Posted by jchristl on August 11, 2004 at 06:24:32:
>> (2) Determine the Value of the Property.
>> The next thing I must do is determine what the property
>> is worth. The obvious thing to do, is comp it.
>> Don’t let the seller or real-estate broker tell you what it
>> is worth.
>>
>> Get it comped yourself.
Here’s a dumb (newbie) question… how?
Creative Financing - Posted by Kristopher Jones
Posted by Kristopher Jones on April 05, 2002 at 08:21:02:
I was wondering if anyone had any pointers for a newbie on financing deals. I have built a solid approach to meet the real estate market with in my area through research and contacts I have made. Yet I still am not comfortable asking to borrow money from these people who have shared their knowledge with me. If anyone has any words of wisdom on this subject I could really use them…
Thanks
Kris
Re: Creative Financing (LONG) - Posted by Ed Garcia
Posted by Ed Garcia on April 05, 2002 at 09:58:11:
Kristopher,
I’m sorry to say that, I’ve answered this question so many times. I now save my answer to reprint it when the question comes up again.
Here is what I tell a Newbie who is starting out.
First, is to evaluate how much time you are going to be able to commit to Real-estate? If your approach is hit and miss, so will be your result.
Second: Go to the street. It is the best teacher. Rather than talk about doing deals, reading in the library, getting courses, JUST DO IT.
You’ll find in the long run, the street is the best teacher. Not only that, by getting out an doing it, you’ll learn your MARKET, meet people to build a NETWORK, learn the demographics as well as the geographics of your area, and of course you would have over come the biggest obstacle in getting started, PROCRASTINATION.
We need to do what we call, penciling out a deal. When doing that, we ask ourselves a battery of questions necessary in structuring a deal.
I’m going to give you 5 steps to get you started.
(1) How much do we want to make?
So many times I hear someone act as if they are afraid of loosing a deal because of the profit they put into it. Forget about it. I’d rather be sorry about the deal I did not make, rather than the one I did. The profit is what protects you in a deal. Don’t be afraid to make it.
When doing a deal I want to make at least 30% and believe me when I tell you, when I structure a deal with 30% in it, I never get it. Some how the profit always dissipates, even after I thought I figured it to the penny.
Would I do a deal with less profit? Yes but I would do it as a flip, lease option, or as a leveraged deal with positive cash flow.
(2) Determine the Value of the Property.
The next thing I must do is determine what the property is worth. The obvious thing to do, is comp it. Don’t let the seller or real-estate broker tell you what it is worth. Get it comped yourself.
(3) Deferred maintenance.
Usually I figure my profit after taking off the deferred maintenance, otherwise it distorts my profit. So it must be figured in the beginning to determine your profit.
(4) Game plan.
What do I want to do with the property? Do I want to fix it and sell it? Do I want to keep it long term or short term? When I buy a property, I have a plan for it.
And usually I buy it with that plan in mind. This part is so important; I’m going to go into more detail by giving you an example.
Remember, you make your money on the buy.
GAME PLAN.
Each deal speaks for it’s self. For example, if I bought a house for Lets say $50,000 and had to put $10,000 into it for fix up. I’m in this deal $60,000. Now what would that house have to be worth in order for me to feel comfortable to buy it, and debt service it on my line of credit.
$70,000? No I don’t think so. I have no room in this deal for error.What if after a month or two I don’t sell it?
Now remember, we can play the, what if game all day. I can create a fast Sale for the purpose of this posting to make myself look good, but that’s Not the answer. So remember we have to always be careful with hypothetical questions and answers. The profit structure on this deal is not good enough for me to do the deal.
$80,000 ? Were getting better, but No. I have to keep in mind that things can go wrong with my deal. What if I sell it after 2 months, and then the sale falls through after being under contract for 45 days because of financing.
Now I have had the property for 31/2 months, and have to put it back on the market again. Also what if the market changes or slows down?
Even though I show on paper that I have a $20,000 profit, that’s not so.
For the fun of it, lets take this so call $20,000 profit and structure a Game Plan around it.
(1.) I plug in 6 month worth of debt service on my deal. I’m in the deal $60,000. Interest, depending on the interest of your credit line, Let say for the benefit of our example is 9.5%. Our payments would Then be $475 per month. 475X 6 = $2850.
