When we have isolated a home priced well under market value, we give our private lenders an opportunity to fund the purchase and rehab of the home. Lenders can also earn high interest rates – generally 4 or 5 times the rates you can get on bank CDs and other Traditional Investment Plans.
There are many reasons, but the primary reason is: time and negotiation leverage. Many of the homes we are purchasing are in need of a quick sale within 10-14 days. A traditional bank requires 30-45 days to close a loan. Also, our leverage is far greater when we purchase using cash instead of financing. Many traditional home sales fall out of contract because of financing issues; and this allows us to negotiate a much lower purchase price and reduce our risk.
Lending guidelines are also continually changing. Most new requirements include applications, approvals, junk fees, and strict investor guidelines. They also limit the number of investment properties that can be purchased by one company.
We make our money on the purchase, and this allows us to purchase 20-30% below a retail purchaser. This instantly creates thousands of dollars in equity. Typically, we also cut out the middleman in a transaction, i.e., commissions, mortgage broker fees, loan fees. Our attorney costs are usually also lower, because there is less paperwork to review.
Absolutely. With your cash funding, we can offer something very few buyers can. We are buying within their timeline in as little as 10-14 days. Knowing that we’re going to renovate the home and purchase it in as-is condition is a very important factor to most sellers of distressed property. The seller also won’t have to pay any additional fees.
This is a great question and valid concern. However, our strategy is not to speculate 3 years down the road. Our goal is to purchase quickly and sell even faster. Most of our projects are complete in 1-2 months and will be sold in 4-5 months. The market doesn’t tend to shift that dramatically in a matter of months – it’s typically a longer process for an area to decline. Remember, we’re buying in strategic areas where inventory is already low and demand is high; this greater minimizes our risk.
Most of our lenders are paid from 10%. Our rates will fluctuate very little all depending on the purchase price and rehab involved. The lower the purchase price, we can sometimes afford to pay a little higher rate to make sure our lenders make it worth their time.
The majority of our loans are set up on an 8-12 month note, but it depends on the size of the project. If we are doing a teardown and rebuild, we will have to wait on the county inspectors for approvals. This will cause delays. But we account for all of those details upfront and will give you estimated time frame for the return on your investment beforehand.
It’s extremely important to us that we do not waste your time. However, occasionally, situations may occur where we find a buyer immediately. In this scenario, we provide you with two options: we can either move the note to another property, or provide you with a minimum of 3 months interest. Most investors see the strength of our purchase ability at that point, and simply move the note to another property.
Typically, we pay one large lump sum at closing on a short-term note. This is much easier to manage for both of us, especially if we’re working out of a retirement account. On a longer note, we will pay monthly, just like a typical mortgage.
No. There is no government backed guarantee on these privately held real estate notes. You’re deriving protection from the equity in the real estate. If at any time we were to default on the note, you have legal right to take the home (essentially foreclose on us). Many investors laugh about this one and say, “I hope you’re a day behind on payments – I’d gladly take this one off your hands.” You have to remember that we plan for the worst, and our homes have thousands of dollars of equity in them. So in a worse case scenario, often times we just don’t make “as much” profit as we originally hoped for.
If we purchase a renovation, we get a builders risk policy (Vacant Dwelling Policy). In case of any damage, insurance distributions would be used to rebuild or repair the property, or used to pay you off.
It is our policy to pay for all the closing costs so that your entire investment goes to work for you. We will pay for the closing agent, document preparation fees, notary fees, overnight mail fees, bank wire fees and recording costs. We do not charge any fees or commissions to our private lenders.
In this unlikely scenario, we would simply transfer ownership of the property to you, if possible. If for any reason we did not (or could not), then you have all the legal rights of a secured lender. The best way to legally protect your interest in case of a default would be to hire an attorney. They normally would seek to retrieve your investment, any unpaid interest, any collection costs, all your attorney fees and maybe even more. An attorney could advise you of whether or not it makes sense to foreclose on the property or seek ownership to protect or recoup your investment.