The perception of the uses of hard-money loans is for short-term solutions in real estate investments. The hard-money alternative is in place for the benefit of investors needing access to capital for acquisition and rehab opportunities.
As a hard-money lender in Los Angeles, I understand the need and the use of hard money for the benefit of heirs who become owners of real property upon the death of a loved one. Unfortunately, not all of the heirs have the same objective. Where some want to continue their ownership after the estate settles, some have no interest in ownership and want to cash out.
The key takeaways of this blog are:
- each heir needs separate legal representation
- all heirs must agree on the value of the property, and
- the heirs wanting to quitclaim their ownership can have access to the cash for the buyout before the settlement of the estate.
The issue for traditional lenders is that the property remains titled in the estate or the trust. These lenders will not provide the financing to buy out the disowning heirs. This is when the placement of a hard-money loan can be used by the estate or trust to cash out the disowning heirs before settlement.
This loan structure is a specialized placement of capital known as an inheritance loan. As a hard-money lender, I want personal representatives and trustees to understand the use of a hard-money loan in the interim situations to buy out the heirs before the estate settles or the trust dissolves without the use of the remaining heirs’ funds.
The Inheritance Loan
In simple terms, an inheritance loan is a loan against an estate to be used by the heirs to accelerate settlement. These loans are placed when some heirs want to retain the real estate holdings while others want cash for the value of their interest.
The Value of the Property
The first and most important step is for all the heirs to agree on the property’s value. An independent appraiser needs to be retained. The appraiser should be completely independent of the heirs and know the market and property type.
Sometimes, multiple appraisers will be hired to accommodate the need for comparison.
The Hard-Money Lender
Unfortunately, an existing relationship with a bank or a credit union cannot lend on an inheritance loan scenario. Title to the property must be in the names of the remaining heirs or in an entity comprising the heirs.
A hard-money lender will underwrite an inheritance loan on the basis of the property’s value rather than on the credit scores and the income of the remaining heirs. Generally, an inheritance loan will be 75% of the property’s value.
The loan proceeds will be paid to the estate to benefit the heirs wanting to cash out. The heirs can receive the cash for the value of their interest before settlement.
When the settlement is finalized, and title to the property is transferred to the owning heirs, the hard-money loan can be satisfied with conventional financing.
The interest rate and costs on a hard-money loan will be higher than that offered by a conventional lender. However, the streamlined approval process and the quick closing schedule will offset the higher costs.
Since private investors fund a hard-money loan, the offered rate is not affected by the rise in the federal loan rate like a conventional lender.
Representation of the Heirs
Before seeking the services of a hard-money lender, it will be necessary for all heirs to understand that the attorney representing the estate will not represent the individual position of the heirs. Each heir will need their own legal representation.
All heirs need an understanding of the necessary agreements to effectuate an inheritance loan. This will not be a “one-size-fits-all” template. All situations are different and specific to the terms of the will and how title to the property is held.
A hard-money lender must work with the attorneys representing the heirs to ensure the inheritance loan is appropriately structured and executed.
An inheritance loan, when used and placed correctly, is a valuable financing vehicle when some heirs want cash instead of shared ownership. However, before a hard-money lender can place an inheritance loan, all heirs must know the process, the value of their interest, and the tax ramifications of a buyout.
If you believe an inheritance loan will benefit your situation, then it is in your best interest to work with an experience and reputable hard-money lender in Los Angeles. PB Financial Group is a premier, direct hard-money and bridge lender that has provided quick funding since 2007 and has closed over 2,700 loans. Our objective is to satisfy your financing needs on important real estate matters throughout California efficiently.