(2.) What ever the market value you come up with, always cut it 5%. Because realistically, the potential buyer is going to want you to Discount your price. Now if you don’t have to, great. But lets face It. If you were trying to sell it for $80,000 and someone offered You $ 76,000, you know you wouldn’t want to wait for another Buyer. You would still be debt servicing the deal. With you luck, You wait another month or two and the next buyer would make The same offer. Terry Vaughan will tell you, that the first 10% of
a deal is water. I agree with Terry, but for the purpose of this deal we’ll just keep it at 5%. So lets take off another $4000.
(3.) I always plug in a realtor. Now I know that there are a lot of Geniuses out there that don’t need them. They are so great that they can sell the property themselves. Great, you plug in a Realtor. 76,000 X .06 = $4,560.
Lets recap. A sale of $80,000, gives us on paper a $20,000 profit.
$20,000
-$ 2,850 Debt service
-$4,000 5% Discount
-$4,560 6% Sales commission.
Potential Profit $8,590.
As you can see the profit dissipates quickly. And personally I don’t think it’s enough to take the risk your taking with your line.
How about $90,000 ? Now all of a sudden the deal can make sense.
We have between a $17,500 and $18,000 profit.
Lets look at our LTV (loan to value). 60,000 divided by 90,000 = 67% LTV.
So you see the deal speaks for it’s self, but the structuring of a deal with a Game Plan is what will let you know if you should do the deal.
(5) Financing.
How am I going to take my deal down? Am I going to create a seller carry back, and use a lender to give some money to the seller? Will the seller carry back the whole deal? Will I have to buy it with a combination of down payment and financing? Or will I pay cash and then refinance it later, getting all of my money back.
It’s all in having a motivated seller, and how you structure the deal.
I think that it’s important, to understand financing of all types.
Because there will be financing in EVERY DEAL.
CASH DEAL:
Cash is usually derived by financing. However if you did use your own
cash, my suggestion would be to leverage it, and not to put all of your
eggs in one basket. Cash is Power, cash is King, and many times cash
can be a deception. It can be what we want the seller to see in order to
negotiate our best deal, and in most cases it requires financing depending
on the size of the transaction.
FLIPPING A DEAL:
Here we have the impression that no financing is required, when the truth
of the matter is, we just transferred the financing problem to the new buyer.
Financing is still required and I can’t tell you how many time I have
arranged the financing for the new buyer. Or rearranged the financing on
the, property to make the property more marketable.
For example, I may offer a 100% financing.
LEASE OPTION:
I’m sorry, just another way of financing. In most cases this is considered
high risk, because the majority of borrowers are unable to qualify for a
loan. Which has gotta to scare you due to the felexablilty of financing
in today market. This is a very popular way of financing properties in
undesirable areas. I say that because if the property is in a strong active
market, Lease Options are almost nonexistent. Remember I’m in
reference to the rule, not the exception to the rule.
SELLER ASSISTED FINANCING:
Now this is one of my favorite. I can really make things happen with this
baby, and like Lease Options, I need a motivated seller. I like to structure
the deal where I can give new cash to the seller as well as have them
carry back. The reason for this is to make them feel like they have really
sold the property, rather than have a glorified renter. Remember I’m in
California where it’s an active market.
SECOND MONEY PURCHASE :
Here is another cute pie many of you over look. I notice that were only as
good as our mentor’s or are product of our environment.
I also notice that many of today’s so called experts are vary limited in their
knowledge of finance, and that is why you don’t see more of the
information that I’m providing you. Second money purchase can be the
fastest, cheapest, easiest money to qualify for. When I say cheapest,
that’s not because it has a lower rate, but because it will be for a lower
loan amount. Since you are not refinancing old money, just the new money
your bringing to the deal, your fees and loan cost will be less.
This can make a difference if you are going to keep a property for short
term.
My posting is already getting to long so I’m going to cool it.
But you have got
SWING LOANS:
WORKING CREDIT LINE:
NOTES:
and the list goes on. These are all financial vehicles that can make our
deal happen.
So now you can see the power of learning and understanding FINANCING.
Every deal is touched by it.
Kristopher, I have told you how to approach doing a deal and have given you an understanding of financing. Now what you have to do is STOP PROCRASTINATING and go find a deal.
Good Luck,
Ed Garcia
Re: Creative Financing (LONG) - Posted by jchristl
Posted by jchristl on August 11, 2004 at 06:37:43:
> (2) Determine the Value of the Property.
> The next thing I must do is determine what the property
> is worth. The obvious thing to do, is comp it. Don’t let
> the seller or real-estate broker tell you what it is
> worth. Get it comped yourself.
How does one go about getting it “comped” themselves, without the real estate agent, or broker?