate loans (it's still the originating lender even if a broker actually originated the loan and sent it to the lender) which go into early payment default or the dreaded first payment default lose their rating and cannot sell their loans as readily as they could before the default.

Lenders who sell on the secondary market like my Novation depend on what is called lender yield to earn an income. If that lender has a high rating and has originated only well performing loans they can price their loans for a higher yield than a lender who has a lower rating. In fact some lenders submit so many poorly performing loans that they can no longer sell for a profit and must close their doors.

Lenders need to sell the loans with a high enough yield to cover the cost of doing the loan which includes any commission or "Yield Spread Premium" (YSP) paid to the broker and enough to continue doing business so sales of 105 or 106 or even higher are commonplace. Sales of 103 or less could be harmful to the lender and obviously a sale of 101 or lower would eventually put them out of business. Those numbers are a percentage of the loan amount. In other words a loan of $100,000 needs to be sold on the secondary market for at least $105,000 (105) to make sense. (It is beyond the scope of this posting to explain why that can be done but just remember that interest is front loaded on mortgage loans and it should make sense to you.)

Having written all that I can now demonstrate why Short Sales make good sense for lenders. A lender will lose money on a short sale to keep from having a foreclosure on their books so their rating doesn't go down as sharply as it would for a foreclosure. The lender takes the loss on a short sale; the investor takes the loss and downgrades the lender on a foreclosure. (I won't take the time to talk about the caveats of other events or procedures in this article so if you are familiar with lending and secondary marketing I know you are think, "Right, but Ken; what if .....?")

The key to successful short sale negotiation comes in having access to or business partners with access to AVM (the type used by lenders), contact information at the lender for the appropriate department or even person, knowing the necessary timing of when to start a SS negotiation (i.e. Do you have an NOD? What is the payback power of the home owner? etc.) 

If you don't know everything you can about Short Sales next summer is too late to learn because your competitors will beat you to the punch. Already today I've had two calls from client's needing to Short Sale. There is a set of rules and procedures necessary to negotiate a short sale. Look around and see what kind of information you can find. Start here and do some searching on your own.

SHORT SALES QUICKSTART ONLINE WORKSHOP

Happy helping people! 

I MUST CLOSE THIS YEAR! 

If the deal has not already been submitted to the broker/lender and it is a purchase I would say you are out of luck. However if you have the appraisal and it is in the broker's/lender's name, the client does not have any credit issues, the title search has been done, you already have the homeowner's policy in place, and the lender has already okay'ed the closing date you should be fine.

What we have already had this week (today) is people calling and absolutely MUST close by the end of the year and they have just now made an offer. Sorry folks, it's a 99.5% surety that it will not close this year. 

I know you have been spoiled by people who say we can close a loan in 48 hours - maybe if it is a refi and the value is there and there are no credit issues or property issues yes. But for a purchase the very fastest you can reasonably expect is seven to ten days so long as the borrower, seller, the closing agent, the insurance agent, the appraiser, the borrower's employer (VOE) and current landlord/lender (VOR or VOM), and a small handful of other folks are on the ball - yes! It can and has been done. Our most recent quick closing went from submission to close in six working days and we have done some in as few as four or five working days. But that is not what you should regularly expect on a purchase from anyone - especially if the property is REO or HUD.

REO you can add at least five days and HUD I recommend adding 14 days. Generally 21 days is safe so long as everyone listed above does their job but 30 calendar days should always do the trick unless there is information being omitted, withheld or otherwise distorted. The preceding statement is true on most botched closing dates.

BUT AS FOR THIS YEAR

If you absolutely need to close by the end of the year and you are just now submitting or accepting an offer it probably needs to be a cash deal. There are only four days left this week and only four days available next week. Thefour days next week will be difficult because some people will not be open at all and those who are will be short staffed. 

When looking for investment opportunities I sometimes I find myself driving, alone, to areas well off the map for my in-car GPS. I may not see another car for miles especially in remote areas of the North Georgia mountains. A little fog and a little ice or even water on the road could be a formula for disaster on some of those winding mountain roads miles from the nearest town and who knows where I may find the nearest occupied home. 

Even though I always tell my wife and at least one person at my office where I am headed and my general route that may not be enough. 

