These loans are offered by private lenders rather than traditional financial institutions, and they are typically backed by the physical property itself, making them a popular choice for real estate investments that require quick funding.

Unlike traditional loans, hard money loans are primarily based on the value of the collateral, not the borrower's creditworthiness. This makes them an attractive option for investors who may not meet traditional lending criteria. However, these loans carry higher interest rates and fees, reflecting the increased risk to the lender. Borrowers need to consider these factors and their ability to repay the loan in a short time frame.

Properties Eligible for Hard Money Loans

Various types of properties can be financed with a hard money loan, each with its unique considerations. It's worth noting that the lender's willingness to finance a particular property type may depend on its condition, location, and market value. Here are some common types of properties eligible for hard money loans:

1. Residential Properties: These include single-family houses, multi-family units (duplexes, triplexes, etc.), and apartment buildings. The loans can be used for buying a new property, renovating an existing one, or refinancing a previous loan.

2. Commercial Properties: These encompass office buildings, retail spaces, warehouses, and more. Hard money loans are often utilized for purchasing these properties, especially when the borrower intends to refurbish and sell or refinance the property quickly.

3. Land and Lots: Undeveloped land or lots are also eligible for hard money loans, which can be particularly beneficial for real estate developers or investors looking to build on the land.

4. Mixed-Use Properties: These properties combine residential and commercial elements. For instance, a building with retail shops on the ground floor and apartments above would fall into this category. They are often financed with hard money loans due to their diverse rental income potential.

Hard money loans provide a versatile financing option, accommodating various types of properties that may not be eligible for traditional loans. However, borrowers must be mindful of the higher costs associated with these loans and ensure their investment strategy can yield an adequate return to offset these costs. Always conduct thorough research and seek professional advice when considering a hard money loan for your real estate investment.

Hard Money Loans Underwriting and Approval Criteria

Hard money loan underwriting primarily focuses on the asset's value, rather than the borrower's credit score or income. This process is what sets hard money loans apart from traditional lending. Here are the key components of loan underwriting and approval criteria for hard money loans:

1. Property Value: The value of the property is a critical factor in a hard money loan. The loan-to-value (LTV) or after-repair-value (ARV) ratios are often used to determine the loan amount. These ratios represent the percentage of the property's value that the loan amount represents.

2. Exit Strategy: Borrowers must have a clear exit strategy, detailing how they plan to pay back the loan. This could be through the sale of the property, refinancing, or other means. A feasible and strong exit strategy can increase the chances of loan approval.

3. Experience: While not always a deal-breaker, lenders tend to favour borrowers with a track record in real estate investment. Experienced investors are considered less risky due to their understanding of the market, their ability to manage the project efficiently, and to sell profitably.

4. Equity: Lenders will assess the borrower's equity in the project. A higher equity stake by the borrower reduces the lender’s risk, as the borrower has more to lose if the project fails.

5. Property Condition and Location: The property's condition may impact the renovation budget, and its location can affect its marketability and potential resale value. Lenders will consider these factors during the loan underwriting process.

Remember, each hard money lender may have their unique criteria and process for underwriting loans. Always clarify these criteria and understand the terms fully before proceeding.

Hard Money Loans vs. Conventional Mortgage

When navigating the world of real estate financing, it's crucial to understand the differences between hard money loans and conventional mortgages. Both have their unique features and benefits, making them suitable for different situations and types of real estate investments.

Interest Rates and Fees: Hard money loans typically have higher interest rates and fees compared to conventional mortgages due to the higher risk involved for the lender. These costs are part of the trade-off for the faster approval and flexibility that hard money loans offer.

Loan Approval and Funding Speed: Conventional mortgages often involve a lengthy approval process, requiring extensive documentation and credit checks. On the other hand, hard money loans have streamlined approval processes, focusing more on the property's value than the borrower's creditworthiness, resulting in faster funding.

Loan Term: Conventional mortgages generally have longer loan terms, often ranging from 15 to 30 years. Contrastingly, hard money loans are short-term loans, usually with terms of 12 months to a few years.

Flexibility: Hard money loans offer more flexibility than conventional mortgages. They can be used for a variety of property types, including those in poor condition or unique properties that may not qualify for traditional financing.

