|
|
|
 |
November 2007 - Real Estate Investor News |
|
| Return to all Real Estate Investor News Categories |
|
| |
|
Category > November 2007 - Real Estate Investor News
|
|
|
|
View our news articles regarding topics that effect Real Estate Investors. Our November, 2007 collection of news articles include topics focused upon:
- A Burst Bubble doesn’t mean No Profit
- Hard Money Lenders
- Investment Funds: The Hard Money Option
- Looking for a Hard Money Lender?
View our November, 2007 Articles
|
|
|
|
|
|
A Burst Bubble doesn’t mean No Profit
|
For several years in the United States, real estate investment almost meant easy money. Speculators invested money in projects and properties that had not yet been developed in hot markets and were guaranteed a great return. The market marched on and on, despite the warnings from the federal reserve of an eventual slowdown, inevitably followed by interest hikes to make the warnings a self fulfilling prophecy. Eventually, the continued interest hikes did take their toll on the prospects of the speculating side of the industry, and housing prices seem to have come to a standstill in most parts of the country. This is bad news for speculators, of course, but what the media fails to mention is the other half of the real estate marketing market, the flippers. And for the flipper, the new reality of the real estate picture is far from bad news.
Understanding the two side of the real estate investment coin
Speculating is the portion of the real estate market that is most often referred to in the media and is most understood, at least at a very basic level, by most Americans. Speculating means that a piece of property is purchased with the idea that by the time it is ready to sell, the value will have increased and the investor can gain a tidy profit through the sell. It’s kind of a bottom up approach; the person who buys the property will stand to gain from the person they sell to. This process goes on until eventually, someone pays too much for the property and the price finally bottoms out, leaving the final buyer on the ladder with nowhere to go but down, at the expense of the investment. Speculators are the first to feel the bite when the market goes cold, the first to lose a lot of their money.
Flipping, on the other hand, involves working on real estate fundamentals, and investors who specialize in flipping a property are not as susceptible to changing market conditions as speculators. The idea behind flipping a property is not to roll the dice on what looks like a great project or development, but rather to take a calculated risk on property that has already been developed and has been proven to be in demand. Flippers look for undervalued properties and after a purchase rehab them and then sell them at a profit. While a hot market is good for speculators, it can actually be detrimental to flippers, who are looking for bargain properties to buy in order to ensure the profit. In addition, flipping is a much shorter term investment than speculating, as the idea is to get the repairs done and have the house up on the market in a very short time, reducing the interest on loan payments as well as the risk of a decline in price in a falling market. As long as the property sells above the buying price (already purchased at a good discount due to the undervaluing), a falling market will not have an effect on the investment return.
Maximizing profits
Speculators have only one thing to rely on if they want to make a profit; a buyer has to come along who is willing to pay a greater price on a property than the speculator paid. Because of the stagnating nature of the real estate market, this one way exit strategy can lead to serious problems when the increasing price door becomes blocked.
Flippers, on the other hand, have several options when it comes to exit strategies. The two most common exit and profit strategies used by flippers are quickly flipping the title of the property to another investor, or rehabbing the property and then selling it at the current market value. In some cases neither strategy will be possible, such as a market where the bubble truly bursts and suddenly the buyers have all disappeared. Although this event sounds as though it will cost any real estate investor, the reality is that flippers still have some means of reaping a profit.
The first option to consider in a selling market gone flat is the potential for renting. Although most flippers don’t want to become landlords, with all of the attached conditions and hassles the occupation entails, but rental income is better than no return at all. In addition, the rental market is not tied to the same conditions that affect the selling market, so often in a market where there are no buyers there will be a surplus of renters.
Another option for the flipper is refinancing the property based on its value after rehabbing. This way, the flipper can get all of the money out of the property with any rental income becoming pure profit. When the market improves (which it inevitably will) you can make the sale. Another option here is to lease with a buy option; this is attractive to young people looking for their first purchase, as lease payments can be applied to a purchase after a certain period of time.
