How a Lawyer Can Help You Navigate the Technicalities of Real Estate Lending
Posted by: kevensteinberg
The California Residential Mortgage Lending Act (CRMLA) is found in Division 20 of the California Financial Code, and regulations are contained in the California Code of Regulations. The CRMLA was enacted in 1994 and became operative in 1996, and it authorizes licensees to make federally related mortgage loans, to make loans to finance the construction of a home, to sell the loans to institutional investors, and to service such loans.
Real estate lending in California can involve various financing options, including mortgages for residential real estate, non-residential real estate, and commercial real estate. Financing real estate transactions can be especially tricky for people, so it is important for a person to be working with a skilled small business lawyer.
Obtaining Real Estate Investment Financing
Real estate financing describes a person’s method of securing funds for a deal, with investors securing capital from outside sources to buy and renovate properties. Real estate finance will involve terms and underwriting that need to be fully understood before a person enters into a contract.
A common misconception concerning real estate investing is that a person needs to have a considerable amount of money to get started, but this is actually not true. There are many different real estate financing options available to fund every kind of investment, so the ways deals get funded may impact outcomes.
There are different ways people can finance real estate investments. It is important to understand that not all real estate investment financing options will be created equal, so what works for one person may not work for another.
Real Estate Financing Options
When investors are seeking ways to finance an investment property, some of the real estate finance options could include:
Cash Financing — Cash can often be one of the best ways for a person to ensure that they get what they want. Cash not only leads to more offers being accepted, but cash financing can also help investors save on interest, increase cash flow, and receive instant equity on an investment. The purchase amount could also be lower in some cases. RealtyTrac reported that all-cash homebuyers for single family homes and condos paid on average 23 percent less per square foot than all homebuyers nationwide. There are times when paying cash for property makes the most sense and other times when other financing options should still be considered.
Hard Money Lenders— Hard money lenders are funded by private businesses and individuals and provide short-term, high-rate loans for real estate investors. This financing option does not conform to bank standards of creditworthiness, so it is typically used by rehabbers hoping to renovate properties. Hard money financing is often determined by the value of an investment property itself, with lenders analyzing the After Repair Value (ARV) to determine the size of the loan. Hard money lenders usually will not fund an entire deal but rather a percentage of the purchase price or the after repair value, ranging from 50 to 70 percent. Hard money lenders can also charge fees apart from the interest on the loan that are delineated in points, representing additional percentage fees based on the loan amount. The bottom line is that hard money lenders will charge much higher interest rates and have different requirements, so all real estate investors must be aware of what they are actually getting themselves into.
Private Money Lenders— A private money loan is a loan secured against real estate with the source of funds coming from a private investor as opposed to an institutional lender. Private money will be a faster and simpler way to obtain financing compared to traditional lenders because private money loans require far less documentation and have a much faster application process. Private money loans may be approved and funded within three to five days whereas traditional lenders could take up to 45 days or more. Private mortgage lenders will be individuals or companies lending funds to property owners with a note and deed of trust secured against the borrower’s real estate. Private money lenders for real estate typically require higher down payments (or existing equity) than traditional lenders and have higher interest rates. This lending is often intended for short-term financing of one to three years.
Self Directed IRA Accounts— A self-directed Individual Retirement Account (IRA) is a savings account allowing for compounded, tax-free growth over time. Self-directed IRAs allow owners to control many investment options, including real estate. Owners of self-directed IRA accounts have the benefit of purchasing, rehabbing, and selling properties while still being able to defer taxes. The catch here is that owners under 60 years of age will typically be subject to penalties for withdrawing funds early.
Seller Financing— In certain scenarios, both an investor and a seller could strike their own financing deal as seller financing allows a property buyer to make payments directly to the seller of the property rather than going through a bank. Sellers can sell property more quickly and investors can avoid many mortgage lending hurdles. A buyer and seller will enjoy a faster transaction process and avoid many costs and fees associated with the closing process. An owner can also sell a promissory note when they no longer want to manage their own owner financing.
Peer-To-Peer Lending — Peer-to-peer lending will let an investor borrow money from another investor or group of investors. While this is similar to hard or private money lending, investors may bypass traditional funding requirements because their portfolios instead take on an important role. This kinds of real estate financing often involves a lower loan-to-value ratio than other funding types, which prevents investors from borrowing the entire loan amount needed to purchase a property. Peer-to-peer financing will offer a greater degree of flexibility.
Contact Our Los Angeles Small Business Attorney
Are you struggling to determine the best way to complete a real estate transaction in the Los Angeles area? You will want to work with Steinberg Law because our firm regularly handles these types of cases and knows how to help people find answers to their problems. Our firm has received numerous awards, including being awarded the United Chambers of Commerce Small Business Award and being a recipient of multiple United States of America Congressional Certificates and California State Assembly Service Certificates. Call (818) 855-1103 or contact our Los Angeles small business attorney online to receive a free consultation.