All Forum Posts by: John Worley

Raj,

I'm not sure that I see your point as it relates to the topic being discussed. Can you please explain what you are getting at here?

jason,

True hard money lenders are indeed just as i described (lenders that are not focused on credit, assets, documentation, etc, but rather the situation surrounding the borrower and the loan). A true hard money lender will not ever consider an investment property because they (like most all lenders) consider investment property financing to be head and shoulders riskier than any other type of lending, including forclosure bailouts, which is what most hard money lenders deal in.

Now your opinion is not an uncommon one. The term "hard money" has been used around the REI industry for years and we could argue all day about what to call REI financing, but that's really missing the point that i was trying to make. Too many investors think of their financing in terms of no credit, no assets, no docs needed and that thinking is, in its very nature, wrong. Real estate investors are businessmen and we have to think and conduct ourselves as such, especially when approaching a lender to obtain financing for a project. No succuessful businessman walks into a potential financing situation with nothing to offer on the deal, but that is exactly how many investors want to operate. Even if you work with a lender whose guildlines allow for no money down, all costs rolled into the loan, etc; that does not mean that its ok for you as a businessman to have nothing in savings or reserves on which to run your business. Yes, lenders have let that slide for many years now and have made loans that they shouldn't have, but those days are long over. The investor who doesn't bother with keeping a fairly large amount of liquid reserves is, for all intents and purposes, living paycheck to paycheck. It is a practice that investors should have never gotten into and it is a practice that many have to now break themselves of or get out of the business altogether. Changing this way of thinking was more of the point I was trying to get at, rather than arguing over the names used to describe REI financing.

Oftentimes a subject of some debate is the reality of what is a renovation or “rehab” loan. Simply put, a rehab loan is a specialty loan program that allows the borrower to purchase a run-down home and to finance an additional amount of money above and beyond the sales price to use in renovating or “rehabbing” that home. In some cases the loan may also allow the borrower to finance the closing costs, so that he/she comes to the closing table with very little, if any, money out of pocket. This makes the program ideal for many real estate investors who wish to put as little of their own money as possible into their rehab projects. Terms and conditions for these rehab loans will vary widely from one lender to the next, from very short term, high interest loans to more conventional long term, low interest loans. Things that are usually taken into consideration during the underwriting process for these loans include: the borrower’s personal credit and finances, the size of the proposed renovation or “rehab”, the condition of the home being financed, the area where that home is located, and the borrower’s plans for repayment of the “rehab” loan.

What a rehab loan is not is a “hard money” loan (although the terminology is used interchangeably across the industry). “Hard money” loans are very short term, high interest loans used to help struggling homeowners try and avoid foreclosure. These loans are usually underwritten based more on a borrower’s character and situation rather than their personal credit.

It is important that borrowers understand this difference so that they do not walk into a potential loan situation with the wrong idea of what to expect. While some rehab loans may have similar terms to a “hard money” loan, they are not used for the same purpose and therefore will be underwritten differently.

A borrower for a “hard money” loan is someone who is usually facing the foreclosure process on their own home. Their credit is most likely in pretty bad shape and they will usually have next to no savings in the bank.

On the flip side of things, a borrower for a rehab loan is a businessman. Regardless of the terms and conditions offered for the loan program, it is expected that the borrower will have very good or excellent personal credit and that they will have at least a minimum amount liquid cash reserves in the bank with which to run their business.

Knowing and understanding these differences can make your next rehab loan experience a more smooth and efficient transaction.

John Worley
RTL Financial

John Corey brings up what I think is the heart of the problem when refinancing any rehab project, regardless of how you purchased the property. The key issue is establishing what is the FMV for that property and why you were able to buy it below FMV in the first place. Underwriters are picky creatures. The big thing to remember in an underwriter's world is that if it isn't documented, then it doesn't exist. For example, say you pick up a bank REO for cash on the court house steps for $50K, but the FMV on the property is actually $125K. If you go refinance the property after you rehab it, then the underwriter (9 times out of 10) is not going to see anything about a foreclosure sale; they're just going to see on the HUD-1 that you bought the property for $50K and as such will assume that was the FMV.

Getting around this issue is usually pretty easy, believe or not (although from time to time I'll come across an underwriter determined to prove me wrong :D ).

***Have a subject to appraisal done when you purchase the home. Make sure that the appraiser lists your intented repairs and makes note of how you are purchasing the property.

***Keep track of ALL of your invoices and rehab budget. Once you are finished with the rehab, put together a simple itemized final report of everything done to the property and what it costs. Even if you don't refinance, this can make a good selling point.

***If you refinance, put together an exective summary of the rehab project. Explain how you purchased it, what it appraised for when you purchased, a brief history of the property, a breakdown of everything you did to the property, your future plans for the property, etc. Include a copy of the original subject to appraisal, so that it may be compared to the new appraisal that will be done for the refinance.

The idea being that you want to appear as organized and professional to the underwriter as you can. By providing this detailed information, that the underwriter usually won't have, you give the underwriter a far better feel for what is going on with this particular property and loan.