Use of Funds: While conventional mortgages are primarily used for buying homes, hard money loans can be utilized for a broader range of purposes, including property flips, land loans, construction loans, and when the borrower needs to act quickly.

While hard money loans and conventional mortgages share the fundamental purpose of financing real estate, they cater to different needs and circumstances. Hard money loans are a viable option for investors looking for quick funding, flexibility, and short-term loans, while conventional mortgages are more suitable for long-term residential property purchases. It's important for borrowers to carefully consider their options, and their financial circumstances, and seek professional advice to make informed decisions.

Finance Monthlyhad the pleasure to speak with Tracy Alan Saxe, President and CEO of Saxe Doernberger and Vita P.C. (SDV) - an insurance coverage practice firm that represents policyholders in insurance coverage matters. With offices in Connecticut, Florida and California, the firm advocates across the nation to resolve disputes with insurers on all lines of coverage, including general and professional liability, commercial property, business interruption, directors and officers, and pollution coverage. Below, Tracy tells us more about it.

Your career began as a general litigator – can you tell us about that experience? What drew you to the insurance field?

I began my career at a small general practice firm of less than 20 lawyers, in Stamford, Connecticut. There, I tried many cases of all types – both civil and criminal. Beginning in the 1980’s, I worked in insurance coverage doing asbestos insurance coverage work. I began working in this area after a friend of mine from law school who was in-house counsel at Combustion Engineering (later owned by ABB) asked me if I was interested in doing insurance coverage work. At that time, they worked on a lot of asbestos claims and insurance coverage disputes. Initially, I thought that it sounded boring, but once I began doing insurance coverage work, I realised that I loved the intellectual challenge that came with it and started turning away other types of work. By the 1990s, I was doing insurance coverage work to the exclusion of all else. I found insurance coverage to be the most interesting and exciting type of work that I’ve had the chance to do – the exact opposite of what I thought it would be!

It’s been three decades since that day and I haven’t looked back! I find it very exciting to work in this field, on behalf of policyholders. I take great pride in the fact that we level the playing field for policyholders who are up against insurance companies whose sole focus is to use their vast resources to find the areas of a policy that reduce coverage. It’s much more rewarding to be fighting for David than Goliath.

By 1994, I was Co-counsel on a major coverage matter with Anderson Kill and after a couple of years, they asked me to open their Connecticut office for them - something that I happily did. After about three years, it became clear to me that there was a better way to service our clients. This area of law benefits from an efficient, creative and nimble organisation that a large firm typically does not provide. In 1996, We changed the name of the firm, but everything else stayed the same. We started with three lawyers, and today we have 28 lawyers in three offices nationwide.

Over the years, we’ve seen considerable organic growth and we continue to expand. The other very exciting thing about doing insurance coverage work is dealing with liability policies. A liability policy is when Person A is bringing a suit against Person B and Person B is then seeking insurance coverage for that suit. These are called third-party liability policies that are supposed to provide for the expense of Person B’s defense fees and to pay for any settlement or judgment against them. In those matters, we get a bird’s-eye view of the strategic decisions about what goes on in the suit against Person B, which is defended by a different set of lawyers. Our goal is to get the insurer to pay the lawyers’ fees, as well as our client’s settlement. This dynamic gives us the opportunity to work with lawyers all over the country who are very good at their specific field, but don’t do insurance coverage work, adding to our strategic ability.

How can potential insurance disputes be minimized in relation to coverage, so that litigation can be avoided?

There are many ways to do this. Thoughtful strategies on the purchasing side of insurance are important. When it comes to commercial property coverage, we make sure we’ve figured out what the client’s business interruption valuations are. In other words, what type of losses they are likely to sustain because of a business interruption of any sort, making sure they get proper coverage for that. Then, our lawyers look at the actual policy language, with the claim scenario in mind, to make sure that the endorsements give the client the coverage that they expect. In addition, we review your contractual relationships with vendors, customers, sub-contractors, sub-consultants, landlords, tenants, or any variety of contractual relationships, to make sure they have properly specified the insurance coverage that is required of them and to what extent they are required to be an additional insured, to what extent they expect indemnification and the opposite. This is to say to what extent they are providing additional insured coverage to other parties and to what extent they indemnify them, making sure that any indemnity they give or get is actually covered by the respective insurance policy.

