Do You Need a Real Estate License to Flip Houses in California?

If you have the right knowledge and skill set, flipping houses can be highly lucrative. This process typically involves purchasing a property at a price below its actual or potential value. After making changes to the property to increase its value and/or appeal, the house flipper is able to sell the property at a handsome profit. 

For people interested in house flipping in the state of California, one of the most common questions asked is “do I need a real estate license?” The simplest answer to this question is “no.” There is no law that requires you to obtain a California real estate license in order to flip houses. However, this does not mean that getting a real estate license to help you flip houses is a bad idea. Below is some information to help you understand how a real estate license could be useful to house flippers so you can make the best choice for your future in real estate investment.

What Is a Real Estate License?

A real estate license is a license issued by the state that gives you the authority to engage in real estate transactions on behalf of another party. In most cases, someone with a real estate license represents a person or organization that intends to buy, sell or lease real property. Because serving as someone else’s agent in a real estate transaction requires specialized knowledge and skills, a real estate license is required by state law for anyone who wants to act in this capacity.

Most real estate licenses belong to real estate agents. Real estate agents spend their time acting as buyer’s agents or seller’s agent in exchange for commission. These agents may also work in property management.

How Do You Obtain a Real Estate License?

In order to obtain your real estate license in the state of California, you must satisfy several requirements. Specifically, you must be over the age of 18, and you must have completed at least 135 hours of approved pre-licensing education. You must also find a licensed California real estate broker willing to act as your employer, and you must pass an exam administered by the state. The final requirements to apply for real estate licensure in California include fingerprinting and passing a background check. 

Benefits of Real Estate Licensure for House Flippers

Although it is not required to become a house flipper, having a real estate license can still be beneficial if you are looking to make money in real estate. Some of the specific benefits available to house flippers with a real estate license include:

1. Access to the Multiple Listing Service.

Only licensed real estate agents have unrestricted access to the Multiple Listing Service, or MLS. This is the online platform where real property is listed for sale. Properties listed on the MLS are viewable by the public. However, only a licensed real estate agent can add a property to this database. In addition, websites like Realtor.com and Zillow that make data from the MLS public do not have access to as much information as a licensed realtor. Furthermore, access to newly listed properties is often delayed. 

If you have a real estate license, you will have the ability to list properties for sale on your own without seeking help from a real estate agent. You will also have full access to information about other properties listed on the MLS, making it easier for you to find the prospective purchases that are most likely to work for you. Additionally, you will be able to access all newly listed properties as soon as they hit the market, giving you an advantage over any house flipper that doesn’t have a real estate license. Since many of these properties are under contract within a few hours of being posted, this is an invaluable benefit for someone flipping houses.

2. Access to alternate sources of income. 

Some people are eventually able to earn all of their income by flipping houses full-time. However, if you are hoping to make this your way of life, it may take you some time to get started. While you are waiting for your house flipping business to get going, you may need other sources of income. If you obtain your real estate license, you have easy access to other sources of income that are closely related to the field in which you are trying to become successful. 

House flippers with a real estate license can supplement their income by working as a real estate agent and earning commission. House flippers can also add to their income by accepting positions in property management.

3. Decreased closing expenses. 

If you don’t have a real estate license, you will probably need the help of a real estate agent when you are ready to put one of your investments back on the market. When the real estate agent sells the property, you will be required to pay a sizable commission. 

Even if you have a real estate license, you will still need to pay commission to the buyer’s agent. However, your overall closing costs will be much lower.

4. Networking advantages. 

The more connections you have in the local real estate industry, the more successful your house flipping business will be. When you obtain and utilize your real estate license, you will meet other real estate agents, as well as wholesalers, home inspectors, appraisers, contractors, California hard money lenders and investors. This will help you to build a stronger business.

Making a Decision

Getting a real estate license can be beneficial for someone who wants a career as a house flipper. However, that doesn’t mean that licensure is the right choice for everyone. After all, obtaining your real estate license is both time-consuming and costly, so you need to be sure that you are making the right choice. 

To decide whether you should obtain your real estate license, review the requirements carefully and consider your own unique situation and goals.

What about a contractor’s license?

A real estate license is not the only type of professional license that can be beneficial for someone who wants to flip houses. After considering a real estate license, many people wonder whether a contractor’s license would be useful. As with a real estate license, a contractor’s license is not required for anyone who wants to flip houses. However, also like a real estate license, having a contractor’s license can make you more competitive in the marketplace. 

Benefits of a Contractor’s License for House Flippers

Some of the specific benefits of a contractor’s license for someone flipping houses include:

1. Reduced permit expenses

Before you can begin renovating a home you plan to flip, you will need to pull certain permits as required by law. In most cases, a hired contractor will charge you an extra fee for this service. However, if you have your own contractor’s license, you can pull these permits on your own without paying the extra fees, thus reducing your overall expenses and making it easier to qualify for loans from hard money lenders in California.

2. Lower renovation costs

Renovation work on a house you plan to flip should be completed by a licensed contractor. If you have your own contractor’s license, you will be able to do the renovation work on your own. You won’t spend nearly as much money in renovation costs as you would if you had to hire someone else to do the job. 

However, even though doing the work on your own can save money, it is important to remember that you will need to invest a significant amount of time and effort on the process. In addition, it may take longer to complete the work if you are doing it on your own, especially if you have a full-time job. If you want to speed up the process, you can hire your own hourly workers to do some of the work while still paying less than you would to a third-party contractor.

3. Fewer risks

When you have your own contractor’s license and you don’t have to hire a third-party contractor, you won’t face as many risks with regard to poor workmanship, theft and default. Although many contractors are reputable professionals who do quality work, some are not. A single scam could end up costing you thousands of dollars. When you are working as your own contractor, not only will you be protected from these scams, but you will also enjoy greater peace of mind.

4. More predictable expenses

When you hire a contractor to handle your home renovation projects, you will usually receive an estimate of the costs associated with the project. However, in many cases, these costs will change throughout the project. Acting as your own contractor reduces the guesswork associated with this process. In addition, as you gain more experience with home renovations, you will be able to predict the cost of future projects much more accurately. This can give you a substantial competitive advantage.

5. Opportunities to earn extra income.

Just like a real estate license, having a contractor’s license provides you with opportunities to supplement your income. This can be especially beneficial in the beginning stages of your house flipping business when you are still trying to learn the ropes. With a contractor’s license, you will be able to complete other projects on the side to earn more money. If you have a day job, you may even be able to quit and focus all of your time and energy on contracting work and house flipping.

6. Knowledge.

The process of obtaining your contractor’s license can provide you with valuable knowledge that will make you more successful as a house flipper. With this knowledge, you will have a significant advantage over other people who flip houses to earn money.

Should I Get a Contractor’s License?

Just as with a real estate license, getting a contractor’s license is not right for everyone. There is an investment of time and money required before you can obtain the license. For some people, the benefits may not outweigh this investment. In order to determine whether a contractor’s license is the right path for you, you need to consider how it will affect your individual situation.

The Bottom Line

As a house flipper, you may benefit from having a real estate license and a contractor’s license, or you may be able to work effectively in this career without either one. Still other house flippers may begin working in this field without either license and eventually decide to get one or both. 

If you are thinking of investing in real estate to flip, there is no need to jump into either of these licensure programs. Take the time to learn about the requirements and compare your options in order to make the decisions that will serve you best in the future.

What Documents Are Necessary for a Hard Money Loan in California?

Most lenders base their decision to extend a loan primarily on your income, credit score and other related factors. California hard money lenders, on the other hand, offer loans secured by collateral. With a hard money loan, you can get the financing you need even if you do not have a high credit score or the other characteristics required to qualify for a traditional loan. 

