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Title Theory v Lien Theory

Written by a hard money lender. Posted in Uncategorized

In the United States there are two primary ways that property ownership is held and transferred. Some states recognize what is called the “title theory,” while other states recognize the “lien theory.” In a title theory state, the lender holds the title to the property in the name of the borrower through the instrument known as a “deed of trust.” In a lien theory state, the deed remains in the borrowers (mortgagor) possession, and the lender (mortgagee) places a lien on the property via the more commonly known instrument called a mortgage. However, the difference between these two theories is not particularly substantial, until the borrower defaults on the loan.

Most title theory states employ a non-judicial foreclosure process, whereas most lien theory states conduct foreclosure through a judicial proceeding. In a non-judicial foreclosure, the lender forecloses on a loan without a court’s interaction, and the lender is the party that holds the actual foreclosure sale. However, the mortgage must contain a “power-of-sale” clause which expressly provides for non-judicial foreclosure. This is a key requirement, because it demonstrates the borrower’s express agreement to the non-judicial foreclosure when the loan was instigated. In a judicial foreclosure, a lawsuit is filed by the lender and foreclosure is issued by the court. A public official holds an auction, which is often times on the steps of the courthouse. The public official was traditionally the sheriff, which is why a judicial foreclosure is often called a sheriff’s sale.

It is important for both hard money lenders and borrowers to understand these differences. Naturally, the title theory states are more attractive to hard money lenders, while the lien theory states provide more advantages to the borrower. Admittedly, this distinction is the reason that many hard money lenders are hesitant to lend in lien theory states. Furthermore, strict usury laws will in many instances dissuade lenders from doing deals in a particular state. For example, Florida, is a lien theory state, and has very tough usury laws. The usury laws prescribe a maximum interest rate of 18 percent on loans that do not exceed $500,000. While that may not be a deal breaker by itself, coupled with the lien theory, Florida becomes a very unattractive state to hard money lenders. If you find a hard money lender who is anxious to to give you money in a state like Florida, then you might want to consider their motives. They quite possibly are only after your “application fee.”

Restoring Hard Money To Its Throne

Written by a hard money lender. Posted in Uncategorized

The tabloids are, and always have been, full of fraud stories relating to securities, real estate, and hedge funds. However, lately there are an influx of scandals relating to the hard money lending industry. These fraudsters are tainting the good faith of our industry. These misconstrued conceptions of the industry are leading borrowers away from the honest lenders, to other sub-category divisions like private lending. Borrowers now-a-days refuse to pay any upfront fee’s to lenders, and push the expense of due-diligence off to the lender. This cautious advance is understandable given recent history. One of the more common methods of deceit in the hard money world is found by way of “up-front” fees. So called lenders charge up to $20,000 up front, then disappear altogether, taking the borrower’s precious funds with them.

From an honest lender’s perspective, charging an up-front fee is absolutely necessary to stay in business. A properly functioning lender cannot possibly survive if it must stomach all expenses such as travel, hotel, and inspections for each individual deal. These alternative perspectives raise a certain dilemma: How does a borrower know if a lender is trustworthy? First of all, if a lender is charging more than a couple of thousand dollars in up-front fees, it probably is not reliable. Second, honest lenders will usually stipulate in the letter of interest (LOI) that they will refund to the borrower any unused funds. Third, a good practice is always to ask the lender for referrals. This will almost guarantee that a fake lender will show its cards.

So what does the path back to hard money look like? We can’t possibly expect to eliminate the liars and fraudsters from the industry. What can we do then? We must be smarter lenders and smarter borrowers, working together to expel deceit and foster an environment of high standards within the world of hard money. Hard money brokers are not exempt from this categorical imperative. A broker must maintain this high standard by investigating all potential lenders before recommending them.

If honesty and integrity are two of your values, then contact Hard Strategy lending today. With five years of experience in the industry, our greatest pride is our integrity. If we can’t fund your deal, we will approach our network of pre-qualified lenders to get the deal done. Let’s join together to restore the good name of hard money lending!

Hard Money vs. Hard-Money Standard

Written by a hard money lender. Posted in Uncategorized

I have noticed lately some confusion in relation to the term “hard money.” The confusion stems from recent political debates. Anyone who is familiar with the recent arguments in regards to the debt ceiling and the gold standard, may have seen the term hard money. The term is not referring to a hard money loan or a hard money lender, rather in relation to a “gold-standard”. The gold standard, as we refer to it today, was called something different in the past. The original name for it was the hard-money standard. Once again this name has no reference to a private money or hard money loan. It simply means that the standard for currency is gold, or rather, something hard. Recent debates among the political parties like the new-era “Tea Party” support the ideas of returning to the hard-money standard.

Unfortunately the restoring of the gold standard term hard-money standard, has confused the google bots, and concurrently confused people seeking hard money loans. To reiterate, the term hard money is not a loan made in gold, or a standard of currency backed by gold. Hard money is a non-conventional loan made by lenders or investors which is generally backed by real estate collateral.

