Access Wealth Strategies

Watch the video below for my second visit to this upscale Desert Ridge home, as I tour the house and point out the changes made.

After Renovations

Before Renovations

For your reference, the “before” video (just 2 days after the home was purchased at the Phoenix trustee sale auction) below:

Ask yourself this question:

Would YOU buy this home for approximately half of its peak price at the trustee sale?

Related post: Real Estate Investors Turning to Trustee Sales for Bargain Purchases

When is the right time to buy an asset for investment purposes? This could the most important question an investor asks himself or herself.

There is not one right answer for everyone that applies at all times. Instead it takes judgment and applying core principles to answer this question.

The most successful passive investor of all time, Warren Buffett, provides a few guiding principles in answering the question, “When is the right time to buy an asset?”

Let’s take a look at a few of Buffett’s famous quotes.

“A public opinion poll is no substitute for thought.”

My transation: Just becuase something is popular doesn’t mean it is the best buy in the marketplace.

“The investor of today does not profit from yesterday’s growth.”

My Translation: If you buy an asset today you DON’T get the past profits, only the future profit from the investment.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

My Translation: The best time to buy (or sell) is when everyone else is doing the opposite.

So, we see that from Warren Buffett’s perspective, the time to buy an asset might be when people think he’s crazy to do it.

Think back to fall 2008 when Warren Buffett made a multi-billion investment in both General Electric and Goldman Sachs. At the time the financial world almost failed, yet just over a year later he has a multi-billion dollar profit plus 10% preferred dividends while he waits. Not too shabby.

What do you think? Have you seen Buffett’s principles at work in your investing life? Or do you have a different way of timing your asset acquisition and how much success have you had? Please comment below and let us know.

In Part 1 we discussed why the market is ripe for hard money lending, now let’s look at why hard money lenders are willing to fund deals traditional lenders reject.

Hard Money Lenders Can Charge Much High Interest Rates

Hard money lenders demand much higher interest rates (10-18% or 2-3 times higher) than banks do because they fund deals that do not conform to bank standards.

Banks have very specific standards because they are highly regulated and need standardized systems to make many loans. In contrast, many hard money lenders are individuals or small groups who are willing to work in narrower markets with niche products.

It’s All About the Asset / Collateral

If you could own an asset (e.g. real estate) that is worth $200,000 for only $100,000 (getting it for half price), would you do it?

Hard money lenders provide short-term loans (usually 6 to 18 months) based primarily on the value of the hard asset (such as real estate) that is collateral for the loan. In contrast a traditional lender bases the loan on the borrower’s ability to repay with the collateral as a secondary factor.

The two best quotes I’ve heard from hard money lenders are:

“Only lend if you’d rather have the asset.”

“Drive by the asset and think: do I want to own this?”

The “asset” referred to above is real estate, typically a single family home. Now think from the hard money lender’s perspective: You’re making a loan based on the asset, so what’s the worst thing that could happen?

Answer: The borrower defaults and does not pay you back.

So what happens when a hard money loan is defaulted upon?

If the hard money lender has properly recorded a first lien on the property / collateral, then the lender can follow the legal procedure to foreclose on the property – i.e. the hard money lender becomes the owner of the property which was the collateral for the loan.

Let’s see how the math works out in an example:

Imagine a new home bought in 2005 for $400,000 (inflated price in the bubble) and is now worth $200,000 (realistic market price today). The home owner who owes more on the home than it is worth today and who lost their job in the recession has stopped paying the mortgage and been foreclosed upon.

A flipper can buy this home at the trustee sale auction for say $120,000. The flipper buyer gets a hard money loan for 80% of the purchase price, or $96,000, and pays the remaining $24,000 cash himself.

So, assuming the home is really worth $200,000 (realistic price a retail buyer would pay today), the hard money lender’s basis in this property ($96,000 loan amount) is roughly 50% of today’s retail price ($200,000)!

That is a VERY secure position for the hard money lender.

