1031 Tax Free Exchange will Save You Money

,

Since property values are going up some of you might be considering selling and taking profits on your properties. If the property you are considering selling is NOT your personal residence and qualifies as an investment property then the option is available to sell by taking advantage of IRS tax code section 1031. This is the tax code that allows investors to defer paying capital gains taxes when selling investment properties. This procedure is referred to as a “1031 tax free exchange”.

Under current tax laws the capital gains tax rate for selling investment property is taxed at a rate of 15%. The tax rate for capital gains is lower than most marginal tax rates, so it would be beneficial to take advantage of selling using a 1031 tax free exchange to get immediate tax savings.

There is a catch as there so often is with tax laws exceptions. The catch is that you can’t get your profits in cash, but you are allowed to roll over your profits into another investment property that you MUST purchase within 180 days.

If you don’t “need the money now” then rolling your profits into a replacement property will add to your net worth by saving taxes now and should allow for greater appreciation of the property purchased.shutterstock_187606628

One other reason to do a 1031 tax free exchange is that the IRS calculates a 3% depreciation amount for every year an investment property is owned. This amount is “re-captured” at the time of sale by being added back into the property’s cost basis and taxed at the taxpayer’s marginal tax rate. Taking advantage of selling using a 1031 tax free exchange will also allow for the taxation of IRS depreciation to be rolled into the replacement property.

Under IRS tax code 1031 a tax fee exchange is treated as an exchange and not as a sale. This is an important distinction since selling is always treated as a “taxable event”.

It is this unique distinction that allows for any profits also known as capital gains to be transferred into the replacement property. It is VERY important that each requirement of tax code 1031 be followed very carefully as the devil is in the details, since if all requirements are not followed the exchange can be rejected and the “sale” will then be subject to capital gains taxes in the year of sale.

A few things need to be explained or defined prior to going any further:

Capital Gains: Taxable profits from an investment property

Like Kind Property: Property qualifying to be included in a 1031 tax free exchange must be considered like kind. In the world of real estate all real estate is considered like kind.

Replacement Property: This is the property that is purchased.

Accommodator: Company or third party that accepts and controls the net money from the sale of the property sold while the 1031 tax free exchange is in process.

Boot: Any sum of money received by the seller of a property in a 1031 tax free exchange. The amount of money received is taxable at the taxpayer’s marginal tax rate.

Recaptured depreciation: This is the taxable event that is triggered upon the sale of investment property when depreciation is added back to the cost basis of the property. The IRS 3% annual depreciation calculation is added back at the time of sale and taxed at the tax payer’s marginal tax rate.

“3” Property Rule: This is the rule that states that no more than 3 potential replacement properties can be identified to the IRS in any 1031 tax free exchange.

The general requirements of an IRS 1031 tax free exchange are:

  • The property must be an investment property
  • The replacement property much be like kind
  • The replacement property much be of equal or greater value
  • The seller is prevented from receiving the net cash proceeds
  • The funds much be handled by a third party, known as an accommodator
  • The replacement property much be identified within 45 days
  • The purchase of the replacement property must close within 180 days

shutterstock_118606231There are applications in the law that allow for “partial tax free exchanges”. Under this situation the percentage of cash received under the law is referred to as ‘Boot”. In partial tax free exchanges the proportional percentage of cash received from sale of the property will be subject to the recapture of property depreciation and becomes a taxable event in the year the property is sold.

There are companies known as accommodators that can be retained to perform the duties of handling the funds, filing required forms and completing paperwork required to finalize an IRS 1031 tax free exchange. There are companies that only act as accommodators. There are also escrow companies that provide accommodation services in addition to standard escrow services.

It is very important that any accommodator you chose to handle your transaction needs to have adequate insurance and fidelity bonds to guard against misappropriation of your money while in their custody. There are many reputable companies that can professionally handle an IRS 1031 tax free exchange.

There are reasons other than tax deferment to consider when selling by way of an IRS 1031 tax free exchange. Some things to also consider are:

  • Relinquishment of management duties: The options exists to exchange into a managed real estate investment where monthly management duties are handed by a management company or by a general partner or some other management arrangement.
  • Exchange into a triple net property: Where management duties, costs and expenses relating to property ownership are transferred to the tenant occupying the property.
  • Exchanging multiple properties: It is permissible to exchange numerous properties into one replacement property thus reducing multiple management duties required when owning more than one property.

