What do you mean finance the deal – isn’t this about acquiring property without using your own money? Of course it is – we will get into some techniques you can use without taking your wallet out of your pocket next, but I would find this discussion somewhat incomplete if I didn’t touch a little bit upon financial methods that may require some skin (yours), and naturally, a pretty good credit score.
Conventional: When I got started, I didn’t have a couple hundred G’s sitting in my bank account ready to plop down on my first rehab opportunity – perhaps you’re in the same boat. But I did have good credit. If this is the case for you, consider doing what I did and visiting with your favorite mortgage broker (should also be on your professional team, right?). Get yourself a standing pre-approval – this will need to be updated from time to time but this is a nice tool to have in your arsenal.
Why? Because it is necessary when you go MLS shopping – you know, scouring for great deals on your local multiple listing service with your agent – the same agent you chose to become part of your professional team. Let’s not get confused here: remember, MLS shopping is only one of the ways you are employing to find sellers, certainly not your only way. Don’t forget to continue your targeted mailing, signs, flyers, door knocking/leave behinds, classified ads, internet strategy…
Are there deals on the MLS? Yes and no, I certainly couldn’t speak for where you live, but I do go shopping in my area for REO’s, short sales, and fixer-uppers on the MLS and I do indeed put offers on them. Not all of them are available for the price you need, but then again, some are. You will find out who is ready to play ball (the motivated seller) and who prefers to stay listed (the unmotivated seller) right away based on the seller’s counter offer.
Here’s why you need to have that pre-approval we discussed above – it needs to be submitted now with your offer, without that pre-approval you’re just wasting everyone’s time. By the way, if you do have that $200k in your bank account, skip the pre-approval and whip out your proof of funds.
Not to belabor the point, but if you are lucky enough to have an abundance of cash, give me a call (just kidding, kind of) use it – a cash offer that is free and clear of any mortgage contingencies will always rise to the top of the pile if you find yourself bidding against other investors.
So I have a standing pre-approval for submitting offers, and I will use conventional financing if I find something that makes sense to buy and hold. If you have credit issues that will prevent a lender from sending over a pre-approval letter, don’t sweat it, let’s look at some other alternatives that may be available for you.
Credit Lines: these can be secured or unsecured. I have a home equity line that I can tap into and I also have 2 unsecured lines I have access to (through another business). If you are a homeowner with a good amount of equity, you can speak with your lender (also a professional team member), about acquiring a HELOC. If you have another business that is credit worthy and in good standing you may want to also consider an unsecured line of credit. This type of financing is good for down payments, rehab costs, and (depending on your market prices and the amount of your lines) they can also be used to acquire a property outright with cash.
Hard Money: this type of lender will have some pretty steep terms, but if you have purchased the property correctly, the sale of the repaired property will take care of the points and elevated interest rate necessary to squeeze into this type of loan. The good news here is that the lender will analyze the numbers associated with property you are trying to purchase rather than your FICO score. So if you are having an issue with getting into a conventional loan, this may be a nice alternative.
The less than good news is that these lenders are looking for some of your personal participation (see credit lines above). In my area, I have found that the hard money lenders are scrutinizing the potential deal much more so than in the past. Prepare yourself to be grilled over your comparables, repair estimates, and ARV (After Repair Value). Like a lot of the conventional lenders we have been hearing about over the past 2 years, hard money lenders have eaten their share of deals gone bad and have had to foreclose on a large number of properties. As a result, the hard money lenders have also tightened their lending policies just like the conventional lenders.
Speaking of ARV get to know it, and the necessary metrics involved in determining whether you have a deal or a dud. The standard formula form the not too distant past has been: ARV*70% – Repair Costs = MAO (maximum allowable offer). But in today’s declining real estate market, you will need to be a bit more conservative, especially if you are going to deal with a hard money lender – Look for picking up property for 50-60% of ARV, the lower the better…
Private Money: of course if you are fortunate enough to find a private lender or two – you know, one who will finance your deal for a fair return on their risk – then by all means, pass right to go! Finding a private lender(s) will certainly save you time navigating through today’s rocky credit markets and allow you to spend your time finding deals! This is a point that should not be overlooked – let everyone know about what you do, the value you bring to your community – have you seen the returns on Wall Street lately? This is a great time to let the world know about alternative investment opportunities – network, network, network….
Securing financing will be a good first step for the beginning investor and it will also instill some confidence behind those offers you will be submitting. Yes indeed these different methods will require some personal finance/credit analysis by your choice of lender – if you need no money/no credit alternatives, stay tuned for our next discussion on creative financing: controlling property with options.
Kevin Sullivan is an active real estate investor and owner of Maplegate Realty.