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Financing Your Future: Finding Millions for Real

Estate Investment

Secrets to Real Estate Investment Success

www.reitrainers.com

http://www.yuckyhousesecrets.com/

Financing Your Future: Finding Millions for Real Estate Investment

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Table of Contents

Introduction ....................................................................................................................... 2

Where's The Money? ........................................................................................................ 5

How Hard Money Works ................................................................................................ 8

Why would you want a hard money loan? ............................................................................. 8

How much money can you get? ............................................................................................. 10

How can you use hard money loans? .................................................................................... 11

How do you get hard money loans? ...................................................................................... 11

What paperwork is required for a hard money loan? ......................................................... 16

Who regulates hard money lenders? ...................................................................................... 17

Are there other non-conventional lending options? ........................................................... 17

Investor's Anyone? .......................................................................................................... 23

Looking for Opportunities ............................................................................................ 30

Locating Loans That Are In Danger of Default ................................................................. 31

Evaluate Properties and Narrow Choices ............................................................................ 32

Contact the homeowner to see if they are receptive to a sale ........................................... 32

Preparing an Offer for the Property...................................................................................... 33

Preparing a Contract for the Sale ........................................................................................... 34

Closing on the Property .......................................................................................................... 35

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I N T R O D U C T I O N

Every night there’s a new story about the economy – some days the stock market has tanked, some days it’s regained a little, banks are failing, and foreclosures are at an all time high. Sounds like a terrible time to make investments, right? Well, only if you don’t want to make money. Take a look at the investment strategy of Warren Buffet – the world’s second wealthiest individual – in a quote from a Newsweek interview:

Warren Buffett, a.k.a. the "Oracle of Omaha" for his savvy invest-ments, is shopping his way through the financial crisis. Even before Washington passed the bailout bill, his Berkshire Hathaway holding company had put $3 billion into General Electric and $5 billion into Goldman Sachs, and he admits he's trawling for more good deals. "You want to be greedy when others are fearful ... It's that simple," he said in a PBS interview with Charlie Rose, adding that Americans are as fearful now as he's ever seen them. "We're seeing [stocks] that are attractive right now."

Warren Buffett Newsweek Magazine

October 3, 2008

While Buffet is referring to the stock market, the same can be said for the real estate investment market. In fact, there’s never been a better time to invest in real estate. Think about some of the factors that are influencing both the commercial and residential real estate market at this time:

Bubble Burst – For the last several years, we’ve watched real estate values climb at unprecedented rates. Many first-time buy-ers were forced out of the market, simply because they couldn’t afford to buy a home. Now the real estate bubble has burst, and we see market price cor-rections in every real estate market.

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Financing Your Future -- Finding Millions for Investment

Limited Rental Market – Because few buyers could afford to buy a home, more and more people were forced to look for rentals or stay in rental properties. In many cities, it’s difficult to find affordable rentals, and more people than ever before are looking for rental homes or hoping to purchase their first home. Mortgage Debacle – It’s impossible to be unaware of the recent mort-gage banking problems, especially since it’s had such an enormous affect on the economy. Many less-than-ethical lenders encouraged buyers to purchase homes that they simply couldn’t afford and some shady prospec-tive owners took advantage of poorly thought out mortgage programs. The results – hundreds of thousands of mortgages in default.

Some people look at this situation as a crisis. Smart investors view it as an oppor-tunity. There’s a lot of real estate available for all-time low prices, and a lot of people looking for rental properties, or new buyers that are hoping to find a great price on a home. You could be one of the people that take advantage of this situation and make a steady stream of profits. Let’s take a look at how some people are profiting from what some perceive to be a real estate crisis:

Big Profits on My First Rehab/Flip

I learned of a property for sale through friend in May 2006. I knew the neighborhood the house was located in. It was a great value at an asking price of $180,000. I knew that with a few changes, I could sell this house – it was a great deal. Unfortunately, I wasn’t the only person interested in the house. I was the second offer for the home. I kept in touch with the seller and when the first buyer backed out – I got the house, for $180,000 – well below current market value. I made some updates and repairs to the home for a total of $21,000. I put the house back on the market in May 2007 and sold it for $290,000. After all the fees and the costs associated with fixing up the property, I realized a profit of roughly $60,000.

Paul in Minnesota

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Here’s another great example:

Smooth First Time Investing Experience

The first home I purchased for investment was a three-year-old home in a decent neighborhood. I bought the house at auction for $125,000. The tax value was $188,000 and the house would typically sell for about $175,000 in the current market. Although I didn’t get a chance to see the inside of the house, it looked decent from the outside. I knew I’d have to do some work to update it, but knew the house was in good structural condition and still under warranty. I knew I was going to have to do some work on the inside – I spent about $12,000 on carpet, paint, tile, granite counters, and landscaping. I did some of the work and contracted some out. When we were finished, the house looked better than most of the other homes in the area. It took me about 2 months to get the house ready for resale, and another 3 months to sell. We priced the house below current market conditions $169,000, and sold it for $165,000. After the sale, we cleared about $15,000 on the deal after all costs. Not a huge profit, but not bad for a few months work. We’re looking for the next opportunity.

John in Arizona

Maybe you don’t need convincing that real estate investing is a good idea. For most people, the biggest obstacle is “Where do I get the money?” That’s the issue at the heart of this book. I’m going to show you how to find money, so that you can start your career investing in real estate and begin to make those profits. We’ll explore several options for financing your investments. Let’s get started.

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W H E R E ' S T H E M O N E Y ?

If you don’t have a huge savings account, you may be wondering exactly how you’d finance a real estate investment. There are a surprising number of ways to finance real estate investment, some fairly simple, others more complex. We’ll take a brief look at some methods, and go into more detail later in the book.

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Traditional financing – This method financing means going to banks, credit unions and other mortgage companies to finance your investment. Rates for traditional loans are good, but the re-quirements for lenders have tightened up quite a bit. Your credit score will be scrutinized along with your income and debts. With this method of lending, you’ll also be asked to bring a down payment to the table, usually a minimum of 10% and up to 20%. This is a safe and well-known method for purchasing real estate, but it might not be right for you because:

It ties up your lending potential for your own home – if this is just for an investment property, will you be able to finance your own home?

It requires up-front money – fees, closing costs, and down payments.