With tax rates high and possibly going higher in the near future it only makes sense if you are considering selling to take advantage of IRS 1031 and defer taxes now. In a future Blog we will be discussing tax advantages available when selling a personal residence.

 

 

 

 

 

Why Finance with a Hard Money Loan

,

There are some people who will never need to borrow against any property they own or finance a property they are planning to purchase with a hard money loan. This can be attributed to great credit and great income levels or never having the need to “get the money fast” due to circumstances requiring urgency or immediacy.

Then there are people that don’t have perfect credit or those that don’t have the monthly income needed to satisfy the typical approval profile of the big banks or institutional lenders. Their alternative is to seek a hard money loan.

What is a Hard Money Loan?

A hard money loan is an asset-based loan meaning the collateral for the loan is an asset, typically a property. A hard money loan is issued to borrowers who cannot qualify for a bank and/or institutional loan because of poor credit scores or lower-than-accepted monthly income levels. Hard money lenders, like Westar Financial Group, fill the void and are there to help with the assistance of private investors and private investment companies by their side.

While the interest rate and mortgage loan costs are typically higher for hard money loans (because of the higher risk involved in financing the loan) many of the negatives associated with them are offset with the benefits attributed to the use of the money borrowed.

The Benefits of Hard Money Loans Come From What You Do With The Money Borrowed

Loaned money can be used for most any purpose such as paying off higher interest rate loans or credit cards. Paying off a higher rate with a lower rate will save money. That’s easy to understand. Other benefits include starting a business or investing in additional real estate. If the business is successful or the investment property goes up in value or provides positive monthly cash flow then the use of a hard money loan has benefited the borrower.

Then there are those situations where the benefit is simply the receipt of the money needed to pay obligations or supplement living expenses when life gets a little rough. The use of a hard money loan to fill a money gap in life should only be considered as a short term solution since there is a monthly interest payment due that just might become an additional financial burden if monthly income is not increased or augmented to offset the costs associated with the loan.

Interest Rates On Hard Money Loans

Interest rates on hard money loans can be up to 10% higher than the rates offered by banks or institutional real estate lenders so it is advised to use the proceeds of the loan prudently and carefully.

One of the situations where a hard money loan is currently employed is where active buyers of distressed properties simply do not have the luxury of time to get a bank loan or the banks are not lending on speculative real estate investments or where there exists more potential deals than money possessed by the interested buyer. So often a buyer will purchase property “A” for cash but then property “B” comes along and the buyer doesn’t have enough money to the buy it but there appears to be enough potential profit to justify any financing costs. So the buyer will typically borrow money on property “A” and use the proceeds to purchase property “B”. The profit derived from property “B” more than offsets the costs of money from the hard money loan.

If property buyers are successful in the home buying business, they will eventually accumulate more money as more deals are consummated so the need for hard money will decline as they become more successful.

But sometimes in life opportunities just keep coming in, so the funny thing about money is you just never have enough.

Opportunity is Knocking

, ,

With the current improvement in the California real estate market it just might be a good time to look into using the equity in your home to purchase a second property. The equity in your home can be used to get the down payment money to purchase that new property.

Many people have suffered from the mortgage meltdown that began in 2007 and from the overall real estate recession by losing their homes. So many people have been put in the position of going from being property owners to being renters. This recent event has caused an imbalance in the supply and demand ratio for available rental properties currently on the market. This has caused monthly rental amounts to increase and has provided the opportunity for real estate investors to take advantage of higher monthly rents. With current mortgage interest rates (now at historical lows) triggering lower monthly mortgage payments, the definite possibility exists for positive monthly rental net income.

Most institutional lender are not currently providing financing for cash out which many potential homeowners need in order to purchase an investment property. Private real estate financing does not live by the same constraints that the big banks or large institutional lenders are required to operate under when making lending decisions.

While the interest rates for private real estate financing are higher than traditional financing sources the opportunity that the current real estate market is offering far outweigh any additional interest rate expense.

With one call and a few minutes over the telephone our company can calculate the costs associated with purchasing a second property and determine the ongoing monthly expenses from owning and managing a rental property. We can show you the amount of monthly rental income you can earn each and every month which would be in addition to any increase in property values leading to an appreciation in your net worth.