Even though a hard money loan does not have the same requirements as a more traditional loan, you must still submit a variety of documents before your loan will be approved. Below is some basic information about hard money loans, along with a discussion of the documents you will need when you apply for a hard money loan.

Benefits of Hard Money Loans

Hard money loans offer several benefits over traditional sources of financing. Some of the primary benefits of getting a loan from hard money lenders in California include:

  • Faster funding – Hard money loans typically fund much faster than a traditional loan, giving you access to the money you need much more quickly.
  • Less documentation – The process of submitting documents for approval when you are applying for a standard loan can be daunting. In many cases, the underwriter will request more and more documents throughout the process, and the smallest error or omission can cause the entire process to stall. Much less documentation will be required if you opt for a hard money loan instead.
  • Fewer strict requirements – To qualify for most other types of financing, you will need to jump through quite a few hoops. However, most hard money loans have fewer requirements that must be met before the application will be approved.

Different Types of Hard Money Loans

Not all hard money loans are the same. The type of hard money loan you apply for will ultimately determine which documents you need to submit. Most hard money loans can be classified as one of two types: Consumer loans or non-consumer loans. 

A consumer loan is a loan in which the funds will be used for household, family or personal purposes. A non-consumer loan is a loan in which the funds are used for a purpose that does not fall into one of these categories. Keep in mind that the classification of the loan is based solely on the use of the funds. The type of property you use to secure the loan has no effect on its classification. 

The documentation requirements are least cumbersome for non-consumer loans. Consumer loans will require a greater amount of documentation. If you are seeking a consumer owner-occupied loan, the documentation requirements will increase even more. These differences in documentation are related to the federal regulations that apply to all consumer loans, even those offered by California hard money lenders. Because of these differences, obtaining a non-consumer hard money loan is typically much easier and faster that obtaining a consumer loan, especially when you plan to occupy the property used as collateral.

Documentation Requirements for Both Consumer and Non-Consumer Loans

Below are the documents and disclosures that must be completed and filed regardless of whether you are seeking a consumer loan or a non-consumer loan. 

1. Application

In the majority of cases, the first document you will need to submit to obtain a hard money loan is the initial application. This application may ask you to supply information about your loan’s purpose, the collateral, your income and more. The level of detail required on a hard money loan application can vary considerably by lender. The specifics of your loan may also determine the level of detail required on this first piece of paperwork. 

2. Privacy Policy

Hard money lenders typically provide you with a document that explains how they will use the personal and financial information you have supplied. 

3. Equal Credit Opportunity Act Notice

Under federal law, lenders are not allowed to discriminate against borrowers based on certain characteristics, including age, marital status, sex, religion, race and more. Lenders must provide a notice of these requirements to borrowers under the Consumer Credit Protection Act. 

4. Mortgage Loan Disclosure Statement

The Mortgage Loan Disclosure Statement provides you with specific information about the terms of the loan you are seeking, as well as the costs and fees you will pay to obtain it. 

5. Fair Lending Notice

Similar to the Equal Credit Opportunity Act Notice, the Fair Lending Notice is a disclosure required by federal law that states the lender’s obligation to avoid certain discriminatory practices.

6. Hazard Insurance Disclosure

The Hazard Insurance Disclosure describes your rights and responsibilities with regard to maintaining insurance coverage on the real estate that secures your loan. 

7. Deed of Trust

The deed of trust is a document that is designed to bring in a third party to ensure that both you and the lender uphold your responsibilities as determined by the loan agreement. This document will designate the identity of this third party, who will be responsible for holding the property deed until the terms of the loan have been fulfilled. After you have paid the loan in full, this trustee will relinquish the property deed to you.

8. Escrow Instructions

The escrow instructions are detailed, written requirements imposed on the escrow company. This document describes each of the conditions that must be met before the loan escrow can be officially closed. 

9. Promissory Note

The promissory note is one of the most important documents that must be completed during this process. When you sign this document, you are promising to make specific loan payments on specific dates until the loan is paid in full. The promissory note will also list rules the trustee must follow in order to ensure all parts of this agreement are satisfied. 

Additional Documents Required for Consumer Loans

As mentioned above, consumer loans require more extensive documentation than non-consumer loans. If you are applying for a consumer hard money loan, some of the additional documents you may need to submit to the lender before your loan can be approved include:

1. Documents to prove your income

In many cases, you will need to provide substantial proof of your income before you can qualify for a consumer hard money loan. The purpose of these documents is to provide the lender with reassurance that you will be able to make the required payments. Some of the proof of income documents California hard money lenders may accept includebank statements, pay stubs, tax returns and W2s. In most cases, these documents will need to be recent. You may also need to provide more than one of each document requested. For example, the lender may ask for tax returns from the past two years or pay stubs from several recent pay periods.

2. Documents to prove assets

If you are making a downpayment, or if the lender has a requirement related to financial reserves, you may need to provide documents that prove you are in possession of sufficient liquid assets. For most borrowers, this will simply involve submitting copies of your most recent bank statements.

3. Documents related to debts

Many hard money lenders considering an application for a consumer loan will ask for documentation related to your other revolving debts and expenses. The purpose of this documentation is to allow the lender to verify that you will be able to make the required loan payments without raising your debt-to-income ratio above a certain level. Most lenders will simply use the information contained on your credit report. However, if any of this information is inaccurate, or if you will be repaying debts listed on your credit report prior to closing in order to qualify, you may need to provide additional documentation.

4. Loan estimate

Under the Dodd-Frank Act, lenders of consumer loans are now required to prepare a loan estimate for borrowers. This document will give you specific information about all the costs associated with your loan, including your monthly payment, interest rates and more.

5. Closing disclosure

The closing disclosure is similar to the Loan Estimate. However, this document includes other information about the loan, such as its disbursement date and the date of closing.

Consumer Owner-Occupied Loan Requirements

If you are applying for a consumer owner-occupied loan, even more documents will be required in addition to the ones listed above. Some of these documents may include:

1. Oral Disclosure

After going over all of the terms of the loan, many hard money lenders require borrowers to complete an oral disclosure confirming that they understand all of the loan’s terms and their responsibilities.

2. Right of Rescission

With a consumer owner-occupied loan, the loan in question is likely going to be secured by your primary residence. This means that the lender is required to provide you with a three-day Right of Rescission by law. During this time, you have the right to cancel the loan. The Right of Rescission period begins after you have signed the loan documents.

3. Homeownership Counseling

Before the loan can be completed, a homeownership counseling certificate must be obtained. This document discloses the requirements related to this certificate.

4. HOEPA Disclosure

The Home Ownership Equity Protection Act requires California hard money lenders to include a HOEPA Disclosure if the fees and interest rate associated with the loan are above a specific threshold. This document will disclose the loans Annual Percentage Rate, or APR.

How to Raise Capital For a Residential or Commercial Real Estate Investment

If you’re interested in throwing your hat into the real estate investment ring, you’ll need some capital to get started. Generally, when you’re first starting out in real estate investment (whether it be residential or commercial), you’ll want to start relatively small. Still, buying a property as an investor often means placing a large down payment—so it’s not uncommon to need thousands or even tens of thousands of dollars to get going.

If you don’t exactly have that kind of money lying around, you may need to raise capital for your first real estate investment. By having a better understanding of how California hard money lenders work and what they’re looking for in an investment, as well as how to convince a money partner to lend to you, you’ll have an easier time getting your start in the real estate game.

