<< Search continued from Page 37
Continued on Page 40 >>
Scotsman Guide Residential Edition | ScotsmanGuide.com | January 2018 38
The supply of distressed housing has dwindled in
the past few years, but rising housing prices have
kept interest in residential property investment
high. And, with low-cost property opportunities
diminishing, real estate investors appear to be
more willing to seek out various types of financing
to purchase and renovate higher-priced properties.
More than 53,000 single-family homes and
condos were flipped nationwide in the second
quarter of 2017 alone for a home-flipping rate
of 5. 6 percent of second-quarter home sales,
according to Attom Data Solutions. The estimated
total dollar volume of financing for homes
flipped in second-quarter 2017 was $4.4 billion,
the highest level since third-quarter 2007, nearly
a 10-year high.
Although cash has always been king in the real
estate investment market, for many real estate entrepreneurs, access to financing is extremely important. More than 35 percent of homes flipped in
second-quarter 2017 were purchased with financing, according to Attom. That’s the highest level
since third-quarter 2008, or a nearly nine-year high.
Despite rising awareness and acceptance of
hard money loans thanks to popular home-renovation TV shows such as HGTV’s “Flip or
Flop,” short-term hard money loans haven’t
really changed all that much over the years.
These private-lender offerings still provide
several key benefits for fix-and-flippers that
mortgage originators should bring to the attention of their real estate investor clients.
First of all, hard money lenders are knowl-
edgeable. Many specialize in the single-family
and residential real estate market and are geo-
graphically focused, so their knowledge of the
local market and their understanding of a real
estate investor’s needs in that particular market
is generally strong.
Second, they lend based on an asset’s value
and not an individual’s credit score or credit history. That means a credit “ding,” such as a past
bankruptcy or a less-than-perfect credit score,
won’t hurt an investor client’s chances of getting
funding if the hard money lender the originator
works with determines the property being purchased is a good risk.
Last, but probably most important, hard money
lenders are fast. They can often provide funding
in just a handful of days instead of the six weeks it
takes, on average, to close a traditional mortgage
loan because of the significant amount of time it
takes to gather documents, delve into a borrower’s credit history and maintain compliance with
regulations. Speed is key for real estate investors
who often are competing to buy a property and
must move quickly or risk losing deals.
Although hard money has clear benefits, it
also has a few potential drawbacks that originators should be prepared to explain to their investor clients — especially those new to flipping or
who have not used financing previously.
First, because of higher risk, hard money loans
have significantly higher interest rates than traditional mortgages. In addition, hard money lenders only offer short-term financing, which may be
as short as a few months and often not longer
than a year. Investors who need financing for a
longer period will have to look for other options.
Finally, hard money lenders generally require
a downpayment of 25 percent to 35 percent.
Some may loan up to 100 percent of the existing
value of the property, but not on the expected
The traditional route
Although short-term, hard money loans are used
more often by fix-and-flippers, traditional loans
backed by Fannie Mae or Freddie Mac, such as
a 15-year or even 30-year fixed-rate mortgages,
offer a good solution for investor borrowers who
can qualify and aren’t in a hurry. This type of financing also is useful for clients who are looking
to fix-and-hold a property for use as a rental.
There are several benefits to a traditional
mortgage loan for real estate investors:
■ n Borrowers with good credit ratings often
will get interest rates that are lower than hard
■ n Longer loan terms and adjustable-rate
mortgages are available, which can reduce
■ n Investors with high credit scores (720 or
higher) can finance up to 75 percent of the
purchase price on up to 10 properties (with certain restrictions) under Fannie Mae guidelines.
(Freddie Mac limits investors to four property
■ n Cash-out refinancing options also are
available on investor-owned properties through
lenders that sell loans to the government-sponsored enterprises.
Certainly, the main benefit of going the traditional route is lower cost, but there are two key
negatives that often preclude real estate investors from pursuing a traditional mortgage loan:
time and credit checks. Originators should be
aware of these issues to help guide their clients
to the best products.
Most banks and nonbank mortgage lenders
who make conventional loans can take several
months to close the loan. For a real estate investor,