Re: Ed, can you explain about the LOC - Posted by Ed Garcia
Posted by Ed Garcia on July 30, 2001 at 18:13:36:
There are various types of credit lines. There is a big difference between an equity line, and a working line of credit.
An EQUITY LINE OF CREDIT is collateralized by a house or specific piece of real-estate. It’s size is RESTRICTED to the amount of equity you have in the house pledged for collateral. You can do what ever you want with the funds, NO RESTRICTIONS.
It’s primary advantage for an investor is to use it for down payment money.
An WORKING LINE OF CREDIT, is a commercial LOC (line of credit) given usually
by a bank. This line is devised as working capital for a business.
A Working Line Of Credit is AWSOME…
(1) You can make CASH offers, allowing you more profit in your deal.
(2) You can CLOSE faster, making that extra deal, and more profit.
(3) You can SEASON your properties, by leaving them on your line for a while.
(4) You can use it to do FLIPS, where conventional financing is too expensive.
(5) It’s CHEAPER money, meaning you pay 1 or 2 over prime and no points
(6) You can make offers with more confidence, which is projected to the seller,
or Real-estate agent.
(7) There is NO LIMIT, as to how many deals you can do.
If I own a furniture store and I need inventory, a bank may lend me money to purchase furniture from the manufacture. I now stock the furniture for re-sale at a profit.
In our case, we purchase real-estate at below market, or wholesale. We convince the bank, that our business runs just like the furniture store, and they provide us a working line of credit to purchase our inventory, which consists of real-estate.
In both cases the line is secured by the inventory. The bank will usually determine how much they think your line should be, based on past performance or track record. As you grow and do more business, your working line of credit can be increased.
A new investor would not be ready for a working line of credit. An experienced investor with a track record, could get a working line of credit, which would allow them from the sellers stand point, to pay cash. In making cash offers you can usually cut better deals.
Sorry to say Nick, but it’s not unusual for people to get confused when working with banks and going in and requesting a curtain line of credit, just to have the bank offer or give you what they have available, and try to get the borrower to accept it in lieu of their
So you see Nick, the average investor would NOT know the differences of the various
Credit lines. Someone with my background would, and that’s why I try to teach it to
folks such as yourself, and others in the business. I noticed this, when I was doing my first workshop and had several investors who would tell me, that they already had a Working Credit Line.
As I discussed this with them further, I found out that what they had was, an EQUITY LINE instead.
As a rule of thumb not always, the bank will request a BUSINESS PLAN, etc.
If someone plans to be successful in this business, then they should take it upon themselves to have an understanding of a Business Plan. Many people are intimidated by
just the thought of a Business Plan. They have no idea how valuable of a work tool this is
for their success. As a result they try to find someone to write if for them. Unfortunately,
much of the benefit of a Business Plan is lost if you have somebody else write it for you.
Spending time and writing it out, piece-by-piece forces you to do considerable thinking and evaluation of your plan.
I could go on and on about what it takes to build or map out your real-estate career to be
successful in this business. I’ve said it before, and I’ll say it again. If you run this business off of the seat of your pants with no rime or reason, no direction, you can still be
successful in spite of your stupidity. Can you imagine how successful you can be if you
do it with a GAME PLAN ( Business Plan).
Sorry Nick, sometimes I get carried away ( smile).
Each thing you do is just a stepping-stone to the next thing you must do. So no Nick, I don’t think an investor is wasting their time going from one credit line to the next. I think it’s part of your learning process. Yes, if you can hook up with someone that has been there before you, you can save yourself a lot of time, aggravation, and money for that matter, and that’s why we share this type of information with one another on this forum.