Why You Need Investment Capital

Most investment properties will require a minimum of a 20% down payment, regardless of whether you’re looking at a fixer-upper residential home or a commercial property. In some cases, you may even be expected to pay for a property in-full at the time of purchase (though this is most common with auctions).

With this in mind, it’s a lot easier to see why being able to raise investment capital is so important. Specifically, investment capital refers to the money that you’ll borrow and use to pay for your real estate investment. This can include not only the price associated with purchasing the property itself, but any expenses that may go into updating it and/or renovating it as well.

When you’re trying to determine how much investment capital you’ll need, then, there are a few things to keep in mind. In addition to the list price on the property itself, you’ll also need to factor in closing costs and other expenses that go into closing on a residential or commercial property. This can include title fees, inspection costs, and appraisals as well. In many transactions, this can easily add up to thousands of dollars.

If your investment property will need work, you’ll also need to do a fair amount of research to figure out an approximate figure for your renovations and remodeling. When you add all these costs together (and subtract any money you may be bringing to the table personally), you’ll be able to figure out how much investment capital you need to raise.

Using debt investment capital as opposed to equity capital is where most new real estate investors start out; this means you’ll most likely be turning to banks and other hard money lenders in California to secure the money you need. The banks or individuals you end up receiving funding from are known as money partners. Keep in mind that depending on the size of your proposed investment, it’s not entirely uncommon to work with multiple money partners on a given deal.

Tips for Raising Money as a New Investor

Getting into the real estate investment game can be challenging. Some lenders may not want to work with you because you don’t have experience—but how are you supposed to gain experience if nobody will lend you money? The key is knowing what today’s money partners are looking for in a sound real estate investment and being able to deliver that to them.

As you prepare to approach California hard money lenders, there are a few tips worth keeping in mind that may increase your chances of being able to secure that first investment.

Use Some of Your Own Funds

While this may not be a realistic option for all beginning investors, it’s always a good idea to have a little of your own cash in the game. Doing so will force you to put more thought into where that money is being spent. It will also encourage you to be a little more careful about your spending. This is especially true if you’ll be doing any major renovations or other projects; taking the time to shop around for competing bids and estimates may save you a decent chunk of change.

Your investors may also like knowing that you’re using some of your own capital on any given project. This shows them that you’re confident enough in your plans to put your own money on the line, which can in-turn boost their confidence in your investment.

And of course, there’s always the fact that putting some of your own money into your investment reduces the total amount that you need to borrow. This can make it easier to raise funds while also cutting down on interest payments down the road. The key is deciding on the right amount of your own money to kick in; you don’t want to completely drain your savings account for your first real estate investment, but having at least a small amount of your own money brought in can make a big difference in a lot of ways.

Reach Out to Your Connections

Ask anybody who has been in the real estate game for a while and they’ll tell you that being able to secure funding for your real estate ventures is all about networking. Before you even begin reaching out to hard money lenders, take some time to think about investors you may know personally. If you have any existing relationships with lenders, you may have an easier time securing funding. Even if you don’t know any investors personally, talking to one of your connections could send you in the right direction of somebody who may be interested in funding your project.

Another solid tip to keep in mind when it comes to meeting new potential investors is to find out when local real estate clubs are holding meetings and attend those meetings in our area. These events not only provide a great opportunity to meet some new investors and network with others in the world of real estate investing—but they sometimes offer free training courses as well.

Be Realistic About Returns

At the end of the day, it doesn’t matter if you’re working with a private lender (such as a California hard money lender) or a personal connection. There’s one thing that everybody wants when they lend you money for a real estate investment: returns. When somebody lends you money for a residential or commercial real estate investment, they’re trusting you to protect their capital and deliver on the return that you promised.

With this in mind, it’s important to be realistic about what you can and cannot deliver. Calculating returns, especially when you’re first getting started in the real estate investment game, can be a challenge. It’s always better to air on the side of being cautious with your promises to investors than to over-promise and under-deliver. From there, if you end up delivering more than what you promised, all that’s going to do is create a stronger bond and sense of trust between you and the investor for potential future projects.

If you’re not feeling totally confident about crunching the numbers for your first real estate investment, there are plenty of free resourcesthat can be useful.

Build Your Reputation

Hard money lenders will be more likely to invest if they know who you are and see you as a reputable figure in the real estate industry. This is where things can get tricky because if you’re looking for investors, you’re probably pretty new to real estate investing in the first place. Still, there are plenty of ways to build your reputation and make yourself more of an authority in the field without having a lot of hands-on experience.

This is where it can be especially useful to familiarize yourself with the world of private lending and look for ways to more-or-less become an educator on the subject. From there, you can write blogs, hold free classes, or take other steps to establish yourself as an authority figure. As your name and reputation grows, so will your chances of being able to secure your own real estate funding with investors who are familiar with you.

Focus on Building Relationships

One of the most difficult pieces of advice for many new real estate investors to follow is to focus on building relationships with others—even if they don’t necessarily have any interest in investing in your next project. You never know when you may have an opportunity spring up that they will be interested in, so you never want to write somebody off simply because they’re not a good fit for your current goals.

Remember, successful real estate investing (and fund-raising) is all about who you know. Building relationships with others in the field and maintaining them will always help you grow—even if you may not reap any immediate benefits.

Don’t Forget to Document

Being detail-oriented is one of the best characteristics you can have as a real estate investor. You’ll want to have documentation of everything you do related to any given real estate deal. This includes write-ups for how you calculated potential returns on investment, as well as proposed purchase prices, renovation costs, and any other details related to a purchase.

A hard money lender will not only appreciate this documentation, but many will actually require it. And of course, having everything documented can help you out in the long run by allowing you to reflect on your investments down the road. If mistakes were made, your documentation will make it easier to go back and determine when and how those mistakes occurred so you can prevent them in your next investment.

Show Off What You’ve Done

Last but not least, keep in mind that it never hurts to have a portfolio and do a little “showing off” of successful investments you may have taken on in the past. Even if you’ve never been involved in a real estate investment before, having proof of other investments or similar ventures can be useful when you’re pitching to a lender for the first time. 

As you gain more experience with real estate investing, it’s a good idea to build a portfolio and/or website. Don’t be ashamed to talk about your success. The key is to just be mindful that you’re not coming off as “braggy,” as this could be a turn-off to some potential investors. When investors are able to see your past successes, they may feel more confident funding your projects.

The Bottom Line

Securing funding for your first residential or commercial real estate investment isn’t going to be easy—but a little bit of preparation can go a long way. By having a solid understanding of how the world of private money lending works and what these lenders are looking for in an investment pitch, you can move forward with confidence. From there, you can secure the financing you need (less any of your own money that you may be putting into the project) and embark on your real estate investment journey.

Bank Lender Meeting with Clients

Staying Compliant With A Private Consumer/Owner-Occupied Loan

What are consumer owner occupied loans? These loans are loans where the borrower intends to live in the property as a residence or for a consumer purpose. Consumer purpose includes paying a tax lien, helping a family member or bill consolidation. There are tight lending regulations when it comes to consumer owner occupied loans in addition to borrower protections and time frames. It can be too cumbersome for many private lenders to want to pursue. However, private consumer loans can be a good Plan B for borrowers who cannot qualify for Plan A. It’s an option for those who cannot get a conventional loan.

The Types of Private Consumer Loans

There are two types of private consumer loans: consumer bridge loans and and long term private consumer loans. There may be a number of reasons why someone would need a consumer bridge loan. They may not be able to obtain conventional financing due to foreclose, probate situations, down payment challenges, 1031 exchanges, downsizing or reverse mortgage fallout. Here’s the terms of bridge loans.