It limits your lending potential for the property. Most lenders will only

lend 80% of the home’s value. Equity or Second Mortgages – If you have a home, you can borrow against your home, especially if you have equity built-up in your home. Unfortunately, you’ll begin paying your mortgages immediately, while you may not be able to turn the rental property right away. Seller Financing – With this financing, the seller agrees to carry the note for the financing of the property. It’s essentially a loan made to you by the seller, who charges you interest just as a traditional bank would. This type of financing is


most often available when the property owner owns the property outright, or has a very low balance on a mortgage. This is usually offered for a limited time only – maybe one to five years. Subject-to-Lending – This is a creative, but short term solution. This term refers to “Subject to existing financing” which means purchasing the property on the condition that the existing financing stay in place. The title of the property is transferred to you, but the loan stays in the seller’s name, while you make payments. As you can imagine, most seller’s aren’t too excited about having a loan in their name, while someone else makes payments (or not) and holds the title to the property. This method is sometimes used in the phase of pre-foreclosure, when the seller is desperate for someone to take over the mortgage payments. Assumable loans – This financing option allows you to take over the mortgage of the seller. Sounds a lot like Subject-to-Lending? Well, not exactly. Assumable loans allow you assume the mortgage while getting the loan in your name. Assumable loans were especially popular in the 70s and 80s while interest rates were skyrocketing. Not all lenders will allow a loan to be assumed. However, FHA and VA loans can be assumed without permission from the lenders. The assumable loan is at the original interest rate – which could be good, or it could be an assumable loan, with a lot of problems. You have to be cautious. Seller Second – This is kind of a tricky financing option. You can finance the property by requiring that the seller provide a second mortgage. Usually, this amount covers your down payment. This allows you to take out a loan, without having to put money down. But you have to make sure that you can take a loan on a property that has a second mortgage attached, not always the easiest method. Investors – You can sell others on your ability to make profits on real estate and get their financial buy-in to purchase real estate. Lease-Options – You can arrange with the seller to lease the property, with an option to purchase at a later date. Essentially, you are taking over the mortgage payments without a solid agreement for purchase. Hard Money Loans – A loan based on assets where the borrower receives funds based on the value of the real estate. These loans don’t fit into to same category

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as traditional mortgage loans. Hard money loans carry higher interest rates than traditional financing, but they offer a great deal more flexibility to real estate investors. While real estate investing requires the investor to think on their feet and be creative with financing, the single most consistent form of financing comes from hard money loans. In the next chapter, we’re going to discuss hard money loans in depth – where to find the, what to look for, what to watch out for, and what it means for your real estate investment.

H O W H A R D M O N E Y W O R K S

Real estate investors often need to have money on hand, or at least access to money fairly quickly. That’s why hard money loans are so often used by investors as one of the ideal financing options. When you need money, hard money loans can deliver the funds much faster than most traditional financ-

, e to

ecializes in hard money loans.

loaning ard money. This is an attractive option for these companies because:

The interest rate is higher than tradi-

a short period of time (typically 2 to 18 months, but could be

The loans are secured by hard assets

stors, a hard money loan is a win-in situation that offers a great pay-off, without

Let’s take a look at some of the questions associated with hard money loans.

Why would you want a hard money loan?

e higher, there’s still a significant profit from the eventual le of the property.

ing. Hard money loans are available through non-traditional lenders. You won’t find hard money loans at a typical bankfinancial institution or credit union. Instead, you’ll havfind a company that sp

There are some companies, or groups of investors that are interested inh

tional lending programs;

The loan is for

Why is it called a Hard Money Loan? The “Hard” refers to hard assets (such as the proper-ty) that are used as colla-teral for the loan.

up to 5 years.)

(could be the property or stocks, etc.)

For these invewa lot of risks.

Hard money loans are great for short-term borrowing and property speculation. While interest rates arsa

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Almost all hard money loans are made by private money lenders. These are perfectly legitimate companies. They simply have greater flexibility than tradition-al lenders over the loans and the lending criteria. For these lenders, the most important part of the loan is the property or asset used to guarantee the loan. The private lender will often pay more attention to the property than the qualifications of the buyer. Hard money works well if you have no credit or poor credit. Because hard money loans don’t have the same credit requirements as traditional loans (the loan is guaranteed by the property or asset), you can qualify for a loan if your credit score is below 500, if you have had repossessions, judgments, tax liens or even bank-ruptcies. Perhaps the most important reason for considering a hard money loan is that it can be processed very quickly. Traditional lending takes at least a month. Private lenders often do not require income verification or even property appraisals. It’s possible to close on a hard money loan within a week or less. Hard money loans are often used on non-traditional properties, especially items like ranches or land. Sometimes properties have unusual or special requirements that make it difficult to arrange financing. Some examples include:

Estate or Property Trusts Distressed properties Properties in receivership Properties with a current notice of default Properties in foreclosure Properties that need significant rehabbing

Hard money loans are appropriate when you want the money to purchase a property and the funds to rehab the property in one loan. Most traditional lending programs will only lend you a portion of the value of the home, no money for renovations. With hard money loans, you get it all with one stop shopping. Hard money loans are also used by borrowers that can’t qualify for traditional lending programs. A few years, the sub-prime lending market had loan programs for people that couldn’t verify income, were dependent on bonuses or commis-sions for their income, or had bad credit. But over the last year, the sub-prime lending market has almost completely collapsed. Hard money lending is an option for people that would have applied through sub-prime lending programs.

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Finally, some people prefer hard money loans because it gives them anonymity. With traditional lending, your finances are scrutinized carefully, and each applica-tion and review of your credit rating affects your credit score. Hard money loans can be made without disclosing all your financial dealings. Sometimes property is held in a trust or held by a business entity. A hard money loan can be made to the trust, rather than an individual.

How much money can you get?

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For most investors, hard money loans are secured by the real estate property, although some will also accept stocks or bonds as collateral. Generally, hard money loans are available for any amount from $30,000 to $10,000,000. Hard money loans aren’t available for the full value of the property. A hard money lender will only loan up to 70% of the value of the property. One important difference to realize over traditional lending programs is that the hard lender will base their valuation of the property on the improved (remodeled/renovated or rehabbed) property. So if you know a home when improved will be worth $100,000, you can secure a hard money loan for $70,000 -- even if the initial purchase price is $50,000 or less. In the past couple of years, people became accustomed to unique lending pro-grams that let borrowers take a loan for up to 100% or the LTV, sometimes even higher. The recent history of the mortgage upheaval has completely eliminated those programs. It was never really an option with hard money loans to get 100% of the LTV. Lenders need to protect their risk when loaning the money, so they will always calculate the LTV on the property value estimates for the next 6 months or 1 year. Hard money lenders do take into account improvements you plan to make to the property, and the changes to the home value.


How can you use hard money loans?

The majority of borrowers will use the hard money loan for the purchase of residential or commercial property, or vacant land. But that certainly isn’t the only reason people are looking for hard money loans. They can be used for:

Debt consolidation, bankruptcy or foreclosure bailouts.

To get a financial fresh start. Most importantly, you can use a hard money loan for both the purchase and the renovation of a property. That means you don’t have to sink your savings into the repair of a property, or even have money available in savings. There are a number of situations that hard money lending is the ideal answer. For instance: Let’s say you have a property that you need to move on fast. This is often the case of properties that are up for auction. When you go to an auction, you have to have cash on hand to make an offer. You can’t wait for traditional financing, which would take 30 to 60 days. However, you can get a hard money loan in as little as 2 days with the right lender. What if you want to purchase multiple properties? A traditional lender would require that you complete the entire paperwork process for each loan. With a hard money lender, once you’ve established a good record for repayment of the loan, the hard money lender is more likely to quickly provide a loan, sometimes without submitting applications. You’ve found a great property that requires renovations. Unfortunately, you don’t have the savings to invest in remodels or renovations. Hard money loans allow you to take out money for the purchase – and the remodel/renovations.

