Monday, May 05, 2014

Dealing with Advance Fees and Deposits

“NEVER PAY FRONT MONEY” is a wise rule to live by. If you don't pay for something until you have it in your hands, no one can skip town with your hard-earned cash. To get a business or real estate loan, however, loan applicants may be asked to shell out cash for a deposit or upfront fee (sometimes referred to as an advance fee or front fee). In cases like this, the most important things to know are:
  • Is the deposit or fee for a legitimate, reasonable and documented cost?
  • Is the money refundable, and under what conditions?
  • Can the money be credited toward the cost of closing the loan?
HOW DO YOU TELL A RISKY FRONT FEE from a legitimate, reasonable charge like a good faith deposit, earnest money, or an application fee, processing fee or transaction fee? After all, honest and reliable lenders and brokers sometimes need to charge a deposit or service fee so they can afford to do due diligence and carry out the work you need them to do.

TO DEAL WITH FEES AND DEPOSITS EFFECTIVELY, you need to know the difference between them.

  • accounting 
  • appraisals 
  • legal work 
  • travel 
  • title searches
  • credit reports 
Such fees are often not refundable, but may be credited into a loan's closing costs.

DEPOSITS, SUCH AS EARNEST MONEY in a real estate deal, are a way of acknowledging the costs the lender may incur to make the loan. They also help to ensure the lender that the borrower is serious and acting in good faith about wanting to complete the transaction. Deposits are sometimes refundable and may be rolled up into closing costs.

WHEN A LOAN APPLICATION IS REJECTED or the borrower decides not to proceed with the loan, some lenders will refund the amount of the deposit, minus costs incurred up to that point. For example, if you gave a $500 deposit, and the lender spent $250 on a completed appraisal fee and $20 on a credit report, the lender might refund the difference of $230. Since you paid for the appraisal and credit report, the lender should provide you with copies of each.

IN THE UNITED STATES, RESPA (the federal Real Estate Settlement Procedures Act) requires mortgage brokers and lenders to document their fees, in writing, on good-faith estimates and settlement statements.

IF A BROKER OR LENDER CHARGES the borrower for unearned or illegitimate, nonrefundable fees or deposits, they may be breaking the law and could become subject to legal penalties.

DEPOSITS AND FEES CAN VARY WIDELY from one broker or lender to another and from one deal to another. Larger commercial and real estate loans usually require more work and have higher fees.

HERE ARE SOME TIPS to observe with any loan offer: 
  • Confirm that the lender has provided complete contact information, especially if it's an online lender and you won't be visiting their offices. If a the lender doesn't give their physical address, phone number, and a "real"* email address , avoid them. Today, lenders should also have their own, fully operational websites. *A real email address is one that doesn't come from a free service like Yahoo or Hotmail; ideally the lender will have an email address or form connected with its website. If they fail to produce any of these things UP FRONT, we would not give them any money up front.
  • Make sure the broker or lender has a good reputation. Pay fees only to people you know you can trust. If necessary, check online, at consumer reporting agencies, the Better Business Bureau, or in public records.
  • Confirm that the broker or lender makes the type of loan you want in your area and for the amount you're seeking.
  • Ask for details on loan deals they've completed and see what deposits, fees or refundable amounts were involved in those deals.
  • Work with a skilled attorney who has knowledge of the laws in your geographic area and experience in the kind of deal you're looking to do. 
  • Use a written agreement that clearly lays out all terms of the deal, signed by you and the broker or lender you're working with.
BE SURE YOU KNOW THE EXACT PURPOSE of each fee or deposit. Ask yourself: does it seem reasonable? A $350 appraisal fee might be normal, but a $10,000 travel fee may be out of the ordinary.

ALWAYS GET A SIGNED AGREEMENT STATING WHAT FEES may be charged and what services or products will be provided as part of the deal. This will make it easier to ensure that the broker or lender honors the deal and doesn't pull out or disappear after you've shown your good faith and paid good money. 

THAT MAY SEEM LIKE A TALL ORDER. No broker or lender can guarantee that a deal will always go the way everyone hopes it will. There are too many unknowns. But there are smart things you can do to stay safe. 

AVOID PAYING ADVANCE FEES until you confirm that the person you're dealing with is "legit” and will uphold their end of the bargain as stated in the written agreement. This isn't a guessing game. You can easily confirm the lender's history and reliability by reviewing records of the lenders "done deals." If necessary, you can contact previous clients of the lender for more detailed input.

BELOW ARE SOME SIGNS THAT MAY TELL YOU when you should not pay money in advance. None of these things by themselves mean a broker or lender is bad or dishonest, but if you see a bunch of these signs all at once, it may be wise to wait until you can confirm all the details.