The old adage that “a rising tide lifts all boats” apply so perfectly to the real estate market. Owning one property when the real estate market goes up will get additional equity resulting in increased net worth. But when two properties are owned the owner gets a multiplier effect of having two properties increase in value leading to increased equity in both properties and an exponential increase in net worth for the benefit of the property owner.

It is so true two is better than one!!!!

When can a Private Equity Loan Help your Borrower

While most Mortgage Brokers focus most of their time and energy originating “A” Paper Loans, situations do come up when even an “A” Paper Borrower might need a Private Equity Loan in order to “close the Deal”.

Most of the time this situation occurs when the “A” Paper Lender is dragging their feet or better yet going crazy with underwriting conditions that are imposed on the Mortgage Broker’s Borrower.

We have seen instance after instance where due to a small insignificant matter led an “A” Paper loan going down the drain.  In such a situation time might not be available to close escrow with another “A” Paper Lender in the time agreed to in the Purchase Contract with the Seller. Or in the case of a simple refinance where the Borrower needs funds for a Business or Investment purpose a Private Equity Loan can provide a Mortgage Broker’s Borrower the funds they need when the “A” Paper Lender proves difficult.

When might a Borrower Need a Private Equity Loan?

 Following are the most common situations where a Mortgage Broker should suggest a Private Equity Loan to their Borrowers:

 The Borrower has Credit Issues:

  • Current and past delinquent mortgages and consumer credit that are not acceptable to the big banks and other institutional lenders.

The Borrower has Income Issues:

  • This covers everything from limited income documentation to no income  documentation whatsoever, either way the big banks aren’t accepting the income documentation

There are Property Condition Issues: 

  • Deferred maintenance and contemplated property additions not allowed with traditional bank financing

In additional there are numerous types of properties that the big banks and institutional lenders will not often fund, some of which are:

  •  Churches
  •  Gas Stations
  •  Auto Repair Facilities
  •  Fix & Flip Transactions
  •  Vacant Land
  •  Unpermitted property additions

The Borrower Needs the money FAST: 

 When money is needed faster than the big banks or institutional lenders can provide

A Mortgage Broker that offers a Private Equity Loan to their Borrowers can prove be a good business decision for both the Mortgage Broker and their Borrowers.

Mortgage Brokers should ALWAYS inform their Borrower/Clients that anytime a Private Equity Loan is obtained that a plan should be put in place to pay the loan off, by either refinancing when credit, income & the property is acceptable to an institutional lender or by simply selling the property.

Often times Borrowers contact our company directly or through their Mortgage Broker to obtain funds for a GOOD business or investment deal that would not remain available when allowing for Institutional Lender’s loan processing time frames.  We always suggest a plan to pay the loan off, whether that plan includes credit repair, income documentation matters or necessary improvements to the property’s condition.  Often times income documentation is a much harder challenge, since the underwriting requirements of institutional lenders often demand two years’ documentation of business income and often the same time frame for employed Borrowers.

This type of situation provides an opportunity for Mortgage Brokers to earn a commission from originating the Private Equity Loan and later another commission from originating the institutional refinance.

We’re currently offering Private Equity Financing at interest rates that range from 9% to 12%, with most of the loans our company funds having an interest rate of approximately 10%.

Whenever a Mortgage Broker has a Borrower who might need or benefit from obtaining a Private Equity Loan all the Mortgage Broker needs to do is provide us with the address and the “Deal Points” and our company is usually able to make a lending decision, which includes a proposed interest rate, loan terms together points and closing costs.

Submitting the Borrower’s information to our company can be done over the phone or through the Mortgage Broker Portal on our company’s secure website.

We always provide a preliminary underwriting response the day a Mortgage Broker submits the Borrower’s information to our company.

Private Equity Loans are very much like institutional loans but with only a few differences.  The primary differences being the approval requirements and the funding speed.  Private Equity Loans are much easier to get approved when credit or the condition of the property is an issue.

The typical time frame from Mortgage Broker loan submission to funding in typically “1” to “2” weeks.  There are instances when it takes longer but that is usually associated with title matters or matters not disclosed by the Borrower that later pop up at the last minute that requires additional time to resolve.