So, in the “worst” case where the borrower defaults on the loan, the hard money lender gets to own the asset that’s worth $200,000 today for only $96,000 (ignoring fees and other legal costs).

How to Win Even If You Lose!

Hard money lending in this market is lucrative because you get to “win even if you lose”:

(1) If the borrower pays you back with interest as promised, you’ve received double digit yield on your money in a short period of time (6-18 months). This is an attractive yield compared to 0-3% on bank CDs and not much more for corporate bonds.

(2) If you “lose” and the borrower fails to pay you back, you can take ownership of the collateral property for what amounts to about half the current market value (e.g. $200,000 property for $100,000).

So, as a hard money lender, you can receive a double digit yield in most cases AND have the security of making even more money if the borrower defaults and you get the property at a cost below the REO or trustee sale price.

Do trillions of dollars of failed loans and losses lead to great lending times?

With the recent collapse of the credit markets, the economy, real estate prices, and the stock market, lenders around the world will take massive losses on their loan portfolios. Large lenders such as Washington Mututal, Indymac, and related entities have already failed.

The write downs on collateral and loan values could make most (if not all) lenders insolvent. So doesn’t it seem strange then that lending on real estate assets could deliver both a high yield AND safety (low risk)?

As strange as it sounds, hard money lenders are well positioned in this market cycle to generate the highest income with the most security. Let’s look at why.

Why Are Hard Money Lenders Needed In Today’s Market

In today’s market with a huge inventory of distressed properties such as foreclosed homes and even commercial real estate, investors and “flippers” are buying these properties at a huge discount.

There’s only one problem: These distressed deals usually require a quick close (sometimes as little as 1 day at a trustee sale auction).

Most traditional lenders would not be much help in these scenarios – not that they are willing or able to lend money on real estate purchases these days. Even if they were, it would take too long (45-60 days) and require perfect credit from the borrower.

Of course, deep-pocket buyers could pay all cash to buy the distressed properties all day long if they wanted. But what if they want to buy but don’t have enough cash of their own? Or, they do have the cash to buy one property but want to buy multiple properties at the same time?

For some experienced flippers, the number of properties they can buy at one time can make a huge difference in their bottom line profit.

Enter the hard money lender, who can fund deals quickly and is willing to overlook the borrower’s less than stellar personal credit, as long as the property meets their deal criteria.

Typical Hard Money Loan Terms

• Short term: 6 to 18 months
• Application or due diligence fee around $500 to $1000
• Origination points 0% to 5%
• Interest rates 10% to 18%
• Prepayment fee (if the loan is paid off earlier than expected)
• Recorded first trust deed (lender has first lien on the property)
• LTV of 60% to 80%

Why would hard money lenders fund deals that traditional lenders reject? We’ll discuss the 2 main reasons in Part 2. Meanwhile, please add your comments and questions below.

A couple of weeks ago, our business partners picked up a home in North Scottsdale at the trustee sale auction. Since we live nearby, we took a video of us driving by the house and the neighborhood, which is a very nice gated community.

The house is currently occupied by tenants – that’s why we didn’t go inside – who signed a lease before/while the last owner was going through the foreclosure process.

There are several things to note here:

1. There are some nice neighborhoods where you can pick up homes at the trustee sale, if you do the proper research beforehand and go through the right channels.
2. Tenant occupied homes bought at the trustee sale create more complications for rehabbing and flipping the house.  You could offer “cash for keys” but sometimes it could turn into a lengthy process regardless.
3. Not having a “move-in ready” house decreases the potential buyer pool and we’ll probably have to offer additional incentives (reduced price and/or credit at closing) to get the house sold quickly “as is” (with some minor exterior work).
4. If you’re a tenant looking to rent in areas where foreclosure rates are high, beware of the financial conditions of the owner.  For example, having your security deposit held in a real estate broker’s trust account is better than giving that money directly to the owner, in case they go through foreclosure and you’re forced to leave the property earlier than expected.

Please add your comment below and let me know what you think.