How do you get hard money loans?

Most hard money loans are made either through direct lenders, or hard money brokers.

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Brokers put together deals of hard money – they essentially put lenders and borrowers together. Of course, they are compensated for their work. Generally, you can expect a broker to add 2 to 3% to the total fees associated with the loan.

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nd n ss l

ded

me trying to put a eal together.

t

gh, ou’ve got another option.

t

at it

o

you

ave ou a lot of time and money.

Direct le d are able to fund your loanand proce in one place. If you are applying todirect len

you may spend a lot of time aneffort trying to get to the personthat actually makes the decision. Or, you could spend a lot of time just to face a rejection of your proposal. The advantage of working with a direct lender is that you don’t have to pay the extra feefor brokerage. But you will spend more of your ti

ers, on the other ha the application, al

rs, Lending Terms

When you discuss your loan with either a broker or a private lender, you’ll need to discuss details of the loan. Some of the terminology can be confusing and you want to sound knowledgeable and in-formed.

APR – Annual Percentage Rate, the interest rate annualized over a year.

Amortization – Period of time which the repayment of the loan is based.

Bridge Loan – A short term loan made prior to long-term financing.

Lien – A claim a lender has placed on the property in return for a loan.

LTV – Loan-To-Value, the ratio of money loaned against the actual resale or appraised value of the property.

Points – Up-front fees paid to the lender. One point is equal to one percentage point of the loan ($100,000 x .01 =$1,000.)

Principal – The loan amount without interest.

Prime Rate – The lending rate assessed by the Federal Government to lenders.

Term – The time period for which the loan is made.

d It’s a good idea to investigate several direct lenders for a hard money loan. That way if you are rejected by one, you’ve already goanother lender in the chute, or ifthe deal suddenly falls throuy Brokers can do a lot to get the besloan in place for you. They know how to package your loan so this the attractive to hard money lenders, they have relationships tdraw upon, and they have expe-rience with which lenders are truly ethical and trustworthy. While may pay more to work with a broker, in the long run it can sy


Hard money loans are known for requiring a lot less paperwork than convention-al loans. If you’ve applied for a traditional loan, you’ll know that you feel like yoare signing your life away, with reams of paperwork. Hard money loans are much more straight-forward. This is one of the reasons that hard money loans are lesstime consuming than traditional loans – because they require less documenta

u

tion,

less verification of the property, and less filing of the loan.

to out your deal. Here’s some of the information you should

xpect to provide:

Purchase price of the property;

What type of property – home, land, commercial building, etc.

Does the property require renovation or remodeling?

e resale value of the home (with all planned changes to the property)

What is your plan for the property – resale, rental, lease, etc.

usually willing to loan between 50% and 70% of the value of the roperty.

ulted on e loan. Obviously, this protects the lender in the instance of a default.

hat else should you expect to cover with the lender?

,

r tion or the amount of equity that you

ave in the home or bring to the home.

When you approach either a broker or a direct lender, you need to be preparedanswer questions abe

What is th

The lender will discuss the loan in terms of its LTV – Loan to Value. The hardmoney lender will loan a percentage of the resale value of the property. Hard lenders arep The LTV is the amount that the lender could expect to realize if you defath W Discuss the interest rates. Most private lenders rates can vary from 12 to 24%. Your actual interest rate is determined by the lender. When they look at the loanthe lender evaluates the LTV ratio of the property, the financial security of the borrower and the condition of the property. The lender will also evaluate whetheyou are bringing any cash into the transach Discuss the repayment options. The best option for repaying your loan is to pay the fees upfront, and make interest only payments for a specified period of

13


time. That way, you are able to make only interest payments while you work on the property, and then pay the interest and principal of the loan when you sell the property. With an interest only loan, it’s common to have a balloon payment. That’s a payment that requires a large payment to the principal amount. Make sure that you have sufficient time to complete renovations and resell before a balloon payment is due. Otherwise you may find yourself in the uncomfortablposition

time. That way, you are able to make only interest payments while you work on the property, and then pay the interest and principal of the loan when you sell the property. With an interest only loan, it’s common to have a balloon payment. That’s a payment that requires a large payment to the principal amount. Make sure that you have sufficient time to complete renovations and resell before a balloon payment is due. Otherwise you may find yourself in the uncomfortablposition

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Second Mortgage Example

Loan Amount: $50,000

Interest Rate: 12 to 15%

Loan Fees: Loan arrangement fee (5 points) 2500.00 Processing and Underwriting 1593.00

Escrow and Appraisal Fees 1350.00 Escrow and Appraisal Fees 1350.00

Total Fees $5,443.00 Total Fees $5,443.00

e of having to sell the property fast to cover the payments or having a

deficit.

es

e a look at a ouple of examples of loans and the fees associated with them.

o examples of the type of costs that are usually associated ith a private loan:

fork over a lot of money in fees, especially if it’s possible to roll the fees into the

e of having to sell the property fast to cover the payments or having a

deficit.

es

e a look at a ouple of examples of loans and the fees associated with them.

o examples of the type of costs that are usually associated ith a private loan:

fork over a lot of money in fees, especially if it’s possible to roll the fees into the

Are there additional fees? You’ll also need to discuss what additional fees are involved in the transaction. Generally, a loan fee will be between 3 and 5% of thetotal amount of the loan. You can expect to pay some additional fees; these feare third-party fees such as escrow and title companies. Let’s tak

Are there additional fees? You’ll also need to discuss what additional fees are involved in the transaction. Generally, a loan fee will be between 3 and 5% of thetotal amount of the loan. You can expect to pay some additional fees; these feare third-party fees such as escrow and title companies. Let’s takcc The following are tw The following are twww

Can you pay the fees from the loan amount? Let’s face it. No one wants to

Can you pay the fees from the loan amount? Let’s face it. No one wants to

First Mortgage Example

her interest rate for construction

ommercial building)

ement fee

scrow and appraisal costs $2500.00

Total Fees $19,095.00

Loan Amount $300,000 Interest Rate 10 to 13% (Higor c Loan Fees Loan arrang(5 points) $15000.00 Processing and underwriting $1595.00

E


loan amount. Find out from the lender whether it’s possible to pay the fees out of the loan amount. Some hard money lenders are making a lot of money from the fee structure. If you approach a hard money lender that charges exorbitant fees prior to even loan approval, move to another hard lender. Are there prepayment penalties? Another important factor to discuss is whether the loan has a pre-payment penalty. Of course, your loan is generally short-term, but you need to know whether you can expect a fee if you repay the loan before a specified amount of time. Most hard money lenders will want to collect a minimum of 3 to 6 months of interest before repayment. After that period of time, there may not be a repayment fee.

