Loan Terms & Default
The standard loan term for residential investment properties here at Epic Impact Investments is twelve months. Yes, many borrowers don’t anticipate needing a full year, they are certain the project is only going to take six to eight months. If everything goes well and the borrower is able to renovate, and sell the property in eight months, that’s great! It is the ideal outcome for the borrower, the capital investor, the lender, and the community.
However, renovation projects often take longer than anticipated. Experience has shown us that most projects take between nine and twelve months. We feel our borrowers get the most benefit from a standard twelve-month loan term from the beginning.
Although it's highly unlikely to ever happen, let’s say a project only took two months. We still require a minimum of three months of payments. Even in this situation where they want to pay the loan back in two months, we still require a third payment. Our capital investors will still receive three interest-only payments. The borrower will not need to wait a full extra month, but a third payment will still need to be made before the loan can be settled.
The more likely situation will be that the borrower needs more than the original twelve months. There can be a variety of reasons why the project runs more than a year, maybe they’re just behind schedule, or they had issues with permits, whatever the case may be. There is also a possibility that the renovations have been completed but the home hasn’t sold yet. The property is ready, but since it hasn’t sold, the borrower can’t pay back the loan yet.
The above examples are the two most likely reasons why a residential rehab project would not be done in time to meet the twelve-month term. Many borrowers (and capital investors) are concerned about what happens in this situation. New borrowers especially may be scared about what happens next. Will they default? Will they need to pay all this interest right away? Hopefully, our borrowers won’t panic or do anything drastic.
First, it is essential to keep the lines of communication open between us. Our goal here at Epic Impact Investors is to have a successful project. That means our capital investor gets their investment back with interest, the borrower wants to continue investing with future projects and a finished home has enhanced the wealth for a community of color. These are the points we keep in mind when evaluating the next steps.
Typically, if the borrower needs to go beyond the twelve-month loan term, the first step would be an extension. There are fees associated with an extension request. The fees vary based on the situation. For example, the fee may be two points for a three-month extension. The capital investor would continue to receive their monthly interest payments with an extension. As the loan servicer, Epic would get the extension fee for handling the day in and day out of the loan.
Loan term extensions are for a minimum of three months and additional extensions may be available but there is a limit. It is a judgement call and not a guarantee that multiple extensions could be granted. A lot will depend on the progress of the rehabilitation, payment history, etc.
Some projects, unfortunately, get too far behind schedule for just an extension. We have practices in place to prevent the money from getting too far ahead of the project but sometimes the borrower just can’t keep up. In this case, we could put the loan in default. Default rates range between 20-24%, with a split between the capital investor and Epic. For example, if the rate was 24% then 17% would go to the investor and 7% would go to Epic as the loan servicer.
It is a judgment call, not a science, regarding whether an extension will be given or if the loan will go into default. We take many things into consideration: our understanding of the borrower, our understanding of the project and communication with our capital investor. For example, in a situation where the renovations are finished, but the property hasn’t sold yet, we are not likely to put the loan in default. They have finished the construction and listed the house for sale, so we think again about the three aspects of a successful project to make our determination.
We want to maintain an ongoing relationship with both our borrowers and our capital investors for future projects. Depending on the relationship, the project, the loan status, and the overall situation, the extension fees might be extra points, or we may charge a flat fee. For example, if the loan term is up but the house is already under contract then a flat fee for handling the extension might be more appropriate to the situation. The house sale is going to close in a few weeks so a full three-month extension at 2% isn’t necessarily the right direction.
As a local loan servicer our goal is to continue to build relationships with our borrowers and our investors, as well. We want repeat borrowers that can reach the end result of a successful project.
I hope the above explanation about what happens when a project goes over the standard twelve-month loan term has relieved some concerns regarding borrowing from Epic Impact Investors. If you are here in Chicago and looking for a hard money loan please reach out and contact us to submit a loan application online. https://epicimpactinvestors.com/loan-application
If you are looking to invest, if you want to help build communities of color while building your own wealth then Epic Impact Investors can help you receive a great interest rate on your capital investment as well. Become a part of putting contractors of color to work in communities of color, be a part of that investment while passively building your own wealth portfolio.
I encourage you to join our Epic impact Investors Facebook group https://www.facebook.com/groups/epicimpactinvestors where I share free information and downloads. We also have live presentations online every Wednesday, talking about some aspect of hard money lending. Also, subscribe to our weekly newsletter out on real estate investing. We want you to feel comfortable moving forward with investing through a hard money lender, namely Epic Impact Investors.
Visit us online at www.EPICImpactInvestors.com to schedule a FREE consultation call or download one of our borrowing or investing resources.