$500 down the drain??? - Posted by Paul_MA

Real Estate Investing Real Estate Law
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Posted by Eric C on October 18, 2000 at 11:51:11:

Hi all -

Notwithstanding the current market climate in Detroit, I have NEVER done a hard money deal that involved personal guarantees.

However, as Dave says, that doesn’t mean I wouldn’t, I would have to take another very hard look at the deal first.

Real Estate is a funny game. As a money manager I can lose fairly consistently (sometimes for years), then win only once and achieve both fame and fortune.

Real Estate is almost exactly the opposite, I can win every time for a very long period, and then lose everything because I made one very small, but really bad decision. Often for many folks in the Real Estate game, that bad decision is to personally guarantee just one more deal.

With regard to my area, I’ve done deals throughout most of the United States and in Europe; still no personal guarantees. Not for hard money anyway.

Of course, we may be arguing semantics here. True hard money loans translate to me to be EXPENSIVE. Upfront points, prepayment penalties, very low LTV’s and short term fuses.

If I’m going to put up with all that, then why not go ahead a get a bank loan? Mostly, I do.

But for me, the major reasons to get a hard money loan would be speed (I can do one of these in as little as an hour sometimes) and the fact that the property (or deal) stands by itself – again, no personal guarantees. This would allow me to do more deals. And not have to keep looking over my shoulder.

Now, I will tell you that when “I” provide the money for someone else’s deal (I become the hard money lender), I push for every concession I can get (just like most lender’s do)including personal guarantees. Why not?

Like Dave said, you need to know your market. I think it’s critical to know your own capabilities too. Develop a track record and prove yourself.

But, if I were you, I’d keep looking for less stringent lenders. They are out there, I assure you.

Oh, and I’d highly recommend Ed’s class. Everyone needs to learn more about money and how to make sure you get your share of it.

Yours,

Eric C

PS - heck, I’ve even had banks drop their insistence on personal guarantees. It doesn’t happen all the time, but every once in awhile the deal is sweet enough or I have enough clout to get this done. But I always ask. (they do sometimes laugh though!)

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$500 down the drain??? - Posted by Paul_MA

Posted by Paul_MA on October 15, 2000 at 22:17:53:

I decided to refinance with a mortgage company. Here’s what happened:

Selected a mortgage company I felt I could trust. The only contact being phone conversations.

I must use a Non-Income Verification (NIV) loan; the rate to be determined at closing. In fact, everything is to be determined at the moment of closing. The loan broker will give you a Good Faith Estimate (showing all the costs of the loan as they MAY appear at closing), for you to sign, to show your commitment.

I signed the ‘tentative offer’ loan documents and return them to the lender. The next step for the lender is to pull credit and order an appraisal.

The lender orders the appraisal.

Even though I waited at my property and pay the appraiser with my money ($500), the original appraisal is sent to the lender and the appraiser is unable to give me any information about the appraisal without the permission of the lender.

The updated version of the Good Faith Estimate was mailed to me with a bunch of new fees. Of course, the loan broker wasn’t aware of it. The updated version was written in another department, the department that would eventually complete the loan process with me. The original broker is somewhat out of the picture now.

Now I don?t want to use this lender. But I?m stuck. I just paid $500 for an appraisal and have nothing, not to mention the $55 for the credit report.

Is this normal risk or just another day at the school of hard knocks? Am I stuck or must I dig deeper in my wallet? Is there anything I can do to get the appraisal so I can show it to other potential lenders?

Paul_MA

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***** Get You Own Appraisal… ***** - Posted by Paul_MA

Posted by Paul_MA on October 17, 2000 at 20:27:57:

This experience is educational (at the cost of $500).

After talking with more lenders, I’ve told them I would order the appraisal in my name because I just lost $500 on a prior appraisal.

Thats ok with most lenders.

This way, I will not be commited to one lender and I retain some control over the process.

It sort of puts lenders in a bidding position. ; )

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Re: $500 down the drain??? - Posted by Hugh James

Posted by Hugh James on October 17, 2000 at 16:22:09:

In my experience as mortgage broker, I would have done the following:

Taken your application, pulled your credit and given you a good faith estimate and truth in lending statement. Your credit fee ($50 for us) would be gone. I would not have ordered an appraisal until I had a conditional approval from a non-conforming lender (NIV being a non-conforming loan). We just fax your 1003 & credit (or do it on the Internet in some cases) and can usually have you graded and a decision in 24 to 48 hours. That way, we all have a really close idea as to what your costs will be, rate, terms, etc., and you’re not stuck with an appraisal you can’t use.