Our company is highly dedicated to serving the needs of the Mortgage Broker community and their Borrowers with Private Equity Financing.

Our company has a convenient online Broker portal just for Mortgage Brokers on our company’s website that makes it convenient to obtain a loan quote on a potential loan or to get a formal loan approval on a loan in process.   Our website is fully secure and is an accredited SSL domain.

If you are a Mortgage Broker and would like to obtain additional information on how a Private Equity Loan can be a valuable choice for both you and your Borrower, then please call our company at (888) 797-7970.

Mortgage vs. A Deed of Trust – What’s in a Name?

,

Have you ever heard the term “I need a mortgage” or “I just refinanced my mortgage” or another other statement that contains the word mortgage? Was the person making that statement talking about a property in California? Was that person you?

The public has a huge misconception when referring to the legal document used in California known as a mortgage when discussing real estate financing. This is due to the fact that there is no such thing as a mortgage in California. Our country is comprised of 50 states with each state having its own unique laws and customs. States are free to adopt whatever type and form of legal real estate documents.

California is known as a “Trust Deed State” which refers to California legislation requiring that for promissory note to be used as a lien on a property it must be secured with a deed of trust.shutterstock_195175772

The word “mortgage” has simply been adopted by California society as the normal and customary way of referring to a deed of trust, whether knowingly or unknowingly. In fact, there is a mortgage company or bank on just about every corner that advertizes low rates on mortgages. So even the lenders and banks who lend money to purchase or refinance real estate in California are using the wrong word. There are many other such misconceptions often used customarily in society.

The main differences between a mortgage and a deed of trust are listed as follows:

 

Mortgage Deed of Trust
2 party instrument 3 party instrument
Borrower: Mortgagor Borrower: Trustor
Lender, Mortgagee Lender, Beneficiary
Trustee: Has Power of Sale
Reconveyance by Mortgagee Reconveyance by Trustee
Foreclosure by Judicial Action Foreclosure by Trustee Sale

 

As you can see the title of the parties to each respective document is referred to differently, but in each document there is a borrower and there is a lender. It’s just the deed of trust that has the 3rd party that a mortgage doesn’t have. The 3rd party to a deed of trust is the trustee. This is the main difference between the two documents.

The trustee has authority “authorized” by the borrower when they signed the deed of trust. A trustee can be a person, a Title Company or even the beneficiary as it is acceptable for the lender to also be the trustee. The trustee handles reconveying the deed of trust when the loan is paid off or processing a foreclosure sale.

The other main distinction between the two documents is in the way a foreclosure is processed. A mortgage requires that a lawsuit is filed in court and the process is handled in a court of law. The process of foreclosing on a deed of trust is by way of a non judicial process known as a trustee sale. This is processed and conducted by the trustee. A trustee sale is processed outside of court. After simply recording several documents, mailing out notices by certified mail and advertizing in the newspaper for 3 weeks a trustee sale can be held on a street corner or on the courthouse steps. The process is fast and simple.

After a foreclosure sale of a mortgage there is a Right of Redemption period for 1 year allowing the borrower the opportunity under certain circumstances to redeem their property. With a deed of trust that is foreclosed on by way of a trustee sale there is no Right of Redemption. Once the property is sold the borrower has no right to redeem their property.

shutterstock_123019507A deed of trust does allow the lender the option to either foreclose judicially or hold a trustee sale. A judicial sale will take about 1 year to complete and a trustee sale only takes 4 months. A judicial sale does provide for a deficiency judgment which allows the lender the option to foreclose on the property and also get a judgment against the borrower. Lenders almost always though choose the trustee sales route since the timeframe is so much shorter and there is no right of redemption.

The trustee to a deed of trust holds “Naked Title with Power of Sale” for the entire term of the loan. If a borrower has a 30 year mortgage the trustee possesses the power of sale for the entire term of the loan. The power of sale provision only becomes effective if the borrower defaults on their payments. The trustee’s power of sale is only removed when the borrower pays off their loan. The trustee will then issue a deed of reconveyance to the borrower. This action releases the deed of trust against the borrower’s property. It is at this point the trustee’s power ceases to exist.

If the borrower makes the monthly payments and eventually pays off their loan then the differences between the documents will have little to no effect on the borrower. Most borrowers will never even realize the differences.

