Acquiring Financing for Foreclosure Investing

Before we start to learn how to identify distressed properties, which is the easiest part of this business, you MUST HAVE  your financing arrangements in order.  The reason for this is that when you go under contract  with a homeowner or Realtor and tell him you will close in 30 days  you must close in 30 days.   Closing within that time frame is not a legal requirement,  but doing so will establish you with a good reputation; and in this business your reputation is very important. There will be times, however, when problems with title or some other issue may legitimately prevent you from closing within 30 days. If this occurs, simply inform the involved parties of the situation and let the chips fall where they may.

Closing when you say you will legitimizes your professionalism. If a Realtor sees that you do not close when you say you will, the next time he has a good property, you will not be the one he calls.

‘Going under contract’ with a homeowner refers to that time when both you and the homeowner agree to and sign a contract specifying that you will purchase the property from him for an agreed upon amount of money.

‘Closing’ is common real estate language that relates to the final paperwork, legal, and monetary transactions of the sell/purchase of a property.

What is the primary factor which determines whether you will close within 30 days or not? Financing. You must have your funding source established before you ever start looking at or making offers on property. This does not mean that you actually get financing on a property before you go under contract with a property, as that is almost impossible. Rather, this means that you sufficiently research financing options ahead of time, so that you are informed enough to know who will best accommodate your financing needs. You need to know who you will be going to for financing after you have signed your first contract to purchase a property. That being so, I bet I know what you’re asking: “Sounds great, but how does someone like me find a funding source? I’ve never made a real estate deal in my life.” That’s what I am here to teach you!

HARD MONEY LENDERS

The majority of real estate investors use banks, commonly called “hard money” lenders, to fund their deals. A representative list of hard money lenders is included in the bonus section.  The way hard money lenders work is that they loan you enough money to purchase the property and to cover repair costs; but there is a condition – they will typically loan you only 65% of the value of the home. The value of a home is based upon its fully repaired condition.

Hard Money Financing Process

Let’s run through the sample financing of a home: You locate a property and go under  contract for $45,000. This means that you sign a contract with the owner to purchase the property from him for an agreed upon amount of money, in this case, $45,000. After inspecting the property, you determine it needs about $15,000 worth of repairs. Upon studying the market value of other houses in the area, you conclude the fully repaired house is worth around $100,000. Your next step is to do the appraisal. As there are lenders who allow borrowers to conduct the appraisal through an appraiser of the borrower’s choice, it is always preferable to do business with such lenders, and to use the appraiser of your choice. Why? By using your own appraiser (one you are friendly with), he can bump-up the value of the property as far as possible without breaking any laws. Appraisals, including drive-by appraisals (a cursory appraisal accomplished without the appraiser having to examine the interior of the property), will typically cost you $250.

The next thing the lender will ask for is clear title. Clear title means that the title of the property has been professionally examined by a title company and found to be free of liens and encumbrances, and is legally owned by the person you are buying the property from. This is something your attorney must order for you (obviously, then, you must also locate a real estate attorney).  Prior to approaching your attorney, however,  Realize, however, that attorneys are not normally used in some parts of the country for residential real estate transactions (California, for example). So be sure to establish what is protocol in your area before you go out and hire an attorney. A good way of finding out, if you don’t know already, is to confer with several Realtors or real estate agents in your locale.

You must ask the lender who she wants the bank endorsement  made out to. Call your attorney and give him the name of the bank the endorsement is to be made out to, as your attorney must specify this information on the title policy. A title policy will take five to ten business days before it is received by your attorney. Some title companies take even longer to deliver title. Make sure you tell your attorney to order title through a title company that is very fast. As you will come to see as you proceed through this program, speed is of the essence.

At this point, the lending company (bank) will ask you for hazard insurance. You can purchase this through a local insurance agent. It will cost between $500 and $1,000  for a one year premium. Keep in mind that your insurance agent will ask what bank to  put in the “additionally insured” section of the policy. Put in the same bank name that you put on your title policy. This is a bank requirement.

Once you have the appraisal, title policy, and hazard insurance, it’s time to get rolling. A good hard money lender is able to lend you the money and schedule a closing just a few days after all these items are in. At closing, you will sign all the necessary paperwork, including a mortgage, mortgage note, and the HUD-1 or RESPA (these latter forms itemize all the fees associated with closing a mortgage and transfer of ownership).