You wouldn't believe how much smoother and easier these three things will make a refinance go (at least in my experiences).

Most MLS will only let you have access if you are a r/e agent or an appraiser (NAR's attempt at keeping the information exculsive to r/e agents and out of the public's hand, which is down right stupid.).

However there are plenty of other databases to obtain good comp information from. First and foremost, you can go down to the local county courthouse and go through recent sales. Another option are paid services such as RealQuest, Realist, or Redlink. I like RealQuest in particular because instead of having to pay a huge monthly fee for access to the service, you can set an account and pay for the reports one at a time. I get comparable sales reports for about $3 a piece that way.

Also bear something else in mind, while MLS is great tool when researching market data, it has two major drawbacks. First it is expensive. Back when I had access as an appraiser, it costs me something like $300 or $325 a month and that was just for the limited access they give to an appraiser. Second, the MLS is limited to only those sales and listings that were handled by a real estate agent. Now think about that and consider about big the FSBO market is in this country (especially in the REI business). The databases I mentioned earlier (county sales records, RealQuest, Realist, and Redlink) don't have any such limitation.

Last thing, stay away from the AVM like Bank of America, Zillow, HouseValue.com, etc. More times than not, these things are way off is their value estimates and completely worthless.

Alex,

I'm always on the lookout for real estate agents who want to work with and learn about the real estate investment community around Atlanta and would be more than willing to answer any questions about the business that you may have. Shoot me an email ([email protected]) and let me know.

Klotz,

There are two problems that you are going to run into. First your credit score is way too low for investment property financing, especially now with many lenders pulling Alt-A programs all together. Second problem will be the lack of title seasoning for a cash out deal. The closest program for you to qualify for would require a min 660 credit score with Full Documentation and even if you qualified for that, I would still recommend you try a no cash out (aka rate/term) refinance.

Specialist may be right. Your best option at this point may be to sell or if your private lender is willing to hold the loan for a while (12 to 18 months) then you might also look into setting up the property as a lease/option.

Just some information I put together. I thought everyone might enjoy it or at least find it useful. :D

John Worley

Selecting Good Comps and Planning the Sale of Your Rehab

Being able to select good reliable comps is essential for any real estate investor. It can be the whole back bone of your purchase offer and if you don’t understand what makes a good comp, then you could wind up over paying for a rehab property that is not worth nearly what you thought it was.

So what is a comp? Comp is short for comparable sale. These are sales of similar homes in the same neighborhood as the property that you are looking at buying. They should have as much in common with the subject property as possible in order to give you a solid estimation of the subject property’s market value.

Selecting a good comp is all about comparing apples with apples and oranges with oranges. When looking through local comps, there are several items that you will want to compare. Here is a list of the most common.

• Distance From Subject Property – in most major cities, you want to pull comps located within a ½ mile radius of the subject property. If you are in an area with little market activity, then pulling comps from a 1 mile radius is ok. However, unless you’re dealing in rural properties or 3 and 4 unit properties that may not be in abundance in the subject neighborhood, then you don’t want to pull anything outside of a 1 mile radius.
• Date of Sale of Comp. – Same story here, in most major cities, you want to pull comp sales that have taken place within the last 6 months. If you are in a slow market area, than going out to 12 months is acceptable, however nothing beyond 12 months.
• Construction - if the subject is an all brick house, then pull comps that are all brick houses; if it is a wood or vinyl siding house then pull comps that are wood or vinyl siding.
• Condition – if the subject property is a dump, pull comps that are dumps; if the subject is new, pull comps that are new. This is where trying to figure out a "subject to" value or ARV can be tricky. When trying to determine the after repair market value of your rehab property, it is important to take into account the condition of the property after the work is completed. Then try to pull comps in the neighborhood that have also been rehabbed to similar condition. Most importantly, remember one cardinal rule: A rehabbed property will never be in the same market condition as a new home. Always remember that even if you completely overhaul a 50 yr old home, it is still a 50 yr old home. Comparing it with new homes will never give you a realistic market value.
• Age – pull comps that are the same age as the subject. Try to keep within about 5 years older or younger to the subject. And again never compare rehabbed homes with new homes.
• Gross Living Area/Sq Footage - pull comps with the same approximate sq. footage as the subject property. Try to keep it within 100 sq. ft and no more than 200 sq ft, if at all possible.
• Bath Room Count - pull comps with the same bath room count as the subject, or as close as possible. A typical appraisal value adjustment for a full bathroom is only a few thousand dollars. So if your subject is a 2 bath home and all you can find for comps are 1 bath homes, than they can still be reasonably good comps provided that the bath count is the only major difference between comp and subject
• Basement – If the subject is on a crawl space or slab, then pull comps on crawl spaces and slabs; likewise if the subject is on a basement, then pull comps on basements. Try to keep the sq. footage of the basements as close as possible (same as above), within 100 sq. feet is ideal, but no more than 200 sq. feet, if at all possible.
• Garage or Carport - again pull same for same.
• Lot Size – again pull with similar size lots as the subject property

One last item that you want to look for as much as possible is the terms of sale for your comp. Ideally you want to pull comps that were normal market transactions with no “undue pressures” on buyer or seller. Some of the most common examples of "undue pressures” include:

• A seller who must sell quickly to avoid foreclosure or bankruptcy
• An estate in probate that must be liquidated quickly
• A tax sale or bank REO where the seller is willing to take less money just to get the property off of the books.
• An investor wholesaler who is willing selling his property at a deep discount to avoid rehab costs or to obtain a quick sale.