So, in the future, if someone in California tells you they’re getting a mortgage you can let them know what they really mean is they’re getting a deed of trust.

Probating an Estate in California

, ,

Death and Taxes are the only sure things in life that we all know are inevitable.

The Federal Government and the State of California have not lost sight of at least the tax part.shutterstock_263639303

There are laws that the government, through our elected representatives, has passed providing for taxes to be assessed on certain Estates of deceased people. The government will want to confirm what is “Owed in Taxes” and then collect the taxes due prior to heirs receiving their inheritance. There are a number of exceptions such as the size of the estate and legal form of ownership prior to the death of the decedent.

When someone dies in California there is a process known as Probate. Simply put, Probate is the process of distributing the assets and paying the debts of the deceased person according to their request, such as is instructed by the Decedent in their Last Will and Testament. Or if someone died and did not have a will (also known as a “Dying Intestate”) the court will then make a determination as to who gets what under the theory of law known as the “Process of Intestate Succession”.

So often the Executor or Administrator of an Estate will need to petition the court to inform the court as to who receives what. At the same time, a dance with the tax man occurs as to what the value of the Estate is or what the value of certain assets are and if there is what’s known as a “Taxable Event” – on other words, the tax man will calculate the taxes due the government.

The process of settling and distributing the assets and money of the Estate to the appropriate parties can be very challenging and can often lead to a delay of a year or more.shutterstock_240242545

As part of an overall Estate planning process, everyone who has an Estate valued at a minimum of $100,000.00 needs to obtain legal advice as to what the correct Estate structure should be. The right choices and decisions made prior to death can lead to a substantial savings in aggravation and taxes at a very difficult and trying time for all involved.

Nothing Ventured Nothing Gained

,

Starting a business is the dream of many Americans, the risks are high but the rewards can be great.

Money is always a necessary evil for anyone when they take that deep breath and make the decision to live the American Dream and start a business.

Starting a business almost always requires a substantial sum of money from the person attempting to get a business off the ground – money that many would-be business owners just don’t have. Sources such as family and friends can lead to disappointment due the their lack of excitement in the new business venture.shutterstock_70442032

Potential business owners then often turn to “their” bank thinking that it can’t wait to jump in and fund their new business venture. Many future business owners might have poor or even bad credit when deciding to start their new business ventures – credit that their bank just might not find inviting when reviewing the loan application for the new business.

Well unfortunately, traditional lenders do have very stringent lending standards when lending to a new business, primarily due to the fact that so many businesses fail in the first several years and many lenders in the past have gone down with the ship with the business owner when the business failed. So naturally, lenders are very careful in what business they lend on and who they lend to.

Potential business owners can look to lending sources that don’t require the same stringent lending standards that the big banks do when lending money, lenders that will lend to business owners with poor to bad credit or have had a business failure in the past.

Equity lenders will lend the potential business owner the necessary money to get the business up and running based on the equity in the real estate they already own. Business owners can use their personal residences, rental properties or other investment properties to obtain the money needed to get things going.

The interest rates on equity loans are higher than traditional banks but when the money is used wisely for a business that has a good product or service that is in demand then the cost of money would be considered a wise business choice if it leads to a successful business and profits to the business owner. Later on, when the business is humming along and the need to expand the business arises then an equity loan can once again be used to finance the business expansion and thus provide the business owner additional profit.

Equity = Business Profit

Now go out and get that business going!!!!

Dealing with Reverse Mortgages after Death

The advent of Reverse Mortgages a number of years ago was a godsend to many “older” Americans who had built up substantial amounts of equity in their properties.  Reverse mortgages allows homeowners the ability to “tap into” their equity to obtain monthly funds for living expenses or to refinance a loan that requires a monthly payment and obtain a Reverse Mortgage that has no monthly payments.

shutterstock_263639303When Reverse Mortgages first come on the scene they quickly garnered a bad reputation..  There were stories about lenders stealing houses and precluding the now deceased homeowner’s heirs from their inheritance.  There are currently commercials running on both TV and radio touting the virtues of Reverse Mortgages and the fact that the equity in the property will still be there for the beneficiaries of the homeowner.

The terms of Reverse Mortgages have improved over the years but they still remain one of the most costly mortgage any homeowner can obtain.

