Friday, June 10, 2011

HML #18 Started Two Weeks Ago

Started another hard money loan. Actually, this one started about 2 weeks ago, but seems to have gotten lost in the shuffle. My partner had an influx of about 6 loans to fund and he mislabelled some emails so it was pretty confusing with all the properties flying around.

Anyway, this property is San Leandro and is a 900 square foot, 3 bedroom, 1 bath single family home. It was built in 1942. It was purchased at auction for $195,000. Our loan is for $144,000, giving a LTV of 74%, based on purchase price. The estimated market value after repairs looks to be $250,000. (Comps sold in January and February for $260,000 and $250,000.) The LTV at that price is 58%. The pros of the property: It's on a huge lot. Fix up costs will likely be low, simply based on the size of the house, but the condition of the inside is unknown. The cons are it backs up to a strip mall and the condition of the inside is unknown.

I should also note here there is one more potentially huge con: the borrower is under investigation by the FBI for bid rigging at foreclosure auctions. (I obviously disagree with the comments in the article about how the margins are thin in this business. I've made lots of loans here and I know that is not the case. Just look at this property for example.)  This is interesting. The borrower is one of the biggest buyers of properties in the county and is our biggest borrower. My partner has a very high opinion of him. He always makes his payments early (for example, he just made a payment this week, even though his due date is the 29th of the month). My partner estimates the borrower employs about 10 or more people and runs a professional business. He typically buys 1 property a day and closes on 1 per day. He recently took out three loans with us. My partner doesn't know what the FBI will find or if he will do jail time, but he does figure the guy will probably at least face a big fine.

But based on the numbers, I went ahead and got in on the loan. If we have to foreclose on the property, we're still in good shape. I image the legal proceedings of a foreclosure when the borrower is in jail would be somewhat horrendous, but not insurmountable. And we'd have almost $100,000 cushion to work with.


Anonymous said...

Why would someone go for a house in that conditions where you don't know how it is going to look in the inside? When purchasing a house is concerning, you should always think twice or three times. I mean it is an investment that you do. We have that clear here at Maple Ridge Homes

Shaun said...

As your link indicates, you obviously only know about selling homes to owner occupants. Real estate investors have a much different set of criteria for home purchases.

Linda said...

@Anonymouos That happens all the time for auctions. Its a very common occurrence!

Another Investor said...

Is one of these folks your borrower?

Shaun said...


Jo said...

I think most people would agree that when one is very busy, it will definitely be times when a loan gets lost in the shuffle. Thanks for sharing!

Iggy said...

Do you have a checklist that you use when you evaluate a deal?

If so would you mind sharing it with everyone


Shaun said...

Not one that is actually written out, but I look at at the things I have mentioned on this blog - location and comps are the biggest factors. And an estimated amount for repairs. From those, you can get a decent loan-to-value ratio. As a hard money lender, I also tend to be more comfortable lending to past borrowers who have a solid payment history and those who have been working in the business for some years and know what they are doing. For instance, if a former borrower who had a good payment history came to me and wanted a loan at an 80%-85% LTV, I probably would do it, but I wouldn't make that loan for someone I have never done business with before.

Todd Hays said...

This story is hard to wrap around, but so is this market.

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