  • The broker or lender asks you to pay an advance fee that seems high for the kind of deal you wish to do. 
  • The broker or lender tries to rush you through a transaction. 
  • The broker or lender says it's a “done deal” or claims you're guaranteed to make a lot of money no matter what happens.
  • The broker or lender won't sign a written agreement or loan document; or they won't agree to standard, reasonable terms; or they try to put unclear words in the fine print; or they don't clearly explain the purpose of a fee.
  • The broker or lender asks for your credit card, bank account or social security information without explaining and documenting why this information is required. 
  • The broker or lender repeatedly fails to answer their phone or email, or fails to identify themselves as the person or company you think they are.
  • The broker or lender won't give you their physical address or refuses to see you at their office.
  • The broker or lender wants you to send money electronically to them or to a third party at a far-off or unspecified place. 
  • The broker or lender refuses to discuss the possibility of any kind of refund if something beyond your control goes wrong.
  • The broker or lender discourages you from checking them out with consumer reporting agencies or looking them up on the Internet or in public records.
WHEN YOU NEED MONEY, THE PROMISE of a loan may seem like an answer to a prayer. Avoid paying unearned front money and advance fees, and you'll risk less and be richer in the long run.

AT THE END OF THE DAY, BORROWERS MUST WEIGH a number of factors to decide for themselves whether a deposit, fee or promise seems legitimate. You may not be able to predict the future, but you can assemble all facts on each lender, evaluate the evidence based on the criteria discussed above, and PAY FEES ONLY WHEN THOSE FEES WILL PAY OFF FOR YOU in the end.

Monday, April 21, 2014

Key Points About Construction Loans for Commercial and Residential Properties

CONSTRUCTION LOANS ARE AVAILABLE in the United States, Canada, and worldwide for all types of real estate, including:
  • Single-family residential properties
  • Multifamily residential properties
  • Businesses and commercial properties
  • Land, raw and developed
CONSTRUCTION LOANS GENERALLY DON’T COME IN NEAT, standardized packages like conventional mortgage loans which are structured according to strict government regulations.

FOR RESIDENTIAL PROPERTIES IN THE U.S., certain parameters relating to construction or renovation of a property being acquired may be specified in the standard Uniform Residential Loan Application (Form 1003) required for government-backed mortgages.

FINANCING FOR MULTIFAMILY AND COMMERCIAL PROPERTIES is more complex and harder to obtain than residential home loans. Commercial properties include office buildings, shopping centers, retail outlets, healthcare facilities, educational buildings, storage structures, apartment complexes, manufacturing facilities or other properties that will be sold or rented. These properties may cost hundreds of millions of dollars to build, renovate or retrofit. In addition, commercial construction may involve multiple investors, joint ventures, bond financing and complicated tax structures.

Either way, all construction loans have certain basic features in common.
Here’s a brief overview of key points about construction loans.

  • Construction loans obtained by the builder
  • Construction loans obtained by the property owner
  • Construction-only financing
  • Construction-to-permanent financing, where the construction loan is converted to a longer-term traditional mortgage after construction is complete
CONSTRUCTION LOANS TYPICALLY REQUIRE interest-only payments during construction. The principal then becomes due after construction is completed or a certificate of occupancy has been issued. On a construction-to-permanent loan, the lender may schedule mortgage payments to begin when construction is finished and the builders have been paid.

CONSTRUCTION LOANS ARE USUALLY, BUT NOT ALWAYS, set at a variable rate and priced according to a short-term interest rate, such as the prime rate. As a result, interest rates on construction loans can change frequently.

KEY PARAMETERS to consider in any construction loan include:
  • type of loan (construction-only, bridge, construction-to-permanent, permanent, forward commitment; new construction, rehabilitation; debt, equity, convertible, commercial mortgage-backed securities, bond)
  • interest rates and type of interest (fixed, variable, Treasury-based)
  • term (short- or long-term, number of years)
  • loan-to-value ratio
  • availability of tax credits (First-Time Homebuyer Credit, Energy Efficient Tax Credit, Renewable Energy Investment Tax Credit, Low-Income Housing Tax Credit, Rehabilitation Credit, Research and Development Credit and others)
  • additional assistance available from state, federal or local government programs or loan guarantees (Department of Housing and Urban Development, Federal Housing Administration, FannieMae, FreddieMac, Veteran's Administration, Canadian Mortgage Housing Corporation)
DURING CONSTRUCTION, FUNDS ARE TAKEN FROM THE LOAN through a process known as a “draw.” The draw is the method by which money from the construction budget is paid out to material suppliers and contractors.

THE BORROWER, CONTRACTOR AND LENDER establish a draw schedule based on stages of construction, and interest is charged on the amount of money disbursed up to a particular date. Different lenders have different requirements for processing a draw.

MANY BORROWERS USE CONSTRUCTION-TO-PERMANENT FINANCING programs where the construction loan is converted to a mortgage loan after the certificate of occupancy is issued. The main advantage here is that the loan requires one loan application and one closing. These construction loans are sometimes called “all-in-one” or “one-time close” loans.

