Proof of funds and portfolio lending = cash?

Question

Hi BP!

I have been researching the different financing methods, and would prefer to use portfolio lending for its better rates on my first flip. I have roughly 60k liquid available as a down payment if needed, and the lender I spoke to qualified me for decent rates, etc.

My questions are:

1. Does a portfolio lender preapproval letter count as cash when searching leads?

2. When searching leads, what keywords tell you they'll accept portfolio lending? (if PL doesn't =cash)

3. Depending on answers 1&2, is hard money lending usually the foot in the door for beginners low(er) on cash?

4. Do I need to ask for a preapproval letter each time I want to make an offer, or can I use one to submit for multiple leads to save time?

I want to avoid following leads that want different financing than I can offer (or know I need to pursue different funding), or bothering the lender all the time if one letter suffices.

J Scott · Answer

A portfolio loan -- like any other loan -- is not cash. It's a financed offer.  Typically speaking, a seller isn't going to differentiate between a portfolio loan and any other type of bank financing.

Odie Ayaga · Answer

A lot of interesting info here...coming from a loan officer for a hard money lender I'll try to trim this down as best as possible:

No a pre-approval letter does not mean very much. It doesn't take much to find a lender to give you one with the address listed and how much you're willing to pay for it. It isn't cash and as a knowledgable seller I would never treat it that way.

It sounds like you're overcomplicating things a lot. Pre-approval letters are not very difficult to come by compared to properties worth putting offers on. Find the deal. If putting an offer in requires a preapproval letter or proof of funds that should not be difficult to come by, hopefully you've already built a relationship with a lender who can put them together for you quickly, it should literally take them less than 10 minutes.

That being said, the more important part is the LENDER not the LETTER. Any lender can easily write you a POF or PAL, but you need to make sure they'll actually perform. Most lenders don't do the full background package until after term sheets are signed so you need to get a good feel for who you are dealing with. You should also be prepared should your primary lender fall through in underwriting because it happens far more frequently than people think.

Tom Parris · Answer

1. Does a portfolio lender preapproval letter count as cash when searching leads? - It all depends on your purchase agreement. The As-Is sale and purchase agreement allows you to check the box saying you're paying cash, but that voids that ability for a financing contingency. You can say you're a cash buyer all day long, but if you want that safety net of being able to walk away from the contract if you get denied, then you wouldn't be a cash buyer. I recommend getting familiar with that contract. I've used it on 100% of resales, and only use a different contract when doing new construction, and using the builder's contract. This is also what you'll use when you list the home. I recommend marketing yourself as "well qualified buyer".

2. When searching leads, what keywords tell you they'll accept portfolio lending? (if PL doesn't =cash) Portfolio lending would be the check box marked "other" on the contract. Just explain to them it's not traditional financing, and say, feel free to call my lender to verify my strength as a buyer. You can still check the box other and be a strong buyer. Strength of the contract isn't always price, it's about control and the terms. Just make sure you use your due diligence period appropriately.

3. Depending on answers 1&2, is hard money lending usually the foot in the door for beginners low(er) on cash? It usually is because a lot of people getting into REI don't have the capital to do both, buying the property and funding the rehab. Hard money allows you to do both at the same time with the same loan. Lenders aren't dumb either, they are a good source of advice when they underwrite your property.

4. Do I need to ask for a preapproval letter each time I want to make an offer, or can I use one to submit for multiple leads to save time? Pre-approvals are going to be generic as they come. Listing agents (if one) is going to want one that's younger than 60 days old. They usually have an expiration date on it. It isn't also necessary, but it makes you seem more legitimate.

Good luck!

Watch out for those cash only deals. Property condition is a huge here, and whether or not the home can be insured. Honestly, that is one of the best approaches you can choose when thinking of buying the house. At the end of the flip, you have to sell it to an end buyer. That buyer is going to use traditional financing, and if you don't fix the roof, HVAC, plumbing, or electrical, you won't have an easy time selling that home. So make sure the homes systems are in good working, and insurable shape before you move forward. There are a lot of really terrible flips here, so there's opportunity to separate yourself from the competition, just make sure you budget correctly and make sure there's enough meat on the bone.

Daniel Molina · Answer

@Ryan Steiner I agree with a lot of the feedback you have been receiving. I would add that you should focus on the close time frame and if the seller is accustomed to dealing with investors. Typically anyone who is used to closing with investors understands that there will be some sort of financing involved but it will not adjust the ideal closing date.  In my experience, here is how I would answer your questions:

1. Does a portfolio lender preapproval letter count as cash when searching leads? Not unless you can close in the same time frame as a true cash buyer.

2. When searching leads, what keywords tell you they'll accept portfolio lending? (if PL doesn't =cash) Financing available, close in 10 days. Look at how long it has been offered for sales or DOM if it is MLS listed. the longer it has been on the market the more likely you can negotiate a financing contingency

3. Depending on answers 1&2, is hard money lending usually the foot in the door for beginners low(er) on cash? Yes, Tampa has been getting pretty affordable lately. I see a 9-11% rate and 2-3 points very regularly. 12 months with no prepay.

4. Do I need to ask for a preapproval letter each time I want to make an offer, or can I use one to submit for multiple leads to save time? Only ask for a new one if they are property specific.

J Scott · Answer

If the listing says that they will accept hard money, that probably means that they'd be open to any loan type that is meant for a flipper/rehabber, including a portfolio flip loan.  When a seller asks for cash or hard money, they are generally doing it for one of two reasons (or both of them):

1.  They want a quick close; and/or

2.  The property is in distressed condition and wouldn't qualify for more traditional financing.

If they care about #1, they will say, "Cash only."

If they care about #2 (or both #1 and #2), they will say, "Cash or hard money."

Because a portfolio loan can typically be used for a property that requires rehab, it will meet the #2 requirements above.  In other words, if a seller is open to hard money, they should be open to a portfolio loan as well, as long as it can close quickly (meeting the #1 requirement).

As for whether you need one or more POF, that's up to the lender.  In some cases, they will give you a pre-qualification letter specific to a property and an offer amount; sometimes they'll give you something more generic that doesn't have an address, and has a max price that you're qualified for.

Keep in mind that if you use the more generic form, the seller will know how much you have to spend, and can use that information to negotiate against you.

Ryan Steiner · Answer

@J Scott thanks so much! I've been using your book and it's been immensely helpful. I guess I wasnt sure when looking at leads what keywords I should focus on. In tampa I've seen many "cash or hard money only", and they want a quick close.

Would it be feasible to get a hard money proof of funds for multiple offers, or do I need to request one each time I want to submit an offer on a new property? I'd like to begin making offers asap, but want to ensure I have the right documents to secure a contract.

Anthony Dadlani · Answer

@Ryan Steiner. Yes you may use a portfolio lender or standard lender however the issue with that is their underwriting takes too long for the fix and flip game. Many sellers of distressed properties would rather sell to a cash buyer who can close in days.  The best way to finance fix and flips is to partner with a money partner or private lender in my opinion.

Best of luck in all your endeavors.