The borrower’s reasons would be:
- You either want or need a quick close
- You need funds for a short period of time
- You have a weak credit or income documentation
o Weak credit score
o Weak income
o Need to pay a judgment, late payments, tax liens, et cetera.
The Property reasons would be:
- It needs work
- It has weak income
- There’s an unusual situation on for the property
The difference between banks and private lenders are these. For regular on as it relates to banks, regular on is very high and as it relates to private lenders it’s low. I don’t have a crystal ball and I’m probably going to regret saying this, but I don’t anticipate or foresee much regular on in the private money mortgage market any me soon other than the licensing requirements which we’re already seeing. The reason for this is the Federal Government knows that with the mandates against banks through FDIC and all the other hoops they have to jump through, about 50 percent of the properties in the country will never qualify for conventional financing. There has always been and I believe there always will be a place for private money.
I can tell you that through the recessionary downturns and the tumultuous market, there has never been a situation on where I was not lending. That’s the kind of industry that I can really get behind. Even though there’s volatility, there’s always opportunity. That’s why I love real estate and mortgage and debt finance. Hopefully you are here watching and reading this because you love real estate and mortgage debt finance too. You may not understand or you haven’t participated in the mortgage or debt finance side yet as a lender, but as we’ve discussed, that’s what we want to groom you to be eventually: a lender.
Time to close for banks is long. For private lenders, of course we know, that there’s commonly a short close me. As I mentioned earlier, my wife and I have been working on refinancing a condo that we own and it’s been about a 4 month process—a ridiculous amount of me. In a private money loan, that thing would have been closed over 3 months ago. Just 2 weeks—easy and done. But we already have a private money loan on the condo at 9 per- cent and we plan on keeping the condo for cash flow. Through conventional bank financing, we can lock in an interest rate of 3.75 and almost double my cash flow by cutting my interest rate or my cost of capital in half. I’m willing to wait the 4 months that it takes to get the lower rate so we can maximize the cash flow from the rent. That’s just another opportunity cost analysis that you need to look at when you’re holding.
With banks, the borrower needs a strong credit score, strong credit reading, and strong financial statement. Private lenders don’t care if your credit is weak or you don’t have any credit. All they ask for is a strong asset.
Banks, as it relates to the property, need a strong, current condition on and income. They want the property to be perfect, beautiful, and in a nice location. Private lenders, however, can accept weak income on property knowing that it’s probably in such dis- repair that it’s uninhabitable and needs to be repaired. Private money knows that through investment of capital, you, the competent rehabber, can take that property from where it is and eventually make it qualify for conventional financing.
IMPORTANT LEE TIP: You do yourself a tremendous disservice when you pursue properties that are in the jumbo category be- cause only jumbo lenders can participate in this segment of the market and that represents about 4 percent. Now if you pursue properties where your retail price does not exceed the FHA cap for your area, you’re more likely to get funding and more likely to easily find an end buyer. You can search on Google the FHA cap for your ZIP code or your county. For example in my market, the FHA cap is about $285,000. Because of this, I avoid buying any fixer-upper where my retail exit exceeds $285,000. I know that 80 percent of the buyers that I’m going to be marketing to are going to be getting a FHA or other government-backed loan.
I don’t want to price myself out of the majority audience of buyers so I’m going to buy below the FHA cap and then know, with- out a shadow of a doubt, how to renovate the property so that it conforms to FHA underwriting. If you don’t know what the FHA underwriting guidelines are, again, Google FHA guidelines for renovations on and repair on a resell. Certain things have to be done with the property to qualify it for an FHA loan. I use private money to acquire real estate that does not qualify, and then through renovations on and repair, I make sure it qualifies for the end retail buyer. Also, unlike banks’ funding, which must meet agency (Fannie, Freddie, FHA) requirements; private lenders do not need to meet these requirements. It is completely at their discretion on where to deploy their capital.
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
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