  • No prepayment penalty
  • Close in 5 to 7 days
  • 11 month maximum term
  • Purchase component
  • 2.0 to 3.0 points
  • 9.9 percent interest rate

Long term private consumer loans are less common. They are usually due to borrower credit issues or short term employment when applying for a conventional loan. In these circumstances, a borrower may be able to qualify for a long term private consumer loan. This loan is only available as a 30/30 loan. It’s a 30 year loan with payments based on 30 year amortization. Recent regulatory changes have eliminated the 30/5 loan. Some of the reasons for a 30/30 private consumer loan include inconsistent income history, bankruptcy, credit issues, self-employment, need to finance and difficulty documenting income. The terms of long term private consumer loans are:

  • No prepayment penalty
  • 30 year fixed
  • Close in 5 to 7 days
  • Up to 9.9 percent interest rate
  • Debt ratio can be above FNMA
  • 2.0 – 3.0 points

Keep in mind that California hard money lenders can also offer 15/15 and 20/20 loans. However, these are uncommon because borrowers typically struggle with debt ratios.

Navigating the Regulatory Compliance Landscape

While the regulatory compliance landscape is clear for mortgage lenders making loans to consumers, it’s a lot more complex when it comes to business purpose loans. This includes fix and flip loans. Many people are under the myth that these types of loans are exempt from state and federal laws that govern consumer lending. Business purpose does not equate with compliance exempt.

The Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) come into play. Lenders can face stiff penalties by categorizing a loan as exempt and investors can face exposure for violations. Both lenders and investors need to pay attention when TILA and RESPA apply.

“There are two key TILA exemptions potentially applicable. First, loans to non-natural persons are exempt. In other words, if the loan is extended to an entity as opposed to an individual, then TILA will not apply. Second, loans primarily for a business or commercial purpose are exempt. However, this exemption is more nuanced than the exemption for loans to non-natural persons.

The Official Commentary to Regulation Z, the implementing regulation of TILA, sets forth guidance for determining whether a loan can be considered to be primarily for a business purpose. A creditor must evaluate five factors in making a “business purpose” determination:

  • the relationship of the borrower’s primary occupation to the acquisition;
  • the degree to which the borrower will personally manage the acquisition;
  • the ratio of total income from the acquisition to the total income of the borrower;
  • the size of the transaction; and
  • the borrower’s statement of purpose for the loan.”

It’s important to note that there is a special rule for non-owner-occupied rental property. A property attained to improve will always be deemed as a business purpose. Owner occupancy is determined when the owner occupies the property for more than 14 days. Regulation X does not have a specific exemption for non-natural persons either.

Other Considerations With Federal Law

In addition to TILA and RESPA, there are other regulations under the Fair Credit Reporting Act, Home Mortgage Disclosure Act, Equal Credit Opportunity Act and the Servicemembers Civil Relief Act. And FHA applies whether or not the loan is for an individual or corporate entity. Furthermore, additional signatories required for business purpose loans can trigger considerations under Regulation B, SCRA and Regulation E. Plus, the 2015 amendment to Regulation C may not be excluded.

State Law Considerations

The consumer business loans are broad, and business-purpose lenders may be subject to state laws. In addition, state laws vary with mortgage lending. But, most of the state laws are in place to protect against high-cost loans, unfair practices and predatory lending. This includes doing due diligence of the assets and knowing the originators of the loans. Non-compliance penalties can be severe for both the lender and the investor.

The Wild West of Private Money Lending

To ensure compliance with all of the regulations of private money lending, money lenders in California and lenders face many rules. It’s like living in the Wild West. Violations can come with hefty fines and sometimes and even criminal penalties. That’s why it’s wise to have a real estate attorney look over the contract for proper navigation. Everyone involved in the deal must be aware of the extensive rules that apply. “In California, one such law passed in 2012 regarding investor suitability requirements and took effect January 1, 2013. Cal. Bus. & Prof. Code §10232.45 (setting further requirements to determine investor suitability following the crash of the real estate market). This law added a whole new level of requirements to the already heavily regulated profession, requiring, among other things, a broker to determine whether an investor can invest in a certain loan or indeed in any loans at all. A professional unaware of all of the new and constantly changing requirements will set him or herself up for a professional liability claim down the line.”

One characteristic of private money loans is high interest rates. But, most states now have usury laws in place to guard against this, including California. Some penalties for violating usury laws include hefty fines, invalidation of borrower’s obligation to pay interest and nullification of the loan contract.” On August 13, 2018, the California Supreme Court (“Supreme Court”), in a unanimous decision authored by Justice Mariano-Florentino Cuellar, said courts “have a responsibility to guard against consumer loan provisions with unduly oppressive terms,” including interest rates, even though California’s Financial Code (“CFC”) allows lenders to charge whatever the market will bear for loans over $2,500.00.”It’s also important for an investor to have their own attorney. There should be no dual representation. There could be a conflict of interest that may wind up in court.

Keep in mind that there may also be servicing issues. While private money lenders have a fiduciary duty to protect a borrower’s collateral, they may want to foreclose. Missing interest payments or failing to pay the principal can trigger a host of problems. An attorney can enlighten an investor as to the provisions of the contract. Private money lenders often include other provisions, such as waste provision. This allows the lender to foreclose if a borrower’s conduct causes the decline of the property’s value. Other provisions to be aware of include provisions to prohibit unapproved junior liens. If the lender retains the right to review the financial status of an investor, they may have the right to call the loan due. It’s advisable for investors to use an attorney to be able to understand the servicing provisions in order to avoid a dispute down the road between the lender and the investor.  Plus, an attorney can help the investor structure the deal.

At the same time, due diligence is required of private money lenders. There should be a collateral evaluation, geology inspection, property inspection report and a review of the borrower’s financial records.

The Benefits of Having an Attorney

The idea of becoming an investor is intriguing to many. After all, real estate has always outperformed the stock market. Buy a fixer upper, ramp it up and sell for a sizeable profit. Or, become a passive-income landlord to make money. However, there are multiple moving parts for success. Investors must constantly monitor local laws, accounting, new regulations, taxes and project management. Investing in an experienced attorney offers many benefits from contract creation and creating LLCs to conducting closings and staying in compliance. Having a real estate attorney to draft contracts is well worth the expense. During closing, a real estate attorney will review all the documents and let you know the risks.

A real estate attorney can advise investors on ways to reduce liability and potential risks. There may be more liabilities and risks looming than an investor may be aware of. Both flippers and landlords function with a lot of exposure to legal liability. An attorney can assist in mitigating risk and liability. In addition, an attorney can help an investor decide whether it’s best to form a partnership or LLC. And most of all, an experienced real estate attorney can help keep an investor on the right side of the law. In the Wild West of investing, an experienced and knowledgeable attorney is essential to success.

According to JWB Real Estate Capital, “If you plan to upgrade your investment property, this work will usually need investment property contracts to complete the work professionally. Many contractors should be hired with an agreement to protect the investment that you make to upgrade your property. Attorneys that specialize in real estate understand contracting laws and what is to be expected in each contract. These professionals can also provide legal assistance to you if there is a problem with a contractor or in the finished work. Protecting your rights as an investor is one of the ways that you can retain more of the rental income that you make. States with high foreclosure rates often have a larger than average percentage of unscrupulous contractors that prey on beginning real estate investors.”

No investor can be a legal expert, and state laws are tight with regard to tenant rights. An attorney can assist an investor in reviewing the lease terms to avoid future lawsuits. It’s important for real estate investors to protect their investment by using a real estate attorney.