The winter months bring more deaths from stranded motorists and lost weekenders than any other time of the year. Please take the time and make the investment in your life and your family's lives to consider always having each of these six items in your car or camping gear. I keep them all in a 10 gallon plastic storage box in the trunks of my cars.

Personal Locator Beacon - Your cell phone can be used to track you most places you'll be going but once you get out of reach of cell towers your cell phone is no good unless Search And Rescue (SAR) is in your immediate area and can pick up your ping signal. Then, unless they have triangulation equipment they'll only know they are near you. A PLB will alert SAR automatically. SAR will be able to pinpoint your location within about 5/100's of a mile or roughly 200 feet. That's close enough to hear movement and give an audible and visible signal. Keep at least three days worth of replacement batteries with the unit. This is by far the most expensive item in this list but what is your life or the life of your family member or friend worth?

Survival Blanket - Each member of your party should have one of these moisture proof, reflective blankets on their body at all times during your trip. These are not designed to be "snuggy" comfortable blankets; they are designed to help save your life. They function by reflecting back up to 80% of your body's natural heat. Exposure - hypothermia mainly - is a leading killer for stranded or lost people. This alone may be enough to save your life.

Survival Food - Many distributors even have "food tablets" which can provide you with enough energy to keep strong and alert until you are encountered by SAR. In your vehicle this time of year you should always keep at least one gallon of fresh water, a couple of boxes of breakfast bars, a couple of bags of trail mix with dried fruits, and even a bottle of multi-vitamins to help sustain you in the event of an emergency. I strongly recommend no less than five gallons of water. It takes up very little space when stored in a collapsible container and can be a life saver all on its own. I have had to walk seven miles for water and carry it back to my party in one of these - it was heaven!

Water Purification Tablets - These are cheap. I mean you can get enough to purify 50 gallons of water for about ten dollars. This will purify almost any water that is not polluted with chemicals or oils - follow the directions on the packaging. These don't generally expire and many don't leave a "chlorine" taste at all.

Survival Knife - Many people are afraid of these things but I wouldn't feel right without mine. It can cut almost anything and leave a sharp edge but in the event it loses its edge there is a sharpening stone in the handle. One side is a sharpening stone and the other side is flint. It is heavy enough that the handle can be used as a strong hammer. It includes a compass and some fishing hooks and 12' of piano wire that has all kinds of uses. The back of the blade is a toothed-saw that I guarantee you will make a big difference should you have to cut any larger limbs either to free yourself or a friend or construct some type of shelter.

First Aid Kit (Survival Type) - This should go without saying but I bet less than 25% of readers have a kit or know where it is. The one very important thing left out of kits that can truly be a life saver in an emergency survival situation is surgical tubing. Keep at least 12 inches of tubing in your kit, too. Nothing stops bleeding in limbs like surgical tubing and you can use it with one hand unlike trying to tie a bandana. I was once able to tear the hem off my t-shirt but had a difficult time tying it around my right upper arm with my left hand. I am left handed. I lost a significant amount of blood before I finally got it tied off. My life was never in danger and I was close to help but leaving the trail without stopping the blood could have been dangerous. I needed surgical tubing. Also make sure you have needle and thread. It sounds gross but you may have to sew something up other than your clothing.

Just having these things available to you can save your life. It is amazing what people can do when they are prepared. I recommend reading the instructions that come with each of these items when you first get them. Having that information in your brain can be a lifesaver, too. Imagine being lost in the cold and dark and having had an accident which may put you into shock and then having to try and read the directions! Useless. But if you have already read them and you know that for shock you've got to keep warm and awake and start your PLB you're already ahead of the game.

If you have been injured the first thing to do is to start your PLB and address your injury. Then get an idea of where you are in relationship to where you should be. If your cell phone is still working dial 911 and tell them your current situation. If you can't get an answer to 911 try calling 1-800-495-6369 (that's right, put it in your phone book on your cell phone right now) which is the National Search And Rescue Dispatch sky pager number. You'll have to enter your call back number so if you are too injured to use your cell phone this will be the time you had better have your PLB close enough to you to locate it an get it activated.

I hope the situation to use this information never enters your life but especially if you live in an area where weather can change quickly and become severe or you drive in isolated areas where it is possible to run off the road and into vegetation or just out of site of the nearest road these can be life savers.

While you are online go ahead and visit the United States Search and Rescue Task Force web pages. You'll enjoy learning some of the things provided on this elementary designed but information wealthy site.