The truth about hard-money loans

Costs, terms often more onerous than conventional mortgages

By Inman News Feed
Add Comment Add Comment | Comments: 11 | Posted Mar. 26, 2013

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I am not advocating getting the lowest bid all the time. You get what you pay for, and sometimes it would make sense -- in the board's judgment -- to use a higher bidder. But obviously, if you have only one bid, you can't go either higher or lower.

And there are situations where there is only one company in town that can do the job for you. In that case, the board cannot get more bids. If that's the situation, then the board should document these facts and send a note to all owners about why it is not getting multiple bids.

Communication, in my opinion, resolves most, if not all, problems. Lack of communication, on the other hand, creates distrust and fights.

In your case, the board might want to retroactively get another bid just to satisfy its members -- and you -- that the current price is in the ballpark. Realistically, however, I doubt that any contractor would want to waste time preparing a bid knowing that it will never be accepted.

DEAR BENNY: Congress started removing some financial hazards of default when it enacted a law that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale), or gets a loan modification that reduces the principal balance. The tax waiver originally applied only to debt on a primary residence canceled in 2007, 2008 or 2009. Last month, in the bailout bill, Congress extended the waiver until 2013.

Say you lived in your house as a primary residence from 2005-2007. Then because of economic hardships you rented out your house to a tenant in 2008 in order to pay the mortgage. If you are foreclosed on or do a short sale in 2009, do you still get the income tax waiver on mortgage debt that is canceled?

I already know of at least several people in my situation ... before all these federal bailouts occurred in 2008, the only real economic recourse for saving their homes was to rent out their primary residences to tenants. But because of continuing declines in the value of the homes, many would just want to foreclose but aren't sure if the tax waiver on foreclosures applies since the home is no longer their primary residence. --Kevin

DEAR KEVIN: You sent me this email a couple of years ago, and I did not get a chance to use your question. However, it now becomes timely, because when Congress enacted (on Jan. 2, 2013) the American Taxpayer Relief Act, it extended the law you are discussing through Dec. 31, 2013.

In general, as strange as it may seem, if your mortgage debt is canceled by way of a short sale, foreclosure or loan modification, the Internal Revenue Service calls this income and you have to pay tax on it. We call it "phantom income."

However, as you stated, Congress was concerned about this and in 2007, enacted the Mortgage Forgiveness Debt Relief Act. Oversimplified, if the debt that was canceled involved your principal home, up to $2 million of forgiven debt is eligible for exclusion ($1 million if married filing separately), i.e., you don't have to pay any tax on the money you did not get. That law was to have expired at the end of 2012, but, as mentioned above, has now been extended through the end of this year.

However, this must be your principal residence. In your example, if you moved out and rented, for whatever reason, I am concerned that this is no longer your main home. Presumably, you declared the rental income on your tax returns, and even may have taken depreciation. So the IRS would not look kindly on your claim that this is your principal residence.

It's not fair, but neither is the phantom income tax.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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COMMENTS

Comments 1 - 11 of 11
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1. Anonymous said... on Jun 13, 2013 at 10:42PM

“Dear Benny: I'm a new real estate investor and I'm looking for good creditable hard money lenders. Can you recommend any?”

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2. Charmcaster said... on Jul 16, 2013 at 01:35AM

“Hard money loans? There are people who thinks it easy to cope with this kind of loan. For me, one that should be considered as hard money loan is the 401(K) loan where many of us suffered in paying for it. Despite 401(k) loans making good financial sense in theory, the number of 401(k) loan defaults is still much higher than normal. A number of people have trouble paying them back once they borrow from their retirement funds. If you need some financial help, get a payday loan.”

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3. Does your business need funding said... on Oct 12, 2013 at 05:39PM


I Mr Nicholas Williams own a legitimate loan company that offer out reliable good loan offer at an affordable low interest rate of 3% for the period of 1 to 30yrs only ,i issue out different types of loan ,loan such as personal loan student loan company business loan private and public investor loan so for more details if interested reach us via email:nicholasloanagencys@gmail.com

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4. Nacho said... on Nov 11, 2013 at 12:19AM

“There are lots of hard money loans. It seems like there's nothing but not so great news going around nowadays, but then again a ton of it is down to the press just fear-mongering again because it gets ratings. Anyway, there is something to give some people hope, specifically if they have retirement anxiety. A number of reports revealed that 401(k) plans are beginning to make cash again, after years of stagnation. You can get a cash advance to pay for things while waiting for your retirement account to go up.

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5. Monty said... on Nov 13, 2013 at 06:17PM

“Hard money loans are designed for investors - commercial
Consider a bank that may charge 6% for short term loan for distressed property and hard money that charges 12-14%. You are paying for the "availability of capital' at a premium. A good deal should support such and its usually less than a partner.

Equity investors often take 25-50% of a development, so hard money if used as bridge (most 6 months to 2 years) is a very useful tool

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6. bot said... on Nov 27, 2013 at 05:59PM

“trying to find hard money lender”

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7. darr said... on Nov 27, 2013 at 06:05PM

“trying to find a hard money lender that lend in Sharon hill, Pa that will do a rate & term 1yr the borrow has good credit”

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8. inAmust said... on Nov 28, 2013 at 03:10AM

“People usually turns into hard money loans if they don't have any choice. As an example, after you move to a new place, you never know what your utilities will really cost you until you get that first bill. You may have been anticipating a fifty dollar bill and end up with a two hundred dollar bill. You can pay for the unexpected additional expenses with a payday loan. You would not wish to be late on your first bill. Get more information here

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9. Abe said... on Jan 23, 2014 at 09:58AM

“In response to a few people asking for a credible hard money lender. I have worked with White Glass Lending (http://www.whiteglasslending.com). They have an indepth vetting process that keeps them from taking loans that will default (apparently they don't like loan-to-own). But if they give you a loan, it helps to validate that the property has good investment potential. Hope this helps,

Abe”

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10. Anonymous said... on Mar 12, 2014 at 02:42AM

“Hello everyone?
My name is Mrs Shirley I live here in USA and i am a happy woman today? and i told my self that any lender that rescue my family from our poor situation, i will refer any person that is looking for loan to him, he gave me happiness to me and my family, i was in need of a loan of 10,000.00 dollars to start my life all over as i am a single mother with 2 kids I met this honest and GOD fearing woman loan lender that help me with a loan of 10,000.00 dollars, she is a GOD fearing woman, if you are in need of loan and you will pay back the loan please contact him tell him that is Mrs Shirley that refer you to her contact lady lopez via email: Ladylopezloaninstitute@gmail.com
thanks and God Bless
Mrs Shirley”

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11. VA Lender said... on Apr 7, 2014 at 02:12PM

“As with anything, there are positives and negatives to each hard money lender. A good one will provide much more than just capital, they have expert local knowledge, a network of experts across related areas (e.g. architects, permit expediters, etc.) and a great feel for project success. For example, on in Washington DC and Northern Virginia is: www.congressionalcapitalva.com”

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