Real Estate Loan Underwriting - Managing Increasing Loan Risk

Real Estate Loan Underwriting – Managing Increasing Loan Risk

In today’s economic environment managing risks in Real Estate lending is increasingly more difficult. Establishing the value of the realty collateralizing the loan is more akin of shooting at a moving target. The continual decline in property values is only one factor that increases the risk for lenders, another factor in these trying times in the financial soundness of the borrower. The financial stability of individuals is under continual pressure for borrowers due to the economic crisis as unemployment rates rise and credit scores drop. Like a house of cards and individual’s ability to meet his/her credit obligations can tumble overnight.  

The decline in real estate prices is not only affecting lenders and borrowers but also state and local governments whose property tax base is quickly loosing value. All across the country local and state governments are looking for ways to crimp their budgetary shortfalls. Departments are being asked to look for ways of increasing their revenue sources. Of particular interest to risk managers is the step-up of code enforcement activities seen in most major municipalities. With the decline in new construction nationwide many building and zoning departments are expanding staff duties to include code enforcement.  Instead of laying them off to cut expenses government maintains personnel by increasing revenue streams from fees for services and fines. In some places violation fees can quickly escalate if not addressed to the tens of thousands of dollars.  

Code violations ride with the property and become the responsibility of the new property owners whether they created the violation or not. For the borrower making an investment in a home regardless of it being a market rate, short-sale, or foreclosed property, a major code violation or the cost of legalizing an illegal addition can be prohibitive thus seriously decreasing the value of the property and increasing the risk of the real estate loan. Many borrowers simply do not have the necessary financial resources to address serious violations or repairs unseen at the time of purchase resulting in default.  

Banks have relied on a property appraisal by state licensed companies that they trusted as the way of establishing the value of the asset. The typical residential appraisal relies on one of two methods for determining value, the cost approach and the direct sales comparison approach.  

1. Cost Approach – In this approach, the replacement cost of the building and improvements is estimated, estimated depreciation is deducted, and the value of the site is added.

2.   Market Data or Direct Sales Comparison Approach – The essence of this approach is to determine the price that similar properties have sold for recently on the local market and, through an appropriate adjustment process, to estimate the fair market value of the subject property based on these comparable sales.

Both have serious flaws in the current market. Current real estate prices in many parts of the country are lower than what it would cost to build the structure without considering the cost of land or depreciation leaving appraisers to give land negative values or use other adjustments to meet values arrived at by the sales comparison approach. Additionally these appraisals do not consider unseen code violations or illegal additions not disclosed by the seller and that appear to be legal at first glance leaving open a tremendous hidden risk potential for the lender. Appraisers are not always schooled in architecture or engineering or construction and are unable to determine the value of a structure based on undisclosed structural inadequacy, zoning code violations, encroachments, or illegal additions that might appear to be legal.

The lack of a comprehensive assessment of physical needs that includes not only the condition or expected life of the structure but also deficiencies and above all zoning violations leaves the buyer and equally important the lender at risk of buying into a property that will lose its value if found to be in violation with local laws.

 Governments are stepping up in places like Miami Dade County, Florida. A recent law effective April 1, 2009 requires that a “Disclosure of Findings” report must be prepared by a Registered Architect and recorded in with the “Clerk of the Courts” for bank owned properties (REO) prior to offering the property for sale. When the report is approved and filed the county issues a “Certificate of Use” for the property.  

The “Disclosure of Findings” report is prepared upon completion of an inspection by the architect. The inspection determines if there are any code violations, inadequacies or other illegal or life threatening conditions not usually spotted during a conventional home inspection or appraisal of the property. The report includes an estimate by the architect of what costs are to be expected to correct deficiencies. When the service is properly performed, an architect will search historical zoning records and codes to determine what requirements were applicable to the property when it was built. It is not sufficient to judge the legality of a structure based on current codes and ordinances since codes have changed over time.  

The spirit of the law is “consumer protection” but clearly it offers the county an additional income stream not only from filing fees but also from violation fees and new permit fees. Banks lending on properties with a Disclosure of Findings report have found an added level of security. More lending institutions are implementing similar inspection requirements on properties they are lending on and passing the cost of the inspection to the buyer much like the conventional inspection paid by the buyer. These inspections in Florida can also be used to satisfy the required insurance inspections commonly required by providers. The net result to the consumer is minimal considering the added security of the investment received and potential savings in insurance premiums.   

Armando M. Montero is a Florida Architect and Co-Founder of Property Assessment Group, LLC a firm providing due diligence services and Loan Risk Mitigation to Banks, Lenders and Asset Managers.

