The Questions I Ask Before I Fund a Deal

You've probably seen the headlines lately. Private lending has taken some heat in the news, and rightly so in certain cases. When investor money gets mismanaged, everyone in the industry feels it. Trust is fragile.

So let me walk you through what actually happens when a loan request hits my desk.

First question: what is the property really worth? Not what Zillow says, not what the borrower paid five years ago — what a disciplined appraisal backed up by current comps tells us. We stick to conservative loan-to-value ratios. On a first trust deed, that usually means lending at 65% of value or less. That cushion isn't a nice-to-have. It's the whole game. If something goes sideways, the equity in the property is what protects the investor's principal.

Second question: who is the borrower, and what is the exit? I want to know how this loan gets paid back. A fix-and-flip borrower has one exit. A bridge loan on a commercial property has another. If the exit story doesn't hold up under questioning, the deal doesn't make it to funding.

Third question: is there anything unusual in the file? Title issues. Tax liens. Recent transfers that look odd. Prior litigation on the property. Permit problems.

Fifty-one years in, Val-Chris has funded a lot of loans. We've also passed on a lot. The "no" deals matter just as much as the "yes" deals — maybe more.

Here's the thing about trust deed investing. The returns are real. Monthly income, short durations, tangible real estate collateral. But those returns only matter if the underwriting is sound.

When you invest with us, you're not handing your money to a black box. You see the property. You see the appraisal, the title work, the LTV. You decide.

That transparency has been the model since 1975.

Construction and Rehab Loans: Are You Using a Pre-Construction Budget Review? (PCR)

Rehab and construction loans are a huge part of lending. They are excellent products that offer significant value to borrowers across the nation. When done right, it provides the capital and opportunity for regular people to buy properties and add value to them. Often called “flippers”, they find properties that need some “love” and bring them back to life. Many times, and hopefully most of the time, for a profit. 

Another side of the same coin would be construction lending. Construction and rehab loans can be similar, though in my mind, they are very different. While rehab loans start with a house that’s already built but needs upgrades, construction loans typically start from scratch and are built up from the ground up.

How are they different from “normal” loans? 

Most loans use what is called “as-is” value. That is the current value with no upgrades or changes. When you are doing a rehab loan, you typically base the loan on the “After Repair Value” or ARV. How do you get the ARV? Typically, through an appraisal, however, the appraiser will need to know what you plan on doing with the property. Usually, the borrower or lender will provide a list of work along with the amount they will spend on upgrades. Then the appraiser can go and find comparable properties with similar upgrades or finishes. 

Before the work begins

This is where it gets tricky. To properly start the process, you need a contractor bid and a lender ready to lend. As a lender, you have to know that the contractor’s list of work and the order of stages make sense and can be relied on. 

One way to make this happen is by using a PCR, or Pre-Construction Budget Review. A 3rd part fund control company typically does these before you fund the loan. They will review the budget, do a search on the contractor for outstanding liens or lawsuits, and then give you a summary based on their review. Sometimes the review will come back with recommended changes to the budget or draw schedule before you fund the loan. The few times I’ve done these types of loans, the person doing the PCR is a contractor and they will give their 3rd party input on whether or not the budget makes sense.

Not everyone’s cup of tea 

My Input? I don’t like these types of loans. It’s not that they aren’t good loans, but they require a significant amount of work. Some lenders specialize in this type of lending, and it’s literally all they do every day. Whether they have years of experience in this type of lending or are a licensed contractor who has transitioned into lending, they possess the expertise to manage these loans effectively. 

I joke that the “real work” on rehab or construction loans doesn’t actually start until after the loan funds. Obviously, there is truth behind most jokes, and frankly, I prefer to have the work done once the loan funds. 

In summary, rehab and construction loans are a great tool and can be a fantastic product when done by the right lender. Tools like PCR and a third-party fund control company can offer another layer of protection and expertise to ensure the transaction is as smooth as possible. 

Reach out if you have any questions on this type of lending, and I’d be happy to discuss.

The Essential Documents for Securing a Real Estate Loan in California

Securing a real estate loan requires thorough preparation and understanding of the necessary documentation, especially in California where the real estate market is highly competitive.

Key Documents Required:

1. Loan Application Form: This is the starting point and includes personal and financial information.

2. Credit Report: Lenders will pull this report to assess credit history and risk.

3. Proof of Income: Pay stubs, tax returns, and W-2 forms show your ability to repay the loan.

4. Bank Statements: These demonstrate financial stability and cash reserves.

5. Property Appraisal: A report from a licensed appraiser to confirm the property’s market value.

6. Title Insurance: Ensures the property title is clear of issues.

7. Purchase Agreement: The contract between buyer and seller stating terms and conditions of the sale.

Navigating the Process: Understanding each document’s role in the loan approval process can help streamline your application and improve your chances of success. It's also beneficial to consult with a real estate attorney or a financial advisor to ensure all paperwork is complete and accurate.

Proper preparation of the required documents can significantly ease the process of obtaining a real estate loan in California. Being well-prepared not only helps in securing the loan but also speeds up the transaction, allowing you to close deals faster.

Underwriting a Hard Money Loan

Underwriting is a critical component of the lending process, and it requires a unique blend of expertise, experience, and attention to detail. As a hard money lending expert, I have honed my underwriting skills over many years of experience, and I am committed to providing my clients with the highest level of service and support throughout the underwriting process. In this blog post, I'll explore the key factors involved in hard money loan underwriting and why I am so good at it.

