Real Estate Investors - Are the Banks Lending Money?

As reported by RealtyTimes.com (Author: Kenneth R. Harney) - "Investor Report: Who is Lending?"

The premise:

Some investors may believe the headlines and assume that nobody's lending money anymore -- and certainly not for small residential rental projects.

The assertion:

But the reality is a little better than that. If you can come up with a downpayment, and are prepared to document income, assets and a solid appraised value, there are still some willing and able funding channels open to you.

Who's lending:

Portfolio lenders such as regional or smaller banks and savings institutions who continue to offer carefully-underwritten, specialized niche products for small investors.

Second, Fannie Mae and Freddie Mac, who continue to fund single and multifamily loans, although with lots more restrictions than before.

And finally -- if either of these two don't work for you -- you can explore the so-called "hard money" lending route, which will almost certainly cost you a lot more.

Caveat #1:

Let's start with number one: As just one example, Home Savings of America in El Segundo, California, still offers jumbo investor loans on one to four unit rental properties with a proprietary "pay option" adjustable-rate program, according to loan officer John W. Barnes.

You've got to sink some serious equity into the deal up front: Maximum loan-to-value ratio is 60 percent and you need to come to the table with a minimum 680 FICO score.

Caveat #2:

There are also some geographic limitations, but if you get through these hoops, you might qualify for a fully-indexed 6.65 percent rate, with a 40-year term and an "MTA" index tied to the average monthly yield of Treasury securities over a one year period.

Caveat #3:

For investors looking for a more plain-vanilla, 30-year, fixed rate mortgage, Fannie Mae continues to offer loans to rental property purchasers. But again, you need solid equity up front and higher credit scores than in the past. Even on loans with 30 percent down, Fannie is tagging on a 1.75 percent adverse market delivery fee on investor mortgages. Once you're over 80 percent LTV, the fee goes to 3.75 points.

No other options:

Finally, if all else fails, there is traditional "hard money" financing -- just ask local mortgage brokers who's in the market with the best programs. Since hard money investors are all about collateral and yield, be prepared to put a lot into the deal up front, and to pay double digit rates over a relatively short term.

My thoughts - Hmmm?

Caveat #1: Who has 40% to put down on a property? A 100k investment and you need 40k for a down payment, 80k for a 200k investment, 120k for a 300k investment. Perhaps you could use your equity line. Oh, that's right, most equity lines have been closed by the banks because values in many local housing markets have been battered. They're cutting limits on credit cards too, so be careful with the cash advance at 26%!

Caveat #2: Geographical limitations, if ... you might ... you could get. Better yet, use that 400k wad of cash you have sitting idle under your pillow and purchase a few homes in Las Vegas, NV and Phoenix, AZ. Home values in these locales have dropped significantly and you can buy 20-30% below today's battered values. In all seriousness, these will be good markets again and values are becoming very attractive. Take a closer look even though you may not have the 400k wad of cash under your pillow.

Caveat #3: Fannie Mae offers great loans. You only need high credit scores, solid equity positions, paying steep points (1.75%) with 30% down, paying hard money type points (3.75%), with 20% down. Again, who has the down payment and, if you do, can you make the numbers work with the associated fees? Perhaps I should back up and address my thought, "Can you make the numbers work?" That should be your first glaring indicator that there may be a problem. If you're trying to make the numbers work, need I say more?

The Hard Money Option: If you're rehabbing and reselling properties this is a viable short-term option. For a "rental property", this option is ludicrous unless you have the ability to refinance into one of the above-mentioned programs.

In short, for the average housing boom investor, the same investor who has foreclosed on homes and/or is hanging on for dear life, these are not plausible options. In fact, these options are nothing short of laughable.

If you're one of the few investors who actually figured all of this out. The same investor who usually figures it out. There's plenty of funding available, with plenty of options, because you have plenty of cash. You indeed, as always, are a small minority.

In conclusion, Harney's basic premise is right, the banks are lending to investors. However, the practical reality of his assertion is much different.

Getting an investor loan is like going into the supermarket to buy a turkey for your Thanksgiving gathering. The supermarket only has one 4lb turkey left when you need a 20lb turkey. The 4lb turkey costs $200.00 and the only method of payment the supermarket will accept is a cash advance from one of your credit cards.

Can you get a turkey, sure. Does it meet your needs, absolutely not. I'll let you ponder whether this is the return to fundamentals that we need or just more of the extremes. The drunken irrational exuberance of the housing boom has turned into a never-ending hangover.

Carlos Rossi anyone? Help yourself, it's in the refrigerator, top-shelf .... yeah the cardboard box. Drink up, your hangover will be gone before you know it.