All Forum Posts by: Russell Monson

Ryan,

I recently purchased a property with less than 20% down. The way I did hasn't specifically been addressed here, so here's how I did it. There is a FNMA guideline called the deferred financing exemption. If you purchase the property for all cash you can then finance it with FNMA with the loan to value based on the appraisal regardless of what you paid for the property. The financing has to be completed within 6 months of the all-cash purchase. For me this translated as follows:

$105k appraised value
$85k purchase price
$5k closing costs
70% LTV allowed (I'm in the >4 financed properties and this was on a duplex, so my max LTV is lower than yours would be).
Loan amount I got was (105*.7) = $73.5k making my effective downpayment $11.5k (about 13.5% of purchase price compared with the 30% I would have put down had I not done this).

Like most loan programs there are a million guidelines and rules surrounding how this has to be done, so it won't work for very many situations, but if you can make yourself fit in the FNMA box it can be done. The main downside is that the purchase has to be all cash and there can be no mortgage on the property you buy (So HMLs are out). What I did is get a person I know with some excess cash to write me a HELOC against my primary residence and used that HELOC for the cash to buy the house. FNMA considers proceeds from a securitized HELOC to be the same as cash. I then repaid the HELOC with the proceeds from the deferred financing exemption loan.

I know this may not work for your situation, but if anyone was wondering where the "White Unicorn" of less than 20% down conventional financing is, there you have it. (In my case I avoided the problem of the fees eating up the benefit that @Brian Hoyt mentioned by using HELOC funds rather than HML.) Obviously the "White Unicorn" isn't so white as FNMA has cluttered up the rules of getting a mortgage so much that you have to have a VERY experienced mortgage broker to make sure you can actually get this done without last minute snags. (I'm a former mortgage broker with 9 years of experience and I wouldn't have been able to do it, so I had to find someone with more experience than me to get it done.)

Russ

Having worked with DPW I would echo a few things that are said above. Even if you're working with a turn key provider, I would suggest you completely ignore all of their pro formas (including DPWs) and create your own pro formas based on independent research. That's what I did and came up with a completely different result from the DPW pro formas, but still within the range of my required minimums and investment rules for myself. I own several other rental properties and can put this information together based on real experience, however, if you are new, I would not rely on the turnkey provider to give you all of the inputs for your proforma. You need to get yourself educated enough to do this part of the analysis independently before you invest, especially out of state with a turnkey provider. Also, I would say that determining what you buy should go in this order: 1) Investment Goals & Philosophy, 2) Market Selection, 3) Team of people to work with and Last, 4) the property. I think if you take that approach you'll be a lot less likely to get burned.

Russ

Wai,

I am working with DPW right now in St. Louis. My brother has closed on two multi-family deals with them there as well (one duplex and one fourplex). I am closing on a duplex there this Friday and have another one under contract that I will be closing on in January. I did fly out to St. Louis and inspect the properties, meet with the property management company, etc, and found the quality of the work DPW does to be acceptable. Keep in mind they are rehabbing in B and below neighborhoods, so set your expectations accordingly and make sure your cash flow numbers are tempered with appropriate assumptions. (There will be higher vacancy, higher maintenance costs, higher insurance costs, etc, think "50% rule" here.) My brother's properties in St. Louis are performing pretty close to the pro-forma he completed in advance of the purchase. I agree with some of the previous comments that it is not likely that you will see significant appreciation in St. Louis, so you would need to think of St. Louis as a cash flow play. The only thing I would warn you about with DPW is that their turnaround times on the rehab will be much longer than advertised, so don't expect to close on a property quickly unless they have already completed the rehab before you sign the contract. You can PM me if you'd like to discuss further or want me to send you my pro-formas for the properties I'm purchasing there.