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On the other hand, the hard money lender assumes a lien against that property when the loan is made. So, if for some reason you defaulted on the loan, the hard money lender is the first to receive funds from the sale of the property. Some-times, if the property has another first-lien against it, the hard lender is willing to assume a second or subordinate position. This is called a second-lien loan or mezzanine loan. Is a property appraisal re-quired? Some lenders will require an appraisal of the property, while others will accept comparable values of properties that have sold in the area.

Which is value is better?

Lenders often use one of two values when determining loan amounts – the properties “quick-sale-value” or “fair-market-value”. The amount of money available in a hard money loan varies quite a bit, depending on which value is used for instance:

Suppose you have a property that is currently worth $250,000 (quick-sale-value). If you spend $50,000 on repairs and updates, you expect to sell the home for $400,000 (fair-market-value).

Quick-sale-value – the lender would loan you $162,500 (65% of 250,000)

Fair-market-value – the lender would loan you $260,000 (65% of 400,000).

Hard money loans are based on the “quick-sale-value” or “fair market value” of the property. Each lender will specify which value they use when determining the


loan amount, but always ask which value is used in your discussion with the lender. So, while the lender might not require an appraisal of the property, they’ll want to understand the values of homes in the area, and sales of homes to base their loan amount on. How long does it take to close the loan? It will vary widely from lender to lender. On average, a hard money lender can close a loan in one or two week. This can be an extremely important factor in time sensitive deals, so it’s important that you know what the average closing time-frame is. Here’s an example of the typical lending process:

Day 1: Contact hard money lender

Day 2: Review of Loan Summary, if it looks good

Day 3: Review of standard loan application (see list of items below)

Day 4: Draw loan documents and sign documents

Day 5: Fund loan and prepare for recording of loan

Day 6: Record loan and close escrow on property. Of course, these are business days, so it may take as much as 10 days or 2 weeks to actually close the deal.

If the hard money lending program sounds good, you could have the beginning of a productive relationship. If you plan to continue to investing in real estate, you want to establish a good reputation with a hard money lender. Many hard lenders can provide a prequalifi-cation letter, especially when you’ve established a pattern for good loans and prompt repayment.

What paperwork is required for a hard money loan?

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As we’ve said, hard money loans are sometimes referred to as the no paper loan. It’s a bit misleading, of course there is some paperwork required to process the loan. The following is a list of documents that you will need when you try to get a hard money loan.

Standard Loan Application – called a URLA 1003

Credit Report

Color Photos of subject property

Title/Prelim Report

Escrow/Closing Attorney

Who regulates hard money lenders?

Easy answer – no one. Unlike other lending institutions that have government agencies examining their lending practices, hard money lenders are not regulated. That may change in the next few years as more and more lenders have had difficulties with traditional lending programs and there have been a lot of ques-tions raised about lending practices. Some states restrict the activities of hard money lenders. Because hard money lenders are able to charge substantially higher interest rates than other lenders, their rates are sometimes considered “usury”. Some states are attempting to manage the high interest rates, while states like Tennessee and Arkansas have eliminated hard money lenders completely.

Are there other non-conventional lending options?

If circumstance keep you from financing through traditional lenders, and hard money loans seem to be too high, you might want to consider another option – taking a loan through a sub-prime lender. Most conventional lenders specialize in loans that are considered Class A loans. These loans are issued to individuals who fit the income and credit standards for

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the ideal loan. But there are other lenders who specialize in B, C, D loans – they are called subprime lenders. These lenders charge slightly higher interest rates than traditional mortgage lenders and may require additional fees. How are the ratings for B, C, D, loans calculated? It’s based almost entirely on your previous credit history.

B class loans are borrowers that have had late mortgage payments in the past year. Late payments that were more than 30-days late can change your class of lending. With a B class loan, the total LTV (loan-to-value) is not higher than 80 to 95%.

C class loans have collections against them or charge-offs on the credit

report. The LTV for this loan isn’t more than 70%.

D class borrowers may have had a bankruptcy or foreclosure in the past. The LTV for this loan isn’t higher than 60 to 65%.

With subprime lenders, you can expect similar payments and terms as traditional mortgage lenders. Some subprime lenders offer lower down payments, sometimes no down payments, and have a little more flexibility in terms of credit scores. Whether you choose to use hard money lenders or subprime lenders, you should consider this financing a short-term arrangement. Both lenders will charge higher interest rates. If you are holding the property for investments, you’ll probably sell the property before you need to refinance. However, if you are using the subprime loan as an alternative to traditional lending, you will want to refinance after you’ve had an opportunity to strengthen your credit score my consistent payments.

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Refinance Example

Hard Money Loan Property purchase price $100,000 Repairs $15,000 Total Hard Money Loan $115,000 Refinance Loan Refinance property at 90% LTV After repairs property value $150,000 Refinanced Loan Amount $135,000 Cash back after repayment Hard money loan $20,000

If you are holding the property, you’ll be able to refinance at good total-value once you’ve finished improving the property. You may be able to get more cash out of the property if you


decide to refinance, and use the cash as operating expenses for additional invest-ment properties. The example to the right is a classic example of purchasing real estate with no down while using hard money loans. The real estate buyer is able to get $15,000 for repairs, make renovations and still get cash back after the refinance. Let’s review some examples of investments with hard money loans.

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First Time Hard Money Loan

Steve is a first-time investor. He’s found a great property that he wants to invest in. He calls a hard money lender to explain the deal and arrange financing. Here’s the situation: Steve can get the property for $500,000; with renovation and repairs of $100,000, Steve expects to sell the property for $750,000. He explains to the lender that he’d like a hard money loan for $600,000. The lender asks Steve a question that stops him cold – “How much money are you putting into the project?” Most hard money lenders expect you to have some money on-hand to invest into the deal. It’s one way to make sure that they borrower is as committed to the process as the lender – they have their money in the project as well and are more likely to work to protect their funds. How can Steve get the full $600,000 for the renovation and purchase of the property? His options are limited:

He invests some of his savings in the project; and /or

The purchase price of the property is less than 65% of the future ap-praised value.

Some hard money lenders will loan you 100% of the purchase price of the home, provided that the value of the home is substantially more than the purchase price. Hard money lenders will always want to protect their loan by not lending the complete resale amount – they want to be able to get money out of the loan.


