All Forum Posts by: Wren Martin

@Gordon Olson as a wholesaler you don't need to get pre-qualified to buy a house because you will never close on it.  A wholesaler finds a homeowner who wants to sell and who will sell at a discount to market value; typically someone in a stress situation but not always.  Maybe the house just needs some work to bring it up to market value and they don't have the capital available to fix it up. The wholesaler will make a deal to purchase the house at the discounted price and turn right around and sell their position, which is the right to purchase.  They will either mark-up the sales price to include their assignment fee or just sell the position straight out for an assignment fee.  I like the last option for someone starting out as doing a double close can be a little complicated for new investors, although it won't be after you've done a deal or two.

To become a wholesaler, you just need to create a business plan to go out and find the deals.  This could be as simple as driving for dollars, which means cruising thru neighborhoods that you are interested to invest in, looking for any signs of distressed houses or vacant houses.  Researching "Who" the owner is.  Contacting the owner and developing a relationship.  You might have to keep reaching out to the owner for a long, long time until it is the right time for them to sell.  Then you put the house under contract and Flip the contract.  To be a successful wholesaler, you need a good marketing plan, consistent and dedicated action every single day/week, and patience as it takes multiple touches or contacts to connect at the exact right time. Some people send out letters and postcards regularly to stay top of mind.  Others might call on the phone or knock on the door.  I think the best business plan includes a little of every contact method; in fact, if I could get their cell number I would even include a few texts.  I've heard it said that most people only buy something after the 6th or 7th contact.  I believe this ratio works about the same for someone who is selling their house. I think you must connect with them 6 or 7 times.  I know there are people who will sell their house on the first contact;It happens, but not as often as on the 4th, 5th, 6th, or more.

After you wholesale a few houses, you might find one you want to keep for yourself.  At this point you should have some down payment saved up from your wholesale assignment fees and you will have a much better understanding of what is a good deal in your marketplace.  You will also know exactly what you want to do with the house you are closing on - Fix & Flip, House Hack, or Long-Term Rental... all 3 have their place and you will probably do all 3 in your career.  

Another benefit is you will have created relationships with all the investors you wholesaled the houses too, some of them may finance your deal because they may have more capital available than time to do deals themselves so they will be excited to put their capital to work with a wise investor who knows how to find good deals.  This source of capital may not even require you to have any credit at all since they are making their decision on a.) you and your ability to find good deals and b.) the house you are buying and placing as collateral.

Another benefit to starting as a wholesaler is you might find a seller who will carry the paper so you don't need to get a mortgage or short-term hard money loan.  You might find someone who will let you wrap their existing mortgage.  You might a property that you can lease with an option to purchase.  There are many ways to buy a home that doesn't require a mortgage, you are only restricted by your imagination and willingness to ask "Would you?" to every potential seller you meet.

All the Best!

Wren

@Gordon Olson I thought of you the other day when dealing with another client and wanted to mention what they did to build some fairly quick credit. If you have any family or friends with good credit who will put you on their credit such as a credit card account you would immediately have that show up on your profile.  If it's something like a credit card that has been around for years it could really help you.  Just make sure it's not a credit card that is not maxed out as that will have a negative affect.

You might do a Fix and Flip or two before you jump into your house hack.  This would give you valuable experience and possibly a source to earn the down payment you require.  You can also wholesale houses to other local rehabbers.  You may not have the financial resources to close on the property yet but you can find the deals and put them with other investors for an assignment fee.  This is how a lot of investors get started. 

All the Best!

Wren

@Bevla Reeves This sounds like an event I would enjoy.  I could not find the RSVP link at Meetup.com; Can you send me the link?

All the Best!

@Chandler Calvert Congratulations on taking massive action and getting into the game!  

Many people have commented that your interest rate is high. We all want the lowest rate possible.  I think your interest looks good for a first time investor on a non-owner occupied conventional loan.  Sure, there are lower rates out there, but with your current situation, I think you did very well.  

@John Teachout points out that he had a higher rate and the deal was still worth doing.  My very first real estate deal had a much higher rate, and I gladly took it.  The rate isn't as important on investment analysis as we sometimes think.  

The real measure is can the property cash flow?  Will it be fairly easy to rent and maintain?  If it pays for itself, even breaks even, it's often worth doing if you're planning on holding it for a long time.  Imagine what this house will mean to you if it's still working each day in your portfolio 20 years from now?  

Someday you will want to refinance it, and you may get a better rate; but probably not that much better.  If you can hold this first property thru your career, I promise you will be happier than if you sell it to move up to bigger and better... there is something special about the first one so keep it if you can.  

You've proven you can do a real estate deal, so lease it up and do it again!

All the Best!

