Property won’t sell? What to do if you have a hard money loan

If you are a fix and flip investor, you may be holding a property that just won’t sell. Whether it’s because prices are going down, or whether interest rates are too high. Whatever the reason, you’re stuck holding a flip. So, what do you do? 

a renovated house for sale

If you have a hard money loan on the property, you really have a dilemma because it usually means interest is racking up fast on the loan, which is eating into your profit on the deal. And the clock is ticking on the loan due date as well because typically these are short term loans. And once the loan term is up, the lender wants the loaned funds returned. 

 

The good news is that there are solutions at your fingertips that may help you navigate this difficult situation. Here we go:

 

Communicate With your Hard Money Lender

 Never make the fatal mistake of keeping your problem to yourself. I can’t emphasize this point enough. Communicate with your hard money lender at the earliest stage possible when you know you’re in trouble. And don’t be afraid to over communicate, every week at the minimum. Don’t wait, because it may be too late for your lender to help if you wait too long. Many hard money lenders are well versed in real estate, and many are also very well connected, so they may be able to provide advice or resources. And even if your lender can’t help your situation, at least the lender won’t be surprised if you miss a payment, or need an extension.

 

Pivot

Doing a pivot means changing your plan or course of action. In this case it means renting the property and holding it, rather than flipping it. If you have a hard money loan on the property, renting it will help you generate immediate income to offset the loan payment. But you have to communicate this pivot with your hard money lender so the lender knows your plan. You can try and negotiate with your lender and suggest a loan modification by either extending the loan for a longer term, and/or negotiating a lower interest rate. This can provide some breathing room, and allow you more time to sell the property. If you can’t negotiate a loan modification with the current lender, you will need to pay the lender back by refinancing the current loan. This point leads us to our next solution, under number 3 below.

Refinance the Property with a Long Term Rental Property Loan

If you’ve made significant improvements to the property and have it rented, you may be able to refinance the property with a long term, rental property loan to pay off the hard money loan. A long term, rental property loan, sometimes called a “DSCR” loan, has a lower interest rate as compared to a hard money loan. These loans also have longer terms such as a 5 year term, 7 year, or a 30 year. Refinancing the hard money loan with a lower rate can help to lower your monthly payments. If you refinance with a lower interest rate, it will take off some of the financial strain that comes with holding the property. But remember, you won’t be able to qualify for a loan like this until you take the property off the market.

Refinance the Property with another Hard Money Loan

If you can’t qualify for a long term rental property loan, you could try to refinance out your hard money loan using another hard money lender. This would give you more time, say another 6 to 12 months, to either sell the property or rent it. This type of hard money loan is often called a bridge loan because it helps to “bridge you” from one phase to the next. And then ask yourself if you know an associate, family member, or friend that would be willing to become your new hard money lender and pay off your current loan? If you can negotiate a lower interest rate with this individual, this arrangement could be a win-win for both you and the new lender.  

Find an Equity Partner

You could try to find an equity partner that wants to have co-ownership with you in the property. This person could bring in cash equity to pay off the hard money loan and thus become a partner in the property with you. This means you’ll need to create a joint venture agreement with the equity partner, or form a business entity to hold title to the property whereby you are partners in that business. If you decide to pursue this solution, I recommend finding a real estate attorney and a CPA  to help you structure the partnership in the property.

Sell the Property at a Loss

If you’re unable to make any of the other above solutions work for you, then you may need to consider selling the property at a loss. You can use this loss to offset your tax liability. Talk to an accountant or CPA about how this would work for your personal situation. While selling the property at a loss may not be the ideal solution, it can help to minimize the financial impact that holding the property could have on your life over the long term.

Trying to sell a fix and flip property in a declining real estate market, or in a market with rising interest rates, is a tight spot to be in. By taking no action at all, and just waiting for the property to sell, you are just sitting on a ticking time bomb. However, with careful consideration of the solutions that are outlined in this article, it is possible to minimize the financial impact on you. 

 

If you have a hard money loan on the property, communicate with your hard money lender early and often. Always seek advice from professionals when considering these solutions, for example, involve your real estate attorney or your accountant/CPA in your decision making and planning. If you are considering refinancing your hard money loan on a property, we have both bridge loan options, and long term, rental property loan options available, so reach out to us! You may be glad you did.