The Regulatory Landscape

When it comes to compliance with regulations, size doesn’t matter. Both large and small properties face the same intense regulations. Certain standards must be in place. For example, single family home in LA are required to fit properties with water saving devices. Investors planning to do construction need to know what’s required. What if something goes awry? Are there fines or a hearing? Knowing the answers to these questions can save an investor thousands.

From coast to coast, real estate compliance laws are on the uptick. The laws can impact the growth of an investor’s property. Knowing and abiding by the real estate compliance regulations is both necessary and prudent to protecting investment properties. And remember, real estate compliance regulations transcend type of structure, location and building size. Real estate compliance laws are defined by jurisdiction and region. What you have to abide by differs in cities and states.

If an investor has a diverse portfolio with different properties in the country, it’s critical for the investor to understand the complex regulations in each location. It’s critical for preventing violations and fines.

If you’re an investor seeking to invest in property in California, there are many hard money lenders in California to assist you in your purchase of real estate.  Do your due diligence and select one that is experienced. You’ll also want to select one that offers fast funding, competitive fees and rate, flexible lending criteria and good service. Choose one that has experience with multi-family residential, single family residential, land and commercial.

Is Now a Good Time To Sell a Home in California?

If you know the best time to sell your house, you can sell your house quicker and for more money. Knowing when will help you find that home-selling sweet spot. And waiting to put your home up for sale can help ease the stress of selling it. The best time to put a home on the market is in the late spring. That’s the peak of home-buying season. According to Zillow, houses put on the market between May 1 and May 15 tend to bring in more money. Zillow’s record reflects .07 more for homes put on the market during this time period. Plus, homes sold faster. Homes put up for sale in late spring sold in about six days. Keep in mind that the best time to sell a home can vary among markets. In the top markets, Zillow’s reports indicated that magic selling time fell between the second half of March and the first half of June. The worst time to put a house on the market is December and January.

On the Micro-Level

The right day to put a home on the market is also important. Zillow reports that Saturday listings get the most views in 12 metro areas. Fridays are also good, with Tuesdays being the worst. If you want your home to be seen the most, put it on the market on a Saturday. You can sell your home for about $1,600 more during the right season and on the right day.

Selling a Home in California

So, when is it best to sell a home in California? The simple answer is that it depends on which part of the state you’re located in. California has seen market shifts over the years, but home prices continue to increase in 2019.

The best time to sell a home if you’re in the Bay area is April and June. The best month to sell a home if you’re in San Diego is June. Statistics indicate the month of June comes with a 2.94 percent increase over the annual average. If you’re located in Los Angeles, the month of July will bring in a 2.77 percent over the annual average. Keep in mind that home transactions typically take about three months in Los Angeles, so be sure to list the home in May to take advantage.

Overall, the best time to sell a home in California is in the spring. Prospective home buyers tend to shop for home in the warmer weather. With nicer weather, tax refunds in their pockets and summer break from school coming up, it comes as no surprise that spring is the most popular time to buy a home. And if it’s a sellers’ market, you can expect your home to sell faster, receive multiple offers and sell for full price.

Tips for Selling a Home in California

The area that you are in in California effects how fast you can sell your home and what price you can get. Although, neighborhood prices vary, it’s wise to do research on similar homes in your area that are sold or listed. Look into how long the houses have been on the market for as well as the price. Keep on top of updates, also. It’s critical to get a comparative market analysis of your home. This way, you know what like houses in your area have sold for recently. Your local real estate agent can assist you with getting a comparative market analysis.

If it’s important to you to fetch a high price, you’ll need to be patient. Be sure to get an experienced real estate professional to list your home. This expert can assist you with what to price your home at and help you beat the market averages. It’s important that you pick a real estate agent who knows your area well, offers high-quality marketing and excellent service. Take the time to interview prospective real estate agents and make sure the one you select is willing to go to bat for you.  

Prepping Your Home for Sale in California

According to California real estate agent, Kevin Kieffer, curb appeal is one of the five most important elements to selling a home. California real estate agent Kevin Keifer told Zillow that curb appeal is one of the five most important elements in selling a home. According the agent Kevin Keifer,  “Your house needs to be framed up: It needs to look like a picture when people pull up. They expect to see tasteful paint colors, well-trimmed grass, new bark, fresh flowers — the whole deal.”Homes with strong curb appeal fetch prices about 10 percent higher in his East Bay Area region”. Here’s a checklist on what to do:

  • Ensure that the landscaping is tidy. Pull all weeds and fix any bare spots on the grass. Add fresh mulch, hang a nice outdoor light and paint the front door. These things will give the exterior of the home a fresh, clean appeal.
  • Eliminate any clutter. It will make the home look bigger and cleaner. This include the interior of closets, kitchen cabinets and pantry. Keep the home as neutral as possible. For example, you may have movie posters or a collection of Russian dolls in your home. Remove them. This way, the prospective buyer can better visualize themselves in the home. Even take down that trendy shower curtain and replace it with a neutral one.
  • Paint is your best friend. And again, keep it neutral. Go with beiges or off whites for an open, neutral appeal. You can even update the kitchen with a can of paint. Be sure to paint all trim white. You want your home to look as new as possible. Paint is a very cost-effective fix for any home.
  • Stage your home. Staging highlights your home’s best features and downplays any faults. It includes things like upgrading bathroom towels, putting a bowl of fruit in the kitchen, setting fresh flowers in a vase in the dining room, putting out new-hotel like linens on the beds. Carefully arrange furniture and other items in all of the room. Each space should reflect a defined purpose. For example, a bedroom used as a storage room should be fixed and turned back into a bedroom. If you’re in a neighborhood with family and children, you may want to set up a child’s room.
  • Get rid of any odors. This means cleaning the carpets, cleaning the windows, getting rid of pet smells and doing a thorough dusting.
  • Do a deep clean. Cleanliness is huge. It makes prospective buyers feel that house is well cared for. Your home should look spotless before you put it on the market. Clean corners of the floors, ceiling fans, top of doorways, cabinets, sinks and everything in between. The home should look untouched before you put it on the market.

When getting ready to put your home on the market in California, think of these four senses- sight, smell, taste and touch. Make the home showcase more than just a living space by removing clutter.  Your home should smell fresh. Add some fresh flowers. Look at every room with a critical eye. Cover all small holes and make sure all of the lights are working.

When you’re selling your home, you only get one shot at making a good first impression. Actually, you’ve got less than a minute to impress any prospective buyer. How your home looks on the outside will set the tone for the rest of the home tour. Having your home look well-maintained on the outside will make a buyer more likely to overlook less desirables in the interior.

Recent Home Prices in California

According to Zillow, “The median home value in Los Angeles is $692,800. Los Angeles home values have gone up 2.2% over the past year and Zillow predicts they will rise 0.7% within the next year. The median list price per square foot in Los Angeles is $536, which is higher than the Los Angeles-Long Beach-Anaheim Metro average of $439. The median price of homes currently listed in Los Angeles is $849,000 while the median price of homes that sold is $708,300.”

“The median home value in San Diego is $635,400. San Diego home values have gone up 1.2% over the past year and Zillow predicts they will rise 0.2% within the next year. The median list price per square foot in San Diego is $470, which is higher than the San Diego-Carlsbad Metro average of $382. The median price of homes currently listed in San Diego is $699,000 while the median price of homes that sold is $596,300.” These figures include the neighborhoods of Adams North, Clairemont Mesa West and Serra Mesa.