@Jesse Martin I realize this is an old thread but I thought I would offer a comment since the topic is relevant and applies to many investors on Bigger Pockets; especially those in the early years of their investing career.  Which I know isn't you, but somebody else might benefit.

I've heard it said, "The only thing better than capital is access to capital."

How you structure the private funding depends on what your business plan is for the property.  If you're doing a fix and flip you will want to take a loan for as much of the purchase price and rehab costs as your lender will provide.  @Jason D. Lewis has explained this very well.  Note, he mentions that you should put 4 points in your analysis to cover broker costs and origination fees; I agree with him.  If you can find 2 points great, run your analysis at 4 to make sure you're covered.

This loan is probably only for 12 months with interest-only payments.  You can pay it back anytime with little to no pre-payment penalty.  The more of these deals you do with your lender, the better your rates can be.  Starting out figure a min. 11%-14% based on experience.  After a track record of completed deals, you could see this drop to the 8%-10% range.

If your plan is a fix and hold SFR, you will probably need two loans. The acquisition /rehab loan and the takeout loan to a more permanent mortgage.

If you're private lender is your neighbor or your uncle, then 10% interest with 2 points is probably fine... in fact, 0 points might be more common in that situation.

@Mike McCarthy- I agree that getting a credit card or two is often the easiest, fastest way to build a credit profile.  But credit cards can be a double-edged sword.  If the credit card accounts are too new, they don't help improve credit; they actually can hurt the score in the beginning.  Credit card seasoning is longer than 1-2 years; the magic number is closer to 7 years before many underwriters will consider it a mature account. 

Obviously you can't get to year 7 without going thru year 1 so you're exactly right, the time to build a credit profile to invest in real estate is RIGHT NOW for most people.  

The caution would be for the person who is trying to purchase their own home in the immediate future and they don't have any credit.  If they go out and gain (2) new credit cards, it might send a small red flag making the underwriter ask, "why does this person suddenly need so much credit?"

Also, every credit card inquiry shows up on a credit profile and each time the score can take a slight hit.  This isn't the case for installment loans such as residential mortgages and auto loans.  They bundle those as one inquiry every 14 days.  This means you can go out and test drive multiple cars over the weekend, all the dealerships could pull your credit, and 1 inquiry would only impact your profile.  The same if you were house shopping at multiple new build neighborhoods.

If @Gordon Olson is trying to purchase his first home to live in, going to his local Bank and qualifying for an agency loan is probably the best solution based on the reasons you mention.  But, in his first post he states that reading @David Greene BRRR book has inspired him to get started himself which implies he's looking to buy an investment property to fix up and rent out, not live in.  This means he needs non-owner occupied financing and therefore doesn't qualify for the first time home owner agency loan. 

He shouldn't ignore the local community bank.  This is a relationship business, and he needs to build a relationship with his local banker.  He also needs to build relationships with other capital sources if/when his deals don't fall within the box the bank is looking to fund.

Gordon's plan may very well be to house hack his first deal by living in it a few years while he upgrades it a little at a time which would fit the community bank model.  This also has the positive effect of building his credit during the hold period (as long as He makes payments on time) because it creates a mix of credit accounts; the credit card previously mentioned and the mortgage on the house.  He might even go out and buy a used truck to haul drywall and paint.  If he finances that purchase, it could help build his credit a little more.

Isn't real estate investing fun?  So many variables to think about and no real wrong answers. There are multiple ways to achieve the same result, and one isn't much better than the other; we each get to choose our own path.  Bigger Pockets makes it so much easier thanks to people like you and the rest of the community who share opinions and ideas.  I learn something here every day.

All the Best!

@Surendra Chawla and @Anand Krish I've owned a couple houses in Queen Creek thru the downturn of '08 and the rents increased because of heavy demand for nice SFR homes in the area. I still have them and they're doing fine. Many of the residents of Queen Creek work at Intel.

As both @Dustin P. and @Doug McVinua have stated the communities around Chandler (Gilbert, Mesa, Queen Creek, San Tan, Tempe) are just as good from an investment perspective.

There has been a lot of press concerning future job growth both in Tech and Manufacturing in the East Valley.  The Eastmark neighborhood east of the San Tan 202 and the Phoenix Mesa Gateway Airport is seeing some impressive growth; they just opened two new schools.

We are also hearing reports of some potential new jobs in Tech and Manufacturing coming south of the Valley in Casa Grande and Coolidge.  These communities may have homes a little closer to your desired purchase price.  There are some newer neighborhoods that might match the age of home you're looking for but admittedly not as many.  Although, if the reports are true, I'm certain the builders will resolve that issue.

All the Best!

@Gordon Olson- On a construction or rehab project, the Contractor will submit a payment application at specific milestones of completion.  The payment given to the contractor is a Draw against the entire construction/rehab budget.  

