THE HOLY GRAIL OF PRIVATE HARD MONEY LOANS
Being a private hard money investor, and lender, I probably see more than 50 deals across my little desk each week. Of these 50 deals, I seriously look at perhaps 10, and may fund 2 of the 10. That being said, the main reason I have such a high "attrition rate", is because of a thing that is the Holy Grail in the private hard money industry....PROTECTIVE EQUITY.
WHAT IS PROTECTIVE EQUITY?
Protective is simple, it is the equity in the property that would protect an investor, should the investor be required to foreclose on the property. Normally this is the formula for protective equity when dealing with conventioanl loans...Value of property-debt=equity.
With a private hard money loan, it is defined a little differently...Quick sale value of property(180 day sale value)-debt=Protective Equity.
Let me use an example of a property we funded in Novenber of 2008
The property was a piece of raw land, with an MAI appraisal of $3.4M (As Is) and a 180 day value of $2.1M. My investors lent 50% of the $2.1M, or $1.050Million.
Now, you are probably wondering why the huge discrepancy in As Is value and quick sale value. Here is how a private investor looks at the deal. First, this is raw land, hardly a hot selling property in today's market. Every private hard money investor always assumes he will own the property via foreclosure. If the investor takes the property back, he wants to liquidate the asset to get his m oney back. So, he must lower the pricer of the land below other similar property so it will sell. Hence, that is whay on raw land, we normally use a Quick Sale value.
TODAY'S MAXIMUM LOAN TO VALUE
generally, the maximum loan to value on a private hard money loan is 65%. If the property is in a great area(West LA, Santa Monica), this can go higher. If it is in an area being hit hard(San Bernardino), it may go lower, perhaps 45-50%.
In my next blog, i will talk about how to achieve a higher loan to value with cross-collateralization of other assets.
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