The terms of Reverse Mortgages provide for the payment in full of the outstanding principal balance following the death of the Homeowner.  The standard time frame to pay off a Reverse Mortgage  is “9” months, but there are many lenders who don’t even allow that much time to pay the Reverse Mortgage back in full prior to initiating a foreclosure proceeding.  Our company  has seen on many occasions where lenders were not willing to hold off foreclosing since once a Reverse Mortgage goes into default and a foreclosure is initiated an “Insurance Fee” is charged to the Estate under contract signed by the now deceased homeowner that can amount to many thousands of dollars a month.

If a person holds title in their name the laws of California require that the person’s assets must be Probated in a court of law.  This can take many years due to required court procedures, but can be extended even longer if there are disagreements between the beneficiaries.

Many times the Reverse Mortgage lender will require that the Reverse Mortgage be paid off in full prior to the completion of the Probate court action.  The only option available to the Beneficiaries who don’t have the available funds on hand or the ability to borrow the money from another source is to obtain a Probate Loan. In this situation the Executor or the Administrator of the Probate Estate signs the Probate Loan on behalf of the Probate Estate to pay off in full the Reverse Mortgage.shutterstock_263647079

Since Private Equity financing does not live by the same restrictive lending requirements of the big banks it’s possible to obtain a Probate Loan even if the Reverse Mortgage lender has initiated a foreclosure proceeding.  Our company has on many occasions has been able to fund a Probate Loan to pay off a Reverse Mortgage that was already in foreclosure.  The Beneficiaries often were very happy since they thought there was just no way to ever get a mortgage and thought their only option was sell the property.

The Probate Loan process is quite simple.  If the Executor has received Letters of Testamentary from the Probate Court that contains Full Authority then all that has to be done is:

  1. “Notice of Proposed Action” this is short Judicial Council form signed and filed by the Executor with the court and served on all required Beneficiaries and parties.  This is where the Executor states to the court and to all other Beneficiaries what action is intended to be taken under Executor authority.
  2. “Waiver of Notice” this is a form that is prepared by the Executor and served on the other Beneficiaries to sign and is further filed with the court providing court proof of each Beneficiary’s concurrent with the proposed Probate Loan.  This provides for a waiver of the standard “15” day waiting period provided to all other Beneficiaries to object to actions taken by Executors.

If the Executor was issued Letters of Testamentary that contains Limited Authority or if the Decedent died without a Will and the court appointed an Administrator then under each option a Motion has to be filed with the court petitioning the court to issue a court order acceptable to the title company approving the Probate Loan that was requested by the Executor of the Estate.shutterstock_119212144

There a number of different types of Probate Loans available in the marketplace today, such as those that are not secured by real estate to loans that are secured by real estate.  Due to the size of most  Reverse Mortgages, a Probate Loan that is secured by real estate would be required since Probate Loans that are unsecured are so much more expensive that it would be foolish to even consider.

Our company is well versed in all the ins and outs of maneuvering investor underwriting requirements and court procedures that are necessary to expedite, fund and close a Probate Real Estate Loan.

Probate Loans are funded by Private Investors or Private Investment Funds and are structured, analyzed and underwritten much like a Traditional Private Equity Loan. The interest rates, terms and costs are on par with any other type of Private Equity Loan.  Probate Loans are currently exempt from all the cumbersome regulations, loan disclosure requirements and rescission time requirements under the Dodd-Frank Consumer Lending law that went into effect on January 10, 2014.

We have been called upon on many occasions to step in at the 11th hour and provide a Probate Loan just prior to a scheduled Trustee’s Foreclosure Sale.  We’re well versed in the Probate Loan process and have many years of experience providing Probate Loans to Executors or through the Probate Estate’s attorney.

If there is a Probate Estate that might benefit from a Probate Loan then please contact our office at (888) 797-7970 to speak with one of our helpful loan consultants who will be happy to analyze the situation, address any questions you may have and let you know how our company can assist with a Probate Loan.

Alternative Lending Can Help You Close More Escrows

If  Realtors could have their prayers answered… it would be that every Buyer would be a cash buyer. Escrows would close faster, there would be a lot less work for already overworked agents and no escrow would ever get canceled due to the Buyer not able to get financing.

shutterstock_263240276In realty most Buyers need financing and in most situations are able to obtain the standard Fannie Mae loan. In today’s world there are many instances where a homeowner makes the big decision to sell their home, realizes a large amount of money, makes an offer to buy another property and then reality hits.

