Buy Now Hard Money

Underpromise. Overdeliver.

Browsing Posts tagged real estate investors

When a real estate investor buys a distressed property with the intention of rehabbing and reselling to an end buyer, those investors are frequently not agents, but they often work with agents to purchase the property.  They also get CMA’s from those agents to evaluate the end value of the property after rehab.  The end value is the beginning point of evaluating the rehab budget and how much they can afford to pay for the property. 

Their offers are not usually based on the list price, they are, and should be, based on the end price, working backwards toward the offer price.  Starting from the end price, they will work backwards taking into account the cost of

  • Rehab budget w permits
  • Contingency for unknowns
  • Finance costs
  • Two sets of closing costs
  • Carrying costs including taxes, insurance, utilities, HOA dues, grass cutting, snow plowing, trash removal, etc
  • Let’s not forget entrepreneur’s profit

If they call me for funding, the first thing I look at is end value, called the ARV, or after repaired value.  Often the investor supplies me with the CMA provided by their real estate agent.  This CMA is done for the purpose of estimating ARV.  I look at sold comps in the immediate area of the property in question, in the same size range and hopefully the same style/age.  In New England, there is frequently a huge variety of properties in the same area, so exact comps are admittedly difficult.

But time after time, I find that the agent totally ignored properties close to the subject property that are viable comps.    Included in the CMA are properties that support the end price they want to convey, but may be in a completely different part of town.  They may be larger, have more bedrooms, have more bathrooms, have more garages.  That’s ok if the agent adjusts for those additional features.  But skipping over the houses that sold for much less than the target price is not presenting an accurate picture of the neighborhood.  Perhaps they are in dated condition, perhaps they are bank owned or short sales.  But they can’t be ignored if they are truly comparable in location, size and relative condition.   

What’s really distressing is when a very close comp in size, amenities, condition and location is not included in a CMA because it doesn’t support the after-repaired price the agent wants to present.   The agent considers it to be an anomaly, and so leaves it out.  The investor-buyer relies on that CMA to work backwards toward the offer. 

What happens as a result? 

  • The agent gets their commission on the original purchase.  The borrower then tries to get funding for the deal, and the hard money lender looking at the deal values the ARV much lower than the borrower does.  He won’t lend on the property, and the borrower loses his deposit. 
  • Or, alternatively, the borrower closes with his own or private money, rehabs the property, and then it doesn’t sell because his selling price is too high. 
  • Or let’s say he does a beautiful job on the rehab, gets it under contract to an end buyer, but the end buyer can’t get financing because it won’t appraise for the selling price.  I guarantee the appraiser saw those lower comps, and appraisers are very conservative these days.

In any case, the investor/buyer is in trouble.  This seems pretty short sighted to me, because that investor won’t be back to buy another one. 

I lend to real estate investors exclusively, we don’t lend to homeowners, so the focus of my business is pretty narrow.  But those investors resell to homeowners, so the end after repaired value is a critical component.  I always pull my own comps when I evaluate a property.  And I encourage my borrowers to ask their agent to pull ALL sold properties in a small radius in the same square footage range within the past 3-4 months.  The borrower can then go through and see all sold properties and get a good perspective on the neighborhood.

A real estate investor is reponsible for creating a finished product with the end value that will sell.  It’s his money on the line.  The agent doesn’t have their own capital at risk, so the final value he/she comes up should always be subject to the investor’s analysis and judgement.

Part 4 in a series

Lending money to real estate investors can be a lucrative way to participate in a project without running the project yourself.  It can lessen your risk, because of where you stand in the line of people waiting to get paid.

First, lets make it clear we are talking about real estate investment deals here – not a homeowner purchasing a home to live in.  The real estate investor will probably sell to an end buyer, but a lot happens before that.

Irving Investor is going to buy a property in disrepair, using some of his own money and some of yours.  He’s going to fix it up, probably using your money, and then sell it to an end buyer in this example.  When he sells to an end buyer, everyone gets paid off:  The taxes, the utilities, the mortgages and the agent if Irving used one.  Irving pockets what’s left over.  For purposes of this discussion, we’re going to leave the agent out of the picture, simply because it’s not relevant to the issue I’m illustrating.  If there is not enough money, someone at the end of the line is left out in the cold.