ANOTHER OPTION IS TO SECURE A SHORT-TERM construction loan, then refinance it into a conventional mortgage when construction is finished. This requires two applications and two closings.

OTHER COMMON CONSTRUCTION LOANS include fixed 15-year, 30-year, interest-only and variable-rate loans.

BEFORE PRESENTING THE LOAN APPLICATION TO THE LENDER, the borrower and the builder must prepare a strict budget which covers two general categories of costs:
  • Soft costs—for expenses like architectural, engineering, legal and administrative fees, blueprints, permits, etc.
  • Hard costs—for the “bricks-and-mortar” items like building materials and payments to contractors to build the structure.
NEARLY ALL BUILDING PROJECTS EXPERIENCE CONSTRUCTION DELAYS, so everyone involved must allow for delays and accommodate the changes in costs they inevitably bring. For this reason, the lender usually sets a schedule of regular inspections. A loan officer may visit the property monthly to monitor progress. If changes are needed, a change order is issued to document them.

ADDITIONAL DOCUMENTS TYPICALLY USED in construction financing include a Construction Loan Summary and Budget, Borrower/Builder Agreement, Construction Cost Breakdown, Draw Instructions, Contractor/Supervisor Information Form, Land Plat of Survey, Floor Plans and Builder Specifications, and Description of Building Materials. Many lenders will furnish a Construction Loan Document Checklist to assist in organizing the necessary documentation.

AS WITH ALL REAL ESTATE LOANS, the borrower must complete a loan application and document his or her income, bank account details, assets, credit history and other relevant information. For safety, some real estate experts recommend that borrowers go through a pre-qualification process before applying for a construction loan and embarking on any building or rehab project.

IF THE BORROWER ALREADY OWNS THE LAND, the land may be considered as equity on the construction loan. Private lenders and investors sometimes provide hard money loans which are secured by the value of the land and/or building.

LOCATION CAN MAKE A BIG DIFFERENCE IN HOW EASY IT IS to get a construction loan. In areas where the economy is booming, banks are more eager to make new loans because their risk is much less than in areas where the economy is weak and property values are stagnant or falling.

WHEN SEEKING A CONSTRUCTION LOAN, shop around for experienced lenders with a good track record in construction finance. Construction loans can be quite complex, so make sure you understand all the variables and requirements before accepting an offer. Get all quotes in writing. If possible, consider locking in your interest rate upfront.


For a list of more than 800 active lenders providing loans for single-family, multifamily and commercial real estate of all kinds, see Selected Lenders for Commercial and Residential Construction Loans in the U.S. and Canada, published by IWS Inc. Updated annually, this unique directory includes Lender Name, Postal Address, Telephone, Fax, Email Address, Website Address and Loan Program Descriptions. A detailed description is at Product #IWS-91, 160 pages. 8.5" x 11". Price: $29.50. 

Friday, April 18, 2014

How to Get Owner-User Loans For Business And Real Estate

OWNER-USER LOANS ARE AVAILABLE TO all kinds of businesses, including retailers, manufacturers, doctors, restaurants, dealerships, wholesalers, shopping center owners, and service providers.

ALSO CALLED OWNER-OCCUPIED FINANCING, owner-user loans can be used for most business and real estate purposes, such as:

  • Acquiring or expanding a business
  • Buying, building, improving, and refinancing land and structures
  • Purchasing equipment, furniture, inventory and supplies
  • Securing working capital
  • Repaying existing business and real estate loans

AN ADDITIONAL BENEFIT OF THESE LOANS is that they help a business to respond quickly to changing needs and opportunities such as unexpected large orders, marketing expenses, renovations and improvements, working capital requirements, partner buyouts, increasing cash flow, and new product development.

OWNER-USER LOANS MAY COME FROM traditional banks, credit unions, and private lenders, and they can sometimes come with guaranteed loans from the Small Business Administration (SBA) 7(a) (general business loan) program and 504 (real estate and equipment) program.

BANKS AND OTHER LENDERS LIKE OWNER-USER LOANS because they are low-risk and can be repaid from income the business generates. Additionally, they help the lender form a lasting relationship with the business.

BROKERS LIKE OWNER-USER LOANS because they are relatively simple and easy for eligible borrowers to qualify for.

COMPARED TO OTHER TYPES OF LOANS, owner-user loans often have

  • lower interest rates
  • higher loan-to-value (LTV) ratios

OWNER-USER FINANCING SHARES SOME FEATURES with hard money loans, but depends more heavily on the business and its owners.

TO PUT AN OWNER-USER DEAL TOGETHER, you need a business that rents more than half of a building's space. Ideally, the business will own the property where it's located. If the business rents out part of the building to someone else, that's even better.