 

Don’t Risk It! Make Sure You Have the Right Insurance for Your Investment Property

Did you know that real estate investors tend to be the most underinsured group of property owners? This truth is hard to believe considering most real estate investors are putting their life savings into their investment properties. In fact, insurance is one of the things that real estate investors tend to cheap out on the most! Stick around for a bit because I’m going to outline some of the biggest insurance risks to help you understand what type of investment property insurance you probably need.

Insuring your investment properties is one of the best ways to mitigate risk in real estate investing. But that starts with making sure sure you have the right insurance for your investment properties. You need property insurance to not only protect yourself, but if you have a loan on your property, it also protects your lender. It doesn’t matter if you have a hard money loan or traditional mortgage, as you will responsible for loss

There are different types of insurance to consider when you own an investment property, and for many people, it’s overwhelming. In order to protect an investment property from loss, you’ll need to have coverage for things like fire, theft, and vandalism.

You’ll also want to be sure that you’re protected in the event of an accident on your property or from natural disasters such as earthquakes, floods, tornados, and wildfires. And then what about the loss of use of the property while it is being rebuilt or repaired?

We are not a licensed insurance agency, so please consult with a licensed insurance agent when purchasing insurance policies. But as a private money lender, we often find that the property insurance is the least known area by real estate investors who are usually the borrowers of our loans.

Because a lender is essentially a borrower’s debt partner on a property, it is important that the borrower have the right type of coverage because a potential loss will impact the lender as well. Here we explain some of the most commons types of insurance coverage that our borrowers need to protect their investment properties.

Make Sure You Have Enough Dwelling Replacement Coverage!

One of the most important aspect of any insurance policy is the amount of coverage needed to rebuild the property in the event of a total loss. For most residential policies, the dwelling replacement coverage is the dollar amount that will be available to rebuild the property.

Because the cost of construction is never fixed but is always fluctuating, property owners must revisit this dollar amount frequently to make sure they have adequate coverage or coverage limits are not exceeded. Particularly if building supplies and labor costs are increasing year after year, your coverage may need to be increased slightly every year. Some insurance policies have guaranteed replacement coverage which takes into account inflation of construction costs.

Liability coverage Insurance

Why would you need liability coverage? What if someone gets hurt on your property and sues you? The liability coverage amount listed on your insurance policy is the dollar amount the insurance company will pay if someone is injured on your property. Always make sure your insurance policies have a high dollar amount of liability coverage for renters and other people that enter the property premises. An accident could happen on your property that could cause injury or death to another person and this is why every real estate investor should take liability insurance very seriously! Liability costs will vary depending on the amount of coverage you need. Personal liability policies are also available that cover all of your properties.

Builder’s Risk Insurance

Builder’s risk is a type of insurance coverage that you can obtain on an investment property that is under renovation or construction. If you are building an investment property from the ground-up, or if you are renovating an investment property, builder’s risk insurance may be a type of insurance that you should look into. Builder’s Risk Insurance can be purchased by a property owner, or can be held in the name of the general contractor who is doing the construction work on the property.

Theft Insurance & Vandalism Insurance

Thieves often target vacant properties under construction, so it’s important to have theft insurance coverage if you have a vacant property under construction. Theft insurance is a type coverage that falls under a builder’s risk policy. But if you don’t have a builder’s risk policy, make sure your insurance coverage will protect you from loss if your building materials, tools, equipment, or appliances are stolen.

Vandalism insurance covers the premises and personal property from intentional damage caused by a third party. Builder’s risk policies usually cover vandalism but if you don’t have a builder’s risk policy, just make sure the policy you have covers vandalism. A broken window, tagging/graffiti, exterior property damage from eggs being thrown at the exterior of the property, are just a few examples of vandalism damage.

Vacant or Unoccupied or Property Insurance

If your property is vacant for longer than 30 days you should look into a vacant or an unoccupied insurance policy. What’s the difference between the two types of policies? If your home has personal belongings in it but it is not occupied for longer than 30 days it is considered “unoccupied.” When there are no personal belongings in it and it is empty for longer than 30 days it is considered “vacant.”

When a property is vacant or unoccupied for extended periods, it is considered higher risk, so the premiums for this type of insurance are a higher cost. Particularly in areas with high crime, it’s important to have vacant and unoccupied insurance for any properties that will be vacant for extended periods to protect it against vandalism or theft. Because vacant property insurance is more expensive than rental property insurance, property owners sometimes declare a vacant property as being tenant occupied to save money on insurance costs. Don’t do it!