Hard Money for a Primary Residence

Written by a hard money lender. Posted in Uncategorized

We recently worked with a businessman from Louisiana. He was interested in a residential hard money loan for his primary residence. His goal was to obtain a hard money loan for 90 days so that he could reposition his mortgage. This unique strategy is common among real estate investors, and builders. Unfortunately we were not able to help him with the loan, nor were we able to find a hard money lender who would. The reasons for this was not the LTV, or the value of the collateral, as all numbers were in perfect order for a hard money loan. The problem was that the loan was requested for his primary residence. Some states require you to be a licensed mortgage lender if you lend on a primary residence. Other states require the license if you lend on any 1-4 unit properties. Neither of which were the obstacle in this situation.

The problem is plain and simple. Hard money lenders don’t like to lend on primary residences, usually for two reasons: 1) Because in the occasional event of default, foreclosing on a primary residence is near impossible for a hard money lender because it can be perceived as predatory. It could take years for a lender to take possession of the property. 2) No honest lender likes to foreclose, especially on someones home. We are not in the business of kicking people out of their own home, rather in the business to lend and profit from lending only. Hope this clears things up a bit.

Do I need a license to be a hard money broker?

Written by a hard money lender. Posted in Uncategorized

The real estate, lending, and investing markets tanked near the end of 2008. Immediately following their downturn I noticed a flood of indictments in the local area. These indictments were related to investment schemes, securities fraud, real estate fraud, soliciting securities, and brokering real estate deals without the proper license. Just one week ago I read a news release on the indictment of a local man who was guilty of one of these crimes. HE DIDN’T HAVE THE APPROPRIATE LICENSE! I was extremely curious in the details of his case, so I made a few phone calls. I was very disheartened in what I found. For the purposes of the story I will refer to this individual as Joe.

Joe is a 31 year old father of three with another kid on the way. Joe was involved in the community. His kids play soccer. He always paid his taxes and he is a devout member of a local church. Joe is just your average, ordinary, next door neighbor who is now in prison for 10 years due to 12 counts of securities/real estate crime. Each of which is a 2nd degree felony. In my research I made contact one of his neighbors and found that Joe simply didn’t know that a license was required for the type of business he was involved in.

A sad story it is. Any human, from any perspective can feel sympathy for Joe. However, YOU CAN’T AFFORD TO BE THAT GUY! Your state securities department, real estate division, and the SEC don’t care how much of a stand up guy or gal you are. If you violate securities or real estate law they will hang you out to dry! The looming question I hear on a regular basis is this: “Do I need to be licensed to broker/bird dog hard money deals?” The answer is about as complicated as the regulation that contains it. So in short, it depends on the state of residence and the type of real estate.

Most states only require you to be a licensed broker-dealer if you are involved in the brokering, lending, and referring of residential mortgages. You must also be licensed if your lending capital is that of other peoples or corporations. Generally speaking if you are brokering commercial deals you don’t need a license. Most states also require you to have a loan officer licence (LO Lic) if you are initiating a real estate loan. For example the Utah Division of Real Estate says “Wholesale lenders, hard-money lenders, and commercial property lenders are NOT required to be licensed with the Utah Division of Real Estate as long as they do not conduct the business of residential mortgage loans as defined in Utah Code 61-2c-102.” These laws and codes may differ from state to state. You must do the research before you are involved in any dealings related to real estate, investing, and securities.

I am not suggesting that I am an advocate of all the regulation and regulators, however I am suggesting that you must be in compliance with them. No deal and no amount of money is worth going to jail for. To reiterate; DON’T BE THAT GUY! I’m not interested in seeing any more people like Joe going to jail simply for being uninformed.

What is hard money?

Written by a hard money lender. Posted in Uncategorized

A hard money loan is an asset based loan collateralized by one or more assets (usually real estate). The interest rate is usually higher than a traditional/conventional loan, like one received from a bank. The reason for this is the lenders unique ability to close fast and in some cases credit is not a factor. Generally LTV (Loan to Value) is the determining factor in whether a hard money loan will be funded or not. Most lenders prefer to fund in a first lien position, which means that in case of a default they will be the first lender to receive honorarium.

Hard money lenders are similar to private money lenders in the fact that their funding capital is usually derived from a network of wealthy, private individuals, or companies. This pool allows them to be very liquid and enables them to fund a variety of investments.

Now that I understand, how do I use it?

Cash flow is the life blood of the real estate industry. If an investor wants to be in the position to take full advantage of real estate opportunities, he/she needs to be either cash rich, or have access to large amounts of capital. And have access to this capital in short notice. Being that most investors are not cash rich the second option is a great alternative.

Hard money can be used to prevent foreclosure, used as a construction bridge loan, or to fund projects that a traditional bank would not consider. Hard money lenders can close fast. Once all paper work is in place a deal can close in as fast as 24 hours. A traditional bank may take up to 6 months to fund. This short due diligence period enables the borrower to act fast on fleeting deals.