Real Estate Loan Underwriting - Managing Increasing Loan Risk

Man who loves feet is creeping out dozens of Arizona real estate agents

There is a man in the greater Phoenix, Arizona area who is targeting female real estate agents with questions about their feet. These female real estate agents are not happy about it, but as KPHO CBS 5 AZ reports, there isn’t much they can do about it other than warn each other.

(KPHO)

KPHO spoke with DPR Realty agent Hope Salas. Ms. Salas says she was contacted by a prospective home buyer via text. The man, who identified himself as Anthony, said he had just moved to Arizona from New York four months ago, and that he worked in reflexology. Reflexology, though it does have itsupporters, is an alternative form of medicine that appears to be little more than, “a form of foot massage,” according to Quackwatch.

(KPHO)

“Anthony” quickly steered the conversation away from homes and started talking feet, asking Ms. Salas if she wore heels often. Another realtor, Lacey Washburn of Realty One Group, told KPHO about her interaction with the foot fetishist, saying, “He asked me if I ever had reflexology done before, which I didn't answer that question. And then he asked me if I liked having foot massages or foot rubs, which I didn't answer that question either."

(KPHO)

KPHO reports that a “number of realtors” have reported the man to police, but because “Anthony” hasn’t actually broken any laws, there isn’t much that can be done. In the meantime, agents are warning each other via their Facebook group and are staying on high alert. The station tried speaking with the man, but only got his voicemail.

More info: KPHO

View the original article here

The 3 Secrets to Finding Hard Money Lenders to Fund Your Real Estate Deals

The 3 Secrets to Finding Hard Money Lenders to Fund Your Real Estate Deals

I am often asked by real estate investors that want to purchase wholesale deals how they can find hard money to use to purchase and repair the property.

Let’s start with a brief description of what hard money/equity lenders actually are. They are lenders (often private individuals, but can be companies) that lend based upon the After Repair Value (ARV) of the property. Therefore, they are ideal to use when the condition of the property is such that an investor will be unable to obtain a conventional loan. For instance, if the property needs a new roof, most conventional lenders will not do the loan, but a hard money lender will fund it if the property is being purchased for a big enough discount.

Besides providing the ability to purchase distressed property that needs work, hard money lenders also enable a buyer to purchase a deal quickly, which is a requirement when buying from a wholesaler.

Be aware that because of the lender’s risk in funding such deals, they do charge high interest rates and fees. It is not uncommon to find such lenders charging 15% interest and 2-4 points (each point is equivalent to 1%) on the loan amount. However, if you’ve found a good enough deal and you have a sound exit strategy once the property is repaired, hard money lenders can be a great tool in your arsenal.

Here are the most effective ways to these lenders in your area:

1. Networking – Network with other real estate investors in your area to find out who they are using to fund their deals. Go to investor meetings, e.g. REIA groups, in your area. In fact, it is likely that your local REIA has corporate sponsors, and if so, there is probably at least one hard money lender among those sponsors. If you’re looking for funds quickly and can’t wait to attend the next REIA meeting, you might try searching your local REIA’s website for a list of its corporate sponsors.

2. Internet – There are a variety of ways to find these lenders online. Start by doing a search on a search engine like Google. In addition, social networking sites provide a fantastic resource for finding hard money in your area. If you haven’t already, join every real estate-related group you can find on social networks like Facebook and LinkedIn. After you join, check the postings as you may find hard money lenders that are advertising their services. If not, post a message on the wall or discussion board for each group asking fellow group members for referrals.

3. Data Provider – Finally, here’s a way to find hard money lenders using the power of a list provider, such as Melissa Data or First American Core Logic. Pull a list of absentee owners that have purchased property in your area within the past 6-12 months. Absentee owners are the entries where the tax records mailing address and the property address are different. Be sure that your data provider can provide you with the name of the mortgage holder(s) on each property. It would be a good idea to limit the list to properties that are more likely to be fixer uppers, so you don’t want newer or more expensive properties. Consider limiting your results to those with a purchase price under an appropriate price point and built before, say 1990. Then, cull the list, looking for the lenders that have mortgages on these properties.

If you are looking for more Real Estate Investing strategies or are looking for big profit wholesale deals, visit http://www.PrimeRealEstateDeals.com There, you can receive a Free Report entitled “How To Buy Wholesale Properties Without Taking A Bath”. You can also sign up to be on our wholesale buyer’s list.

The 3 Secrets to Finding Hard Money Lenders to Fund Your Real Estate Deals