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Any real estate investor realizes that borrowing money to purchase investment property is almost impossible in the conventional lending market. Today's banks are besieged with large, bad loan portfolios and a long list of bank owned (REO) property. This article will discuss the conventional lending market, bank REO's, and unconventional lending sources for today's real estate investor. The last five to six years have been incredible for the real estate lending market; incredibly good and incredibly bad. Skip back to 2005, the height of the residential and commercial real estate market. Home sales (both new and existing) were off the scale, and the building of commercial property was vast. Large, national home builders were constructing millions of new single family homes across the country. Tall condominium towers were popping up in major cities all over the US. Thousands of apartment units were being constructed, and new retail shopping centers were being built on every city block. All was great! People were happy. Consumer confidence was high, unemployment was low, and speculative real estate investors were making money "hand-over-foot." Buying, borrowing, and selling real estate was a "piece of cake" at that time. Then one day, the wheels came off the wagon. Practically over night the real estate market went from terrific to terrible! Those who invested and borrowed weren't able to sell their holdings and were devastated; the banks had stopped lending and would not extend further credit to investors. So what was the impetus of this rapid change in the lending market? Well we'll need to start back at the housing boom of 2004-2007. National home builders and large condominium developers flooded the residential market with millions of new units. Many of these new units were sold to speculation buyers who received bank financing to purchase these homes. Several of the speculation buyers purchased multiple units hoping to score large profits by selling to real home buyers (better known as "flipping"). However, builders poorly gauged the real demand for housing by true home buyers and allowed investor or speculative buyers to dictate, thereby inflating what the demand truly was. In a matter of a few months, banks and builders realized that the penned-up demand for housing wasn't anywhere close to the level of the building that occurred within the span of a few years; thus the very basic law of supply and demand took precedence and banks realized that the new supply of housing had incredibly out-weighed the actual demand. The quick spiral downward began in the last quarter of 2006 and hasn't stopped. Overnight banks cut credit to borrowers, and investors stuck in the middle suffered horribly. To make matters even worse, Wall Street cut off the supply of commercial, CMBS paper (loans to real estate investors), and thus banks we're left stuck with large loan portfolios and no hope of being paid off by Wall Street. The Commercial Mortgage Backed Securities (CMBS) market was always an outlet for banks and borrowers. Investors would obtain bank financing to build an office building, for example, and within a short period of time, pay the bank back with new loans from Wall Street. As soon as Wall Street stopped the flow of money in 2007, financial matters for banks became unbearable. Big banks had to borrow from the Federal government, and small banks just failed; new loans were nonexistent. Fast-forward to today, the second quarter of 2011, and things haven't changed. New home sales remain stagnant, condo towers remain empty, and commercial space is still vacant. Bank's REO (real estate owned) portfolios remain at record holdings as foreclosures and bankruptcies continue at a rapid pace. SO, where does an investor go to borrow money to take advantage of vastly discounted real estate prices? Unless you're a public company that raises money via the stock market (which none of us are), you must go to nontraditional sources commonly described as "hard money" lending. What is hard money lending? "Hard Money" typically refers to small loans, generally $100k to $2mm. It usually involves a quick approval process (48 hrs), a 65 to 70% loan against your total purchase, and funds within two to three weeks. Because hard money is usually used to buy distressed real estate, and the loan to value is conservative, personal guarantees are often not required. "Hard Money" lenders are typically private lenders that specialize in the "niche" lending market. They'll do their own appraisals after their review of your financial proforma for the property you intend on purchasing. The key in finding good, hard money sources is to subscribe to a service or find a broker who "runs in those circles." In other words, you're not going to find these sources in your local yellow pages. There are excellent buys out there so take advantage now! MyReviewsNow Please Visit Our Main Site
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