A quick glance at the portrayal of flippers on any television show will lead a person to believe that they fly by the seat of their pants, always just a few days away from a busted deal. In fact, the fundamental approach taken by flippers means that there is much less risk involved than in virtually any other investment scenario, and it is a market that has several alternatives when conditions begin to deteriorate.
|
|
|
|
|
|
Hard Money Lenders
|
Procuring a hard money loan from a hard money lender will mean that you have several profitable advantages in your wholesaling/rehabbing business. With a hard money lender on your business team, you will be able to take advantage of deals when they become available, instead of waiting for the necessary paper work to get pushed through a bank or other crediting institution. A document stating the availability of the funds through your lender will go a long ways towards establishing credibility when you do make an offer on a piece of property. Finally, having a reliable hard money lender will give you the opportunity to supplant the bank as you make the connection between lenders and wholesale buyers so that they can borrow money to buy your properties.
Documentation
Buying properties that are already foreclosed or are in the pre-foreclosure state, means that you are probably dealing with a lot of different financial institutions. The name of the game for these institutions, of course, is making a sale to a reliable buyer – reliable meaning that the money is already in place and the chance of defaulting is nil. This is particularly important in the case of a wholesaling business, where you as the buyer are probably making multiple offers on several distressed properties.
In order to assure the institution that you do indeed have the capital necessary to secure the transaction, you can use a document called a prequalification letter from a hard money lender. This type of letter will carry a lot of weight with both real estate agents and institutions, as the former are familiar with the previous record of the hard money lender in the area and the latter will use the lender as the loan payee for the property and will be familiar with their financial history. This prequalification letter will heighten your credibility among agents and institutions, which will mean you have the inside track as far as credibility for your offer.
Connecting hard money lenders and buyers
The main purpose of securing hard money lenders is so that you have cash readily available when it comes time to finance the purchase and rehab a piece of property. Some wholesalers, and other people involved in real estate investment, may never actually buy a piece of property themselves, and may wonder how a hard money lender could possibly play a role in their line of work. The answer lies in the fact that having as many hard money lenders as possible will mean you have a consistent and reliable source of funds for buyers; in effect you will be able to skip the middle man (and associated fees!) by becoming the bank.
Most experienced wholesalers will know that not all the buyers of your properties will pay in cash, regardless of their own claims. Almost everybody has to rely on secondary sources to fund the purchase of property, and it is in the source of these funds where a wholesaler has to be careful. You need to screen potential buyers in order to determine if the source of their funds is available. Remember that many rehabbers believe they can fix up the property and sell it at a profit, if only they could secure the cash needed for the purchase and repairs. Beware of the source of funds on the part of the investor; it’s here where you can bring your own hard money lenders into play.
If you doubt the legitimacy of a potential investor’s initial funds proposal, it might be time to take the bull by the horns and hook that investor up with your own sources of funds. In essence, you are becoming the bank, connecting an investor with a source of funds that you know to be reliable. Keep in mind that they investor is probably most concerned with obtaining that piece of property; in other words, if one source of funds is deemed unreliable, then they will usually be more than willing to go through a source that you recommend.
Of course, acting as the middle man for a transaction between your hard money lenders and your investors always requires a degree of caution. Having a hard money lender on your team means a certain level of relationship has been established, and with that a certain level of trust. You don’t want to encourage a transaction between one of your established hard money lenders and a potential investor who may not be able to repay the loan, or an important financial bridge may be burned. Do background checks on all new buyers before you begin introducing them to your hard money lenders, and make sure they have a history of intent when it comes to repaying loans on time. New investors should also have a regular source of income enabling them to make the payments necessary to the lender.