AS WITH ANY BUSINESS OR REAL ESTATE LOAN, the borrower must furnish the lender with personal and business financials, property details, tax returns, a description of the business's products and services, and other standard loan application information.

HERE'S AN EXAMPLE OF ONE LENDER'S owner-user financing offer:

Property Type: Office, Retail, Warehouse,
Light or Heavy Industrial, Mixed Use
Loan Amounts: $500,000 to $100,000,000
Loan-To-Value: Up to 90%
Lending Area: Worldwide
Credit: Mid-FICO
Documentation: Full or Stated Doc
Target Terms: Several Options available, up to 30 year fixed;
Fixed and Variable Rates
Recourse: Full Recourse
Special Notes: SBA 504 and SBA 7a loan programs and Bank Financing available
Close: Fast Closing

ONE BUSINESS SCENARIO that creates an opportunity for an owner-user loan is where a business acquires property to house the business and buys a building larger than it needs.

THE BUSINESS OWNERS CAN THEN LEASE PART OF THE SPACE to third-party tenants to generate additional income. If the business needs to expand at a later date, it can take over the rental space for its own use, or it can use the building and the rental income to help secure an owner-user loan.

ANOTHER ADVANTAGE of owner-user property is that, if problems occur and the business needs to raise money quickly, it can sell all or a portion of the space and, if desired, lease back what it needs for its own use.

EITHER WAY, THE OWNER-USER SETUP makes lenders feel more secure, so they're more likely to make the loan the business seeks.

OBTAINING AN OWNER-USER LOAN usually involves a hybrid approach. It uses the value of the real estate, the rental income, and the finances of the business and its owners.

EACH CASE IS DIFFERENT and presents its own opportunities. Often, the borrower and broker can persuade a lender to make the loan by highlighting the right mix of strengths—whether these strengths reside in the building, the rent, the business or the personal qualities of the business owner. A down payment may be required, particularly if the business is new.

IF THE LENDER LIKES THE PROPERTY WHERE THE BUSINESS is located and the business has money coming in, an owner-user loan can often be arranged.

This article was originally published in the May 2014 issue of Money Watch Bulletin. Subscriptions to Money Watch Bulletin are available in print or downloadable PDF for $95/year (12 issues).

Tuesday, March 25, 2014

How To Find Or Buy Low-Priced Preforeclosure Real Estate

YOU CAN FIND OR BUY real estate at bargain prices by looking for preforeclosure properties. Preforeclosure is the period of time between when a homeowner has stopped making payments on a property and when the property is sold at auction.
YOU CAN FIND A PREFORECLOSURE HOME at a cheap price for yourself or a client. Then, you can pocket your commission or rent or flip the property for a profit.
  1. Preforeclosures are cheaper that regular foreclosure properties.
  2. During the preforeclosure period, you can visit and examine the property. At a foreclosure auction, this isn't possible.
  3. With a preforeclosure, you deal directly with the owner/seller, soon after they've received a foreclosure notice from the lender, city or state.
  4. Negotiating with a seller is easier and less competitive than bidding against professionals at a foreclosure auction, and it's simpler than dealing with a lender.
  5. Owners wanting to sell a home during preforeclosure are motivated to sell.
  6. You or your client can rent the home to the owner after taking it over and sell the house back to the owner or to another buyer for a profit at a later date.
  7. You don't need to pay huge amounts of cash upfront like at an auction.
YOU FIND PREFORECLOSURE LISTINGS by taking these easy steps:
  1. Call your city recorder’s or clerk’s office to learn which agency handles foreclosures. Foreclosure data from lenders is freely available public data.
  2. Contact the agency and ask to be put on their free information list.
  3. Read the information on foreclosure procedures for your area. Public records may include a Notice of Default (NOD) from a lender, telling the owner the house will go to auction if payments aren't made. This is when the preforeclosure period begins.
  4. Get to know the preforeclosure period and how long the owner has before he or she must sell. Owners are more motivated to sell cheaply during preforeclosure.
  5. Get to know the "redemption period"--the time the home owner has to buy back the home after it goes to a foreclosure sale. Look for the shortest redemption time possible. Some areas have zero redemption time; others as long as a year.
  6. Before you or your client makes an offer on a preforeclosure property, be sure to inspect it and have a competent real estate attorney review the offer.
  7. Consider using a sale-leaseback deal to allow the seller to remain in the house. An attorney can write it for you. With a sale-leaseback, you or your client owns the property and receive regular rent payments from the seller.
IN ADDITION TO THE PUBLIC RECORDS OF FORECLOSURE LISTINGS mentioned above, you can find NODs and preforeclosure notices in local newspapers, where lenders are required to publish this information. 

Check out HUD Homes at Other sources include the real estate listing services and websites like,,,, and Also be sure to check your area's business and real estate journals and magazines.


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