On the other side of a litigation avoidance is for our lawyers to come in before bringing any sort of suit against an insurance company, making a thorough examination of where the coverage is and making a thorough rebuttal of denial letters. We work with our clients’ insurance broker to approach the resolution of the matter, in a business-like environment rather than a litigation setting. We try to help them understand the facts, laws and policies that apply and present this in a cohesive fashion so they can put their best foot forward.

What strategies do you employ to successfully defend against a coverage issue?

The most important thing is a detailed understanding of all the key issues and the policy, what laws might apply in which state and where the suit might be brought. Most of the cases that we work on are very large and the way we look at each case is very strategic. When compared to typical litigation, our work is more like three- or four-dimensional chess. For instance, it is very common that the insurance policy we are fighting with the insurance company about has ‘no choice of venue’ or ‘choice of law’ provisions. Our clients are almost uniformly national or global entities which means that the lawsuit can take place anywhere in the country or in other parts of the world as well. The law that’s going to apply could be determined differently in each jurisdiction where the suit might be brought, thus, what we often end up doing is looking at anywhere from four to seven issues that might decide the outcome of the case, before we even decide whether a suit should be brought. We look at each issue under the various different laws that might apply in the specific jurisdiction and then make a strategic determination of where a suit should be brought - if it needs to be brought.

We also need to be fully prepared with the facts that support our position.

At SDV, we find that the quickest settlements come when we are fully prepared to aggressively litigate a case. If not handled aggressively or if you don’t have a comprehensive strategy to start with, cases tend to drag on and become very, very expensive. This is where SDV’s experience as trial attorneys adds great value to our clients. In this area of law, it is critical for clients to have a firm that has experienced general litigators who have tried cases to verdict representing them from Day One. Many cases in this area of law are multi-dimensional, and they can move through a number of stages in litigation. A client needs to know that the firm representing them has attorneys that can build a successful case with trial in mind.

How is mediation used to resolve disputes within the sector?

We find that many cases are helped by mediation and if it’s used at the right time, an early resolution is possible. That’s because many firms do not appreciate that the mediation process is not always a zero-sum game. If used strategically and timed correctly, mediation can help both sides understand their cases first, which in turn, helps both sides begin to see the opportunities where resolution is possible. Mediation is very common in the sector - probably almost every case that we work on involves mediation. Some cases could even require more than one mediation (with a third-party mediator) or a court- side mediation conducted by a magistrate or a judge. It has also become a common practice for us to go through these dispute resolution processes without any suit pending. We often have face-to-face negotiations and include mediation as part of this process.

It is critical for clients to have a firm that utilises this alternative dispute resolution process in a strategic and effective way. Once again, it is helpful to our clients that our partners came to this area of law with decades of experience resolving civil cases through mediation.

What motivates you about working within the field? What are your goals for the future?

I find it very exciting to work in this field, on behalf of policyholders. Typically, my corporate clients are busy working on other things and insurance is not their day-in/day-out business, and neither is litigation. Insurance companies on the other hand are solely focused on insurance, so they are naturally better prepared for this battle than the policyholders. I take great pride in the fact that we level the playing field by coming in with the type of expertise that matches or exceeds the insurance companies’ own expertise on insurance coverage disputes.

Our goals for the future is to continue to build our high-quality clientele and reputation for doing high-level, complex insurance coverage work on behalf of policyholders.

Contact

Saxe Doernberger & Vita, P.C.

Website: http://www.sdvlaw.com/

Email: coverage@sdvlaw.com

Phone: 203-287-2100

The European real estate sector continues to flourish but competition for deals is fierce and speed is often of the essence: so much so that, according to recent Drooms research¹ over 50% of real estate professionals in Europe are compromising on the quality of their due diligence to complete transactions quickly.

