When there’s blood in the streets
Posted on May 20, 2008 - Filed Under Business |
Last week, the Real Estate Agent and I had a great meeting.
Reviewing properties for sale, this trend has started appearing. Halfway through a renovation, people are stopping and being forced to sell. Why?
Banks have closed off HELOCs.
It’s common practice for someone to purchase a property, take some equity out, then finish the property. The only way to take the equity out is in the form of a HELOC, which banks are closing down due to the state of affairs.
Moral of the story: the property can’t be finished. Surprisingly enough those mortgage payments don’t go away. One day, Mr Bankruptcy will come knocking at the door. The only solution: sell. But banks won’t finance a property if someone can’t live in it. My bank wouldn’t finish my appraisal because no carpet was down in the bedroom. Forget that everything else worked perfectly. No carpet equals no appraisal.
One property we looked at. A triplex. One three bedroom, three bath. Two one bedroom units, both rented out with total $2000/month rents. The three bedroom was completely gutted with brand new, up-to-code electrical and plumbing. No drywall on ceilings or walls. Floor was plywood.
Asking price: $575,000.
Our thought was to offer $520,000 with 10 day escrow. Who can say “no” to that when facing bankruptcy?
As far as cashflow is concerned: this particular property had three units. Total incoming rent would be $4800/month. Taking a look at the mortgage, insurance, taxes, water - roughly around $4500/month. The numbers look good.
Stated previously, no bank will finance this property. Many investors would be hardpressed to just “pay cash” and come up with $520,000 for one property. Afterall using 80/10/10 financing, an investor could buy $5 million in real estate.
Really this can be done only one way: hard money lender.
REA and I were looking over contracts, essentially getting a hard money loan between 8 and 10% with no payments for 90 days. At the end of 90 days, the property is finished and the bank will now finance it. Between 6 and 7%. Pay off the hard money loan with a bit of interest. If the property for some reason can’t be finished and refinanced the hard money lender takes possession of the property*.
“Buy when there’s blood in the streets” - Baron Philippe de Rothschild
Wait wait wait a minute. No, I’m not buying the aforementioned property. A hundred things must be done before this and I’m on thing 14. This is talked about now because (1) the media is completely inept and this story won’t see the light of day (2) it happens to be a strong possibility for finding cash-flowing properties.
*Of course, many details about the contract have been left out due to keeping this article brief. It’s just an option we’re exploring.
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6 Responses to “When there’s blood in the streets”
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What about a “construction loan”? It sounds very inefficient that a bank won’t finance something productive. But I guess if there is no income from the property and your other income can’t finance the loan that may very well be the case.
mooms last blog post..Potential Changes (Yet Again) to Superannuation
I’m Done! I’ve now learned my one thing for the day… Hard Money Lender… I can now go back to sleep for the rest of the day.
All kidding aside, I had never heard of a Hard Money Lender before your post today. Excellent post!
I have to say that I was getting excited for you on that prosective property. It seems to be a great deal, but probably a better education tool to work out the possibilities of the Hard Money Lender.
Have a great day!
Ummmm…. Clifford, what part of cash flow don’t you understand? Without putting the repair money into the property, your GRM is 9.0. It’s probably around 10 by the time you are done with the renovation. I don’t see vacancy amd collection loss or repairs and maintenance as deductions from gross income. What happens when (not “if” but “when”) rents go down? I’m sorry but the property as you have described it will be an alligator.
There is more to the story (and it is a “story”) than people no longer having access to HELOC’s. If the rehabbers could finish the job and sell for at least enough to recover their costs, they would max out the credit cards or borrow from family and finish the job. Breakeven is a lot better than foreclosure. The problem is the properties are already under water and there is no point in putting another dime into them. I would not be surprised if over half of these “bargains” are short sales.
I know I am being harsh, but I think you need to learn income analysis from someone other than your real estate agent. Find a couple of older investors, the kind that have been in the business for 20 or 30 years. Follow them around for a few days. See what they think will cash flow. Then go back and do a realistic income analysis on that triplex.
Oh, and hard money lenders are for when you find a property that needs very little work for 60 percent of its market value in its current condition and you can be finished and out of the property in 90 days. Usurious leverage requires usurious profits….
Cliff,
Those interest rates you quoted and “hard money lender” don’t go together. You also better count on points either to the lender or the broker or both. Most investors with a truly good deal have no problem paying interest rates in the mid teens to achieve their short term (sure thing) result. When you are really, really confident about a deal, short term, high interest money is not really a deterring factor. But if you have to be concerned about the interst rate, that is a sign that there is a lot of ambivalence in your deal. Good luck.
–a lender
@Moom - When the market was booming, construction loans were everywhere. In buying a piece of property, the bank has to assured that the value of the property matches or is greater than the value of the loan. These days, property values are still slipping. It’s hard to judge if a $575,000 property with a $40,000 construction loan will be worth $615,000 when it’s done. If the loan is above the value of the property, the loan isn’t properly collaterized.
Also, lenders are relying more and more on Fannie Mae and Freddy Mac guidelines for loans. Those guidelines don’t account for construction loans. Nor will it allow property to be purchased which isn’t livable.
That’s not to say construction loans are impossible to find. But I would certainly be leary about taking one from a dude in the back of a van.
@Matt: Like I stated in the article, I’m not getting this property. It happened to be one of three we spotted, which was caught in the middle of a renovation. This looks like a trend, which may happen more and more as credit gets tighter and tighter. Don’t worry: I won’t interrupt your nap from learning something.
@AI: From the sounds of your comment, you don’t read my blog every day. Which is fine for that is not my expectation. My next real estate deal is going to include my Mentor, who has extensive knowledge into how this whole enterprise works. Just beyond cashflow. My Real Estate Agent’s only concern is if the rents cover the mortgage. My concern is the other 7 or 8 things which the rent must cover as well, such as insurance, maintenance, etc. He is good at ferreting out properties but it’s my numbers that decide what will be purchased.
An entire paragraph was dedicated specifically stating that I was not buying this property. If I am not buying a property, I won’t be wasting my time performing a detailed analysis on it.
But I do like your suggestion, regarding following around a few older investors for a few days. That may be something to incorporate into the plan when the search for Property #3 comes around.
@Art: You’re right about points and interest rates. I didn’t provide a detailed analysis of what exactly hard money lenders are or how they make their money. Homework assignment for everyone. While HML may not be my first choice, if a deal pops up that temporarily requires a HML then I will use them. Ideally going Fanny Mae or Freddy Mac would be my choice.
Hello!
Please keep in mind that if the numbers work out you can sometimes include repair costs into a hard money loan.
Typical interest rates with a hard money loan are around 12%.