These types of sales are typically not good indicators of fair market value. However if enough of them occur in a certain neighborhood, then they can effect the overall fair market value of that neighborhood. Lastly you may not always be able to find this information about your comps but it is important to look for it whenever you can.

So you have a good idea about how to select good comps for your rehab properties, now let’s discuss how the actual appraisal should fit into the deal. Many investors feel that the appraisal is simply a necessary evil associated with obtaining permanent traditional financing for their rehab properties. They often think that they have pulled good comps and that should be enough for establishing market value. These investors are also often the ones that go around saying that there need to be “good aggressive” appraisers out there who will find the market values that they (the investor) need to make the deal work.

This way of thinking is not only wrong, but also borders on being illegal.

An appraiser’s job is to offer an unbiased third party opinion of market value based on all of the data available. They can be a very useful tool in helping investors plan out their rehab projects provided that the investor is willing to do the job right. Regardless of whether or not you are required by your lender to have an appraisal completed when you purchase your rehab property, it is always a very good idea to go ahead and have one done. What you want to have done is referred to as a “subject-to” appraisal. This means that you provide the appraiser with a copy of your rehab budget and plans and ask him to appraise the property “subject-to” this work being completed. He will also need to make note of the fact that you are purchasing the property below market value in his report.

Do not, for any reason, tell the appraiser what value to appraise the property at. This is illegal and is considered to be real estate fraud.

Now why is it a good idea to have a "subject-to" appraisal completed when you purchase your rehab property? First of all, it gives you an official document showing the current market value of your property and second it will make the financing process when you refinance or sale your properties go much smoother. When dealing with lenders and underwriters, it is important remember one thing; if something is not documented, then as far as the underwriter is concerned, it does not exist. Without the "subject-to" appraisal, the only document that an underwriter would have to establish fair market value when you purchased your rehab property would be the HUD-1 statement. Without any indication of a distressed or below market sale, the underwriter will assume that the sales price on the original HUD-1 was the market value when you purchased the property. So when you are refinancing or selling the property after only a few short months, at a value that is tens of thousands of dollars higher than what you paid for it, then this will raise a red flag with the underwriter. They may decide to lower your market value, again by tens of thousands of dollars, simply because they have no documentation to show why the property was to suppose to have increased so much in value over such a short time frame.

However with a “subject-to” appraisal, you can provide the underwriter with documentation to compare to the new appraisal that will be completed for the refinance or resale. Now the underwriter can see that the property didn't necessary increase in value by thousands of dollars in a few short months, but rather that you purchased the property well below market value due to the condition of the property at the time you purchased it. This usually makes much more sense to an underwriter and as long as the two appraisals reasonably concur in regards to the market value, then they will be less likely to have a problem with accepting that value.

Around most major cities, an appraisal for an investment property will run you about $400, so to do the “subject-to” appraisal means adding about that much to your purchase/acquisition costs. For those who say that is too much extra money to spend, you have to ask yourself one question. Would you rather lose $400 now or potentially tens of thousands of dollars later? The level of risk that you are willing to take on is a decision that you will have to make for yourself.

RealQuest (in my opinion at least) is an excellent resource for comps, mortgage data, property detail info, lien history, etc. You don't have to pay a monthly subscribation if you don't want it. I use the service on piece meal basis (pay so much per report). The comp reports run $3 or $4 per report. Property detail about the same. Some of the reports (such as doc images, foreclosure history, etc) can get a little high ($10 to $12).

Typically I work on the commercial side of things more than residential and I am not buying much right now anyway as I am focusing more on building my mortgage business. So I can't give you particular deals at the moment, however being able to pick up properties on an average of 50-60 cents on the dollar (sometimes less) is not uncommon around most of metro Atlanta.

For example the last deal I did a little over a year ago was a 2/1 triplex near the GA Tech campus. I picked it up for around $85K and put about $18K fixing it up. I had it rented to kids from the college almost as soon as I finished the rehab and sold it 4 or 5 months later to an investor who wanted to hold it as a long term rental. He bought from me for $180K and still had some equity in it according the appraisals we had done.

Now 3 and 4 units is usually about as close as I get to the residential investing (I just don't care for SFR), but I know a few guys who regularly see similar numbers on their deals and they swear by SFR investing.

The biggest key to being successful down here is that you really have to stay on top of the deals as they come on the market because the really good stuff is usually gone within a few days.