The Bay area of California is comprised on nine counties: San Francisco, Napa, Alameda, Solano, Santa Clara, San Mateo, Contra Costa, Marin and Sonoma. “The median home value in San Francisco is $1,351,500. San Francisco home values have gone up 0.1% over the past year and Zillow predicts they will rise 1.4% within the next year. The median list price per square foot in San Francisco is $1,071, which is higher than the San Francisco-Oakland-Hayward Metro average of $493. The median price of homes currently listed in San Francisco is $1,295,000.” These figures include the neighborhoods of Buena Vista, Corona Heights and Haight.

“The median home value in Napa is $655,600. Napa home values have gone up 0.9% over the past year and Zillow predicts they will rise 0.1% within the next year. The median list price per square foot in Napa is $476, which is lower than the Napa Metro average of $510. The median price of homes currently listed in Napa is $765,000 while the median price of homes that sold is $698,100.”

One of the benefits of buying a home in California is that it’s easy to get loans in California. It’s also easy to find hard money lenders in California. 

The Outlook for California Real Estate

The California housing market just may outperform the country into 2020. Home values have increased 4 percent and are expected to rise another 7.3 percent. Keep in mind that California is a very large state, and real estate condition may vary. An inventory shortage is fueling the California real estate market. There just aren’t enough homes to fill the demand. This increases competition among buyers and increases home prices. In January of 2019, most of the major cities in the state had less than a three month supply of homes. Five or six months supply is required for a balanced market. This is one of the reasons why the state has had a positive real estate market. There are many buyers out there looking for homes, and just not enough homes to go around.

It’s wise to keep in mind that population loss could affect the future real estate trends in California. Although the state’s population has increased significantly over the past 10 years, it’s starting to get smaller due to outmigration. A 2018 report from the California Legislative Analyst’s Office states, “For many years, more people have been leaving California for other states than have been moving here. According to data from the American Community Survey, from 2007 to 2016, about 5 million people moved to California from other states, while about 6 million left California. On net, the state lost 1 million residents to domestic migration—about 2.5 percent of its total population.” This could eventually change the landscape of the real estate market in California.

All around, living the California dream is great, and it’s the perfect time to sell a home.  The weather is consistently warm year-round, it has an easy-going culture and plenty opportunities for fun outdoors. California is home to beautiful parks, including Joshua Tree and Yosemite. Plus, it has many beaches and hiking trails. You can actually ski and surf in the same day in California. It’s also a very ethnically diverse state. You’ll meet and enjoy people from all walks of life. The state also has great colleges, elementary schools, universities, charter schools, private schools and high schools. It’s easy to enjoy the Beach Boy life in California.

California Hard Money Lender Meeting with Clients

3 Things To Look For In California Hard Money Lenders

What do you think of when you hear the words “hard money loan?” Do you envision shady characters conducting business in dark alleys and charging exorbitant interest rates? While a few bad apples have cast a shadow on some hard money lenders, if you do your due diligence, you shouldn’t have to worry about being taken advantage of. And believe it or not, there are reputable hard money lenders out there.

The Basics of a Hard Money Loan

A hard money loan is a short-term loan backed up by real estate. Generally, they are funded by private investors instead of banks. Terms are typically 12 months but can be extended to 5 years. Monthly payments consist of some principal and interest with a balloon payment at the end. The amount of hard money given is dependent on the value of the property. Most hard money lenders are concerned with the property’s value rather than the borrower’s credit. When a bank says “no,” a hard money lender says “yes.” Hard money loans come in handy when banks are not an option or the loan is needed for just a short time. They are ideal for land loans, flips and when a buyer has credit issues or when the borrower needs to act quickly. Hard money loans only take a day or two for approval compared to the typical 45-day wait with a bank.

3 Things to Investigate

When you’re looking at different California hard money lenders, there are three things to keep in mind.

First, take a look at the interest rates and points of the loan. The good news is that hard money lenders the El Dorado state of California tend have lower rates than in other regions in the nation. And that’s because there are so many of them in California.  California hard money lenders have to duke it out with each other in order to get your business.

One thing to note is that hard money lenders do take on more risk than banks. Hence, there will be higher interest and points compared to a bank. The interest rate should range between 10 to 15 % and points should range from 2 to 4%. These ranges depend on the loan to ratio value.

This is why the second thing you need to do is take a good look at the hard money loan to ratio value (LTV). “The loan amount is determined by the ratio of loan amount divided by the property’s value.” You can expect a hard money lender to lend up to 75% of the property’s value. California hard money loans will be based on the value of the property after improvements. But then, you can expect the interest rate to be higher.

Knowing what the hard money lender requires for the loan is the third factor that you need to look at. As mentioned previously, most hard money lenders are not that concerned about the borrower’s credit. If you have the capital to pay the interest on the loan, previously problems such as foreclosure may be overlooked. The hard money lender will also want to know your plan for the property, so be prepared to have one in place. The plan should outline how you intend to pay off the loan.

Lender Meeting with Clients

Why Real Estate Investors Use Hard Money Loans In California

Speed and flexibility are the main reasons why real estate investors use hard money loans in California, but there are many other reasons, too. Let’s take a look at some of the other reasons.

Straightforward Process

Applying for California hard money loans is a simple process. Often, a brief conversation with California hard money lenders and a standard application will get the job done. On the flip side, banks require an almost endless amount of paperwork for the borrower. And it can take weeks to get a response. During the interim, the property just might get snatched up by another investor. Plus, once you’re approved with a hard money lender, the loan can usually be funded within two weeks.

Makes the Offer Stronger

In comparison to attaining financing from a bank, an offer from California money lenders is stronger. It’s not uncommon to hear that the bank pulled financing during escrow. This can kill the deal. California hard money lenders are not known to reject funding for arbitrary reasons.

Negotiate a Lower Price

California hard money loans are considered a cash offer. This gives the buyer an upper edge to negotiate a lower purchase price. There’s a shorter escrow time period and a quicker close. A motivated seller always likes these factors. Cash can always be leveraged for a lower price.

Not-So-Perfect Credit Score Are OK

Typically, a bank will use the borrower’s income and credit as criteria for approving a loan. If there is anything that raises a red flag, most likely the loan will not be approved. Hard money lenders are so focused on the borrower’s credit rating and income. They primarily focus on the collateral and equity.

Reinvest Equity

When a real estate investment opportunity crops us, there’s usually little time to make a decision. If the investor needs to raise money, there may not be that many options. Cash-out refinance loans from a hard money lender are available to borrowers. A cash-out refinance loan can be done by California hard money lenders quickly. This way, the investor can take advantage of a good opportunity.

Flexibility

Traditional banks are very well-known for having arbitrary regulations and being rigid. These characteristics can prevent the real estate investor from obtaining a loan. Less is required from a hard money lender, and many California hard money lenders offer creative solutions to any problems that arise.

It’s a Partnership

When a real estate investor goes to a California hard money lender, it’s a partnership. Both the investor and the lender want a smooth deal. The last thing either wants is missed payments. A California hard money lender will analyze the project and address any concerns that maybe the investor did not think of. With California hard money lenders, you’ll get good advice.

No Limitations

Often, real estate investors purchase and have more than one property. Many banks will cap the amount of loans to a single borrower. Hard money lenders do not do this. They are more concerned with the equity, and view working with an investor on more than one property as positive. They will sometimes even cross-collateralize investment properties.

advantages and disadvantages of hard money loans in California

Advantages and Disadvantages of Hard Money Loans in California

Financing a new real estate project can go two ways; traditional lending or hard money loans. The latter is a tool that many real estate professionals in California utilize to finance a property. Experienced investors who have been taking advantage of these types of loans know all about the advantages and disadvantages of hard money loans. However, for those who are new to this alternative type of lending, the issues aren’t as clear. Read on to learn everything you need to know about hard money loans, including the most important advantages and disadvantages.