The Buyers receive the unfortunate news that for some reason something in their loan application is preventing them from obtaining loan approval to buy their new home. The Sellers can’t sell, the Buyers can’t buy and you the Realtor didn’t receive your commission. This situation is a sure loss to everyone involved.

In many situations like this Alternativeshutterstock_173623172 Lending just might be the answer to everyone’s problem. The qualifying requirements are easier and there are many programs available to accommodate just about every Buyer’s specific situation, whether it be negative credit, difficulty proving income or the subject property not being up to institutional standards.

Alternative Lending can be broken down into “3” basic categories:

Nonprime

For those Buyers that are just “outside” the lending requirements of the major banks and institutional lenders.

Subprime

For Buyers who have additional credit and income challenges.

Private Equity

shutterstock_265252865For Buyers who have substantial negative credit or are buying a property that is in bad condition or just needs the money NOW.

Most Alternative Lending programs require a 20%-25% down payment and if the Buyer has the funds then many of the income and credit impediments of “A” Paper lenders are eliminated, the Buyer can get approved for financing and everyone wins.

Some of the situations where Alternative Lending can help you close more escrows are:

1. Buyers who have lower FICO Scores

Bankruptcy…Loan approval right after bankruptcy

Foreclosure…No need to wait many years to get financing

Short Sale…Not considered a foreclosure

2. Buyers whose Tax returns don’t tell the whole income story.

Bank statements…12-24 month bank statements to prove income

Stated Income…Available in certain situations

3. Condominiums complexes that are not FNMA/FHLMC approved

No need to obtain a FNMA condo certificate

4. Down payment documentation

Less requirements in sourcing the Buyer’s down payment

Additional benefits available with Private Equity are the ability to finance a property that has substantial deferred maintenance. This can help with a client that is an active Fix & Flip Buyer or for a client that is interested in venturing out and buying a property that needs a little more than the basic TLC.

The next time you have a Buyer who is having a problem getting loan approval take a few minutes to look into how Alternative Lending can provide the lifeline necessary to close that escrow.

Marketing Secrets for Originating Private Equity Loans

marketing

It’s common knowledge that most loan agents started in the “A” Paper Market, with many loan agents spending their whole career on that side of the mortgage market…..…often never realizing that there are Qualified Borrowers who want and need real estate financing, but just can’t get approved by traditional mortgage lenders.

Many of us at our company have heard of instances where Borrowers in need of financing contacts a Mortgage Broker who then runs their credit or checks their income and summarily notifies them that “They don’t Qualify “, due to either their FICO scores being too low or their income not adequately reflected on their tax returns.

The Borrowers are then forced to walk away without a loan and the Mortgage Broker goes the other way without a commission.

The result of this event is; the Borrowers are still out there and still need a loan.

The above situation has happened to many Mortgage Brokers……….has it happened to you?

Often Borrowers who don’t qualify for FNMA financing, but have a pressing need for funds will be interested in nontraditional financing where getting the lowest rate is not the driving force.

There are four main reasons why Borrowers would be willing to finance with Private Equity Financing.private-equity-financing

1.Credit not up to FNMA, FHLMC and Institutional standards
2.Income not documented as per institutional lending standards
3.The Subject Property’s condition not being up to institutional standards
4.The Borrower has an opportunity and needs money NOW!

The above “Borrower Situations” while possibly being a reason for FNMA and other institutional lenders declining the loan, Private Equity Investors will welcome the opportunity to provide a loan the Borrowers needs.

The main qualifying requirement is EQUITY.

When the opportunity presents itself and a prospective borrower has one of the above Negatives and there is equity in the subject property, take the time to investigate further if there might be a Plan “B” or even a Plan “C” financing option the Borrower might consider accepting.

If you are looking for additional commission income and are willing to invest a little time and effort in generating Private Equity Borrowers then the following marketing strategies might provide you some suggestions to increase your monthly loan origination and of course your monthly income.