The use of a hard money lender can mean that you take your wholesaling business to a whole new level, whether you buy properties directly or not. A prequalification letter from a recognized funding source can go a long way in establishing your credibility with a seller. A good network of hard money lenders can mean that not only will your investors be able to find properties through you, but can also rely on you to line up the financing as well. Your ability to provide both of these crucial services to investors will mean that your services become invaluable.
|
|
|
|
|
|
Investment Funds: The Hard Money Option
|
If you are new to the game of real estate investment and looking to gain the financing possible to start your rehabbing, wholesaling, or flipping business under way, then you will want to be sure of all your finance options before taking out a loan. Most people are familiar with “soft money” loans, but there is another alternative. These loans are known as “hard money” loans, and the people who lend the money are private individuals rather than banks or other businesses. Hard money lenders are individuals who have extra money and are looking to put it to work, and they choose to do so by lending that money out to real estate entrepreneurs, including wholesalers and those interested in flipping fixer-uppers. There is no universal rule when it comes to hard money lenders, as some have more money than others, and the terms of the agreement tend to differ from lender to lender, although the money is loaned primarily in the short term.
The definition of hard money
The terms “hard” and “soft” money can be misleading. The terms are used in the financial world to differentiate between the terms of an agreement rather than the ease with which the loan is obtained (hard money loans are often easier to procure than soft money loans).
Soft money – the kind obtained through banks and other credit companies – has easy terms, a market interest rate, and usually a fairly flexible repayment schedule based on an individual’s available cash flow (remember, the bread and butter of these businesses is interest accrued on the principle, so that loan can shrink as slowly as possible so the interest stays high). Hard money, on the hand, will always have harsher terms. There will be many points that the borrower has to agree to in the initial agreement, the interest rate will be higher than that in the business market, and repayment schedules are set in stone regardless of circumstance. Hard money loans also tend to have a much more rigid repayment schedule; the circumstances of the borrower don’t matter, only the repayment is important.
What to expect in a hard money agreement
The point that hard money comes from individuals can’t be reiterated too often. Just as you are different from another real estate investor, so hard money lenders are different from each other. Some will insist on harsh terms while others may be more lenient. The main thing to keep in mind is that these individuals set their own agreements – they do not need to follow a strict set of guidelines determined by finances at the federal level. Because of this, hard money lenders actually have room for more flexibility than soft money lenders, with the advantages going to the borrower in some cases.
Hard money lenders, for the most part, operate by word of mouth rather than advertising. This means that there is some degree of personal relationship between a borrower and a hard money lender, and it is fairly likely that the terms of any agreement will be influenced by this relationship. In a typical situation a hard money lender will loan an investor 50 to 75% of the projected value of a rehab home after the repairs have been completed. The interest rate can be anywhere from 12 to 20%, with the loan scheduled for repayment in a time period of anywhere from half a year to five years. Most hard money lenders will also charge an up front fee for the loan, and this can range between two and ten points.
The key to the terms as far as a wholesaler is concerned is finding the hard money lender who offers the right ones for you. Some may wish to place the funds in escrow to be drawn from as needed, while in other cases a flipper may leave the table with the check in hand. Repair money may be a part of the agreement, or it may be restricted just to the final value of the home. It’s important to determine how you operate as an individual wholesaler in order to find the hard money terms that work best for your business.
Lending terms
Again, the criteria by which a hard money lender will determine whether or not to lend the money will vary from one individual to the next. An important thing to keep in mind is that unlike soft money loans, hard money lenders are less concerned about the past and more interested in the future. A credit check is rarely on the agenda. Instead, hard money lenders will be more interested in the value of the property and its potential. In the event of a default on the part of the wholesaler, the lender will want a piece of property that they can at the least recover their investment or more. Most hard money lenders won’t want to go through the hassle of reclaiming and selling a piece of property on their own, but the terms of the loan will operate as a security for the lender and ultimately it is the business plan in place by the borrower that will determine the availability of the loan.
