Wrapup on Financing Escapade

If you've been following me on Twitter: http://twitter.com/wflood you probably already know the outcome. But, if not, here it is:

25 lenders
4 Government programs
2 private lenders
No financing commitments...I had to cancel the deal.

Actually, I went back to the sellers for the 3rd time and proposed owner financing. I noted that most lenders didn't want to touch their market because of the level of foreclosure. I reminded them that they'd already dropped the price from $115,000 to $95,000 to $84,500 and I was the only bite. I pointed out that first-time home-buyers were probably not going to be interested in a mid-century fixer-upper, and that non-owners like myself simply could not get reasonable financing. I noted to the agent that I was distressed in thinking that the property would probably only get sold for something like $50,000 to a wholesale investor with cash.

Still...and this always befuddles me...they would rather take half the original asking price to get cash than to get full price paying healthy interest. I'm not off, either; there's a house down the street in short sale for $49K, so the are clearly competing now with that.

So, I honestly failed in the quest to buy the house, by taking on this public creative financing excapade. What does that mean? Well, success literature abounds with commentary on failure just being a form of feedback and that one must get back in the saddle and learn from it. In this case, I hope my commentary will help you learn from it just as much.

With that in mind...here's my learning outcome:

• This is just a reminder that investors must deal with sufficiently motivated sellers. This seller was simply not motivated enough to consider terms.
• And a wakeup call to me -- I've been correct in my strategy for the last 18-24 months to simply ignore and bypass the traditional lending community and focus solely on owner financed deals. There's really nothing of use in the lending community (in my opinion) for long-term investors.
• On the other hand, right now is one of those unique times when cash is king, and cash-paying investors are "cleaning up" by buying properties at 40%-50% of their realistic value. Lenders I talked to confirmed those figures - deep pocket, cash paying investors are buying portfolios of bank-foreclosed houses (10 to 20 at a time) for as little as 40 cents on the dollar (even at realistic appraisal).
• There's always another property, and the deal of the century comes along about every two weeks (I think that's from Gary Keller's book). No sooner did I cancel the contract on this deal then I came across one equally good, and within a mile of it. That one had just gone under contract, but it had owner financing candidly mentioned (10% down, 7% rate) right in the advertisement. It was in turn-key shape, and while it was significantly more than the one I had pursued and was already under contract - it was a wonderful beakon to demonstrate to anyone reading this that no single deal, whether obtained or failed to be had is the end-all of one's investing. Just jump back in and start digging again.

(I do have to admit I am disappointed, though...it was a darned cool house!!) Put a smile there -- time to get this horse moving again.

Status Update on Financing

So, sixty days into the financin search. Let's see where we stand...

FHA 203K is out. The main program is only for owner-occupants now. The loophole for a non-profit requires that the housing rehab entity be in the non-profit for two years before applying.

USDA financing...no window. Main program is for owner-occupants only. The provision for rental housing providers requires a multi-unit property, and appears to require the borrower to live in one unit.

Conventional - nearly every conventional lender I approached is still holding to the 4 properties/4 mortgages or less requirement even though Fannie Mae loosened up the requirements.

HomePath/Homesteps - referred to them as the holy grail or investor financing. Supposedly have a 10% down program. That's only for the first investment. With more than 4 properties, they want 25% down and --- get this --- 3 to 6 months reserve for payments for every property I own! In my book, they are the antithesis of a creative lender.

Found at least one portfolio lender that would lend even though I have more than 4 properties/mortgages, but they won't allow secondary borrowing of any kind. The down payment requirement was 25% to 30%, and it had to come from my cash. They would not even allow a partner to put up the funding unless they were on the loan and deed. The potential private lenders I've approached do not want to be on the 1st mortgage, nor on the deed.

Most every portfolio lender I've uncovered is really a hard money lender which I won't use. It appears that basically, banks aren't really lending on mortgages. If they can't sell the mortgage, they won't offer it. It may not help my financing situation, but it's certainly illuminating to see how our banking system is really doing business now. Once upon a time a bank took in your money as a deposit and lent it out in the form of loans. Apparently, that's not happening right now...perhaps on credit cards, but not on mortgages.

My recent foray was to look at Farmers Home Administration loans. They are clearly owner-occupant only. The loan must be for the primary residence and no other dwellings can be owned.

My plan is to keep digging into some more banks, but really need to turn my attention to private lenders. Anyone want to put $84,000 to work or know someone who does?

Views the Palm Springs Property and Chatted with the Agent About Financing

Went to view the Palm Springs house yesterday and chatted with the Realtor about the financing situation. I clarified that with more than 4 properties, most conventional lenders won't touch me.

He confirmed that the real estate industry is really up in arms because the stimulous money (you remember...that nearly 1 trillions dollars given to the banks...) is not being used for what was required of it. Banks are doing everything but lending.

He's going to scan his network of contacts to see if he can find any creative lenders with portfolio loans. Better yet, I suggested, individuals who might be interested in getting a good return. Divide and conquer - 10 people willing to lend $10,000 will put the deal together, although that would be logistically messy!

