In real estate investing, “time is money.”
Unless the buyer has all cash available to fund the quick purchase of a home, most buyers need capital from third-party sources to complete their purchase. Investors who can fund the quickest are the most likely to get their offers accepted by motivated sellers.
In recent decades, the third-party funding options were typically from banks, mortgage bankers or brokers, private or hard money.
Of these three primary lending options, banks usually offered the lowest rates and fees, but took the longest to fund the transactions.
Mortgage bankers or brokers offered the most funding options from either their own money from warehouse or credit lines or from any number of multiple third-party sources such as banks, credit unions, or investment firms.
Private money or hard money lenders offered the most expensive loan options from wealthy individuals or from “pools” of investors with “deep pockets”and were the most likely to fund loans faster than anyone else.
From Banks to Private Money
After “The Credit Crisis” began to worsen in Fall 2008, many investors got tired of their local banks turning them down in spite of their perfect mortgage payment histories and years of loyalty to these same financial institutions.
People began to realize that their favorite banks were investing their funds in complex European derivatives instead of making loans to their once preferred customers’ businesses or for real estate.
More and more investors sought out non-conventional lending options such as private money from wealthy individuals, smaller hard money firms, and “institutional funds.”
What is so appealing to investors who work with private or hard money lenders is that the collateral for the investment is usually at least as important as the borrowers’ financial and credit status. Many of these loans are truly “asset based loans” with much more “makes sense” underwriting guidelines than offered by big banks.
When Interest Rates Go Down, Home Prices Usually Go Up
Interest rates and home prices typically have inverse relationships. When rates are headed downward like over the past year, then home prices have historically increased.
30-Year Mortgage Trends (December 2013 –December 2014)
December 2013: 4.58%
January 2014: 4.588%
February 2014: 4.388%
March 2014: 4.4%
April 2014: 4.435%
May 2014: 4.311%
June 2014: 4.226%
July 2014: 4.203%
August 2014: 4.211%
September 2014: 4.207%
October 2014: 4.181%
November 2014: 4.18%
December 2014: 3.94%
(source: Bankrate and Bloomberg)
Sprint Towards the Finish Line
Sellers today are more likely to sell to the buyer who can perform, fund, and close escrows the quickest and easiest.
Given the choice between a motivated all-cash investor with private money options and another investor who needs formal bank approval, a clean appraisal, and other inspection reports, most sellers today would choose the more flexible investor with non-conventional bank funding options.
The key for investors is to be as organized as possible by researching the target areas and sales comps as detailed as possible by using free systems like Redfin, Zillow, and other online resources in addition to contacting local knowledgeable real estate agents for their input.
Investors should also work toward getting pre-approved with their lenders upfront, so they have a better idea of their proposed required down payments, monthly payment ranges, and loan terms prior to writing up an offer.
Housing markets in 2015 should be much improved due to declining mortgage rates and energy costs, more flexible mortgage guidelines for FHA and other government-backed mortgage loans, and reduced “shadow inventory” numbers.
The key for investors is to be as ready, willing, and able as possible, so they are able to research, fund, and invest in today’s “hyperspeed” real estate world as quickly as possible too. The first to fund is the first to win the race!