Financing

[Scott Freer]

First deal investor here. I have found many REO listings I like but by the time I get to see them all and make an assessment, they are gone. I have an 800 FICO and I have been researching real estate in my area for a decade. I just can't seem to get financing in a timely manner without putting up 30k for a 70k house. There has got to be a better way, conventional is killing me. oh and by the way I own a 500k house and owe 300k on it. I have a portfolio worth a least 500k, but why should I risk tens of thousands of dollars of my own money. someone talk me off the ledge please I have yet another offer in on a house pending.

[Mike H.]

There are multiple ways to do low to no money down deals. Subject to deals where you get the seller to sell you the property and you assume their loan. Definitely some very specific education you need to understand  all the details and what that entails. Seller financing is another option from someone that owns the house free and clear (and obviously difficult to find).

But here is the one way that I use "creative financing" to buy and hold houses with little to no money out of pocket. Find a great deal AND use a hard money lender.

It is the one tried and true way that you can buy an investment property, rehab it and refi it with the least amount of money possible relative to a conventional loan.

The key, obviously, is being able to find a good deal. And I know there are tons of debate threads on here that speak to whats a good deal. But for this method to work, there is no debate as to what is a good deal. A good deal is one that you can be all in at (purchase plus rehab costs) for 70% of the ARV (after repair value - which means what the house will appraise out at once your rehab is completed).

Thats not to suggest that just because you're getting all in at 70% or better, its a great buy/hold deal. You still need to look at the numbers (i.e. mortg, taxes, rents, etc).  BUT the key is at 70% all in or better, you can buy the house with little to no money down. AND you can close much faster than most conventional lenders. Hard money lenders can usually hit 30 days or less. Conventional, using 30 to 60 days or more.

Here is an example of a hard money deal and your out of pocket.

1) Purchase price: 80k, Rehab costs: 20k.  All in price then equals 100k.
House appraises out at 150k.

Hard money lender lends you 100k (80k to buy and 20k for rehab). The only thing you come to the closing table with is their points/fees (typically 5%). In this case, you'd put down 5k.

You rehab it using their rehab escrow funds (which you may have to front and then request to be reimbursed once the work is completed and verified).  And then you refi with a bank (rate and term) the 100k loan.

So, at the end of the day, you own the completely rehabbed house and have a loan of 100k on it. You're only out of pocket is 5k.  On to the next one. 

Thats how I was able to spread my reserves out as far as possible. And I even had a hard money lender that would let me roll in the points for the loan as well so I was literally doing these deals with no money down. The one obvious catch is that you really have to cherry pick your deals and you have to hit your appraisals or it won't work.

Lets say that house that you estimated the appraisal at 150k comes in at 135k. Now the hard money lender is only going to lend you 94,500. So you are going to have to come up with an addition 5,500 plus their 5k in points to close that deal.  Its still far less than doing it with a conventional purchase where you put down 30% of the purchase AND pay the rehab out of pocket.

But to limit that out of pocket, you just have to find the right deals. Its all about hitting your appraisals and knowing your market.  

I would also echo some of the previous comments about getting your offer in fast. Watch the MLS every day and you'll see a house that simply gets mispriced. Get over there that day after work and have your offer in that night. Thats how you take advantage of those deals. I just had one that worked exactly that way. I saw the house pop up on thursday, looked at it thursday after work, offer in thursday night. They countered on friday, I countered back. They accepted.

The agent who also worked for the same brokerage as the listing agent told me that on friday they had over 5 requests to view the house. Had I not moved fast, I'd have been in a best and highest situation - and I have never won a single one of those yet in the 6 or 7 years I've been doing this. 

One last thing. If your house is worth 500k and you only owe 300k, why not take out a HELOC (home equity line of credit)? Thats the absolute cheapest money you're going to find. Then you could put your offers in all cash and prove the funds. And you can also set your offers to close in 10 days which would give you another advantage.

There is a fannie mae program that I believe allows you to do a cash out refi in the first 6 months when you pay all cash like that. Not sure how prevalent or easy it is to do. But after a year, I believe you can do a cash out refi as well as long as you have less than 4 mortgaged properties. Or you can always refi the thing into a portfolio loan where a local bank will do a cash out refi up to 70% with no seasoning as well.

You definitely have some options there......