Hard Money Loans have a Quick Turn Around

Compared to a traditional loan, hard money loans are approved and financed much faster. The process for a hard money loan includes the lender looking at a few things, including the property in question, how much the borrower can put down, the borrower’s equity in the property, the exit strategy for the property, and how much cash the borrower has in reserve to make their loan payments. Hard money lenders want to loan money so as long as the borrower meets these requirements, the lender will quickly approve the loan. In fact, a real estate investor in California can expect to have a hard money loan approved and funded within three to five days as opposed to the 30 or more days it takes to approve and fund a traditional loan. In addition, borrowers who have first sought a traditional loan only to have it not approved after sitting in escrow often turn to hard money lenders to get the funds they need for their real estate investment.

Hard Money Loans Have Fewer Requirements Compared to Traditional Loans

Banks and credit unions in California have lengthy requirements for a loan and these requirements often change from year to year. In fact, many borrowers are unable to meet these demands, which include:
• No recent foreclosures
• No recent short sales
• No recent bankruptcies
• Bad credit
• Four current mortgages or more regardless of credit rating
• Self employed borrowers or those with a lack of steady employment for at least two years are unable to get a bank approved loan

On the other hand, hard money lenders have fewer requirements. As stated earlier, these include:
• Satisfactory equity in the property
• Or a substantial down payment (25% to 30%)
• Enough available cash on hand to make loan payments
• A clear and reasonable exit strategy
• Experience in real estate investment
• Credit score and employment history is a non-issue

Hard money loans are easier to get versus traditional loans. In addition, a borrower can opt for a short term hard money loan to purchase a property they intend to live in, and once they meet the requirements of traditional lenders, they can always refinance the loan with a bank or credit union for a longer loan at a lower interest rate.

Projects that Can’t be Financed Elsewhere Qualify for Hard Money Loans

There are certain real estate projects that traditional lenders have no interest in financing. These include flipping properties in California for a profit. Borrowers who intend to flip a property need a short-term loan, usually up to 12 months, to make the necessary repairs and renovations before quickly selling the property for a profit. For banks and credit unions, this type of loan does not fit into their business model. Instead, they prefer to offer lengthy loans of 15 years or more at a lower interest rate. Also, traditional lenders find these projects too risky. This is because the property in question often has issues that prevent them from qualifying for a conventional loan, such as problems with the property’s structure, plumbing, electrical work, and other factors that make the property’s value quite low upon purchase. Overall, banks are not in the business of risk. They prefer sound investments that fit into their strict lending requirements and offer little to no risk, even if the borrower defaults on the loan. If this were to happen, the bank then has the property for collateral and can resell it to another investor without losing any or very little on the loan they sold.

Disadvantages of Hard Money Loans

So far we’ve touched upon the advantages of hard money loans. These include the fact that they are easier to obtain and take much less time to secure. However, there are some disadvantages of hard money loans that borrowers in California also need to take into consideration before taking this lending route.

Higher Interest Rates

Due to the increased risk associated with hard money loans and the convenience they offer to the borrower, interest rates are always higher when compared to conventional loans. Typically, hard money loan interest rates fall between 9% to 15%. In addition to a higher interest rate, hard money lenders in California also charge a loan origination fee, referred to as points, which is a percentage of the entire loan amount. Borrowers can expect to pay from two to four points on a hard money loan, although some lenders may charge more depending on the specific factors of an individual loan.
For real estate investors in California where there are more hard money lenders than in many other areas of the United States, this competition brings rates and points down. For this reason, it’s important for borrowers to compare the rates and points of many hard money lenders in their area before making a commitment.

In addition, there are hard money lenders who will provide loans on second mortgages. In this case, they tend to charge an even higher interest rate than they would on a first mortgage. The additional interest rate for a second mortgage will be about 2% to 3% higher. The higher interest rate on a second mortgage is due to increased risk. If the borrower defaults on the first mortgage, the lender for that mortgage can foreclose on the property, making the second mortgage obsolete.

Short-Term Loans Only

Hard money lenders do not give out long-term loans. Typically, a hard money loan is for one to two years. In some cases, they can be for three to five years but this is the absolute limit for hard money loans. Lenders prefer giving shorter loans because the longer the loan, the higher the risk for the lender due to the uncertainty of future interest rates in the lending industry. For example, if interest rates drop, the borrower then has the option to refinance the loan for a lower interest rate, meaning the lender loses out on the profit they would accumulate through a higher interest rate. On the other hand, if interest rates climb, then the lender needs to wait for the term of the loan to end before they can jump in and charge a higher interest rate. All of these interest rate fluctuations represent a risk for the lender. Therefore, they prefer to give out the shortest loan possible to minimize risk. Conventional lenders deal with interest rate uncertainty by offering lower interest rates for shorter terms and higher interest rates for longer term loans. When a borrower takes out a 15-year loan they can expect to pay a lower interest rate, whereas a longer loan term of 30 years will see a higher interest rate charged.

Larger Down Payment

Traditional lenders require a smaller or no down payment to secure a property loan. However, hard money lenders require a down payment or substantial equity in the property to secure a loan. For this reason, hard money lenders are able to be more flexible with their requirements for issuing a loan because the equity in the property is seen as a hard asset for the security of loan. This is where the term “hard money loan” comes from. On the other hand, banks and credit unions focus more on a borrower’s credit score, stable employment history, and other requirements. In order to secure a hard money loan, however, the borrower needs to have a down payment.

If the borrower has neither a large down payment or substantial equity in the property, they cannot secure a hard money loan since the lender would be taking on the entire risk of the loan. To illustrate further, consider this example. A borrower puts down 5% on a loan and secures funding for the remaining 95%. This results in a 10% drop in the property value and a 5% loss. Therefore, if the borrower decides not to continue with the project due to a decline in property value in the foreseeable future and defaults on the loan, the hard money lender is left with a loan that can’t be paid back. On the other hand, if the borrower puts down 30% on the loan and there is a 10% decline in the property value, the borrower still has the motivation to continue with the project to protect the equity they invested in the property.

Compared to residential hard money loans, commercial hard money loans typically require an even larger down payment. This can be up to 40%. A larger down payment is required because it is more difficult to sell commercial property than residential property, thus putting more risk on the hard money lender. Overall, there are far more potential buyers for residential properties than there are for commercial properties and the hard money lender seeks to avoid as much risk as possible when giving out a hard money loan. Additionally, if a borrower defaults on a hard money commercial loan and the lender takes back the property to sell, they may have to significantly reduce the sale price of the property to recoup their investment through a quick sale. It is also more difficult to place a correct value on a commercial property as there are fewer data points to consider when compared to a residential property.

By taking into consideration all the advantages and disadvantages of hard money loans, it should be easy for real estate investors in California to weigh the checks and balances of these loans and decide whether to proceed with a hard money loan or a traditional loan for their real estate project. If a borrower intends to flip a property for profit, then a hard money loan is the best route to take, as it provides a quick and easy way to get the funds needed to repair the property and sell it in the shortest amount of time possible. On the other hand, hard money loans are also a viable option for those borrowers who do not meet the strict requirements of traditional lending institutions. If a borrower wishes to purchase real estate as a primary residence but can not do so with a conventional loan, a hard money loan is an option to take until the borrower can meet the traditional loan requirements and then refinance at a lower interest rate for a longer loan term.