Here is the order of payment:

  • Property Taxes
  • Condo fees
  • Utility Liens
  • 1st position mortgage holder
  • Mechanics and medical liens (The contractor you didn’t pay, Medicare, etc)
  • Additional liens
  • Equity investor

So since you are not the town levying the taxes and you’re not a condo association, the next best position is first mortgage holder.  Notice that the owner and/or equity investor gets paid last.  He takes the most risk.

Now, I’m not saying that the equity investor won’t make more profit – he might.  Or if something goes wrong, he might not.  The point is, the lender is paid before Irving Investor is paid.

Before you jump into lending with both feet, there are some things you need to know.  I’m going to cover a few here, and then some more over the next couple of posts.

First the disclaimer:  I am not an attorney, don’t play one on TV, and am not dispensing legal advice.  But I know lots of them in New Hampshire and Massachusetts and consult them regularly.  This information is presented as educational only, and if you are considering an investment, alway consult a professional.  A good real estate attorney is essential, as is an accountant.  If you are a real estate investor and are not a licensed agent, find a good investor-friendly agent or broker.

Do you need to be an accredited investor? No, not if you are lending directly to a borrower.  But by all means, take this to your attorney and speak to him about it first.

Do you need to be licensed?  What about the SAFE Act? Ok, here is another “consult your attorney” disclaimer.  But I’ve consulted several, and the concensus seems to be that commercial transactions are exempt from licensing requirements.  Since all my loans are made to companies acquiring property for business purposes, the licensing requirement doesn’t come into play.  All of our borrowers take title in an entity, such as an LLC, and do this as a business.

Should you buy into a “pool” or lend directly? Well, that depends on how much you are allocating to the endeavor, your experience level and your comfort level with the deal.  You should always make sure than anyone you do business with comes recommended by others and is someone you trust.

Buying into a pool may require (generally speaking) that you be an accredited investor, because you are pooling your funds with others, and that is considered to be a security.  You are likely to get a lower return in a pool than lending directly, because the fund keeps a larger part of the return.

Buying into a pool removes any decision makng about individual loans or borrowers, because the fund managers make all those decisions.  Individual lending leaves the control and the decision making about a particular deal in your hands.  You are also free to set the interest rate and terms, within state usury limits.

Here are some of the questions I’ll address in my next post, this one is long enough for today.

  • How do you choose the deal you will lend on?
  • How do you find these good deals to lend on?
  • Should you ever lend in second position?
  • What about business loans instead of real estate loans?
  • How do you protect yourself from fraud or incompetence?
  • How much of my portfolio should I allocate to lending?
  • What happens if the borrower stops paying?
  • Should I form an entity to lend?
  • Should I lend outside of my geographic area?

The Massachusetts Supreme Court recently upheld a decision in the controversial Ibanez case.  To oversimply, many lending institutions assigned mortgages to other entities without the assignment paperwork having been created and recorded.  These new entities initiated foreclosure proceedings.  The assignments would then be subsequently created and recorded.  This was common practice for many instititutions, and it continued for some time until challenged in court in the Ibanez case in Springfield in March 2009.

The Supreme court decision simply confirms the previous ruling, and is not really new information.  Some lenders will now need to initiate foreclosure proceedings all over again, running up costs substantially.  And this brings us to the $64,000 question:

What if you bought that house that was foreclosed improperly?  And then put a lot of money into it?  Do you own it?  What if you bought it, rehabbed it, and resold it?  Who owns it?

If you as a real estate investor bought owners title insurance at the time, you should be covered, at least financially.  The situation may generate additional headaches, but they won’t be insurmountable.  The title insurance should take care of most of the problems.  Certainly if you used a hard money lender, they bought lenders title insurance.

But if you didn’t?  What a mess!!!  This ruling doesn’t cover only those properties being foreclosed going forward, there is no clear guideline for how far this could go backwards in time.

So another lesson learned:  Real estate investors should alway buy owners title insurance.  It may seem expensive, and just one more cost to your deal, but compared to paying for a house that the court says you don’t own, it’s a drop in the proverbial bucket.

Below is a link to the ruling.  And for those of you are going to respond and tell me that my explanation up above lacks detail and is not 100% accurate because I left out the minutiae, yes, you’re correct.  But it was to illustrate a point.  There are lots of sites available tearing apart the details of the Ibanez ruling.

http://www.scribd.com/doc/46471786/Ibanez-Case