The appraisal belongs to the lender, you just get to pay for it. You have a right to a copy if you ask, in writing, within 30 days. We have a right to charge you a reasonable fee for the copy (usually $25). Let me say that I offer clients a photocopy of the appraisal as a routine part of the deal, and I have never charged a copy fee no matter when you asked for the thing. It’s not good business.

I generally will agree to a reassignment, as long as your check has cleared and you have not been a complete jerk – and have been fair with me. I like to get along, and making a copy or reassigning an appraisal is no big deal.

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Re: $500 down the drain??? - Posted by Stan_PA

Posted by Stan_PA on October 16, 2000 at 01:24:41:

Paul,

While Jim is correct that the lender/broker is required to furnish you with a copy of the appraisal, the copy may not do you any good. Many lenders will require that the broker who ordered the appraisal originally release it to them before they will honor it. In PA, where I am, my experience is that very few brokers will release the appraisal even if you have paid for it.

An original Good Faith Estimate can be far off the mark from what appears on your settlement statement if the broker who gave the estimate did not fully understand your credit history. An ethical broker will make his or her disclosures as close to the mark as possible after analyzing your credit; still, mistakes can occur. One way that you can protect yourself from “bait-and-switch” tactics in the future is by asking for a lender’s pre-approval before you order the appraisal.

Bear in mind that both your credit history and the value of the property will both have a material impact on what your lender/broker can do for you. If a lender is going to give you a pre-approval they will have to see your credit report, which should prevent any surprises at the closing table provided that the property appraises where you need it to.

Stan

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Re: $500 down the drain??? - Posted by Jim Rayner

Posted by Jim Rayner on October 15, 2000 at 23:16:52:

Paul ,
here’s the regulation reagrding appraisals for MA

CHAPTER 184. GENERAL PROVISIONS RELATIVE TO REAL PROPERTY.

Chapter 184: Section 17C. Residential property value report; availability to applicant.

Section 17C. Any mortgagee, when processing an application for a loan to be secured by a first mortgage on residential property located in the commonwealth of four or less units and occupied or to be occupied in whole or in part by the mortgagor shall, upon the issuance to the applicant of a letter of commitment to or denial of such application, include therein a statement that the applicant has thirty days from the date of said letter to request a copy of any report, wherever and by whomever prepared, utilized by the mortgagee in connection with any such application and containing an opinion as to the value of said residential property. Upon written request of the said applicant, a copy of any such report shall be provided without additional charge or fee within thirty days from the date of such request; provided, however, that a mortgagee shall not be required to make such copy available if the applicant rescinds the transaction. A mortgagee, appraiser or employee or other agent of the mortgagee shall not be liable in damages to the applicant, or to the seller or agent of the seller of such property on account of the disclosure or the contents of any such report.

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Re: ***** Get You Own Appraisal… ***** - Posted by kevin

Posted by kevin on November 10, 2003 at 14:45:12:

My partner and i are selling a property we rehabbed over the last 6 months. We help our buyers obtain financing. In this last deal we ran into trouble with the mortgage broker getting our deal to closing. After 90 days of the broker dragging his feet our buyer went to another mortgage broker. Since the appraisal was done in the original brokers name we thought we might have to get another appraisal. I contacted the appraiser and he told me to have our buyer fax him a request to change the name of the lender on the appraisal. He normally charges 100$ for this, however since we do alot of business with him he waived this fee. You should call the appraiser and explain your situation to him. I am sure for a small fee he would help you out .

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Re: ***** Get You Own Appraisal… ***** - Posted by Hugh James

Posted by Hugh James on October 18, 2000 at 16:08:47:

I know things are done differently in different areas. And, I know many local banks and savings and loans are probably more willing to accept an appraisal under these conditions, especially if the appraiser is will to recertify to them. I can say that in our area, and as a broker, not one of my lenders including all the nationals would accept an appraisal you ordered under any circumstances. In our area appraisals MUST be an arm’s length transaction, and “ownership” does not reside with the borrower, anymore than you can “own” your credit report file. The file belongs to the repository, you just get to pay to see it.