Russ

Garrett,

I had a leg-up in finding a good mortgage broker because I worked as a licensed mortgage broker for 9 years and knew who would be able to get it done. Since you may not already have those relationships I would try to find other buy & hold investors in your area who are actually closing deals and see who they are working with. I've found that most successful investors who are actually closing deals already have these relationships and would be happy to share their contacts with you. The key is "actually closing deals." Also, when you are interviewing the mortgage broker to see if they would be a good fit ask them how many investor Homepath deals they have actually closed with 10% down (To get a yes answer to this you will probably have to call A LOT of different mortgage brokers unless you can find an investor who is already doing them). Unfortunately my Homepath broker is only licensed in Utah so he can't help you in Ohio. I am purchasing property out of State and have a great mortgage broker who I'm working with for those properties, but I haven't closed any Homepath loans with him. PM me if you'd like his contact info.

Russ

I actually closed on two of these deals this year in the SLC metro area. I used an experienced mortgage broker who had to filter through several lenders for me to find one that would actually do 10% down. Additionally, I had to patiently filter through 100s of homepath listings and make several offers to get a property under contract. The problem I ran into is that you can't go under contract on a Homepath property until owner occupants have had 15 days to make their offers on the property. This means that all of the really good deals go to the owner occupant buyers. To get around this, I just favorited (on homepath.com) every property that met my criteria whether it was under contract or not. If the OO buyer can't get financing or backs out, FNMA changes the status back to available for sale but there is no longer a 15 day waiting period. I check the site every day and offer on these properties immediately when they come back on the market. It's a bit of extra work this way, but it sure does make your down payment sources go a lot further. As others have noted the rates are a little bit higher but not bad. I closed one in Feb '12 at a rate of 4.5%, and one in July '12 at 4.25%. For an investment property with 10% down I thought that was an excellent rate for 30 year fixed money. Hope that's helpful!

I have purchased two of these in Utah as an investor this year. They tend to sell very quickly during the first look period in my area, so both of the ones I purchased were properties where the OO buyer didn't go through with the deal. When they are re-listed they don't go back into first look, so as an investor I was able to pick them up immediately. Both were priced very near appraised value, however, FNMA had completed a full renovation of both properties. I was able to rent them quickly and both cash flow well.

Bottom line is that in order to buy them as an investor I had to watch for the re-listing of properties I knew I wanted and check the listings every day to make sure I could put in an offer very quickly. The 10% down loans are great and worth the effort for me as I've been able to purchase more property this year than I otherwise could have.

I've used myfico.com to track my score for the last 6 months and have obtained two mortgages in that time. The score pulled by my mortgage broker was within 5 points of the score I showed on myfico.com both times. I'm sure this varies significantly depending on your individual circumstances, but my experience has been pretty good.

I've been thinking about this issue lately as well as I'm up to 4 properties now. I haven't formed an LLC yet, but am in the process of updating my umbrella insurance policy as another way to protect myself. I'm pretty sure there is no way to completely protect yourself from liability (life involves risk), but for where I'm at right now I think insurance is even more important than entity structure, especially with a smaller number of properties. It is also cheaper and less complex than worrying about how many LLC's to have.

One important tip I might provide since I'm going through the purchase of a new umbrella policy right now is to remember that most umbrella policies cover only above and beyond a certain loss threshhold. The policy I am getting kicks in after $300,000 in losses have been covered by the primary insurance on the property. So it's not enough to just get an umbrella policy and think you're ok, you also have to go make sure you have at least $300,000 (in my case) of liability protection on each primary insurance policy.

As far as cost is concerned, I'm paying $250 for $1M in coverage, could have paid $410 for $2M in coverage. No entity set up or attorney's fees, no additional bookkeeping requirements, no new tax filings... Not perfect protection, but a pretty good bargain IMHO.

Russ

I have been looking almost exclusively at FNMA Homepath properties in my market for the past few months and have had a number of properties that I was interested in go to owner occupant buyers during the First Look. However, even if they were taken by an OO buyer I still made offers on them anyway betting that some of them wouldn't close and FNMA would come back to me as a back up offer. Sure enough after a few offers that didn't work out one of the OO buyers cancelled, and FNMA offered the deal to me. My docs will be at title tomorrow!

I'm super excited because the property cash-flows well, and I was able to qualify for the 10% down FNMA Homepath financing, which, as you might expect makes my cash-on-cash & ROI numbers work great. (I also was super lucky and have it rented prior to even closing).

I'm sure this won't work in all areas or with all banks, but patiently putting in offers on these things is working well for me.

Good luck!