Specialty Real Estate Loans vs. Traditional Mortgage
Rather than securing a traditional mortgage, borrowers and investors sometimes seek “Specialty Real Estate Loans”, also known as “private loans” or “hard-money loans”.
A specialty real estate loan:
Is very expensive – Expect a rate from eight to 20 percent or higher per year.
Is short-term – The duration typically ranges from just six to 12 months.
Requires a 20 percent or larger down payment – The lender usually funds only 2/3 of the property value.
Yet, despite these perceived drawbacks, this lending niche exists and many specialty real estate loans are funded each year. Here are some points to consider in helping you decide if you may be a candidate for a specialty real estate loan:
Time Crunch – Real estate deals are made under deadlines and contractual close dates, and there are penalties when they’re not closed on time, including voided contracts. Unlike traditional mortgages which often take up to 45 days to close, specialty lenders can close a deal in under a week, and, sometimes, in under 24 hours.
Property Condition – Banks and traditional mortgage lenders will rarely finance distressed properties, including those with incomplete kitchens, unfinished walls, bad roofs or septic systems, and other outstanding safety hazards. A borrower may seek a specialty real estate loan to correct these issues after the purchase.
Plenty of Cash but Not Enough Credit – A borrower can have $100,000 in liquid assets, place an additional 20 percent down on a special property, and have a job with a six-figure income, but if he has damaged credit or an insufficient income history, he can still be shut out of the traditional mortgage market. A specialty real-estate lender can help finance a property and create or verify a viable exit strategy.
Enough Equity in the House but Insufficient Credit or Cash – An example of this scenario might be a property owner who has gone through a life-changing event like the death of a spouse or a divorce, and has been left in charge of exiting a less-than-optimal residential property. Let’s say the house is worth $400K “as-is”, is worth $470K “fixed up”, and could use a $30K remodel/refresh. The house has a $200K existing loan, but the owner has battered credit or insufficient cash to cover the repairs. A specialty lender can loan her $230K, which would allow her to pay off the $200K loan and fix-up the property to attain maximum value at sale. She can potentially pocket the additional $40K from the value created in remodeling the property.
Foreclosure Auction – Without proper title, escrow, appraisal, and inspection services, banks have not and will likely never enter the foreclosure auction-financing arena. Specialty real estate lenders provide capital for buyers purchasing properties via foreclosure auction.
New Construction Financing – Banks and builders have seen their real estate portfolios severely beat down in the recent economic downturn because land prices and finished house prices have dropped over 25 percent. That’s why, despite the fact that the new construction market is starting to climb back, many lenders are still gun-shy. Specialty real estate lenders understand that some builders have access to deal opportunities and capital, plus they have the expertise and ability to move finished new houses quickly, despite the fact that they may still be in the process of rebuilding their credit.
Banks Have Pulled Back – In a few years, banks, after sitting on the sideline watching other groups take advantage of opportunities in the real estate market, will begin to wade back into the waters. Until then, and even after banks rejoin the market, private lenders will continue to fill in the financing gaps for customers where banks refuse them. If there is opportunity and a property with equity, meaning it has a significant asset value above the loan value, a specialty real estate lender will be there, standing in the gap and powering the market.
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Veristone does not finance owner-occupied properties.