The California Department of Real Estate published a new consumer protection manual that anyone hunting defaults should look into.
In an effort to warn consumers about the dangers of borrowing against home equity, the DRE has released a guide detailing the negatives of hard money loans. According to the Department, the real estate equity borrower may fall victim to the hazards associated with such loans and end up losing their houses. Many times, not enough thought is given to repayment and the consequences surrounding the failure to repay.
This pamphlet should become a part of every distressed equity buyer’s toolbox. Imagine government propaganda supporting the seller’s needs to sell rather than borrow. The number one competition of equity purchasers is equity lenders. So much so, experienced equity purchasers become equity lenders looking to borrow the homeowner money first and purchase (or repossess) the house second. They use equity lending as a back door. Either going with the homeowners want, but inability to borrow, or filling his need to sell.
Equity loans’, commonly referred to as hard money loans, fees and interest make them very lucrative for the lender. Of course, they are risky. Many borrowers don’t pay. If you are a real estate professional, the fees and interest generated by these loans are plenty for you and your money investors. The risk of getting the property back is not a negative, in fact it is the reason you funded the loan the first place. No doubt, one of the “hazards” the DRE alludes to.
The equity lender forecloses, fixes it up and sells it on the retail market. This is the business plan neophyte real estate professionals must compete against. The Department of Real Estate is helping you. Equity loans are seldom in the best interest of the homeowner. The fees, five to ten points, are excessive. The interest rates, double the normal home loan, are usurious. If a homeowner is unable to pay his current loan, how can he be in a position to make his new higher payments?
Unfortunately, the defaulted homeowner is seldom in a logical mood and is blind to any solution that does not include him keeping his home. This is where the government propaganda is the solution. In the past the equity purchaser had only his own sincerity to persuade the homeowner to sell. Now the buyer can give the defaulted homeowner the pamphlet. By using the pamphlet, the purchaser can reference a trusted third party’s information explaining the pitfalls of equity borrowing. After you’ve done a few deals, then go get your broker’s license and you can use the “hard money loan” scenario too.
This month’s motivation: Fourteen of the 400 richest people of the world earn some of their wealth from real estate according to Forbes Magazine. King Fahd Bin Abdul Aziz Alsaud is the king of realty with his $25 billion. Along with his oil fortune, he has stakes in real estate throughout the U.S. including Fairmont Hotels. I guess we don’t say millionaires are made through real estate anymore… It’s BILLIONAIRES.