Never say a property is occupied by a tenant when it is actually vacant in order to save money an insurance policy premium. This is because an insurer may not pay an insurance claim if the true occupancy status of the property is not declared. The good news is that you can have different types of insurance for the different stages of your property’s life. For example, you may need vacant dwelling coverage for your investment property while the property is under renovation for the first six months. Once the property is rented, you can change the insurance to a landlord/tenant policy (rental property insurance).

Landlord and Rental Property Insurance on an investment property

Rental property insurance or landlord insurance on an investment property is important for 3 important reasons.

First, it protects your investment in the event of damages caused by tenants, such as a fire or water damage.

Second, it protects your income if a tenant skips out on rent payments.

And, finally, rental insurance can help protect you from liability and cover medical costs in the event that someone is injured while on your property.

For these 3 reasons, it’s important to have rental insurance on any property you own that is rented to tenants. And your insurance won’t cover your tenants’ personal affects such as furniture, bikes, etc., so make sure your tenants are aware of this and if they are concerned they should purchase their own rental insurance or landlord policy coverage.

Loss of Use Coverage

Loss of Use Coverage is critical for tenant occupied rental properties. This type of insurance coverage will pay if your tenants are unable to occupy the property due to a loss. Sometimes loss of use coverage will put your rental property tenant in temporary housing or a hotel if the property is uninhabitable. This could possibly cover rental income as well. Loss of use coverage usually comes standard with most insurance policies, but be sure that it is a stated coverage on your specific policy.

Fortunately, there are ways that real estate investors can protect themselves from suffering too much financial hardship due to loss of use. One option is obtaining loss of use insurance, which helps to cover expenses related to lost income during such periods. This type of coverage is typically included with landlord insurance policies and can help minimize potential losses due to having a vacant rental property.

Fire Insurance

Fire insurance is a standard coverage found on most insurance policies. Fire insurance covers the cost to rebuild or restore a property that has been damaged or destroyed by a fire. It also covers the replacement of personal property that has been damaged or lost due to a fire. And fire insurance coverage will also cover costs associated with the loss of the use of a property while it’s being repaired or rebuilt.

For example, if your tenants are displaced from a property after a fire, your insurance coverage ought to reimburse you for loss of rents and cover the cost of relocating your tenants temporarily. Because investment properties with tenants are treated differently than owner occupied properties, make sure your fire insurance coverage will cover all of the potential losses associated with a fire.

Wildfire Insurance

In recent years, we’ve seen an increase in wildfires and, as a result, the demand for wildfire insurance has also gone up. If your investment property is located in an area where it has exposure to wildfires, wildfire insurance is specifically designed to insure property owners from damage to their properties caused by wildfires.

If you already own one, or you are considering purchasing an investment property in the western United States, be sure to ask your insurance agent about wildfire insurance. It could be the difference between losing your investment and keeping it safe and protected.

Earthquake Insurance for your Investment Property

If you’re an investor with a property located on or near an active earthquake fault line, it’s important to make sure you have adequate insurance coverage. One thing that most people don’t know is that earthquake insurance is not covered under most hazard or homeowners insurance policies. This is because it is a speciality insurance coverage that will cover the cost of rebuilding your property if it is destroyed by an earthquake or suffers structural damage. It will also cover other structures on your property, such as driveways, garages, warehouses, and small storage buildings.

For example, the Wasatch Fault in Utah represents one of the biggest earthquake risks in the interior of the western U.S. In 2020, a magnitude 5.7 earthquake in a suburb of Salt Lake City, caused over $60 million dollars in property damage. For property owners without specific earthquake coverage, this meant the potential for a total loss! Because many people have their life savings tied up into their investment real estate, a total loss from an earthquake would be utterly devastating. That’s why it’s important to make sure you have adequate coverage in place before an earthquake strikes. As a private money lender, it is important to us that our borrowers have earthquake insurance coverage on any property we lend on that is located on, or near, an active fault.

If you own a property in an area that is prone to earthquakes, earthquake insurance will cover the cost of repairing or rebuilding that property if it is damaged by an earthquake. It will also cover the cost of temporary living expenses if you need to relocate while your property is being repaired. Make sure your policy has a low replacement deductible and enough dwelling replacement coverage to rebuild the property in the event of a total loss from an earthquake.

