Hard money lenders in California are the source for financing solutions for those who cannot qualify for a traditional lender. The market for hard money lenders in California is big. That’s because the state has a very active single family real estate market. California has one of the highest median home values priced at an average of $500,000. Hard money lenders in California provide lucrative home flipping opportunities for investors. In a nutshell, they provide a quick fix and flip transaction.
Hard Money Interest Rates and California Hard Money Lenders
The interest rates for hard money loans vary from lender to lender, but the typical interest range if 8-14%. The charge for interest is based on current market rates, and the rate usually does not move up and down with the federal funds rate.
Hard money loan rates may fluctuate depending on the loan to value (LTV). The higher the LTV, the higher the interest rate. That’s because a hard money lender will want more compensation for a higher risk. Lower interest rates are offered for lower LTV’s. Full documentation of credit history and income from the borrower is not always required. This is seen as an increased risk factor for the hard money lender.
“Investors want to maximize their return on investment, and they may do so by requiring you pay whatever rate they’re charging for at least six to 12 months. Prepayment penalties or guarantee fees will need to be paid whether you sell the property or refinance it within the prepayment period, so you’ll need to figure it into your net profit if you think you’ll be selling the property before the period expires.”
Additional Fees to Interest Rates
Hard money lenders charge points in addition to more interest. The points are considered a loan origination fee. Depending on the terms and type of loan, points can range from 2 to 5. For example, 2 points on a $200,000 hard money loan would have an origination fee of $4,000. Other fees that may be added to the loan include underwriting fees, processing fees, documentation fees or administration fees. Extra junk fees can definitely increase the total cost of the hard money loan. Plus, there are third party fees, including the closing fees for escrow, notary, title insurance and recording.
Finding Hard Money Lenders in California
Tapping into your network or asking other property investors for hard money lenders are ways to find a hard money lender in California. And while the amount of the loan and interest rate are important factors, there are other things to consider when choosing one.
- Does the lender provide full transparency?
- What are the origination fees?
- How much LTV is allowed?
- How soon is closing?
- Are rehab costs covered?
- Do you fully understand the terms?
- Are there any hidden fees?
Asking the right questions is key to finding the right hard money lender. It’s important for hard money lenders in California to provide full disclosure to borrowers.
The Advantages of Hard Money Loans
Even with higher interest rates on hard money loans, they do have advantages. Because the underwriting guidelines for hard money loans are less strict and require less documentation, the hard money loan can close quick. So, speed is a benefit. If you have a low credit score or are a foreign national with no credit, hard money loans are lenient. There’s also flexibility with hard money loans. For example, you can seek a longer term period. California hard money lenders aren’t restricted to established terms. Hard money lenders in California provide leverage in the market. Bargain properties can be hunted down by flippers and snapped up quickly before another buyer steps in. If you cannot get traditional financing for an investment property, need money fast in a hot market or your credit score is low, a hard money loan just may be a good choice for you.
The major pitfalls of hard money loans include higher interest rates, shorter terms and little oversight. The bottom line is that you’re going to end up paying more interest than a conventional loan. Repaying a loan in five years of less equates to high monthly payments. The shorter terms of hard money loans come with a price. It’s important to note that hard money loans have little government oversight. It’s important for investors to do their own due diligence in order to avoid any unethical lenders.
Be sure that the lender has a lender’s license. This will help weed out any potential loan sharks. Take a good look at the interest rate. Every state has guidelines on how high of an interest rate a lender can charge. Look into any adjustable rates. While the initial rate may look attractive, it just may rise quickly. Do a comparison of the interest to the payment amount. If regular payments don’t pay off the hard money loan, it’s likely you’re dealing with a shark. It’s critical to use a real estate attorney to ensure that your hard money loan contract is not fleecing you. And, that’s right. You do need a contract. Don’t exchange any monies until both the lender and you have signed the contract.
Investing in California Real Estate
The state of California always draws a keen interest for investors. The beaches, perfect weather and home to top companies like Google and Apple make it a good pick for flips and rental properties. Some of the best communities to invest in include San Pablo, Arvin, Adelanto, Dos Paos and Lake Elsinore.
“California ranks near the top in all estimates of “hot property” zones and rents in LA are 4th highest in the country. LA is vast area, and the averages cloak some communities with very high rent rates and selling prices. It’s a trendy market that will see many more people renting a house, condo or apartment in LA. And with that, demand for rental properties will rise. Buyers from around the world are keenly interested in Los Angeles property, and the competition can get intense. The California Association of Realtors reported that sales of lower end properties plummeted in April and higher priced homes shot upward. The lower end of the market has dried up, forcing renters to pursue pricier condos or apartments.”
If you’re investing in California, it’s important to know the market. Some markets are overpriced due to local economies increasing the demand for housing. In the Bay area, the strong demand for housing is due to the tech companies offering high paying jobs. In LA, the home prices are much lower.
It’s wise to use caution if you’re investing in an overpriced market. Think about how you’re going to manage the property. “Be aware that you also may face a dip in prices. If you’re investing in flipping properties, stay away from the upper end and shorten your timeframe. Right now, the home prices in San Francisco are sky high, and it’s likely rental properties will continue to be needed. If you’re planning at least a five year investment, homes in this area may be a good choice. Just don’t buy it overpriced, as the expected appreciation just may not be there down the road. The north California markets like Redding, Chico and Yuba City have a different kind of economy but with their lower home prices are likely to have better growth in the future and are less competitive for prime investment properties.”
According to Forbes, “If you’re a home builder or rehabber who will finish your project soon, if you’re a speculator who will flip an acquisition, if you plan to split a property into several rental units or condos, if – in other words – you have an investment horizon of only a couple of years, now is a great time to invest in California property.”
California offers many opportunities for investors. However, it’s also the place of boom and bust. Know your market and check the risks.
In sum, the overall California market for investors looks good. It looks so good that those high interest rates for hard money loans just may be worth it. Choose your hard money lender wisely, pick the right market, use a real estate attorney, and it should be smooth sailing. There’s always risk involved, even in a good market. But, if you follow this advice, you will definitely be lowering your risk.