I have always referred to hard money loans as equity loans; hard money has always sounded very sleazy. One of my favorite expressions in life is that “everything is relative”. Consider fire insurance. If your house is in a brush area, you will have to go to California Fair Plan and pay MORE for less comprehensive insurance.
If a product is not generally available, it will cost more. I just read an article about the scarcity of seats at a Taylor Swift concert with some ticket resellers getting as much as $26,000. Now that is where the term “scalper” is used but it’s merely supply and demand.
Conventional bank loans are certainly the least expensive loans but there are MANY reasons why conventional loans are out of the question. It could be credit, the condition of the property, the need to obtain a loan in a week or two and too many others to mention. Equity brokers use mostly private party and pension plan money. Those lenders expect a higher return than bank CDs or Treasury bonds. Remember “everything is relative”.
Yes, your least expensive real estate loan is a conventional bank, Credit Union or typical mortgage company. If your credit is okay, your income can be verified and there is ample time to obtain the loan.
Most equity loans are one to five years and are available for any type of real estate including bare land, industrial, commercial and residential properties. Equity loans are also available for fractional interests in real estate and even loans on loans (hypothecations).
Here are a few tips for anyone needing an equity loan rather than a less expensive, longer term, conventional loan:
- DON’T give up your 2-4% existing first trust deed (mortgage) if you are
lucky enough to have one of those historically low interest loans.
Example: Your 5-unit apartment building has a market value of 1.3 million and the existing first TD has a balance of $500,000. You need $100.000 to finish earthquake retrofit or finish an ADU. MANY lenders will offer you a new 1st TD at $625,000 +/- … DON’T DON’T DON’T. You are looking for a 2nd TD of $100,000. Yes, a 2nd TD is a little more expensive than a first BUT you will not be paying broker’s fees (points) on the 500K that you already have, and you WILL be paying far more interest on the new 1st than the combination of the 1st and 2nd. If the broker doesn’t offer 2nd TDs, go elsewhere.
- Most private party loans have a prepayment penalty for a good reason. If John Jones lends money for five years, he has calculated the interest he will receive and may have sold stock or cashed in a bank CD to make the loan. The borrower inherits some money and
pays the loan off in nine months and the lender will be mad at the broker for not protecting him with a prepayment penalty.
PP penalties ARE negotiable and can be waived completely for a slightly higher interest rate or broker fee. If properly done to protect BOTH the borrower and lender, a PP penalty may be reasonable. For instance; borrower is asking for five years: a PP penalty for the first three years only WITH the ability to pay 20% of the principal balance in each of the first three years without penalty, IS very fair to both sides.
- Default Rate: Many commercial bank loans and most equity loans have a default rate that raises the interest rate, usually five percent, upon default. Please realize, the loan already has a late fee and raising the interest, usually after 30 days, is a double whammy.
Though I can actually defend the lender’s reason for this, it can ALSO be negotiated. Our company has always had a default rate but ONLY upon maturity if the loan has not been paid off or extended.
- Late Fees: Most equity loans have a late fee of 10% of the monthly payment, whereas, most conventional home loans have a late fee of 5% after fifteen days. If the payment is due on the first, send it a couple of days early or a FEW days late. Do NOT mail the payment the day before a late fee date, as almost all payments are logged in the date RECEIVED NOT the postmark date.
A final IMPORTANT comment. Most brokers offering equity loans do not make “consumer loans” on single family houses or 1-4 units. If this is a house or 1-4 units, the broker usually just makes “business purpose loans”.
As an example – a homeowner needs to borrow money to buy a rental property, purchase a printing press for the business, purchase a franchise or a business purpose, borrowing money for income tax, credit cards, or to add a bedroom, etc. That is a consumer loan. Consumer loans are usually available on ALL other property types.
Peter Rosenthal of V.I.P. Trust Deed Company has originated and serviced hundreds of millions of dollars in real estate loans for over four decades. Please feel free to contact him with any questions at [email protected].