Flood Insurance for your investment property

Because flood plain maps are always changing, a property currently located in low flood risk area may be at increased risk of flooding in the future. This means the risk profile for a certain location may change over time with regard to flooding and flood zone classification. Flood insurance will cover the cost of repairing or rebuilding your property if it is damaged by a flood.

If you’ve owned a property for a long time that is located in an area with potential for increased risk of flooding, it is important to assess this risk every few years. This type of risk is something that a property owner needs to assess frequently with the help of a licensed insurance agent.

And, even if you do have flood insurance, it’s important to make sure you have enough coverage to rebuild your property should it be damaged by a flood.

Windstorm Insurance, Tornado, and Hurricane Insurance for your investment home

Windstorm insurance is insurance that protects investors from damage to their investment properties caused by gales, winds, hail, and other gusty hazards. When big winds harm roofs and windows, rain and debris can also damage the personal belongings inside a property. Ensure that your windstorm insurance policy covers physical damage to the property and possessions inside the home. Also, make sure you have the right amount of coverage in place to protect yourself from potential losses!

In some states, insurance for tornados, cyclones, and hurricanes require you to purchase a special policy which is typically more expensive. This type of coverage is something you really need to discuss with a licensed insurance agent that specializes in issuing coverage for properties in areas that are prone to destructive storms.

Conclusion

Real estate investors tend to be underinsured as compared to typical homeowners. Many real estate investors either skimp out on insurance, or just don’t get the right type of coverage. If you are a real estate investor, get the maximum amount of insurance coverage that you can qualify for your investment properties. You local insurance agent will  know what insurance products you will need and explain any policy limits.   Depending on the location of your properties, you may require different types of insurance for each location.

As a private money lender, we see real estate investors making the same mistakes when it comes to insuring their investment properties. Don’t let that be you! Find a qualified insurance agent that understands how to insure your properties right. Finding the right insurance agent to issue the right type of insurance coverage could mean the difference between making a good investment or having a total loss of your life savings.

Hard Money Loans Vs Private Money Loans Explained

Hi this is Corey Dutton, I’m a private money lender and today I’m going to talk to you about, “private money explained.” Some of the questions that I’m going to answer for you today are:

  • What is a private money loan or what is a private money lender?
  • How is a private money lender different from a hard money lender?
  • What are the typical interest rates that are associated with a private money loan?
  • And what are a few ways that private money loans are used?

So what is a private money loan?

A private money loan is any non bank loan. So any loan that comes to you from a non depository institution.

Now, many people have a misconception that private money loans and hard money loans are two different things.

What’s the difference between a private money lender and a hard money lender?

Absolutely nothing!! I see it all the time, I see these videos online where these people are like, “why use a private money lender over a hard money lender?”

Again folks, a private money loan is any loan that comes from a non bank source, ok. So a hard money loan is just another type of non bank loan.

But why is it called hard money instead of private money? What’s the difference between private money and hard money? Like I said before, absolutely nothing!

They’re both non bank loans from a non depository institution. But why does hard money have that name, “hard?” It’s because a hard money loan is any loan against a hard asset.

WhatAre Typical Hard Money Interest Rates

what is the typical interest rate that is associated with a private money loan or non bank loan? The interest rates that are typically associated with private money loans are going to be a lot higher than your typical bank loan.

Usually the rates are going to range from as low as say 8% to as high as 18%. Yes I’ve seen them that high before.

And then finally, what are a few ways that people use private money loans? Well, most typically in my business, private money loans are loans against real estate.

But private money loans could be loans against any type of asset, any type of hard asset such as a car, such as gold.

Ok, those are just a few examples of hard assets that can be liquidated fairly quickly for cash. So

Conclusion

Hopefully I explained to you a little more about what is private money and how is it different from hard money.

The answer, the simple answer to that question is: absolutely nothing! There’s no difference!

And what you will commonly hear, you’ll hear this from other people, they’ll say something to you like, “Well you should start with private money lenders first and then if you can’t get a loan from one of them go to a hard money lender.” Well that’s wrong!!

The reason that’s wrong is because a private money lender is NOT your family and friends, and then a hard money lender is like me, an organized company with a website. No, no, no, no, no! It’s all the same, we’re all private money lenders.

So hopefully you learned something from this and that thing is: There’s no difference between private money and hard money.

If you have any questions about anything that I’ve said here, please leave them in the comments section below and I’m happy to answer you. If you found this video useful, or you liked it, please like it or share it. Thanks for watching!