Foreclosure Borrowers
There are many data sources available that provides a complete list of every property that is in some stage of the foreclosure process. Reviewing the data can be done quickly to determine the properties that have equity and that are potential candidates for a Private Equity Loan. Marketing to the potential Borrowers can be done by mail, telephone or by direct contact.

Reverse Mortgages
The death of a parent while tragic enough can be made so much worse when the reverse mortgage that was taken out by the decedent prior to death isn’t paid fast enough and goes into foreclosure. The children or heirs are then forced to either sell or refinance the property to satisfy the reverse mortgage. Institutional lenders will not touch a property that is in foreclosure but a Private Equity Loan can in many instances provide the funds to pay off the reverse mortgage and allow the heirs to keep the property in the family. These leads are included in the data comprised in the foreclosure list mentioned above.  Often a review of the property data will reveal if the loan in foreclosure is a reverse mortgage or just a traditional mortgage.

Probate Loans

iStock_000034788000XXXLargeMany heirs are “Hot to Trot” to get money or money is needed to pay estate expenses, including attorney fees. Institutional lenders never tough these situations but Private Equity Investors are willing to lend the money needed prior to the probate being completed by the court. Most Executors of Estates have what is referred to as “Unlimited Authority”, where the need for court approval isn’t necessary. In the situations where the Executor or Administrator of an Estate has only “Limited Authority” then a simple court hearing can be set up to obtain court approval for the Probate Loan. The process is quick and simple and usually takes less than 30 days. Marketing to Probate Attorneys by either a direct mail or E-mail campaign informing the attorneys that your company provides Probate Loans can lead to additional monthly closed loans and additional commission.

Tax Liens/Judgments
There are many Borrowers who either have a Tax lien or Judgment that they want to pay off since the penalties and interest are so high in some instances that it makes sense to borrower the money with a Private Equity Loan to pay off the liens. There are many services that provide a list of property owners that have either a Tax Lien or a Judgment. A simple letter or better yet a well designed post card mailed to the property owner might make the phone ring and provide additional monthly commission income.

Delinquent Property TaxesB9316329952Z.1_20150221134713_000_GPLA16IC5.1-0
This information is available from the county where the subject property is located. Each county puts out a list of delinquent properties that are getting ready to go on the auction block for a Property Tax Sale. A mailing campaign to owners of each property that has equity can lead to additional Borrowers and commission income. These Borrowers are very motivated to resolve their property tax problem.

Fix & Flip Borrowers
Many real estate investors make a full time business buying, fixing and later selling properties, and they’re in a hurry, since “Time is Money” or the property is in such bad shape that no FNMA or institutional lender would even touch the property. These situations are great opportunities to provide these types of Borrowers Private Equity Financing. It’s a great way to set up an ongoing business relationship with Borrowers who will come back for financing often. Many of these Borrowers can be referred to you by Realtors you might already be doing business financing their “A” Paper Borrowers.

Deferred Maintenance Propertieshouse-tools
This situation usually occurs when a Borrower applies for financing and in the course of interviewing the Borrower or from the appraisal it is determined that the property in not up to FNMA or institutional property standards. If the property has equity then a arranging a Private Equity Loan for the Borrower might get the Borrower the funds needed.

Properties “A” Paper Lenders Don’t Like
There are so many here that we just can’t list them all but think commercial properties, auto repair, small stand alone buildings, attached buildings or even churches.

Most of the time the Borrowers have good income credit but the loan amount is below the “minimum loan amount” for many institutional lenders. Many commercial lenders have a $500,000.00 minimum loan amount. There are many Borrowers that own properties that are in need of loan amounts that are less than the minimum loan amounts of many institutional lenders. Your title company can provide you a list of properties that would be great candidates for a Private Equity Loan. There are so many potential opportunities available with these types of properties to generate additional Borrowers and monthly commissions.

We hope the above marketing suggestions will give you additional ideas to increase your loan origination business and your monthly income. Like most things in life……….Nothing Ventured Nothing Gained…………take some time to go outside your comfort zone……………….…your business and your income just might benefit.

Our company provides many helpful resources to our Mortgage Brokers who are currently originating Private Equity Loans or for those who are considering setting up a Private Equity marketing program or just want add Private Equity Loans to their available loan programs for their Borrowers.

Call us at (888) 797-7970 or E-Mail us at info@westarlending.com and we’ll be happy to assist you with marketing and sales support.