Hard Money Loans In CA: Lending Alternatives Investors Should Know Inside And Out

Buying real estate in California has many advantages, especially when you buy during a down market. Real estate investment generates cash flow, gains value over time, and is a tax write-off. Most often, real estate is purchased through traditional lending practices, such as banks, mortgage companies, and credit unions. However, since the 2008 market crash in California and other parts of the United States, these lenders have made their guidelines stricter than ever. For example, you’ll need a credit score of at least 740 or more to invest in real estate, along with low debt-to-income ratio, a history of steady employment, and at least six months of liquid funds in reserve to qualify for one of these traditional loans.

For those who don’t meet these strict guidelines, there are alternatives, such as paying for the property in cash or gaining a hard money loan to finance the property. These two alternatives to traditional loans have both advantages and disadvantages. First of all, it should be noted that when pursuing these alternative methods to invest in commercial or residential property in California, it’s important to work with a trusted and reputable lender. Too many times newcomers find themselves with little experience when it comes to securing hard money loans and end up in a bad situation.

As interest rates steadily rise, many real estate investors in California are turning to hard money loans to secure a property. However, there are many factors borrowers need to take into consideration before seeking this type of alternative loan. Hard money lenders are seeking borrowers who have the collateral or equity to back up the loan rather than looking at credit. With so much on line, it’s important to be aware that there are risks that come with securing hard money loans and with higher risk often comes higher interest rates.

Read on to learn everything you need to know about hard money loans for your first or next property investment in California.
What are Hard Money Loans?

Hard money lenders are private lenders who are either companies or individuals who have money to lend. But don’t let the title fool you. Hard money loan doesn’t mean it will be hard for you to get this type of loan. What you need is somewhere between 30% to 50% equity or a substantial down payment. If you have this, you’re good to go. What “hard” actually means in the term “hard money loan” is that the real estate you are purchasing is considered a hard asset.

Some Advantages of Hard Money Loans

Whether you are borrowing money from an individual, such a family member, or from a company, the process takes much less time than borrowing from a traditional lender. Overall, a hard money loan takes about a week to 10 days to acquire, while a traditional loan can take up to a month or longer. This means there is a lot less paperwork to deal with when getting a hard money loan because the underwriter who is reviewing the loan is not as concerned with satisfying the investor since the lender is the investor. Also, hard money loans are concerned with the property’s value after it has been renovated or repaired while a traditional lender is concerned with the value of the property at the time of purchase.

Understanding Rates

While hard money loans typically have a higher interest rate than a traditional loan, this is not a problem since the loan is for a much shorter period. Most investors use this type of loan to quickly flip a property for profit, making the higher interest rate a non-issue.

The Types of Lenders You Should Avoid

In the past, hard money lenders focused on a borrower’s equity in the property. However, since 2015 when the TILA-RESPA Integrated Disclosure rules took effect, hard money lenders are now looking at the borrower’s ability to repay the loan. These rules were put into place to avoid predatory loans. To illustrate further, in the past, when a borrower could not pay back the loan, they typically lost their investment through foreclosure.

Other predatory loans include the bait-and-switch scheme. This means that the lender would guarantee a loan at a fixed rate only to then switch to a different loan at a different rate. Borrowers oftentimes went unaware of the switch until well after closing when they realized their payment was much higher than originally agreed upon. The higher payment was due to an interest rate adjustment that the hard money lender failed to disclose.

When seeking a hard money loan, it is important not to fall prey to a predatory loan. In the excitement of getting a loan quickly through a hard money lender, the borrower must work with a lender who is transparent throughout the process. All documents must be consistent with what was agreed upon by both the lender and the borrower to avoid a predatory loan.

Changes in Traditional and Hard Money Lending

Since the time of the housing crisis in 2008, there have been changes in the mortgage industry every year or two. This is a result of many factors, including a larger customer base and advances in technology. Another change is in the peer-to-peer lending sector that emerged when the LendingClub became a publicly traded company back in 2014. The point of this was to bypass traditional lending with a lending marketplace that uses an online platform to join lenders and borrowers.

Since the popularity of property flipping reality TV shows, we have seen an increase in hard money loans. In fact, these TV shows pretty much promise that anyone can make a substantial profit by flipping a property, whether they do this once or choose to do this as a career. On the other hand, when you use traditional lending, you can only expect a profit of somewhere around 1% to 5%, as opposed to the lucrative profits promised, about 7% to 20%, by quickly flipping a property and using a hard money loan to make this happen.

By using the information above, you should have a better idea of how hard money loans work, as well as the advantages and disadvantages that go along with them. Most importantly, a real estate investor must protect themselves from predatory loans and seek out only the most trusted and reputable private money lenders in California.

How To Find The Best Hard Money Lenders In California

For those who have never applied for a hard money loan before, it can seem difficult to know where to look. Many borrowers are thinking about time and want to get a loan as soon as possible to complete their project and get a return on their investment. However, it is important to find a reputable hard money lender and not just jump in with any lender. Borrowers need to take into consideration that hard money lending is a niche industry that works with borrowers in the real estate industry, as well as property owners, who need this type of financing.

In California, borrowers are in luck, as there are many hard money lenders available in this state. Also, there are a few ways to find the best and most reputable hard money lenders in the state of California. Read on to learn about the best ways to find a hard money lender near you and secure the funds needed for your property or other real estate investment.

Lists and Directories

One place to look for hard money lenders is through a directory or list. This can be done online. The lists are available for lenders to browse and many are organized by state and/or region for added convenience. Many of these lists are free for the hard money lenders while others charge a fee for the lender to add their name. What’s important to note, however, is that the lists and directories do not take into account a lender’s track record or experience. This is something the borrower must investigate themselves. When it comes to the state of California, these lists can be quite extensive. For this reason, it is best to narrow down the list by searching for hard money lenders closest to the borrower’s location. From here, the borrower can do research on the lending company’s overall experience and customer satisfaction. Trust is an important element when choosing a hard money lender, so be sure that previous customers have had a good experience with a lender before reaching out to them for a hard money loan.

Lists and Directories Should be Free

A borrower should never have to pay for a list of private hard money lenders. When someone is trying to sell a list of lenders, this is a red flag. Sometimes, the borrower may fall for a sales pitch that emphasizes that it is far too difficult for a new borrower to find a hard money lender, but this is not true. Another red flag is a sales pitch that says the borrower must buy the list before being able to speak to one of these lenders. This is also false. Hard money lenders are looking for business and are more than happy to speak with potential customers. In most cases, when the borrower has a loan scenario that seems promising, the lender will do what they can to work out a deal. If they can’t, they will try to direct the borrower to a lender than can. One place borrowers will find lists for sale is on eBay. The price ranges from ten to one hundred fifty dollars, but there is no guarantee if these lists are reputable or updated. In the end, it is better to work from free lists and directories to find the most trustworthy hard money lenders for a real estate project.

Local Real Estate Investor Meetings

Another way to find potential hard money lenders is to attend a local real estate investor meeting. This is the perfect place to put on your networking hat and find the right lender for your needs. Many hard lenders attend these meetings, meaning a borrower can meet one or more hard money lenders face-to-face and get all their questions answered. If there are no hard money lenders present at the meeting, simply ask the real estate agents for referrals. They will oftentimes be more than happy to assist in the search.

Google Search

A simple Internet search on Google for hard money lenders should turn up a free list or directory of hard money lenders that a borrower can contact. Simply type in “hard money lenders in California”, “hard money lenders near me”, or “hard money lenders in (city)”. Google will give results of the most active hard money lenders available who can be contacted.

Call a Real Estate Professional

Many real estate professionals have worked with hard money lenders in the past or present. Call a few local real estate agents and create a list by asking for the most highly reputable lenders with experience who can be contacted. Besides real estate agents, a borrower can also contact escrow officers, traditional mortgage brokers, and title company representatives to compile a thorough list of hard money lenders to contact.