Some experienced Rehabbers or Flippers like to pay for the project costs out of their pocket and only uses a private lender for the purchase price. This saves them interest costs on the project.  But uses up their capital which could be used for down payments on their next Deal.  

If you have a Lender who will also loan the cost of construction the Rehabber can submit a Draw application to the Lender as reimbursement for each of the Draw's paid to the Contractor.  This saves the Rehabbers capital for future Deals and can also improve their cash on cash return.  But it increases the project costs which can turn an otherwise profitable project into a loser if it takes too long to flip.

The milestones for Draw payments to the Contractor are part of the contract negotiations so it can establish them at any point that works for both parties.  Typically, the Rehab/Flipper wants to make sure they have received all materials and labor required for each phase of the project before paying the Contractor.  On a simple Fix & Flip this might look like:

• Draw 1 - 20% paid at Demo/Haul Off
• Draw 2 - 20% paid at Frame/Rough In (plumbing, electrical, mechanical)
• Draw 3 - 20% paid at Drywall - tape, texture, and paint (to include ceilings)
• Draw 4 - 20% paid at Cabinet/Countertop install, Fixture install (lights, sinks, faucets)
• Draw 5 - 20% paid at Flooring and Close Out/Punch acceptance

You might only do (3) Draw’s to reduce the paperwork on a short timeline project.  Each project can be a little different depending on timing and capital availabilty.  
The reimbursment application doesn’t need to follow the Draw payment schedule but the Lender will want to see the work has been completed satisfactorily before they issue the reimbursment funds.
You may want to hold retention on each Draw.  This is an additional incentive to make sure your Contractor finishes the project and/or you have enough funds available to finish it yourself if needed.  Retention might be 10% of each Draw held back and paid as a final payment at a certain date after the punch walk acceptance payment.  This acts as a warranty to ensure all parts of the project are working as designed.  
You may develop such a great relationship with your Contractor after a few projects that you determine this retention isn’t necessary.  However, if you are using funds from a Lender, they will always require the condition of retention.

All the Best!

@Gordon Olson the terms will depend on the property business plan.  If it's a Fix & Flip, you will have different terms than if it's a long-term hold.  Starting out, I think it might be easiest for you to establish a track record by doing Fix & Flip.  This could help you build some Credit and it could help you establish a solid relationship with a Lender or two.  

Fix & Flip is a lot of work, it isn't passive at all. The Flippers you see on HGTV have a lot of experience and well-developed teams so they make it look easy but they learned a lot of hard, and possibly expensive lessons to get where they are.  So if you don't have the time, skills, or connections to Flip properties, you might need to start with a different plan.

A Fix & Flip term is usually 12 months or less.  You want it to be less; it costs you interest every month, but you don't want to take a 6 month loan just in case it takes longer to rehab and sell the property than you planned.  Plan for at least a 12 month hold but work like crazy to rehab and sell the house in 4 months.

All Lenders, no matter if they're private or institutional, will want you to have some skin in the game.  You will need to have enough capital to pay down payment and closing costs.  You will probably need to pay the 1st construction draw to your contractor as most lenders, if they pay for rehab costs, will hold back the funds and reimburse you after you complete the work on a percentage basis. Not all Lenders will finance rehab costs but most of the good Fix & Flip Lenders will since they understand the business model.  A typical SFR house Flip in my area is usually 2-3 draws.

The following is strictly an example for this discussion and should not be considered an offer.

For a new investor that has some relevant experience (owns their own home, completed a Flip or two, or maybe owns one or two rentals) but not a long history of doing deals.-  A private investor might pay up to 75%-80% of the purchase price plus 100% of the rehab costs; up to 70% of the ARV.  Term would likely be 12 months with a starting rate at or above 10.99% with up to 4 points.  All of this would depend on the real estate collateral and the business plan.

After you have a track record of completed deals with the Lender, you will probably get better terms regarding points and rate.  Just like everything, this is a relationship business and the better your relationship, the lower the perceived risk to the Lender.

@Richard Bickel III I think a little hesitancy is healthy, it makes you ask all the right questions. Just don't let it hold you back from taking action. If you're working with a good realtor who understands real estate investing and investors than part of the decision process will be "If" the realtor thinks you can quickly flip the property. Your realtor should be able to give you a good feel for what the property will be worth after all repairs (ARV = After Repair Value) and a good idea of what those repairs should include. An experienced realtor may even give you a good ballpark cost of those repairs but get a good, local contractor to price the full Rehab so you have numbers backed up by someone who can/will do the work for that price.

If your realtor works with investors and investment real estate in your area (not all do, nor do they all understand investing) and your being told to stay away from houses that don't have basements then I would follow that advice on the first deal or two.  You can follow your instincts on future deals after you have some experience.