Unpredictability is the only certainty in real estate investing. We hope for the best and plan for the worst. Here in Florida, investors are breathing a collective sigh of relief since Governor Scott vetoed HB 747 in the final hour. If you haven’t heard about our industry’s recent near-miss that would have made Florida’s private hard money lenders almost obsolete, let me fill you in—and tell you what it teaches us investors going forward.
Hard Money Lending in Florida is Core to Our Business
Real estate investors turn to hard money loans because most traditional lenders won’t work with investment properties that are typically in need of lots of repair work. Private hard money lenders may be a single individual or small group whose level of financing assistance can cover up to 100% of an investment property’s cost. To receive a hard money loan, investors generally have to prove their track record of buying and selling profitable properties through a credibility package or kit—at least until they develop a solid business relationship with a lender. That’s because these loans are generally based on the value proposition of the investment, rather than the investor’s personal credit score.
While hard money loans have high interest rates, their benefit is that investors don’t have to cut through lots of red tape. If you have a connection with a local hard money lender, you can usually get the money for an investment property in approximately one or two weeks since you don’t need to deal with a typical mortgage lender’s underwriting and approvals process.
These loans are especially well-suited to short term investments such as fix-and-flips because there are generally fewer requirements concerning the state of the property at the time it’s purchased. You also won’t encounter residency restrictions (some lenders require the property to be your primary residence). Investors perform the necessary repairs to bring the house up to its full market value and then sell it for a profit (even with the loan interest factored into the equation).
How Did Florida HB 747 Hold the Potential to Impact Real Estate Investors?
HB 747 effectively sought to change the meaning of a “mortgage loan.” A mortgage loan has been defined as being “primarily for personal, family, or household use.” However, the proposed law would have eliminated a key exemption. This would have changed the terminology to include non-owner occupied one- to four-family residential dwellings or the land upon which such a dwelling is to be constructed. In effect, that would have required anyone seeking a mortgage loan—whether for personal use or investment—to go through a licensed lender. This would have put Florida’s private hard money lenders out of business. And since many real estate investors rely upon hard money loans, the legislation would have made the fix-and-flip model non-viable for most Florida investors.
Here are a few additional takeaways:
=> No more hard money.
Private lenders would have been required to go through the arduous process of becoming licensed to legally continue loaning money to investors. Otherwise, they would risk being accused of “holding themselves out as a mortgage lender.” You can imagine that most would not choose to do either. Hard money would have simply frozen up.
=> Increased risk of price jacking.
With few other options available for real estate investors, non-private lenders would have been free to charge exorbitant interest rates and fees. And investors would have had little choice but to pay those rates.
=> A higher risk of deception.
This bill would have forced some private hard money lenders and investors to go “underground,” resulting in a covert lending industry that would have been impossible to regulate. This would have left investors in a far more vulnerable position, as the underground nature of the industry would have attracted dishonest and unethical individuals.
The bottom line is that HB 747 would have made money less accessible and could have put most residential real estate investors out of business. The overall economic impact could have been devastating, as real estate investors and private hard money lenders have played an integral role in the Sunshine State’s recovery following the real estate market crash.
What Can We Learn From HB 747?
There’s inherent risk with every real estate investment. A well-meaning but misinformed policy change could have widespread effects on our industry and the economy as a whole. Luckily, we avoided the bullet this time around thanks to widespread outcry and aggressive letter writing campaigns that informed politicians about the real world impact of this legislation.
But it’s essential that we stay informed about policies and market changes going forward. We must collectively speak up should we face another peril. As a HomeVestors® franchisee and long-time local investor, I stay in the loop with my broad network of other franchisees nationwide. And, when times get tough, our business model is agile enough to weather the storm with alternate means of internally financing our franchisees. If you would like to add some certainty to your investment business, get in touch with HomeVestors® today.
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