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Re: $500 down the drain??? - Posted by AWmi

Posted by AWmi on October 16, 2000 at 17:22:44:

As a new investor I too had a run-in with a local mortgage company. After $400 dollars processing fee including a property appraisal I’m still without a guarantee on a hard money loan. I did find out the property appraised for $38,000 and my loan is for $25,000. Should the property stand on its own for collateral or is it common to take firstborn also? They keep back pedaling every time I try to get a straight answer as to finding a willing lender. Obviously they haven’t or it would be a done deal. Is it common to get a preapproval letter? Their must be a way of finding out prequalification on a loan without blowing the $400. What’s Ed’s phone number anyway?

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WOW! What a great answer. - Posted by Michael

Posted by Michael on October 17, 2000 at 24:56:41:

I’m impressed.

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Re: ***** Get You Own Appraisal… ***** - Posted by Stan_PA

Posted by Stan_PA on October 19, 2000 at 15:33:31:

The reason most lenders will not accept an appraisal you have ordered in your own name is that they have no way of knowing if the appraiser is your cousin and willing to sacrifice his or her objectivity to take care of a relative (for example). The bottom line is that the lender is going to be much more comfortable with an appraisal that was ordered by a lending professional than with one that was ordered by the borrower.

The issue should not be whether or not you control the appraisal; that is irrelevant if you have selected a professional, experienced, and ethical mortgage broker. The real issue is whether or not the mortgage professional you have chosen to work with is going to be honest and fair with you. I understand this is not always an easy thing to do, especially when you are just beginning as an investor. You have to understand that mortgage brokers (like realtors) come from varying backgrounds, some are very good and some are either very poorly trained or don’t have the experience to get your deals done.

A good mortgage broker can make some deals happen that otherwise might not, and a poor broker can destroy some deals that should be “slam dunks.” You need to be asking questions of any broker you might do business with to determine what his or her experience level is, especially in the area of investor loans.

Not every good broker is a member of the NAMB (National Association of Mortgage Brokers), but those who are members have shown a commitment to their profession by joining and paying dues to their professional organization. You might ask to see if your broker is a member, and if so, if you could see their certificate.

But the best way to locate a good mortgage broker is to ask other investors in your market who they do business with. Most experienced investors who use bank financing can tell you who the good brokers are and who the snakes are.

Stan

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Re: $500 down the drain??? - Posted by daveh

Posted by daveh on October 17, 2000 at 07:11:47:

My experience with hard money is that yes, you will be personally responsible for the loan. If the lender needs to foreclose and can’t recover all his money, he will sue you for the rest.

I know this because I have been the lender on a couple hard money loans.

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Not where I come from… - Posted by Eric C

Posted by Eric C on October 17, 2000 at 15:11:46:

Hi -

In my experience, hard money, is just that – hard. Asset based. No personal guarantee nor liability. Period.

Fraud not withstanding, you should not have to make any sort of personal guarantees with true hard money loans. The property (or other deal) should be attractive enough that the “lender” (money source) would be happy to step into your shoes and take over the investment.

The sad fact is that there are a lot of folks (and firms) out there who think they have money to invest when the reality is – they do not.

Find a “player” in your town or learn to use Ed’s assistance in securing money through more normal (and less costly) channels.

Quite frankly, whenever a mortgage company, bank, or other investor (institutional or not) begins to “waffle” on you, for whatever reason, just pass.

Often this is a signal that they themselves are having some level of “financial” difficulty or some “liquidity” issues. Don’t add their problems to your own.

Yours,

Eric C

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Re: Not where I come from… - Posted by daveh

Posted by daveh on October 18, 2000 at 06:23:55:

This is another example where you need to know your local market. I’m sure that Eric is right regarding lenders in his area. I can tell you that in my area (Detroit), there’s not a single lender I know of, hard money or not, that won’t demand you personally sign. And I certainly won’t lend money or sell on contract without that guarantee and an assignment of rents.

As a buyer I agree I don’t want any personal liability at all. My experience is that really limits the number of deals available to me.

So, on the flip side of Eric’s argument, if the deal is really that good for you the buyer/investor, why wouldn’t you sign personally? In hot markets where sellers won’t generally go for “subject to” etc., it may be the only way you can get deals done.