However, modern technology has a solution for those seeking to complete real estate deals more efficiently. Where time pressures have led to a potential decrease in the quality of due diligence, parties to a transaction have found a solution in technology enabled with artificial intelligence (AI), such as virtual data rooms.¹

Real Estate is big business

According to a Real Capital Analytics (RCA) report published in February 2018, Europe’s commercial property investment market returned to growth in 2017² as deals of more than €500 million in value accounted for almost one quarter of the year’s acquisition volume. The UK also regained its title as Europe’s largest market after its investment volume increased by 12% thanks to several large transactions such as CC Land’s purchase of the landmark Cheesegrater building for £1.15 billion.

Successful transactions like this depend ultimately on high quality and detailed due diligence but despite the high volumes of information that need to be processed, the real estate sector is still behind the curve in terms of technology and a significant number of important processes are still conducted manually.

The volume of documentation involved in real estate due diligence continues to grow exponentially and it is becoming increasingly important for key stakeholders to quickly and efficiently navigate their way through the mass of information involved and to focus on the key points.

Our survey¹ clearly shows that over the past two years there has been an overall increased focus on due diligence and 73% of real estate professionals believe this focus will increase further over the coming year. For this reason, AI is increasingly being regarded as a solution for today and not technology for the future.

A closer look at the benefits

More than half (54%) of real estate professionals say that they use AI to improve the keyword search process when working on transactions. However, this figure rises to 69% of respondents who say they will be using AI for keyword searches in five years’ time. Other processes that will become more widely used include foreign language translation, identifying red flags, routing documents to the right decision-makers and topic-modelling.

The majority of real estate professionals believe that AI already benefits their firms’ and provides a competitive advantage by enabling a much higher volume and variety of documents to be searched at high speed. Almost the same number say that AI speeds up the due diligence process, while a third believe it improves the accuracy of decision-making. Other benefits of AI include minimising risks and liabilities in an overall deal, reduced reliance on legal services, the ability to automatically create contracts and reports and securing the best deals before other professionals.

The barriers facing AI

Despite these benefits, there are still perceived barriers preventing the uptake and use of AI in the real estate industry. The biggest of these is lack of confidence in AI’s ability to match human intelligence and decision-making (cited by 53%), followed by a lack of skills available to implement relevant AI technology (51%), technology being too difficult to use (41%), a lack of trust by senior management in AI (19%) and concern that AI will replace investment professionals’ roles (17%). Only 9% say the main barrier is a ‘lack of demand’.

What does the future hold?

As a pioneer in the digitisation of due diligence in real estate, Drooms’ technology is helping to change existing processes by integrating AI into its virtual data room (VDR). The aim when building AI into our VDR technology is to enable real estate professionals to reduce the amount of manual review work, eliminate unnecessary errors and reduce reliance on expensive third-party costs. We are just one example of the application of AI, but a very good one.

Crucially, this is not a battle of technology versus humans. Despite its ability to automate a tremendous number of processes, AI will always work best in conjunction with human skills and intelligence. AI needs to learn from human behaviour and there is no substitute for years of experience, instinct and knowledge. However, AI complements those elements and adds huge value by making real estate processes much more automated, efficient and cost-effective.

Website: https://drooms.com/

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¹Source: Drooms, April 2018 - The future of artificial intelligence in real estate transactions April 2018

²Source: Real Capital Analytics February 2018 - 2017 Year in Review edition of Europe Capital Trends.

According to the statistics, Price Central London began to witness a recovery in Q2, both in sales volumes and prices. This follows 2 years of stagnation as buyers held back due to Brexit and residential tax headwinds. The increase in average prices, however, can largely be attributed to a surge of high value sales with buyers taking advantage of price discounting at the luxury end of the market. Underlying price appreciation for the rest of the market remains significantly less buoyant.

England and Wales and Greater London continue to see falling transactions and slower overall price growth, impacted by the introduction of mortgage caps, the instability in the domestic economy and the growing new build crisis.