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Hard Money Loans for Flipping Dennis recently came across a property in a good neighborhood. The owner is asking $200,000 for a quick sale of the property. The house needs some cosmet-ic fixes and a new roof. Dennis figures with these repairs, the house should sell for $350,000. Dennis has received estimates from contractors for repairs and a new roof for a total of $35,000. Dennis has $20,000 to bring to this project. Dennis contacts a hard money lender. He wants to get a hard money loan for 65% of the repaired property price (350,000 x .65), $227,500. He’s found a hard money lender that agrees to loan him the money at an interest-only loan pay-ment. Dennis makes the repairs to the property and lists it. He finds a buyer at $325,000. His repays the loan and has a gross profit of $97,500. Once he factors in the costs of repairs to the property, the loan fees and any real estate listing and closing costs, plus his own initial investment, his net profit is $67,500. Because Dennis was able to make the repairs to the home quickly, sell the property and repay his hard money loan, he’s established a good reputation with the hard money lender. The next time Dennis approaches this lender for a loan, the previous transaction will be considered. He’s more likely to get the loan approved and the process may be approved quickly – maybe without even filing a loan application. Not only does Dennis profit from this deal, but he’s established a good resource for additional finances for other “flipped” properties. He’s on the road to investment success.


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Hard money lending is a great option for people that can’t or chose not to use traditional lending options. These are great short term options – for buyers that only plan to hold on to the property for a short amount of time, or are interested in refinancing soon after the initial loan. Plan to pay more in interest with a hard money loan, but shop around for op-tions. You may find some lenders that are willing to be very competitive with their interest rates. Be careful to find out what fees are included with the loan – you wouldn’t want a lower interest rate, only to find substantial closing fees.

Hard Loan Wrap Up – Why Use Hard Money Loans?

• Hard money loans are ideal for beginning investors that

don’t have a lot of cash on hand;

• Hard money is good for investors with bad credit – hard money loans don’t require the same credit rating scores as traditional loans;

• Need the money fast – hard loans are the best option;

• Don’t have money for rehabbing the property – hard loans let you get money for the property and the rehab.

• Hard money loans let you take out loans based on the value of improved property, not the current appraised value.

I N V E S T O R ' S A N Y O N E ?

Are you looking for other options besides tradition-al financing and hard money loans? One alternative to consider is offering an opportunity for other investors. When you seek private money – money from an investor – you have a lot of control over the finan-cial deal. Unlike hard money lending, where the lender determines the rate of interest, the repayment terms and the loan amount, with private lenders you make the call. You’d be surprised at the number of individuals that are interested in investing in real estate. Many people share your enthusiasm for the current market, and these people can bring money to the table. Let’s take a look at some methods to consider: The two easiest sources of private lending is money from family and friends. Don’t hesitate to let people know of your interest in real estate investing and the potential you’ve discovered. Investing with family or friends can be tricky. One rule for investing is to never invest more money than you can afford to lose. Of course, that saying refers to the stock market, but there is a nugget of truth to real estate investing. If some-thing were to go wrong with the deal, would your family or friends suffer? Only involve family and friends with low risk deals. Seeking investment partners. There are lots of people looking for an opportu-nity to invest in a real estate enterprise. It’s just a matter of finding those people, and selling them on your ability to deliver a profitable deal. One important point about investments is that you make the call on the details of the deal. That means you determine how much input your investment partners

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have in your business – you can choose to make them silent partners, or go to them for advice. How do you find investment partners? Here are a couple of suggestions:

Advertise – You can run an ad in the local newspaper or local magazines searching for investors.

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Seminars – Hold a seminar on real

estate investing. You may get some novices that want to learn more about investing, or you might get expe-rienced investors.

Local marketing. You can find in-

vestors when you unleash you crea-tive side. For instance, postcard campaigns that are directed at certain groups. You can buy mailing list based on a variety of demographics, including income. Try putting up flyers, posting an ad in the newspaper classified ads; you can even take out radio or TV ads. It all depends on your time, and you budget. The wider you market your opportunity, the more good and bad prospects could present themselves. You may have to spend time wading through and qu-alifying the investors.

Search for Internet Investors – Searching online will give you a listing of private investors.

Find local investors through an internet search. You’ll find investors around the world by using an internet search, but you’ll also find some lo-cal venture capital firms and investment firms.

Brown-bag lunches. Lunch time meetings will draw a good crowd of

people looking to learn more.

Community classes. Start a class at your local community center on in-vesting. Don’t give away all your secrets, but give enough details to be in-formative. This type of class is especially popular with retired individuals that may have a little extra income to invest.


Talk about your deal. Don’t hesitate to discuss what you are involved with whenever possible. Discuss it at work, in social situations, etc. You’ll be surprised at how many people are interested, and you may very well get a response from someone that would to hear more and possible invest with you. Don’t hesitate to tell people “I’m looking for private investors, if you know of someone, give them my card.” You might get some great leads, or you might get a response of immediate interest.

Before you have any meetings or seminars, put together a solid plan for selling your investment opportunity. Think carefully about the details.

Will the investors be silent investors – You have the expertise in real estate investing. Do you want to have someone adding their input, or simply supplying the money for the deal? Know your expectations before you begin the sales pitch.

Put together a detailed package – How much money are you looking

for? What percentage of the profits will the investor realize? How much is the property? How much do you anticipate spending to get the property ready for sale? What do you intend to do with the property afterwards – rent it, sell it, etc. Be careful not to disclose specific information about the property. You don’t want the potential investor to take that information and move in on your opportuni-ty.

Borrowing from Retirement Accounts

Investment accounts, such as IRA or 401Ks allow individuals to save for retirement. Typically, you can’t withdraw funds from these accounts until retire-ment (60 – 65). However, many accounts allow you to take loans out from the accounts. Imagine taking a loan out of $20,000 from a retirement account and earning $4,000 profit in 6 months.

How will you structure

payments – Think about how you would pay inves-tors. Would you treat it like a loan with a regular monthly payment, repay with interest upon sale of the property? What repay-ment schedule works best for you?

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What kind of Return-on-Investment (ROI) – This could be a big sell-

ing point to potential investors. A lot of people are using very conserva-tive investment vehicles, like IRA (Individual Retirement Accounts). These investments pay on average 5 to 8% interest. If you can offer an investor a greater ROI – say an average of 20%, you’ll capture a lot more attention.

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Who will manage investment

– You’ll probably set up an escrow account to hold investment funds. It’s a good idea to have an attorney set up the paperwork for the investment contract and the escrow account. It always seems better to have a layer of separation between you and the management of the investment.

