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Q: I am having problems thinking outside the box and coming up with creative means of financing a property. I made an offer on a bank-owned property, and now I'm trying to figure out a way to finance the deal without coming up with my own money. I have traditionally gone to banks, which I am trying to get away from doing. I have 3 weeks to come up with $22,000. The house needs $5,000 in repairs and will retail for $55,000. I'm going to have to hold it for at least a year. Any suggestions?- MF
A: There are lots and lots of ways to get money to buy real estate without going to a bank to borrow it. In your case, we can eliminate several options–the common “owner financing” techniques like lease/options and land contracts–because the property is institutionally owned. So what you're looking for here is 3rd party financing that DOESN'T involve banks and which will be relatively quick and easy to get.
My first thought is to forget about spending a year fixing up the property and wholesale it instead. If your numbers are correct (and the $5,000 reflects the cost of labor AND materials), you should be able to sell your right to purchase the property to another, more cash-rich investor for a profit of $5,000-$10,000. All you need to do in this case is find a good, experienced cash buyer who wants the property, and assign your right to buy it to him for a cash payment. As long as his total purchase price (what he pays you for the contract and what he pays the seller for the property) leaves a decent profit for HIM after he fixes up and resells the home, you can take your profit out now and not concern yourself with coming up with the money to buy it.
But if you’re determined to acquire and repair this property, there are 2 other possibilities. The first is to find a partner who wants to put up the money to buy and repair this deal in return for part of the profit. The other is to find a “private lender” who’d like to act as the bank, and finance the deal in return for a fixed return of 8%-10% interest on his money. Of the two, a private lender will give you more control over the deal and a higher overall profit.
A private lender is an individual who has funds in the bank or in a self-directed retirement plan that he’s willing to loan out for good, safe deals like yours. Now is a great time to start cultivating these folks: there’s an awful lot of money sitting around earning 2% because the owner is afraid to invest it in the stock market.
A private lender can act much more quickly than an institutional lender, because he doesn’t need to see reams of paperwork or process an application through an underwriter or board of directors. Most private lenders can close as quickly as they can get an appraisal on the property–and they don’t charge the fees, points, and closing costs your bank does. All you generally need to do to close with a private lender is to prove that the security for the loan–the property itself–is worth significantly more than the loan amount, that the title is clear and marketable (most private lenders do want you to buy a lender’s policy of title insurance for them at closing) and that the property is appropriately insured with the lender named as loss payee.
When you start asking your friends, family, and colleagues whether they’ve got $27,000 to loan out at 8% interest with a $55,000 property for security, you’ll be surprised at how many people you know who will jump at the chance for this kind of return. Start cultivating private lenders now–you may never have to use a bank to finance a property again.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com
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If her contract with the bank allows you to assign your contract, I will eat it!
That almost never happens. Banks don't want to play games, they want to get rid of their properties, fast.
I think the best option at this point is either the hard money lender, assuming your estimated values are correct or to bring in a money partner, either as a lender or as a partner.
However, the time to line up a private person is kind of limited from what you say, so the hard money deal is probably your best option.
Forget about not using your own money in deals. It is not as great as it is cracked up to be, in most cases. You open yourself up to disputes and give up too much profit due to the high costs of money, as above or having to share your profits.
Your best, most profitable situation, over which you will have the most control, is to be able to finance your deals yourself.
Have you looked at an existing IRA you may have or one you can set up to finance your deals? An IRA can truly be your "Private Bank." Contrary to popular thought, you do not have to have a lot of money in your IRA to start generating real estate profits.
That is thinking outside the box! To learn more about IRA Private Banks, go here: http://ARealEstateIRA.com
If her contract with the bank allows you to assign your contract, I will eat it!
That almost never happens. Banks don't want to play games, they want to get rid of their properties, fast.
I think the best option at this point is either the hard money lender, assuming your estimated values are correct or to bring in a money partner, either as a lender or as a partner.
However, the time to line up a private person is kind of limited from what you say, so the hard money deal is probably your best option.
Forget about not using your own money in deals. It is not as great as it is cracked up to be, in most cases. You open yourself up to disputes and give up too much profit due to the high costs of money, as above or having to share your profits.
Your best, most profitable situation, over which you will have the most control, is to be able to finance your deals yourself.
Have you looked at an existing IRA you may have or one you can set up to finance your deals? An IRA can truly be your "Private Bank." Contrary to popular thought, you do not have to have a lot of money in your IRA to start generating real estate profits.
That is thinking outside the box! To learn more about IRA Private Banks, go here: http://ARealEstateIRA.com
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