Robert Montoya is in a predicament. Before that call from escrow this morning, the down payment for his purchase of a 25-unit apartment was set to come from the sale of his 12-unit building. Everything had been so carefully arranged – title clear, casualty insurance secured, termite work completed, a seller carry-back loan with a favorable rate negotiated, and the transactions set to close in ten days. Yes, everything seemed on schedule … until the unwelcome news that his buyer was backing out. And without that sale, where will the $775,000 down payment come from that Robert must produce?
That little scenario is but one typical problem that can confront the aspiring entrepreneur. Money is not only the “mother’s milk of politics,” as an old California politician once said, but is also the necessary ingredient for successful apartment investment. If time is not a consideration, then a reasonably priced institutional loan is the way to go, just as I employed in refinancing a 20-unit building a couple of months ago. Though it took 4½ months to consummate, the 2 percent interest rate savings was worth the wait. But there are times when speed is the deciding factor. That’s when the no-hassle second trust deed loan is needed.
For those of you who haven’t recently negotiated a hard money second trust deed loan (that’s what they’re called – hard money), you deserve to be enlightened. The responses to calls I placed to the half-dozen Real Estate Money to Loan ads in The Orange County Register tell a story not easily forgotten. The one headed “Need cash? Easy qual No hassle” quoted 9% interest and 3-4½ points to a borrower with good credit – 10 points if not so good. The ad boasting “Fast cash No Bank/Hassles” asked for 8% interest and 8 points. I could go on with the others, but I think you get the idea. Borrowing money in this manner is not cheap.
In deference to the firms that fund and market these loans, I’ll acknowledge there’s justification for steep charges. Second trust deed lending is traditionally a hazardous market, and for the holders of this paper, Murphy’s Law certainly applies: “Whatever can go wrong will.” The lenders are entitled to generous interest in return for the risk they take. Similarly, the fees that go to the mortgage brokers reflect a highly competitive environment. It’s not a field for the faint of heart or the weak of knees. If you go this route, the profit you anticipate from the use of the cash must at least equal the cost of the borrowing. And a final caveat: When you analyze the numbers, be realistic. Don’t lie to yourself – that’s like cheating at solitaire.
For those of you who anticipate a need for this sort of financing, let me pass on a little advice. Shop the market thoroughly as rates and terms vary markedly. Whichever lender you choose, keep the two next-best firms in the bullpen in case your chosen lender tries to change terms part way through. It happens.