Pooling Lender Money When you have more than one private money lender, you create a pool of lenders. Essentially, you are putting all the funds together in one pool of money. This type of investment requires a little more paperwork. To begin with, you’ll have to start a business, with a state and perhaps federal business license as a real estate investor. Actually, you must form a corporation – either a LLC (Limited Liability Corporation) or an S-Corporation. You’ll also need to investigate the regulations and security laws in your state. Each states regulation will vary substantially; federal laws are unique as well. Most states will not allow you to pool money under a sole-proprietorship or a DBA. As you begin pooling private money from lenders, you are required to provide a disclosure document to your lenders. The disclosure notifies lenders that they are part of a pool of lenders and that repayment of their investment will be in pro-portion to their investment. Many states allow for exemptions for real-estate transaction. This exemption does not apply to pooling of lender money. Even though the funds are used for real estate transactions, you still have to inform your state’s regulator that your


investment business is pooling lender funds. This protects both you and your lenders. Pooling money from investors is a fairly complex process. Not only do you have to worry about staying in compliance with your state regulations, as you pool money your business is considered a security, and falls under security laws. It’s similar to selling stocks or bonds, and the complexity of managing this process can be daunting and complicated. Seek the advice of a business advisor or attorney before you attempt to pool investor funds together. How Cross-Collateralization Works Sometimes you’re not able to get all the funds you need for a property from a hard money lender. Some hard money lenders may opt to loan no more than 65% of the properties current value. If you are hoping to get money to rehab the property, this may not be sufficient. If you have multiple properties, you can use the value of your property as colla-teral to increase the amount of the loan. When you use more than one collateral property it’s called cross-collateralization. Let’s take a look at some additional methods for raising cash to invest in real estate: Leveraging Credit Cards This certainly isn’t the ideal method of financing your investment, but on smaller sized deals, it could be an option. Many auction properties require that you have cash on hand to purchase a property. One method of doing it is to take a cash advance on your credit cards and having a pile of cashier checks ready to go. Of course, once you sell the property at a profit, you immediately want to pay the credit cards off and keep a balance in the bank for future investments. It’s tempting to spend your profits, but that will just put you back in the same situa-tion. Many credit card companies may offer no interest if you are able to repay within 60 or 90 days. If you have a property that requires small cosmetic changes, it could be possible to make the changes and flip the property without paying any interest, but it will be challenging. However, it’s an option to become established in investing and gain some ready cash for the next deal.

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Borrowing from Your IRA or 401k Just as it’s possible for investors to take money out of their 401k or IRA accounts, it’s also possible to make loans to yourself against these funds. Check the interest rates and repay-ment amounts to determine whether you’ll use this as a one-time solution, or as a permanent option for borrow-ing funds. Creative Down Payments We always assume the seller wants to completely cash out their home or loan. But the reality is that in a lot of situations, the seller just wants to get out from under the burden of the loan or they just need some extra cash. You can step in and help them with their burden. As the seller if they’ll take part of the money now, and the rest of it later on the sale. That gives you the legal right to take over the home and only commits you to a partial down payment. You pay of the remaind-er of the balance when you sell the home. Deferred Down Payments Even better than a partial down payment is a deferred down payment. In this example you take over a loan that (on good terms). You pay the seller the balance of their equity, or the agreed upon down payment amount when you sell or refinance the loan for the home. This is basically a “no money down” option. You can usually plan on paying the original owner off within 6 months. Equity Line of Credit Do you have some equity in your own personal residence, or in another invest-ment property? One option is to take a second mortgage or a line of credit on these properties. With a line of credit, you only pay interest on the part of the credit line you are using. This is a great option for down payments or money to invest in repairs on properties, or even if you have a fairly low priced property. Sell of property or real estate notes

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Do you have a piece of property that you could sell? Whether you have a house that you haven’t had time to fix-up or a house that you haven’t had time to list, this could be the right time to sell that property and use the money for future investments. You properties are only worth as much money as you are getting from it – don’t let it sit there not doing anything for you. Property Exchanges Did you find a great property but don’t have the money or financing, you could opt for a property exchange. Lots of people have reasons for getting rid or selling a property – say someone has a house on a lake, but it’s too far for them to commute. You offer to exchange a nice house in town with a great commute for the lake property. If you are looking for a vacation property, the lake house can be a great option, and will continue to appreciate, especially for a view property. Think about creative options to exchange the property.

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L O O K I N G F O R O P P O R T U N I T I E S

Hard money loans and investors are great when it comes to funding foreclosure properties, pre-foreclosures, and short sales. These are homes that can provide the greatest potential to real estate inves-tors. Sometimes it’s useful to look for foreclo-sures, sometimes it’s helpful to look for homes where the owner owes more for the home than they can get on the market (short sales) or sometimes you might want to investigate homes where people are beginning to feel financial stress, but haven’t listed the home yet. Buying properties from homeowners that are struggling financially can be an ethical dilemma for investors. Just keep in mind that most of these people are in a difficult position with few options. You could be making them an offer on property that makes all the difference to them financially and their future. In fact, you are often helping both the lender and the home owner to resolve a difficult situation in a manner where both benefit. One of the best methods for building your investment portfolio is to look for opportunities. Successful investors use the following strategies to find investment properties:

Look for loans that may be in danger of defaulting or are already in de-fault

Evaluate properties for sale and narrow your choices Contact the homeowner to see if they are receptive to a sale Inspect the property and any loan documents that the seller has Figure out what the homeowner needs to get out of the home Calculate your offer price and profit margin Negotiate with the lender and any lien holders Close the deal and make repairs as necessary

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Sell, rent or lease the property.

Locating Loans That Are In Danger of Default

Anytime a home owner is in jeopardy of defaulting on their home loan, there are legal procedures that must take place. Again these procedures vary from state to state. In general, the first public notice is Notice of Default, or sometimes referred to as Lis Pendens.

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You can find these notices at county courthouses, in newspapers in the legal notices section, and through foreclosure services. When a property is in default or foreclosure, the property will be sold at public auction. If you can locate properties before they go into foreclo-sure, you have a lot more options. Once in foreclosure, you may not be able to examine the home. Prior to foreclosure, you can tour the property, and some-times still negotiate with the seller. Your time to act is from the day that the notice is filed until the property is sold at auction. Be aware that each state’s default period varies – in some states, a home can be in default for 90 days before auction, in other states it’s a 120 days. If a home or property has some equity available, there’s a possibility that you can put together a plan that helps the homeowners, while satisfying the lenders. That’s why it’s some important to find properties pre-foreclosure. With this type of home, you purchase the equity from the homeowner, make a financial arrange-ment with the lender, and ultimately sell the property for a profit. However, there are lots of people that are in financial jeopardy and are looking for some assistance. These are great investment opportunities before these properties get into legal foreclosure. You can find these houses by:

Advertising Newspaper/Magazine Ads Postcard campaigns Partnering with foreclosure lawyers or credit counselors Electronic bulletin boards (i.e. Craigslist)


Evaluate Properties and Narrow Choices

When it comes to evaluating a property for investment, it almost always comes down to the bottom line. How much money can you make from this piece of property?

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As you look at homes that are in default, you need to understand the property’s market value. Subtract the amount of the default from the estimated market value of the property. That amount represents the equity that is in the home and your gross profit. If there’s little gross profit – it’s not worth your efforts and could represent a loss. One of the reasons it’s good to look at homes that are in the pre-foreclosure phase is that you can actually examine these homes and see what kind of repairs may be required. Usually, home owners that are in dire financial circumstances don’t have the money to up-keep or maintain a property. There can be a lot of items that need repair or replacement. Even a home with a good gross profit can see those profits eaten up by repairs.

