Real Estate Economic Predictions For California, 2016
Early October, the California Association of Realtors (CAR) predicted that California’s housing market will continue to improve in 2016 thanks to solid job growth. But they added that the state is encountering difficulties. Prices are galloping, and houses that sold for $10,000 in 1970 are predicted to sell for $491,300 in 2016 – which means that less people are going to be able to buy the property that they want.
At the same time, certain regions, notably San Francisco, are projected to encounter severe housing shortages which will result in stiff market competition and diminishing housing affordability. You may be able to buy property in some areas – but if you want to invest in San Francisco, CAR tells you to lower your expectations.
With 2016 also come worries of global economic slowdown, financial market volatility and higher interest rates. An investor’s nightmare!
Add to this the fact that, unless you have excellent credit, you may be unlikely to land a loan from the bank. Banks have accumulated bad loans in recent years due to loose lending practices. They have now set very strict criteria. Real estate investors have limited financing options. And this is where hard money (or bridge) landing companies come into the picture.
What Hard Money Lending Does and Why It May be better for you than Banks
Hard money lenders focus on your assets not your credit. They are faster than banks – the process may be typically as short as 7-14 days – and they avoid all the inconveniences that banks tend to give. You will find no appraisals or other costs. All you’ll get is the standard origination fee so that the company can do its check on you. There are also no shenanigans from loan committees or from underwriting processes. In short, all you will have to provide is verification of your honesty. You will sign a promissory note, fill out a couple of forms, and your assets are used in lien of the loan. Given the bustling market of bridge lenders in California, you’ll find several lenders that will approve you in 1-2 days.
Incidentally, this ability to get a speedy loan hikes your advantage when it comes to buying. You’ll often find yourself bidding in a competing market. Other investors may have to go with the slow conventional financing, but you – with your ready-at-hand money – are more likely to get a seller’s attention and to set your offer apart from the rest of the buyers.
What Are The Disadvantages Of Hard Money Lending?
You will have to pay higher interest than you would for standard loans – sometimes double as much – and higher origination fees. This is because bridge lenders take on more risk with their loans when compared to a conventional bank loan. They also work harder to facilitate the loans. To profit, they hike the interest rate from 10-15% depending on the specific lender and the perceived risk of the loan. Points can range anywhere from 2-4% of the total amount loaned. Both interest rates and points vary depending on the loan to value ratio. So, shop around.
When Should You Go Into Hard Money Loans?
If you have poor credit history (or similar issues), but want to land a building quick and rehab it before the market turns around, bridge loans may be your best bet. Developers and house flippers tend to go into such loans because they can often borrow up to 100% of the purchase loan!
You may also want to play with a combination. Some borrowers use hard money to buy the property, to rehab the property, and to raise its value. Then, they get a standard loan (based on the property’s new, improved value) to pay off their original one.
On the other hand, I would not advise that you consider bridge loans for longer term investments. In other words, if you have only one rare chance to buy a property, to flip it quickly for quick profit, and you can’t get a standard mortgage – hard money loans may be the best way to go.
How Do You Know Which Hard Money Lending Company To Choose?
There are various ways that you can find a reputable hard money lender. You can Google [your area] + “hard money lenders”. Alternately, you can attend a real estate investor club meeting where you’re likely to bang into one or more such lenders looking for potential borrowers such as you. You can also leverage your network for recommendations.
So Why Are There So Many Hard Money Lenders In California?
California is one of the few states that is a “non-judicial foreclosure state” – which means that if the borrower defaults, the lender can get control of the underlying property quickly enough to get repaid (as long as the home is not owner-occupied). At the same time – California, large and wealthy – has a huge numbers of properties and developers. This makes it terrific for bridge lenders
As regards borrowers, this makes it profitable for you, too, because it gives you the opportunity to shop for the lowest rates. Interest rates and points charged by bridge lenders will vary from lender to lender and will also vary from region to region. For this reason, bridge lenders in California, generally, have lower rates than other parts of the Unites States since California has many bridge lending firms. Increased competition leads to a decrease in prices. This increased competition also allows you to bid for fastest times and to better find your match. So, shop around until you find the lender that you want.
The higher interest rates of bridge lending may seem scary at first, but the benefits of getting financing when all the banks have said “No” will far outweigh the extra cost.
So what about a bridge loan in the future? Sounds attractive?