When a buyer says, “We need creative financing,” run, don’t walk away from these “time bandits.” Many buyers have no conscience about picking your brain (because they can).
“Buyer’s are Liars” Part 1
This is the first in a series of posts
Besides “Investors,” how many homes have your buyers “CLOSED” using “creative financing” in your career? FEW is what I’d wager.
Even fewer after 2010 implemented “Dodd-Frank,” which was brought on by (another) banking crash and a government bailout.
They have already discovered that a) they can’t get financing at all, or b) the financing is “costly, long before they’ve talked to you!
Moving Forward
Two or three times a month, buyers request “hard money” (aka “Alt Doc/ Sub Prime” and “creative financing”). And I don’t do them—here’s why!
Most inquiries are last-minute and desperate, as contingency deadlines are expiring, and it’s evident Conventional / FHA financing is not the answer.
Hard money is then perceived to be the last “Hail Mary” to save the deal.
The bad news is that even when buyers have hard money options, they rarely use hard money financing.
For those buyers who do proceed, many obstacles will soon become apparent, and few “hard money or Alt Doc” loans close escrow.
“Meanwhile, back at the ranch,” the agent is left twisting in the wind as both buyer and seller’s initial frustrations boil even higher!
Here’s What’s Really Happening:
1) Most lenders/brokers get few requests for this type of lending
and often need to cultivate deep relationships with hard-money investors. So, many MLOs (essentially) send the “hard money” loan app to another broker, who sends it another “ad nauseum,” dragging out the process, adding more fees, and losing time while further burying the transaction.
2) Buyers desperately apply for loans “all over town.”
Their credit report shows an obvious paper trail of “credit inquiries.” Since no MLO wants to be “a backup lender” any more than you want to be “a backup real estate agent,” this will worsen.
The result: Few MLOs really “drop everything” and commit to working on the loan because we are all on commission, and the loans with the best chances of closing take priority.
Also, as buyers are turned down for conventional financing, they become desperate, and their “misrepresentation” of every MLO increases.
Once clients (in their highly charged emotional state) start lying, they continue, AND they get (really-really) good at it. So good that the lying becomes “performance art,” and the transaction can drag on for months.
“Meanwhile, back at the ranch,” the agent is left twisting in the wind as both buyer and seller’s initial frustrations boil even higher!
Agents get sucked into all this drama, and they pay an emotional price (after all, there are tens of thousands of dollars hanging in the balance); when they instead could be working with viable clients!
3) Rates and Fees = Buyer Payment Shock
Rates for these loans typically range from 7.9% to 11.9% with 2-4 points, double the rate & fees of conventional financing.
4) Terms
Typically, a 2-5 year fixed rate, Interest Only, and a 2-year “pre-pay” penalty.
5) Down payment
Realistically, 30-40% down, and if it’s a “real fixer,” more may be required.
Here are “Typical” Underwriting Guidelines:
Typically, the down payment is 30-40%, and buyers must have 6-12 months of “reserves” for all properties and typically 700+ Fico scores.
If the buyer has two other properties, the “cash to close” (due to reserves) rises dramatically. These three criteria eliminate 90% of the buyers.
Also, the down payment money must come from a personal account; “business funds” can’t be used for a down payment.
After all, the underwriter says, “How can someone run a business” if they liquidate all of their operating capital?”
Usually, business owners / self-employed buyers become increasingly reluctant to withdraw a large sum of “operating cash” to get a home (as the transaction lurched onward).
Dodd-Frank
The last heartbreaker is revealed only during the final underwriting step – a “QC check” (quality control).
“Hard money/Alt Doc” loans are considered “high-cost loans” and can only be used to purchase or refi INVESTMENT PROPERTIES.
If a buyer is trying to purchase a “primary residence” with a hard $$ loan – AND has no other (primary residence)/property, hard money investors will be forced to decline the deal (but only at the very, very last moment –
Below is my cell number- I pick up the phone!
Daniel Dobbs (.org)
Mutual Home Mortgage
Cell: 949 250-3981
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