Contact the homeowner to see if they are receptive to a sale

It can be a real challenge to talk to homeowners, especially homeowners that are near or in default. These homeowners are often desperate, and at the end of their rope. They are being hounded by collectors and bank representatives. They may find it easier to avoid phone calls or letters. Again, advertising for people that are looking to sell is a great option because you get people coming to you. There are a lot of benefits to getting property owners to approach you, chief among them that you don’t have to sell them on the idea of selling their property – they’ve already come to terms with needing help for their financial problems. Show empathy and understanding for the homeowner’s financial problems and focus on how you can help them solve their financial difficulties, without entering into foreclosure, which could damage their credit for years.


The most important factor is to be professional and courteous, never pushy. Talk with people personally. You’ll have a much better chance of success if you meet with the homeowner face-to-face, rather than having discussions over the phone. Meeting with the homeowner is a great opportunity to uncover important facts about the property:

Does the homeowner need cash? Is the homeowner expecting some kind of financial bailout?

What is the condition of the homeowner’s credit? Are there any liens or mortgages against the property (besides the first

mortgage?) Will the homeowner allow you to inspect the property?

During your initial meeting with the homeowner, don’t make promises or set expectations about purchasing the property. Keep the meeting an information gathering session only.

Preparing an Offer for the Property

Take a look at the property and the equity in the property. The equity is the difference between the market value and the default amount of the loan. Check careful to see if there are any liens or second mortgages against the property. Any liens must be subtracted from the equity amount. Sometimes you have an option to negotiate with lien holders. In some cases, you can offer the lien holder 20% of the lien amount. It’s not uncommon for lien holders to accept partial payments rather than lose everything. As you make your calculations, don’t forget to include the closing costs of the loan, carrying costs, mortgage payments, insurance, repair costs, sales commis-sions for the property. How do you prepare an offer for the property? You can do it several ways – you can show the homeowner an itemized list of the repairs that need to be made to the property, plus the loan amount, and any liens against the property. Or, you

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could simply offer the homeowner one flat rate, without itemizing each cost or expense.

Preparing a Contract for the Sale

If you reach an agreement with the owner for the sales price, you’ll need to get the paperwork done. In this case, you can either ask the homeowner to sign an Equity Purchase Agreement, or a Real Estate Purchase and Sales Agreement. Any party that is recognized on the mortgage contract must sign the agreement – this includes spouses or co-signers. The purchase contract must be very clear, in fact, it’s best to have an agreement drawn by an attorney. Even a standard “boiler plate” agreement can be easy to use – simply fill in the blanks. The most important thing is to make sure that the contract is very specific and spells out all the points of the contract: Make sure the contract includes all the following:

Contingency clause that allows you to get out of the deal if something happens that is not part of the original agreement. This could cover you if the property has unknown damages, termite damage, water damage, etc.

A statement that allows you to show the property to prospective buyers.

A statement that indicates the property has to have a minimum appraised

value.

A date that indicates when the property must be vacated by tenants and their possessions.

An agreement for the specified amount of the repayment of current loans.

A statement that specifies who pays closing costs.

A statement that deeds the property to the buyer and authorizes the re-

cording of the deed.

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Closing on the Property

When you close on a property, you want to make sure that the property is truly in the kind of condition that you expect. That’s why it’s important to get accurate appraisals and inspections on the property prior to closing the loan. In addition to inspections, you’ll also want to do a title search to make sure that there are no lenders that hold liens against the property. When it comes time to close on the property, you definitely want to have all your financing in place and that you explore all your options. Don’t hesitate to consid-er a variety of lending options, such as hard money lenders, investors, or working with the home owner to find a creative solution. On the next few pages, we’ll show a sample financial plan that investors or hard money lenders would request to see before lending money. Remember, it doesn’t matter how big the loan or amount for the property. An investor or lender will want to know:

The sale price of the property Any liens against the property Value of repairs or renovations to the property Expected Sales price of the property Your exit plan – will you send, rent, lease

Take a look at the next section to see an example of a proposal.

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Financing Proposal Example

Getting money from hard money lenders or investors doesn’t have to be a complicated process, but you should put forth a professional and well-thought out proposal to the lender. It doesn’t matter whether you are putting together a package for a commercial property, home to flip, or a rental property. Each requires a proposal that illustrates the benefits and profits of the sale. Typically, you’ll approach hard money lenders or investors through initial phone calls to gauge their interest in the project. But once you’ve discussed the property in fairly general terms, you’ll want to show them specifics of the project. You can simply fax your proposal to them (or hand it to them), once you’ve gained their interest. On the next pages, we have an example of an investment proposal.

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Richie Rich Senior Executive Broker The Hard Money Company Boston, MA 02109 Dear Mr. Rich, Thank you for taking the time to speak with me over the phone yesterday. I am excited by this investment opportunity and value your input and expertise in gaining funding for this investment. As we discussed on the phone, I’ve been working in real estate investment for the last 10 years. I’ve purchased and resold 16 properties in the last 10 years. In addition, I own 3 rental properties. As you can see, I have a history of successful real estate investment. This project is an important next step for my company, Residential Investments, Inc. This multimillion dollar project with a prime view promises a fast resale with considerable profits. Currently, this property is in pre-foreclosure and is underva-lued. With the assistance of Hard Money Company, I will have the flexibility to make revisions to this property and sell at a profit. I anticipate completion of renovations within 9 months of the purchase. I am positive that you will find my enclosed proposal for financing of this proper-ty to be a good investment for the Hard Money Company. I would greatly appreciate an opportunity to further discuss this opportunity with you and begin the funding process. Sincerely, John Smith President and CEO Residential Investments, Inc. (999) 555-1212 [email protected] Residentialinvestmentsinc.com

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mailto:[email protected]


Residential Investments, Inc.

1212 Bay View Road Boston, MA 00123

(999) 555-1212 [email protected] Residentialinvestmentsinc.com

Proposal

Funding for $2,300,000 Residential Property Prepared for: Richie Rich Senior Account Manager The Hard Money Company Prepared by: John Smith President & CEO Residential Investment, Inc. Description Residential Investments, Inc is seeking funding from Hard Money Loans for investment in a bay-front home in Bay Port, Massachusetts. The following information details the location analysis, revisions and renovations, project budget, and resale value. Thank you for your attention and guidance for this property.

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mailto:[email protected]


Table of Contents Executive Summary ................................ 2 Location Analysis .................................... 3 Funding Request ..................................... 4 Return on Investment ............................ 5

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Executive Summary

The Objective: To purchase and renovate residential property at 1234 Shoreline Road, Bay Port, Massachusetts.

Need #1: Initial funding less twenty percent down payment for purchase. Need #2: Remodeling funds for renovation and contractor funds.

The Opportunity: To own investment property in the highly desirable community of Bay Port, MA.

Goal #1: Renovate mid-century private residence, restore home to its original simplicity and elegance, while updating the home to include lux-ury upgrades.

The Solution: Form an investment relationship with Hard Money Lender and Residential Investments, Inc. to obtain funding to purchase and renovate property.

Request #1: 80% funding of 2.3 million, 3 year balloon on initial purchase price.