The upshot
Hard money lenders are a great option for individuals just beginning in the flipping or wholesaling business of real estate. Cash and credit as well as earnings are all a part of the formula for soft money loans and this can mean that the money needed to start or grow your business can be hard to obtain. A hard money lender will mean that you have the cash available to confidently make an offer on properties, with the money to purchase upon acceptance and the money for repairs in place. The key is to understand your options where a hard money lender is concerned and to make your decisions based on a sound business plan.
|
|
|
|
|
|
Looking for a Hard Money Lender?
|
As private individuals, hard money lenders are not generally going to advertise the fact that they have some surplus cash that they are looking to provide for sound real estate investment. The individual wholesaler and/or rehabber can’t look up hard money lenders in the Yellow Pages, so it is important to know who to ask and where to look when it comes to finding individuals who may be interested in fronting you the money to begin the process of real estate investing.
It’s who you know…
The best way to find hard money lenders is through personal contacts. You may actually know people who are interested in investing in a real estate wholesaling endeavor, and if so so much the better for you (just because you have a personal relationship with the lender doesn’t mean it isn’t “hard money”!). If you don’t know personally of anyone, however, it is worth it to examine the list of people that you have been working with in the real estate business and talk to them individually to see if they know of any hard money lenders. Those who have been involved in real estate investing for a while will inevitably have a list of contacts from various professions (accountants, lawyers, insurance agents, other investors) built up. Good relationships will lead to a “you scratch my back…” philosophy which can lead to solid contacts when it comes to hard money loans.
Attorneys who provide settling and closing services are one of the best sources to ask when it comes to finding the names of hard money lenders. These attorneys are familiar with hard money lenders through the preparation of past loan documents, and can usually provide names of potential lenders. You may even find that the attorney is interested in becoming a hard money lender herself, in which case the search is over.
Accountants are a gold mine when it comes to finding hard money lenders, as they often have several clients with surplus cash wishing to put it to work. Sometimes accountants will have clients who already hold paper in hard money lending, and this can be a great boon as the lender is already familiar with the hard money side of wholesaling and rehabbing.
Insurance agents fill out hundreds of papers which include the name of a loss payee in circumstances where a lender is involved. The loss payee is the lender of the money, and the agent can tell the private lenders from the business lenders. An agent has the ability to go through records and find hard money lenders who have previously taken out policies and may be interested in expanding their investments.
Another option when it comes to finding a hard money lender to finance the purchase of a property for flipping is to check with mortgage brokers. Mortgage brokers should have a large list of private money lenders due to their experience in working with these investors on a routine basis. Most mortgage brokers, in fact, should have at least one hard money lender involved in their operation; if they don’t, then they might not be a broker with whom you should carry with in your business. The catch of course is that a mortgage broker will probably charge a fee for the hard money referral, but if you can get the deal done through the referral, then the extra investment was worth it.
The paper trail
The search for hard money lenders will not only involve contacts, but also a bit of knowledge as far as paperwork. Check the area you are interested in for homes that are undergoing renovations, and write these addresses down. All real estate transactions are a matter of public record, and therefore the paper work can be found in the courthouses. A trip to the courthouse with a list of addresses will enable you to uncover the lender involved in the projects. At least ten percent of the time you will find that the money has been fronted by a private lender. If this lender has already loaned money in an area where you want to invest, the odds are good that they will be interested in fronting you some money for your project. Remember that going on a paper trail requires a bit more caution than a personal referral, and you’ll have to get to know the lender a bit before you can expect a loan.
The key to finding a hard money lender is to know exactly where to start looking. Good leads for finding these lenders will come from people who are already involved in the real estate and financing business; lawyers, brokers, and so on. The average person you run into on a daily basis will probably not know what a hard money lender is, let alone where to find one, so it is important that you focus your search among already established real estate circles. Doing so will mean solid contacts within a much shorter period of time.
|
|
|
|
|
|
|
|
|
| Return to all Real Estate Investor News Categories |
|
|
|
|
| |
| Popular Real Estate Links |
| | |
| | |
| | |
| |
| Popular External Links |
| | |
| | |
| | |
| |
| Popular Internal Links |
| | |
| | |
| |
| |
|
|