Overall, I don’t consider underwriting to be very different when initally structuring a loan. While structuring, I am looking at all the pieces below to see what fits and what makes the most sense for everyone involved. When underwriting, the terms are set and now I take a detailed dive into the file and specifics to make sure all pieces of the puzzle fit together nicely.

1. Property Valuation: Property valuation is a critical aspect of hard money loan underwriting. This involves examining factors such as the condition of the property, the location, the current market conditions, and the property's potential for appreciation.

2. Borrower Assessment: Another essential aspect of hard money loan underwriting is assessing the borrower's ability to repay the loan. This includes evaluating factors such as the borrower's credit history, income, and existing debts.

3. Loan-to-Value (LTV) Ratio: The loan-to-value (LTV) ratio is a key underwriting factor in hard money lending. LTV is the ratio of the loan amount to the appraised value of the property. Lenders typically require a lower LTV ratio for hard money loans than traditional loans to mitigate risk.

4. Exit Strategy: A solid exit strategy is essential for any hard money loan. This involves outlining the borrower's plan for repaying the loan, whether through refinancing, selling the property, or another means.

As a seasoned hard money lender, I have developed a deep understanding of the underwriting process and the factors that are most important in evaluating potential loans. I take a comprehensive and customized approach to underwriting, carefully evaluating each borrower and property to ensure that the loan is structured in a way that maximizes returns while mitigating risk.

In addition to my expertise and experience, I am committed to providing exceptional customer service to my clients throughout the underwriting process. I understand that hard money loans can be complex and stressful, and I work closely with my clients to ensure that they understand the underwriting process and feel comfortable throughout the process.

Overall, hard money loan underwriting requires a unique blend of expertise, experience, and attention to detail. As a hard money lending expert with a proven track record of success in underwriting loans, I am well-equipped to help my clients achieve their financing goals and maximize their returns in the competitive world of real estate finance.

Why are Title Policies So Important?

Title policies are a critical component of the hard money lending process, providing an essential layer of protection for both the borrower and the lender. In this blog post, we'll explore why title policies are so important in hard money lending and how they help to mitigate risk for all parties involved.

What is a Title Policy?

A title policy is a document that protects both the borrower and the lender from any defects or problems with the title of the property being used as collateral for the loan. Title policies are typically issued by a title company and are designed to provide a comprehensive examination of the property's title history, ensuring that the borrower has clear and marketable title to the property.

Why Are Title Policies Important in Hard Money Lending?

1. Protects the Lender: Title policies protect the lender from any potential legal issues or liens that may arise from the property's title. This ensures that the lender has a clear and marketable lien on the property, which is critical in the event of default or foreclosure.

2. Protects the Borrower: Title policies also protect the borrower by ensuring that they have clear and marketable title to the property being used as collateral for the loan. This gives the borrower peace of mind knowing that they have clear ownership of the property and can use it as they see fit.

3. Mitigates Risk: Title policies help to mitigate risk for both the borrower and the lender by providing a comprehensive examination of the property's title history. This reduces the risk of any unforeseen issues or defects with the title that may impact the loan or ownership of the property.

4. Provides Clarity: Title policies provide clarity and transparency throughout the lending process, ensuring that all parties involved understand the terms and conditions of the loan and the ownership of the property.

At the end of the day, title policies are a critical component of the hard money lending process. They provide essential protection for both the borrower and the lender and help to mitigate risk for all parties involved. As a hard money lending expert, I understand the importance of title policies and work closely with my clients to ensure that they have clear and marketable title to the properties used as collateral for their loans.

Structuring a Hard Money Loan

Structuring a hard money loan requires a unique blend of expertise, experience, and creativity. As a hard money lending expert, I have honed my skills in this area, consistently delivering creative, customized solutions that meet the unique needs of my clients. In this blog post, I'll explore the key factors involved in structuring a hard money loan and why I excel in this area.

1. Property Valuation: The first step in structuring a hard money loan is to evaluate the value of the property. This involves examining factors such as the condition of the property, the location, the current market conditions, and the property's potential for appreciation.

2. Borrower Assessment: Another critical aspect of structuring a hard money loan is assessing the borrower's financial history. This involves evaluating factors such as the borrower's credit history, income, and existing debts.

3. Loan Terms: Once the property valuation and borrower assessment are complete, the next step is to determine the loan terms. This includes factors such as the loan amount, interest rate, and loan duration.

4. Exit Strategy: A solid exit strategy is essential for any hard money loan. This involves outlining the borrower's plan for repaying the loan, whether through refinancing, selling the property, or another means.

As a seasoned hard money lender, I have a proven track record of success in structuring loans that meet the unique needs of my clients. I take a customized approach to each loan, carefully evaluating the borrower's needs and goals to develop a loan structure that is tailored to their specific situation. I have a deep understanding of the California real estate market and use this knowledge to identify opportunities for my clients that others may overlook.

In addition to my expertise and experience, I am committed to providing exceptional customer service to my clients. I understand that hard money loans can be complex and stressful, and I work closely with my clients to ensure that they understand the loan terms and feel comfortable throughout the process.

Overall, structuring a hard money loan requires a unique blend of expertise, experience, and creativity. As a hard money lending expert with a proven track record of success, I am well-equipped to help my clients achieve their financing goals and maximize their returns in the competitive world of real estate finance.