How to buy houses when working with Private Lenders
Are you a Real Estate Investor, looking for that next “fix & flip” or “buy & hold” project? You have to buy your property differently than you would buy your home.
When you buy your home from a bank, they look at the value of the house in its current state. They also take a hard look at your credit record.
Private Money Lenders evaluate you and the property differently. They are PRIVATE Lenders, and they do not have to follow the rules of a commercial bank. They look to the future and take into account you are going to repair and fix up the house, giving it a much higher value. The lenders consider the After Repair Value (ARV) for the basis of the loan. The ARV is based on the average home sale prices for the same size and style house in the neighborhood. Listing Prices mean nothing; the costs of sold houses are the valid prices. Your credit record may or may not be evaluated, but not as strict as a bank. Some lenders do credit checks, and some do not. For people with Good Credit, No Credit, and even BAD Credit, there is a Private Lender that will work with you. They take into account the property, your experience in Real Estate Investments, more than your credit score. If you do not have any experience in doing rehabs, that is no problem, as long as you have the right lender.
The ARV is the starting point for figuring out your funding. Lenders will offer different terms. Be sure to shop for a Private Lender, just as you would search for a Wholesaler or Agent. Some lenders will base their loans on 75% of the ARV. They will loan up to 75%, and the remaining 25% is their safety net for the project. When making an offer for the property, you should strive to keep the purchase price below 75% of ARV for those lenders. Different Lenders will loan at varying levels of the ARV.
There are documentation fees that are associated with your loan, and you will pay Points. A Point is 1% of the purchase price. Points can vary from 1 to 3 points or higher. Both of these will be part of your loan, and the amount will depend on your lender.
Private lenders will fund from around 80% to 100% of the purchase price, as long as it is in line with the ARV. If you are getting 80% funding, you will need to cover the 20% down payment. Some lenders want you to have a personal investment of at least 10% of your funds in the deal, allowing a partner to provide the other 10%. In getting the 100% funding, your experience will be a significant factor. Also, you may pay more interest for 100% funding.
Unlike a standard bank, Private Lenders may finance 100% of your rehab costs and include it in the purchase loan. You need to work closely with your contractors and develop a detailed project plan listing all expenses for the rehab. When you finance your property, your rehab funds are placed in an escrow account. There are usually three draws of funds. You will start the project, and as you end phase one, you will provide receipts for work completed. After inspection, the lender will issue your first draw, and you will begin on phase two. You will continue until you completed the rehab and received your last draw of the fund.
During the rehab phase, you may be paying interest-only payments for your funds. Once you complete the rehab, you will exercise your exit strategy, whether it is to sell the house or hold it and rent it out for income. If you sell the property and your project plan was correct, you should make a profit after paying off your Private Money Loan. If you are buying and holding, as soon as you have it rented and stable, you will go to a standard bank or Private Lender and get a new loan at the new value and pay off your Private Money Loan.
The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage.
Below is how the numbers would play out for a house with a Lender covering 70% of ARV. For this example, we will use $300,000 as the ARV.
$210,000 Purchase price = 70% of ARV
$42,000 Your down payment of 20% of the purhase price.
$168,000 – 80% of the $210,000 purchase price
$20,000 – Estimated Rehab Costs
$5,040 – 3 Points on loan amount
$1,200 – Document fees
$194,240 – Project Cost
65% – LTV
LSG Funding offers rates starting at 8.5% Loaning up to 90% LTV, 100% Rehab, Interest payments wrapped into the loan, Rehab drawings in advance starting at closing, NO asset verification, NO income verification. Check out the details at https://funding.lionsolutionsgroup.com/2019/10/17/new-program-new-rates/