The Basic Series: Step 1, Find the Money

I started in this business more than broke. Most American are! Here's an exercise: 1. Add up (roughly) the total amount you owe everyone. That's the house you live in, the cars, the timeshare, Sears, everything. 2. Add up how much money you'd have if you sold everything today. If you sold the car, house, timeshare, and all your furnishings. 3. Subtract what you owe from the value of all your stuff. If you are like me back when I started investing in real estate, your number is negative...way negative! Even if it isn't WAY negative, you probably aren't ready to part with all your stuff to start investing, am I right? If you have a couple of hundred thousand, and it's liquid (ready to spend now), then congratulations! Don't skip the rest of this article. Chances are it's probably wiser to use other people's money in rehabbing, especially in the early projects. This adds an extra layer of protection around you that you'll probably not need, but it helps. If you're like me, I had to find money...hard money. I never knew this existed before I started buying property, but hard money is EVERYWHERE. There are people looking to fund real estate investment right now, probably quite close to you! Now, how to describe hard money... It's expensive It's expensive Oh, and it also costs a lot of money Every hard money mortgage broker works a little different I've learned, so what I'm about to descibe are not hard and fast rules. Everyone's got a little different requirements, so flexibility is the key! Your objective is to find a hard money mortgage broker. These folks are mortgage professionals who represent clients with big bucks who are looking for above average returns. So, the hard money mortgage broker brokers out their money to real estate investors. By comparison, if you had a million dollars sitting around...yeah right, but work with me...and you were sick of getting 3% at the bank, you might be willing to assume a little more risk and get 14% by making your money available for mortgages, right? Back to the hard money mortgage broker...he or she will work with you to get you the money you need to buy the property, and often have enough to complete your rehab. My recent deals have cost me 14% interest and 4 points at closing for a 12 month-interest only balloon loan. Kinda makes an exit strategy important doesn't it, but that's a different topics for later. The four points means that at the closing table, I will pay the mortgage broker 4% of the loan value. A "point" is 1% of the loan value. So for a $50,000 loan, the broker gets $2,000. The points tacted on these loans usually goes to the mortgage broker as commission for the loan. This keeps his lights on and buys groceries. Your payment on $50,000 at 14% will be around $550, but you'll only make it a few months. So you can see that the use of someone elses money become your biggest closing cost! That's okay, it's the price of doing business, and you know that going in. Here's the beauty of hard money loans. L-T-V! LTV is loan-to-value. I get myhard money at 70% LTV, you may only be able to find 65%. Here's how it works: Let's say you find a rehab candidate property for $38,000 (more on finding properties later). You suspect, through research, that this property is worth around $80,000. That means that your loan amount could be $80,000 divided by .7 (or 70%) for $56,000 if the property appraises for $80,000 "subject to the completion of your rehab." In a nutshell, if the asking price is $38,000 and your loan amount is $56,000, that means that after paying all closing costs you'd have $10-12,000 for your rehab. (I'm using these numbers because this is a deal I recently did.) Not bad, eh? That's a beauty of hard money LTV. So, back to hard money. Here are the steps when it comes to using hard money to finance your investment: 1. Find a hard money mortgage broker. Ask around. If you ask the right people, you'll find names and numbers. They WANT to be found! If you live in a small city and they aren't in your area, they will only be as far as the nearest bigger city. Try: - Other investors. Trust me, they have them on speed dial! - Title companies - Mortgage brokers. Some mortgage brokers that handle Mom and Pop mortgages also handle hard money...or know of someone who does. 2. Make and appointment with them. Ask them what to bring and do any paperwork to get things going. Get a committment out of them that you are good-to-go to look at and start contracting to buy property. They will probably ask you what you intend to do with the property, so just answer their questions. Chances are you'll learn a thing or two in this conversation. I can't stress enough how important it is to ARRANGE THE MONEY PRIOR TO CONTRACTING TO BUY PROPERTY! 3. Go find, and contract to buy your first property. (A whole different basics area, go here) 4. Call your hard money mortage broker and give him the good news. He'll be delighted and want a copy of the contract for sale or assignment of contract. Give him everything he wants. Be sure your broker know what you think the property will appraise for. He will generally schedule the appraisal. 5. Wait on the appraisal! The appraisal become VERY important to this whole process now. You told your broker what you think, who hopefully passed it along to the appraiser, but it's up to him to come up with a value independent of what anyone thinks. So you are hoping the appraisers value and yours are close. Give your broker time to get the appraisal results and call him to find out what it came in at. 6. If the appraisal comes in close (and it will if you've done MINIMAL research), rejoice! If it's way off, you can either bite-the-bullet and close, or pass on the deal and forfeit your binder. But, KNOW that it will cost you more than a binder. Your hard money mortgage broker has invested time and money in you and you walked, so he or she will probably not be as eager to work with you again. Others with interest in the deal might not be too happy either. So, it's important to access value pretty close. 7. Closing day comes and your money is waiting at the closing table. (The hard money mortgage broker works with the title company to ensure the deal is funded. This take no real interaction on your part.) 8. Start the rehab! Now if after you pay all your closing costs from the loan value there is money left over the title company will usually escrow some of it. For instance, my broker only lets me get around $3000 at a time. This minimizes the risk on the part of the broker and hopefully ensures the money is being put into the property. 9. When you get some rehab done and are in need of more of your escrow money, call your broker, tell him what you've done, invite him to take a look, and tell him you are ready for your next draw. He may or may not take a look, but he will likely contact the title company and authorize them to release another draw. 10. Go by the title company and pick up your check. 11. Repeat as necessary. 12. For your final draw, make sure you are done, or very nearly done with the rehab. Same thing...call your broker and give him or her the good news. He very likely take a look this time and authorize your final draw amount. 13. Go by the title company and pick up your check. 14. Make your payments on time or early because your reputation is everything!!