I have been told by two different, and equally reliable, resources opposing statements with regards to escrow requirements from Hard Money Lenders.
We all know that most conventional mortgage lenders require +/- 4 months of Taxes, Insurance, and sometimes town services (water/sewer) to be paid at closing and placed in escrow.
Have any of you actually run into Hard Money lenders requiring the same? I always assumed that since the Hard Money lender is not “paying” for the taxes, insurance, and services directly (ie. out of an escrow account) that they don’t require a buyer to set aside this money and leave it in their “control”.
Someone please correct me if I am wrong because if this is a new trend I need to rework my deal evaluation calculators to account for the additional fees paid at Hard Money loan closing.
I cant speak for every HML but I can say for myself I escrow for the entire loans term of payments and interest upfront…I also make sure the insurance policy is paid in full for the entire loans term…As for taxes and water/sewer I only escrow for these payments if the borrower has been delinquent in the past,and if they have then I escrow for the entire loans term,if the borrower is current I dont escrow for these as the borrower not paying taxes/water/sewer in a timely manner is a matter of default in my contracts…
A smart HML will try to reduce his financial exposure in the event of a default any way he/she can…Also the tough nature of the lending market allows HML’s to ask for alot more than they have in the past…I always say the same thing when these comments get posted…“What would you do if it was your own money being lent out”
I hear what you are saying, and you definitely make valid points. Maybe it is because I don’t fully trust that the HMLs I have spoke to actually stay on top of escrow payments. These guys (or at least one of them) want to give you money, based on % of FMV (or ARV if a good case is made), have you pay them on time, and walk away. I just don’t get the warm and fuzzies that he will manage an escrow account properly. I would rather roll it into my “monthly carry” costs as opposed to pull together the 3-4 points for the HML and the 6 or so months of escrow. I am not exactly flush with cash, and draining my personal capital to pay the HML points and in some cases potentially more than 6 months of upfront escrow will stretch me thinner than I really want to be stretched. Because if something comes up, not many HMLs will opt to give you more cash to handle the problem.
I realize in some situations this may be making a mountain out of a mole hill, but if I have 3 hard money loans out that each require upfront escrow, that adds up.
I know everytime someone “complains” or “balks” at a HML arrangement the typical “what if it were your money” response is not far away. In fact I would have been disappointed if I hadn’t heard that response in this case. I am just curious if this is a new trend that other investors are running into or other HMLs are implementing. Because if I have to carry more upfront fees in my wholesale calculations, on certain deals my margin will get rather thin.
When it is “my money” I will be happy to be in that position, and welcome these objections :biggrin
I am just waiting for a fair build up of personal capital so that I can join the ranks of direct HML.
Until that day I will criticize :cool those that have made it to HML status and continue to implement new regulations and policies, just so that I can stay on top of the game and don’t get surprised. If the market is going to change I want to know in advance!
I understand your gripes and yes they are typical because the bubble decade of easy money spoiled many a RE investor…Unfortunately what you are experiencing is here to stay( and rightfully so because irresponsible borrowers and bad lending practices created this terrible market)…The lack of funding allows HML’s to ask for anything and everything…Thats includes more than enough collateral…escrows out the wazoo…I have heard stories of investors putting up $4mill in free and clear real estate to get $1mill minus escrows…thats a little much even for me…Lending on ARV is history my friend…It shouldve never been allowed anyway…I base my deals on what the property was bought for and appraised for now…And I want comps within 1/8 of a mile or on the same block or I wont fund…I also check the price of foreclosures right near the property to get my FMV…The main reason why ARV lending is so ridiculous for a HML is this…Lets say you get magically lucky and get a 200k house for 60k…You borrow against ARV from a HML (who has no brain or business sense) at %60 LTV and get 120k minus escrows…You leave closing with 100k+…In the eyes of any HML with a half a brain they just gave you 40k reasons to disappear…I never lend on ARV and never will…Infact my feeder brokers stop asking me years ago…A smart HML gets as much collateral and escrows as possible and only will accept first position and allow no others to incumber the collateral…It must be frustrating for an underfunded investor but its the name of the game nowadays…Collateral…escrows are the only way to do business for a HML.Just so you know a good HML never wants risk despite what you might believe…They simply want a well collateralized deal and their money plus interest returned on time…When its your money believe me when I say you will do the same…
Rookie absolutely knows what he is talking about and I agree 100% about lending on ARV.
However, he drives a harder bargain than I do. I typically get paid everything on the back end and I escrow nothing and typically no payments are made at all if the term is 12 months or less. This has not backfired on me yet.
I guess the point is that there are many different ways to structure HML’s. Nothing is set in stone and things are not consistent across lenders like conventional lending.
eric,
I do drive a hard bargain but its what works for me,and I have no shortage of deals…Like you said every HML is different…Question…How do you not make any interest for the entire 12 months of a loan?..Even though you get it on the back end you are losing usage of alot of what would be escrowed capital…Example if you have a $1.5 million portfolio of loans and you make %18 median (so thats $270,000 a year) of possible more capital to lend with…Which is another $48,600 in possible income per year…Also dont forget that esrowing also compounds your interest…Im not criticizing your methods ,just curious…I mean no disrespect…And I just remembered about emailing you that blank deed in lieu…Im sorry I forgot…