My next stop is the Farmers Home Administration to see what their current state of lending affairs is for rural communities, but non-owner buyers.

Wheel Spinning Right Now

I haven't uncovered anything under the rocks yet. It really is a tight lending market beyond belief. Here's what I've run across so far after talking to about a half dozen lenders:

While Fannie Mae and Freddie Mac loosened up their requirements as to the number of properties one can hold (to 10), lenders have not followed suit...at least not the ones the brokers I've contacted deal with. They are still restricting to a mere 4 properties owned and/or mortgages held. That disqualifies me from virtually all of the well-known lenders.

The loophole I was pursuing with FHA looks closed. Yes, a non-profit can apply for an FHA 203K rehab loan, but they must have at least 2-years of low-income redevelopment and rental provision experience. That's not in my history, and I would be just forming the non-profit.

I'm still trying to get word from USDA on the rural rental lending guidelines to see if there's any stipulation for a single-family unit. The instructions denote multi-family (4 or more units), but I'm trying to find out if there are exceptions.

I just got an offer in the mail from from a national lender for up to $15,000, unsecured for up to 60 months at a supposed 9.88% fixed. Not great, but could be useful for the rehab funds. I believe in divide and conquer, so this lead, while not all that great could go in the file earmarked as a credit line for the rehab....maybe down payment funds if I can find a lender who doesn't care about the source of down payment.

Anyone interested in lending $84,900?

First stop on the financing quest

You utilize every resource available to you. I began with my circle of influence.

My first stop was a friend and business partner who indicated an interest in putting about $25,000 to work. If he's willing to do it, the amount would be sufficient for the 25% down payment if I could get a bank first mortgage. In fact, it would be enough for the down payment and a portion of the renovation costs. No commitment yet.

My second stop was the realtor who sold me my personal residence. He used to play professional football and is still connected to that industry. Like I said...you use every resource you have at your disposal! This contact is really promissing because of his connections. He had indicated on a number of occasions that he knew players who were interested in real estate but who didn't want to buy properties themselves. So, I candidly mentioned I would be interested in talking with them and that I would be interested in amounts anywhere from about $18,000 to approximately $100,000 secured by the property.

My job is to keep on top of him - apparently pro football players are exceedingly busy, even off-season, and he suspects it will take a while to connect with any of them.

I also contacted a mortgage broker in Palm Springs who was supposed to be a "creative" lender who could put deals together where others couldn't. When I explained my situation, he didn't skip a heartbeat in telling me he couldn't deliver. While he did have investor financing that required 25% down, the number of properties I hold disqualifies me for his financing sources. He doesn't do FHA 203K loans, so I need to look for another lender for that. He does do USDA loans, but knows nothing about what I believe is a rabbit in a hat I want to pull - namely utlizing a loophole in USDA loans set up for non-profit corporations. You see, many (not all) USDA loans are for first-time home buyers. But, there is a provision for non-profits who provide reasonable housing to apply for loans. Between this being a somewhat historic rehab, somewhat rural, and that I can rent it to seniors or modest-income folks, I think there's a chance for one of those loans if I form a non-profit corporation. Alas, he knows nothing about that avenue, so I have to do some groundwork there first.

So, out of the gate, I've planted two seeds for private money, but no commitments yet. One lender seems to have been a waste of time.

Week one ends with nothing solid.

A personal creative financing quest

Does creative financing still work? Right now? In June of 2009, in the worst economic climate in 60 years?

I'm going to set out to prove that it does, and at the same time create for you an incredible learning experience on how to finance properties.

With that in mind, let's take journey together. I'm going to get away from the instruction for a while. Basically, for the next several weeks, I'm going to chronical my personal, real-world, nearly real-time experiences trying to put the financing for a deal together.

Those of you who know me personally, know that I am a big fan of Robert Allen's classic book from the 1980's, The Challenge. I'll go so far to say that, in my opinion, it's probably the single best beginner's real estate investing book ever written, because it takes away all the excuses people usually create for themselves. I won't ruin the book by telling you what it's about, but I will say, "get a copy!"

That said, I always wondered what it would be like to be part of such a challenge, and I've often toyed with the idea of creating one of my own. So... here I am...in a bassackwards way...challenging myself, publically. Tounge in cheek, I say, it's time to "put up" or "shut up", put a bit of my reputation on the line, and see if I can do what I know how to do. And, all the while providing you with a roadmap for how to do it yourself!

You see, I believe with every fiber of my being that knowledge of creative financing is the most vital tool a real estate investor can posess. I professed that - even during the crazy bubble of easy money...those days where you could get 110% financing for any purchase just by fogging up a mirror when you breathed on it. I knew that "easy" conventional money was fun, but that it wouldn't last. What's an investor to do now - when, even if an investor loan is available, you probably wouldn't want the terms? In my book, it's right back to what I've preached all along - the assertive use of creative financing.