Request #2: $400,000 18-month open credit line for renovations; open

balance at 18-months to be financed into initial loan.

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nalysis

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Location A

Residential Investments Inc. has performed a thorough analysis of the property and community of Bay Port, MA. The following are the results of our survey: Primary Location:

Location: 1234 Shoreline Road, Bay Port, Massachusetts. This home is located on scenic Shoreline Road in the community of Bay Port, Massachusetts. Bay Port is an island south of Cape Cod. With a land area of 87.48 square miles, Bay Port is one of the largest islands off Massachusetts. This community is primarily a summer colony. The population is 2,750. Description: Mid-century home on scenic road. Home was designed by historic architect Jonas Schliengler. Home features expansive ocean views, floor-to-ceiling windows, hardwood floors, numerous fireplaces, open floor-plan, 5400 square-foot home, 6 bedroom, 8 bathrooms, 50 feet water frontage. Potential Buyers: Luxury home buyers, average income of $30 million. Compara-ble homes in Bay Port sell for 6.5 million.


Request Funding

The following information summarizes Residential Investments, Inc. request for funding. Funding is to be used for the following period: 3 years with start date of April of this year. Funding Requested Residential Investments Inc. requests and initial loan of $1,840,000 ($2.3 million purchase price less down payment of $460,000), with an open line of credit of $400,000 for renovation for the period of June through January of the next year. Balance of credit line to be assumed into initial mortgage on June 1st of the following year, 3 year balloon no higher than 9% APR. Repayment Plan Specifics to be determined by The Hard Money Company. Requesting fixed interest, 3 year balloon. Required Funding Purchase Expenses $2,409,500 Property $2,300,000 Closing Costs $18,000 Escrow $42,000 Taxes $22,000 Insurance $27,500 Renovation Expenses Contracting $400,000 Insurance $16,000 Total Expenses $2,825,500 Current Available Funding $460,000 Funding Requested $2,365,500

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Return on Investment

Detailed below is the Return on Investment (ROI) analysis for the project. The costs for the purchase, renovation and remodel of the property vs. the benefits are summarized for a 3-year period. Purchase Price $2,300,000 Renovation Costs $416,000 Property Resale $4,500,000 Listing and Closing Costs $38,500 Net Profit $1,745,500

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Real estate investment can be an extremely viable and profitable business oppor-tunity. Even if you don’t have a savings account with a huge balance, or sterling credit ratings, you can still find financing to purchase investment properties. There’s never been a better time to invest in real estate. You’ll find some of the best deals in real estate in the last 10 years. Prices are great, there’s an enormous inventory of homes, and the market is right for new buyers or renters. You can finance your future – all by finding the money you need for investing. To find out more information about successful real estate ventures, visit: www.yuckyhousesecrets.com.

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Glossary of Terms Borrower – The individual applying for a loan. Lender – The company or individual that provides a loan. Could include credit unions, banks, private companies, individuals, financial companies, etc. Amortization – The period of time that the repayment of the loan principal amount and interest is based. Loans may have different amortization schedules or terms. Balloon Payment – The final payment of a loan that has a longer amortization period than the term. As an example, if a monthly payment is based on a period of 6 years, but the actual term is 3 years, a large payment (generally half of the loan amount) is due with the final payment at the end of the 3 years. Bridge Loan – A temporary or short-term loan that is made in anticipation of long-term funding or financing. Soft costs – Expenses incurred in developing a real estate project, including legal and lending fees, architectural and design fees, permits, insurance, etc. Hard Costs – The direct costs to construct or remodel a building or structure, otherwise known as “bricks and mortar” costs, includes the acquisition of the property, construction, equipment, etc. Contingency Costs – A portion of the construction costs set aside to cover unexpected expenses or “hard” costs. Collateral – The property a borrower uses to secure repayment of a loan. Colla-teral could include: a lien on your house, equipment from your business, or a bank account. If the borrower defaults, the lender has the legal right to seize the collateral and sell it to pay off the loan. Debt – Money, goods or services that one party is obligated to pay another in accordance with an expressed or implied agreement. Debt Service Coverage or Debt Coverage Ration – Lenders use this to determine borrower’s ability to repay a loan. This calculation is typically expressed as a ratio.

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Default – Failure to pay a debt or meet an obligation. Equity – The difference between a property’s market value and the amount of debt or other liabilities. Fees – Charges made by a lender for making the loan. Fees can include a range of costs. Forgivable loan – A loan made with the understanding that if the borrower meets certain requirements, repayment of the loan will not be required. Guarantee – A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform. Loan guarantee or loan insurance programs make certain loans less risky for lenders. Interest – The cost of using borrowing money, usually expressed as an annual percentage that the lender charges a borrower for the use of the principal over time. Interest Rate – The amount a lender will charge for the use of their funds. Interest rates vary greatly for each loan and are usually tied to the industry measurement, referred to as prime rate. For example, if prime rate is 5.75% then a “prime plus two percent” rate would be a loan with 7.75% interest rate. Leasehold Improvements – Renovations or repairs to leased space to suit the renter’s needs. These may be paid by either the landlord or the tenant. Lien – A claim a lender places on a property in return for lending money. If the borrower is unable to make payments to the loan, as agree, the lender has the right to try and collect repayment of the loan by selling the property. If the lien is made against property, such as a house, or commercial property, the lien is referred to as either a mortgage or a trust deed. Line of Credit – A set amount of money available for the borrower to borrow against as needed. The borrowed amounts are paid in regular payments deter-mined by the lender. A line of credit is different from a loan because after the money is paid, the borrower can borrow and use it again, similar to a credit card. Loan – Transaction where a Lender allows a borrower a sum of money for a specific period of time with a specific interest rate.

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Loan Amount – The amount of a loan is determined by how much the borrower needs to complete the project and the lender’s assessment of the borrower’s ability to repay. Some lenders may have minimum and maximum loan amounts. Loan-to-value ratio (LTV) – The ratio of money a lender is willing to loan compared to the appraised value of the property other security. Mortgage – A written contract by which the borrower gives the lender a lien on property as security for the repayment of a loan. Operating Reserves – Funds set aside annually to be used to offset possible operating losses due to unexpectedly low revenues or unusually high expenses. Points – An up-front fee a lender may charge for a loan, expressed as a percen-tage point of the loan amount. One point equals one percentage of the loan amount. So, if the loan is for $100,000, one point would be $1,000. Prime Rate – The rate, as announced from time to time by commercial banks as the prime rate. Principal – The original amount of money borrowed and the amount that the borrower must pay back, not including interest. Term – The agreed upon period of time for which a loan is made. A loan provided for 10 years has a “10 year term.” For more information about real estate investing, including additional courses on investing, we recommend www.yuckyhousesecrets.com.


Documents

Financing Your Future: Finding Millions for Real Estate ... › wp-content › uploads › 2019 › 08 › Insta… · Now the real estate bubble has burst, and we see market price