In last week’s essay, I showed you how, if you find the right real estate deal at the right price, you can get the financing. Now, let’s take that discussion a step further. Today, let’s look at how you can do profitable deals even if you’re not a typical “qualified” borrower. If you’ve recently changed jobs. . . or set up your own business . . . or even have bad credit . . . there is still a way to find the money.
But now, instead of just looking for a good deal, you’ll have to work harder in order to find an EXCELLENT deal. And then, you’ll probably have to find the money to finance it outside of the bank market. How? By using private — or non-institutional — lenders. Remember, all mortgage lenders (institutional and non-institutional) principally evaluate two things: the buyer and the property (collateral).
So if you’re not a qualified buyer, you either need to find a partner who is qualified or — if you want to do it on your own — a property that is VERY qualified. That is, you have to get a property under contract at a deep discount to market value — at a price that gives you plenty of “instant equity.” Then, at the very least, you’ll be able to negotiate with “equity” lenders, also known as “hard money” lenders. These are private lenders whose loans are exclusively based on the value of the property.
Let’s say there’s a house that is worth $100,000 — on a no-nonsense appraisal. And let’s say you get it under contract at $70,000. Even if you have bad credit, there are hard-money lenders who will lend you the full $70,000. It’s 100% of your purchase price, but only 70% of the market value . . . so they have a significant margin of safety if they have to foreclose on you. Trouble is, these lenders tend to charge at least double what banks charge their good customers. Their financing fees also tend to be three or four times what you’d pay in a typical bank transaction.
But that’s not necessarily your only source of financing — even if you have bad credit. Because we are now in a very competitive mortgage market, it’s possible to find other private lenders who do not charge such high rates. Instead of 6% or 8% more than the typical bank rate, you might only pay 2% or 3% more if you put up a small down payment (even just 5% of the purchase price). To get a still lower rate, turn to your “FAFA Network” — Family, Friends, and Associates.
Show them what an excellent deal you have under contract and invite them in on the deal, with the understanding that they’ll put up the down payment and apply for the loan. Some might say you shouldn’t mix business with friendship or family. But I think it depends on your family and friends. I’ve had pretty good experiences doing it. And I know quite a few investors who feel the same way.
When you team up with friends and family, the key is to spell out everyone’s responsibilities in writing before you go into the deal. Who will steer the deal through closing . . . arranging for inspections, survey, title insurance, etc.? Who will handle renovation and repairs if any are needed? Who will be responsible for leasing out the property if it’s going to be a rental . . . or putting it on the market if it’s going to be a quick flip?
Once you’ve done one successful deal with your FAFA Network, you now have another source of potential financing lined up for your next deals — at good rates. But whatever source of financing you pursue for any given deal, always remember this: Buy right first . . . then borrow right. Borrowed money will make you money only if you’re a sharp buyer.
(Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s Real Estate Investment Program. To learn more about it, click here. Mr. Ford and Mr. Popkin spoke at ETR’s Wealth Building Conference in Delray Beach a few months ago. Professionally mastered CDs and DVDs — including their presentations as well as those of other top real-estate investors, millionaire entrepreneurs, and friends and associates of Michael Masterson — are still available. To order yours, click here.)