Price Central London (PCL)

• Sales volumes have strengthened slightly, with an annual increase of 4.8% to 3,885
• Average prices reached £1,946,151 in Q2 2017, representing quarterly price growth of 7.9%
• Despite the statistical increase, this has been buoyed by a number of high value transactions and an increasing proportion of luxury sales
• Q2 2017 saw the most expensive sale ever to transact through Land Registry at £90m for a flat in 199 The Knightsbridge Apartments
• As a result, the top 10% of the market performed particularly strongly in Q2, seeing a 20% increase in average prices to £8m
• The most active sector this quarter was the £5m - £10m bracket, where the proportion of sales increased by 23% over Q1
• Excluding the top 10% of the market, average quarterly price growth was 4.5%
• Growth in the buy to let sector was the most sluggish with a 1.3% increase in average prices for property under £810,000

Average prices in Prime Central London reached £1,946,151 in Q2 2017, following quarterly price growth of 7.9%. Despite a slow down as the market adjusted to increased residential taxation and Brexit, this recovery is, in part, a result of buyers seeking safe havens in the face of increasing uncertainty as tensions mount in the USA, Middle East and worldwide, together with the attractions of weak sterling and low interest rates.

Transactions in PCL have strengthened marginally in Q2, following a prolonged period of falls from 6,044 in Q2 2013. According to LCP’s analysis, 3,885 sales have taken place over the last 12 months, representing a small increase in annual sales of 4.8%.

Notwithstanding the headline figures in Q2, a detailed analysis indicates that price increases have been buoyed by a number of significant high value sales, including £90m for a flat in 199 The Knightsbridge Apartments, the most expensive sale ever to transact through Land Registry. As a result, a particularly strong performance has been seen for the top 10% of the market with prices increasing 20% to average £8m. With this excluded, average growth falls from 7.9% to a more typical 4.5%.

However, whilst homebuyers have capitalised on luxury property discounts, a divergent dynamic is being seen in the lower value market. Price growth in the buy to let sector was the most sluggish, reflecting a 1.3% increase for properties under £810,000. The proportion of sales under £1m also decreased by 9%, compared with a 20% increase over £5m.

Naomi Heaton, CEO of LCP, comments: “The increase in average prices appears to reflect a greater proportion of high value properties being sold, rather than any significant underlying growth. Not only have we seen some very large individual sales but transaction data shows the £5m - £10m bracket was the most active in Q2 with a 23% increase over Q1. This can be attributed to international homebuyers taking advantage of notable price discounts, alongside beneficial currency exchange rates. The buy to let sector, on the other hand, is seeing a much slower picture as investors continue to adopt a wait and see attitude.”

“Looking at the monthly breakdown gives us a clearer picture of what is really happening in the market overall. Whilst bumper transactions boosted average prices to as high as £2.2m in April and May, which included the most expensive sale to register through Land Registry at £90m, June reflected a more sedate picture with average prices falling back to £1.65m.”

Greater London

• Average prices have shown quarterly price growth of 4% and now stand at £634,234
• However, annual transactions fell by 24% in Q2, resulting in a low of 88,545 sales, half those 10 years ago

Heaton comments: “Greater London is principally a domestic market and whilst prices continue to show growth, slowing sales volumes reflect the current state of the UK economy. Concerns around Brexit have impacted the ‘feel good’ factor which drives buyers’ decisions, whilst affordability issues resulting from caps on mortgage lending have hampered buyers ability to trade up or get onto the housing ladder. Falling sales volumes are also exacerbated by problems within the new build sector. This has seen international speculators pull back in the face of uncertain or negative returns. It is reported that the number of new building starts in London will fall to just 21,500 this year, meaning only 18,000 new homes will be built by 2021.”

England and Wales

• Average prices in England and Wales have shown almost nil quarterly price growth at 0.27% and now stand at £287,823
• Transactions fell by 12% in Q2 with 844,380 sales annually, the lowest since Q2 2010

Heaton comments: “Despite Government measures to reduce Stamp Duty for 98% of the market and schemes to promote activity such as Help to Buy, weaker sentiment and restrictions on borrowing continue to impact on the domestic market in England and Wales. With static price growth in Q2 and annual transactions levels falling a further 12.3%, the Government seriously needs to address the growing affordability issues within the sector and support the building of more low-cost housing for buyers. The artificial stimulus packages and tax reliefs do not appear to be reinvigorating new buying activity.”

(Source: London Central Portfolio Limited)