In our visit last month, I discussed an easy way to filter default leads. I showed the relationship between the purchase date of a piece of property and the date the loan in default was recorded. I taught you that adding the last two digits of the years and comparing them to the number 175 was a good indicator of opportunity. Less than or equal to 175 was good. More than 175 was bad. If you are lost, please refer to the October Foreclosure Forecast.
I also promised to show you another opportunity indicator this month. Unfortunately, this one doesn’t have the snappy name of our last one  The Rule of 175. But it is just, if not more effective, than last month’s tip. Here is the “no name, just logic” tip:
Look for recent Hard Money loans.
A simple enough idea, but it brings up a lot of questions.
What is a Hard Money loan? In the jargon of this industry, a hard money loan is when a loan is funded based solely on the equity in a property, with no consideration given to the credit worthiness of the borrower. Some lenders call it “C” or “D” paper.
What do you mean by “recent”? By recent I mean after the market dropped. In most areas this would mean about 1993-1997. We look for these because of the newer, more conservative underwriting criteria used to fund these loans.
In 1993, the lenders that were funding Hard Money loans were shell-shocked from the results of their 1989-1991 loans. Their foreclosure and default rates were skyrocketing and they were getting back properties that they could not repair and resell without losing money. So they began to become more conservative in their lending practices.
Some of these lenders used to loan to 80% of the value of the property, because they counted on appreciation to continue (ie. The late 1980’s). When the market peaked in 1990-1991, most pulled back their lending practices to a ratio of 60% loan to current value (LTV in real estate speak).
To further accentuate the conservative attitude, appraisers in the eighties were quite a bit more aggressive in their valuations as they should’ve been. In the mid-nineties the appraisers changed their valuations. They stopped using anticipated gains, and now became much more conservative in their estimated market values.
As the market is now beginning to heat up, this leaves buyers working notices of default in an enviable position. Most owners who have a Hard Money loan in default, do not have enough equity to look to borrowing more as a solution (Hard Money lenders are famous for the amount of loan fees they tack on top).
This leaves the spread between the current value of the house and the amount of money a new Hard Money lender is willing to lend, too small to be able to solve the owner’s current default problem. But there is enough equity left for us (investors) to buy the property, rehab it and sell it for a nice profit.
How can you tell if it is a Hard Money loan? The easiest way is experience. But there are other ways also. Look for lenders who advertise equity based loans. Aames Home Loans comes to mind. Look for Finance companies like Household Finance Company (HFC) or Beneficial California. Look for private parties (investors), especially where the loan date is after the purchase date.
There is no sure-fire method, so start observing and learn. Call the lender listed on the Notice of Default and ask them if they fund “Non-conforming” or “D-paper” loans. A yes answer indicates you are looking at a Hard Money loan.
Now get a hold of the property owner and negotiate your way to ownership of the property using an Equity Purchase Agreement and Notice of Cancellation form.
Remember that people who do not have the credit for a lender to take a risk on their property are good people to talk to about buying their property (and no one has ever bought a property without first talking to the seller &).