At this point you will receive your first draw of money to start making repairs on the property you have just purchased.

Hard money lenders charge anywhere from 12% to 20% interest. Though you probably just fell off your chair, let me finish. What you actually pay these lenders is interest-only payments, which DOES NOT include payments on the $65,000 principal.

A “bank endorsement” refers to the fact that on title, your lender’s name always has to be placed as an additionally insured party. This helps financially protect your lender.

To illustrate, let’s take the $65,000 that we used in the previous example. Your particular bank is charging you a rate of 18% on the $65,000. This means your monthly payment would be $975. How do I get this number?

$65,000 (amount borrowed)

x .18 (18%)

= $11,700 (total of annual interest-only payments)

$11,700 (total of annual interest-only payments)

÷ 12 (months)

= $975/month

$11,700 represents the total interest you would pay the lender if you kept the property for one year. So simply divide the $11,700 by 12 (the total months in one year), and we get our $975 monthly interest-only payments. You must also remember that most lenders require a minimum of three months payments. That is, even if you resell the house in one month, you still have to pay the bank $975 x 3 (months) = $2,925. But this is a small price to pay compared to the money you’re going to make when you sell the property.

PRIVATE INVESTORS

I have explained one source for your financing needs; let us now explore another another source of funds — private investors. This is a source I am using more and more these days. Private Investors are individuals who have thousands or millions of dollars at their disposal and who are looking to make a good return on their money. Think about it — as of this writing, the stock market has collapsed, and what are these wealthy individuals going to do, put their money in the bank and make a measly 3% return? Many of these individuals would love to lend you money, if only they knew of you and knew that you would bring them a good return on their money. The question is: How do you find such people?

Well, the best thing to do is advertise in a newspaper. While financial newspapers are the best, you can also advertise in the financial section of any prominent newspaper in your area. Most of these individuals read newspapers such as the Wall Street Journal everyday, to see how their stocks are doing. When I first started out, I placed ads in the Wall Street Journal under the “Capital Wanted” and “Marketplace” sections. I have also advertised in other newspapers under the “Business Opportunities” section. The secret is, you have to place these ads where wealthy individuals will be looking. Another great ad location is the “Investment Property” section. The wealthy are always looking for a good piece of property!

Now you’re probably asking, “What should the ads say?” Below, you will find three ads that I have used very successfully in the past.

Real Estate Investor Has Opportunities for Two Private Investors To Earn High Rates! Call 555 -555- 5555 www.high-profit-returns.com

Earn 14% or More!  Real Estate Investor Has Sources to Borrow Money Secured by Excellent Real Estate.  Call 555-555-5555 for Details! www.high-profit-returns.com

ATTENTION INVESTORS – Earn 16% Return on Money Secured by Excellent Real Estate… Call 555-555-5555 for Details www.high-profit-returns.com

(NOTE:  In this course, I have also provided many other methods of finding private money investors .. try them all ..

http://www.duncanwierman.com/content/category/lead-generation/private-money/

When I used to place these ads, my phone rang off the hook. Keep in mind that many curious individuals will call. Some may be interested, most will not be. It’s just a numbers game. What you’re looking for is that one investor who has at least a couple hundred thousand dollars at his disposal. I no longer place these ads myself because I already have my investors. I’ve been working with these investors since 2004, when I first started in this business. Because I have built a strong relationship with my investors, they have a great amount of trust for me and my projects. At first, they would simply give me draws for the repair money, just like hard money lenders.

For a while now they have been giving me all repair money up-front. They do this for two reasons:

1) they trust me, and

2) I have made them a tremendous amount of money over the years.

This is what you must strive for. And you CAN do it if you listen to what I say, and place the ads where I suggest. Sooner or later you will find one or more investors to work with.

Please understand, I have used both sources for funding—hard money lenders and private investors. Personally, I prefer private investors, because once they get to know you and how you operate, they will be a lot more flexible with you. This is not to say that hard money lenders are inflexible, but a private investor with whom you have developed a relationship will always be more understanding of your situations, capabilities, and needs. To elaborate, when I buy properties today, my private investors do not even ask me for an appraisal. Why? Because they know I will not give them a bad deal. They trust my judgment. So from my view, you MUST find a private investor.  It will only benefit your real estate career.

