HML and credit check - Posted by Darryl

Posted by John Corey on April 13, 2006 at 20:42:43:

Ed covers your question concerning hard money and credit checks in the Lenders Workshop. He explains to the group that if a lender is asking to check credit they are not really a hard money lender. They could be offering a non-conforming product or otherwise providing something that looks to be hard money. The credit check is completely unnecessary with true hard money.

Now you have to understand that most hard money lenders that I know of will stop at 65% of the as-is value rather than 70% of the ARV. When you start moving up the LTV or using the possible future value the lender really is taking on more risk. Most ‘hard money’ lenders who lend on ARV and will go to 70% or higher are going to expect to pull credit.

Some will tell you that they do so as a way to get to know you. Like knowing the borrower is a factor compared to a straight asset backed deal.

Ultimately you have to ask yourself if you like what they are offering and if it will work for you. If the deal fits and they want to pull credit then maybe it still makes sense rather than argue about the true definition of hard money vs. the need for a credit check.

As to CA vs. the rest of the US. There is nothing specific that can be said as the other 49 states do not have one standard which is somehow different from CA.

When rehabbing there are clear issues in many states concerning the need for a licensed contractor when doing the work. The contractor license issue is definitely something to look up and there will be a website per state if they issue licenses.

One specific example to highlight something unique. In OR you need to be a developer to work on your own property that you bought to fix up and sell. Even if you hired licensed contractor to do the work. If you buy, rehab and rent the place you do not need a developers license. Such a license requirement and the developers insurance is rather unique to OR and only started this year.

The financing options are pretty standard if you borrow from a conventional institution. If you are dealing with seller financing (either when you buy or when you sell) there are some states that have placed restrictions. I read of one city that has specific restrictions on lease/options even though there is no requirement that is state wide. The city is not in CA.

Is there something specific you are concerned about when doing business in CA?

Though you did not ask one nasty CA item is the Franchise Tax board fees for an LLC or other legal entity. The last I heard they based the annual fee on the total assets owned and not the equity (net value) of the assets. Hence you pay an annual fee even on debt when it is secured by RE. The fee started at $800 and rose to something over $11,000 before it capped out.

John Corey

HML and credit check - Posted by Darryl

Posted by Darryl on April 13, 2006 at 13:35:22:

If a hard money lender cares about how much equity is in a property, why do they want to do a credit check?
Also, what is the difference in flipping, refinancing and rehabing in California than in other states?