Our Real Estate Investing Model – Protecting our Lenders

While we would love to go back to the old days where we have a huge line of credit at a bank that was going to charge us 1% for the money, about $400 for an appraisal, and $500 for title company fees and get the money for 6 to 7%, the banks are running scared and just not lending money to investors or to anyone for that matter in some cases.  So why are they scared of us investors? 

Well the main answer is some idiot a while back came up with subprime loans and then they went bad and houses started getting foreclosed upon.  All these foreclosures glutted the market with houses that were selling for less that usually, which reduced the average value of homes in that area, the more foreclosures, the lower the values went.  So the banks that were sticking to a very good business model of only lending us investors 75% of the after repair value on a home were suddenly finding out that the after repair value was now at about 10% less, or more. And because the subprime loans went away, the investors could not sell their houses as fast and sat on them 6 months or more while the values kept tumbling, eventually their bank lenders gave up on them selling the houses and took the loans back.  Then they found that they could not sell for the 75% they lent, because that 75% was now less than the value of the home in some areas.

But there is one area that homes are holding their value – areas where first time home buyers are buying homes and in the KC area that price range is $120,000 to $150,000, the market we are targeting.  Several homes we have been working with in the past few months are selling at right about the same values they appraised for 2 or 3 years ago.  So no appreciation really, but no depreciation really.  So if you were a private lender lending to us on one of these houses, your 75% loan amount to our 100% repaired sales price should stay fairly constant in the next 6 months to 2 years, and quite possibly will go up.  (I don’t know if we are at bottom on prices yet, but it sure seems like we are)

So our first step to protect our lenders is to only buy houses and borrow the funds where our purchase and rehab costs are 75% or less of what we can sell it for all fixed up.  So if we screw up and can’t sell the house at our orginal planned price, we can alwasy drop the price to cover the 75% we owe on it, so you get paid.

Second, we work the numbers forwards and back wards and because we have been doing this for 10 years with over 25 years combined experience in this field, we know what houses sell for, how much it costs to fix things, how to plan for holding and selling costs, and we are not ever more than a few $100 off in our numbers.  Plus we are know for getting in and out of a house.  We have a set sequense of rehab so we can do it in 4 to 6 weeks.  If we can’t work a rehab in 4 to 6 weeks, we don’t buy the house.  And we stay away from major foundation issues, fire damage, mold, and houses that don’t make sense.

Third, we insure the property with vacant insurance to make sure if the worst should happen, we are all covered.

Fourth, we want to make sure you get paid if something should happen to us, so we file mortgage documents, deeds of trust, promisorry notes with the recorder of deeds to put the whole world on notice that we owe you money and it has collateral.  If something should happen to us, our estate manager would have to liquidate property and pay you on the property first before any money goes back into our estate, plus there are 4 of us in the deal so one of us should be able to finish up the deal instead of you facing a fire sale.

Fifth, should we go to a long term loan situation if we just can’t sell, we would also file an assignment of rents, so you could have the right to collect the rents if we are not making our monthly payments.

The one question that everyone has at this point, is ok, so I am protected if something bad happens, but what do I get paid.  My answer here on the internet would have to be that all depends on what the going rate for money is.  If you want 10% and I can’t get money anywhere else, then we would have to make a deal work with 10%.  But if I have access to 6% money and right now when I write this, I do, I would want to get money from you at 6%.  Also we usually pay more in interest for the shorter term loans.  So if we were looking at a 6 month loan we may be looking at 8% while if we were at a long term 2 year loan mayb 6.5% to 7%, and if we go for a full 20 year or 30 year loan we may want to be at 6%.

If we needed to borrow purchase and rehab from two different sources, the lender on the purchase would be in 1st position and the lender on the rehab would be in 2nd position. 

The next question might be how much do you need to borrow, as the previous post showed, we are looking at purchase and rehab between about $80,000 and $100,000.  So we are talking a larger number, minimum of $50,000. 

We would love to sit down with you on a one on one basis to see how we might be able to work together.  Give Don or I a call at 816-523-4400 and we can discuss specifics more in detail.