Interaction with a Private Investor

Now, let’s get back to placing the ads. After posting the ads, you will be receiving phone calls from potential investors. As investors call, inform them that you are a real estate investor who buys and sells distressed residential property (i.e., houses). Tell them you’re looking to borrow up to 65% of the post-repair value of a given house (the value of a house after all repairs are completed). Though that is the total amount of money you wish to borrow, be sure to tell the caller that a portion of that will actually go into repairing the property. Ask if he would be willing to disburse that repair money in draws.

So if $15,000 of repairs are needed, he would give you $5,000 at closing for your first draw, for the first stage of repairs. After those repairs are completed, invite him to inspect the work. If everything meets his approval, ask for the second draw of $5,000, and so forth. In addition, it is wise if you insist this repair money be held in an attorney’s trust account. Though it has never happened to me, it is possible that the lender could  have some cash flow problems and not pay you when he’s supposed to. Holding the money in trust with a third party, in this case, an attorney, helps insure that you will have the cash when you need it.

When the topic of ‘interest’ comes up (the amount of money the investor will make on the money he lends you), always state that you are willing to pay 14% interest only payments with the loan having a term of one year. If the investor hesitates, be willing to go up to at least 16% interest-only payments. Further, inform the potential lender that you will supply him an appraisal based on the post-repair value of the property, hazard insurance (helps protect his investment, and yours), and a clear title policy. If the individual asks you for references, inform him that you have been using hard money lenders, but are now looking for private investors because hard money lenders are not as fast in funding as you would like.

Over the course of your conversations, it is important not to act too anxious or eager; try to show that you do not really need them. Why? Because if they KNOW you need them and their money, and they end-up lending to you, they will charge you an excessive rate of interest. So keep a cool head. If the potential lender asks you for the property address, this is a good sign; it means he is genuinely interested. This also presents a great opportunity for you to meet the lender. Tell him that you will meet him at the property at his earliest convenience. Once you make the appointment, don’t miss it, and don’t be late! The investor needs to know that you are reliable, and that you are a serious business person. He NEEDS to feel comfortable with you! If after seeing the property the lender agrees to provide financing, ask him how long will take. He will probably say that you can have the money after he receives the appraisal, hazard insurance, and clear title. This is a good time to ask for his attorney’s name, address, and phone number. Tell him that you will have your attorney send all the information (the appraisal, insurance, and clear title) to his attorney.

As for the appraisal, your private investor may insist on using his own. That is just fine. But if he doesn’t, then locate a licensed appraiser and ask her to do a drive-by appraisal, which will cost you about $250. Tell the appraiser to do the appraisal as if all repairs have been completed. In this way, you can not only supply an appraisal to your private lender, but use the same appraisal when you later sell the property, saving you at least $250. Typically, a full FHA appraisal is $250-500, depending on how many families the unit houses. Just as with all professionals you will deal with in this business, it is important for you to find an appraiser you are comfortable with and who is comfortable with you. A good appraiser is one who will, at your request, stretch the value as far as she possibly can, without breaking any laws.

NO MONEY DOWN

When borrowing from a private investor or hard money lender, always borrow more money than you actually need. Why? So you can pay your monthly interest payments. I always borrow two months of interest payments in order to buy and sell the property with no money out my pocket. The question is, how can you do this without letting the lender know? The way I do it is by increasing construction/repair costs the equivalent of two to three months of interest payments. I just ask the contractor doing the repairs to increase the price on his estimate by X amount of money. For example, if I purchase a property for $60,000, and total repair costs are $30,000, the total money I need is $90,000. Monthly interest payments based on a rate of 18% will be $1,350. $1,350 x 3 (months) = $4,050. So I ask my contractor to increase his bid to $34,050. I never pull money out of my pocket and you shouldn’t either.

But remember, the maximum loan you can receive is 65% of the post-repair value of any property. This rule applies not only to hard money lenders, but also to private investors. As you calculate all associated costs with any deal, you have to keep costs within that limit, unless you want to end-up spending your own money. So give yourself some financial breathing room by including two or three months worth of interest payments in your loan package. Further, be selective of which properties you choose to work with; only buy properties if your calculations show you can do so without spending your own cash.

Additional no money down strategies we will cover later , “Assigning Contracts,” and include the smart practices of assigning your purchase contracts to other investors in order to make a quick, no money down profit, and ‘joint ventures,’ a powerful way to purchase property with zero bucks out of your pocket.