The question is, does creative financing still work? In particular, can it work in this real estate climate? The skeptics - even lots of the supposed investing gurus - say that none of the old-school creative financing stuff is viable anymore. The worst skeptics say that the days of real estate, as a viable investment are over. Do you believe that drivel? What the skeptics don't understand, never did understand, is that mortgage bubbles aren't the secret to successful real estate investing. Our secret weapon is knowledge of creative ways to finance purchases.

I'm going to set out to prove that creative financing is still the investor's secret weapon. My objective is to show, once and for all, through personal experience and illustration that creative financing can still be done. My objective is to demonstrate - to you...through this deal - if I can creatively finance a purchase, in this lending climate, in this economy, in this housing market, then it can be done at any time, and by anyone. The excuses will be torn down once and for all.

So, here's what I'm up against;
the property is a single family home in the Palm Springs area. It's a keeper, about 2/3 rds of market value, with a purchase price of $84,500. It will need about $15,000 in rehab which I'm also trying to finance.

Here are my basic parameters:

• The seller accepted my contract which cast a 120 day net to obtain financing suitable to me.
• The seller does have the right to take backup offer which can accelerate the 120 days to 30.
• I am commited to no more than 5% of my own money into the deal.
• There is no avenue at the moment for seller financing. The seller and I have been down that road three times - no owner carry, no lease option, no land contract. He needs the cash proceeds. So, it appears the funds will have to come from the outside.
• I won't utilize hard money because it's too expensive for a long-term hold. Can't stand hard money anyway!
• I never, never, never look to my personal residence or retirement account to pledge as collateral for an investment. I've always been commited to the idea that your personal residence and your retirement (liquid) funds should remain sacred.
• Beyond that, I will investigate any combination of financing that I can put together to make the deal work.
• Did I mention that this is an out-of-state purchase, in one of those notoriously down markets in California? Salt on the wound there.

The clock is already ticking...........

Renting as a form of Investment Financing

With last week's final notes in mind, let’s talk a bit about this idea of renting a person’s property as opposed to trying to buy it. I think too many investors shy away from renting or leasing because they don’t perceive any economic benefit. To them, if they don’t own it, it doesn’t count. Nothing could be further from the truth.

The Bundle Rights and Controlling a Property
In reality, ownership is just a social construction. What I mean by that is that man has invented the concept of ownership, which is nothing more than a system by which a huge bundle of rights is transferred from one person to another. But, renting or leasing is also a transfer of rights…just not as many. The important thing to the investor, is control – not necessarily ownership.

Here’s a bizarre way of thinking about this. If you were on your last day of living, it doesn’t matter whether you live in the Taj Majal or in a singlewide mobile home. You can’t take it with you. So, this supposed “ownership” is not permanent; ultimately, the benefits you enjoy last only as long as you do. There are many places on the planet (Hawaii is one of them) that recognize this transience, and never grant ownership of real estate, but rather convey it only on long-term (i.e 99 year) leaseholds.

There are also many times when the economics of renting something make far more sense than paying the full price to buy. MBA types with degrees in finance know this intrinsically. I’m going to assume you don’t, but let me prove the point.

An Extreme Case
Would you see the benefit in this:
A condo owner has a vacant two bedroom unit in a nice professional community; let's say it's worth about $125,000. He owes no money on a mortgage, but can't afford the carrying costs of utilities, condo fees, and property taxes. This owner agrees to rent it to you for just the amount to cover the condo fees and taxes, which are, let's say, $275 total. Can you see the benefit of being able to rent that nice property for a mere $275 a month as opposed to trying to buy it? The mortgage along would run $750! And, you'd have to add the $275 to it since you'd be responsible for the taxes and other costs anyway. Which would you rather pay?

A More Realistic Scenario
Right now, in Phoenix, it’s fully possible to lease a $199,000 house for about $850 a month. Even at a 2% interest rate, allowing for taxes and insurance, you can’t beat monthly cost. And, property isn’t really appreciating in Phoenix right now, so buying doesn’t get you much in they way of that benefit. At 7.25% interest, the carrying costs of a $199,000 mortgage, with taxes and insurance would be about $1500 a month. As a result, renting that property saves $650 a month, or $7,800 a year.

With a little bit of savvy marketing, you could probably sublet that property for $975 a month, for a $125 a month positive cash flow. If you tried to do the same under the mortgage I just mentioned, it would be a $525 a month loss! It doesn’t take a Harvard MBA to see the advantages!

What to Look For
Working this technique takes a couple of things. First, you must ensure the owner allows you to sublet the property. You also don’t want to pay any more getting into one of these deals than is customary for renting a property. In most markets, that’s a 1-month security deposit, and first month’s rent. If a seller wants double security deposit, or first and last months rent plus security, they are probably not motivated enough. You need to find the person who isn’t trying to profit, but has a pressing need that you can solve…and is glad for your help.

Coaching Slots Available for Summer!!
Right now, I am taking reservations for private training and coaching for folks during summer. Spaces are limited! If you are working on deals and need guidance, or trying to learn the world of real estate investing and want one-on-one help, give me a shout:

william@thecoasttocooastinvestor.com
614-886-8233