Fix and Flip Hard Money Loans

Fix and flip hard money loans have a number of special features that differentiate them from normal hard money loans.  Typical hard money loans can range from one to five or more years in length, use a loan to value based on a appraisal or purchase price, typically have some kind of prepayment penalty and usually a borrower starts making their payments right away.

Fix and flip loans, however, are custom made for rehabbers.  These are short term loans, typically 6-12 months.  They usually don’t have a prepayment penalty, but are front loaded, so the cost is more.  The reason for this is that investors know they will not be getting years of interest payments, most likely they will get 3-6 months of payments before the loan is paid off.  The additional fees upfront are in exchange for no prepayment penalty, and helps to insure the investor makes some return on the money they lend.

Another feature that is specific to the fix and flip hard money loan is a builders control account.  This account is set up and held by either a builders control company or a trust account.  The funds are held for the work to be done to the property.  This money is disbursed as the work is done to ensure that the property is improved, raising the value and enabling the rehabber to sell and make a profit.  There are a few different ways this fund control can be disbursed, be sure to ask upfront about the procedures required to access these funds.  Requiring inspections on every draw is common, but oftentimes can make the process cumbersome.  Sometimes it is worth an added cost to be sure your draw process moves forward smoothly.

This leads into another difference, the loan to value.  Loan to value on rehab loans is calculated using an after repair value, not the purchase price or ‘as is’ value.  This allows these loans to be much more aggressive, enabling borrowers to leverage the cash they have available to work with.

Finally, these fix and flip loans are typically going to have an interest reserve built into them, so you will have no payments due for a period of time.  This is not a grace period, this is simply prepaid interest that is financed into the transaction.  Typically you will get the unused portion returned to you when the property sells, but be sure to ask!

For more information on these types of loans, and to discuss a particular scenario with a professional who specializes in fix and flip financing, visit All California Lending’s rehab loans page.  Good luck!

Mortgage Acceleration Clause

A mortgage acceleration clause is a clause that accelerates the date that your mortgage is due.  There are a number of reasons why a mortgage acceleration clause may kick in, some of which may surprise you.

Most loans contain provisions that can cause your loan to become due and payable (an acceleration of your mortgage) should you default.  Some of the more common mortgage acceleration clauses are related to the sale of the property – if you sell the property, the mortgage becomes due and payable.

What many don’t realize is that many institutional loans, especially those made on commercial or income producing properties, contain a mortgage acceleration clause should you further encumber the property.  What this means is that should you take out a second mortgage on the property, the holder of the first loan can call that loan due and payable.

Many don’t realize this until after they have already taken a loan out in subordinate position to the existing first and then, at some point afterwards, they hear from the holder of the first, telling them the loan is due and payable.

The best way to find out exactly what kind of mortgage acceleration clause is in your loan, you should refer to the note of that loan.  It will tell you exactly what conditions can trigger an acceleration of your loan, and tell you how you may avoid the issue.

With regards to our example here, if you know ahead of time that taking a second mortgage out on your property could cause your loan to be accelerated, you can take steps to avoid the issue.  Typically the note will spell out exactly what you must do.  Usually this includes getting permission from the existing first, in writing, to take out a subordinate loan.

Simply being aware of an issue like this can spare people from learning the lesson the hard way!  In dealing with commercial loans, I come across this issue on a regular basis these days when people are looking for second position loans.  If you are looking for a second behind a commercial first, be sure to check your note for any acceleration clauses!

Fractional Lending

Fractional lending is pretty common when dealing with hard money.  It’s pretty simple to understand, and just means that you have more than one investor making a loan.

 

When dealing with hard money or private money these days, oftentimes you are getting your loan from individuals.  It used to be that much of the hard money out there was pooled funds, but with the downturn in the market, this is not true any more.

 

Pooling your funds gives the benefit of spreading your risk across the full portfolio of loans.  It should be less risky, but overly aggressive lending practices and the fall of real estate values made that untrue.  In addition, once your money was put into these pools, you no longer had control over the decision making process.  The fund managers made the decisions on what to lend on, but part of their compensation was tied to the loans being made and volume (typically speaking).  I don’t have to connect the dots here I hope.

 

These days, you can accomplish the same goal by investing in multiple trust deeds.  By doing this, you are investing in individual deals, and you can look at each deal and make a decision as to whether or not you may want to lend on that particular transaction.  This is great, but many investors don’t have millions of dollars to spread across many loans.

 

To accomplish the same goal, fractionalized lending is a solution.  It allows investors to pool their money on a transactional basis, with each investor owning a percentage of the deed of trust that is proportionate to the amount they funded.  This allows someone who may not have the large capital available to fund multiple deals to still spread risk over multiple deals, simply by funding a percentage of each deal, along with other investors.

 

Assignment of Rents

When dealing with hard money loans, there can be a number of terms that are important to understand.  One such term has to do with the assignment of rents.

 

Assignment of rents is typically reserved for multi-family or commercial properties, but can be used in conjunction with lending made that secures other property types.  The assignment of rents clause basically gives the lender the ability to collect rents directly from your tenants should you be considered in default as described in the note.

 

The assignment of rents is added protection for hard money lenders, and is used to ensure that a borrower does not stop making payments on their loan, while continuing to collect rents on the properties that secure that loan.  It also allows the lender to continue receiving cash flow on the debt while either negotiating new terms or going through foreclosure proceedings.

 

Assignment of rents does not mean that the lender can collect rents directly at any time they choose.  For this clause to kick in, certain conditions must be met.  Typically these conditions involve delinquent payments or non payment for a period of time.  By reading the actual assignment of rents clause, you can see the reference to the section that outlines the conditions that must be met for the clause to be actionable.

 

Usually this section says that the lender can collect rents should the borrower be considered in default as defined in another sub section.  By finding the section that is referred to and reading the conditions that would put the borrower in default; you should be able to have a clear understanding of what conditions could cause a lender to have the ability to collect rents from your tenants directly.