NEW! BP Podcast 018: Flipping, Wholesaling, and Everything Marketing with Danny JohnsonHide this
H.R.2751, also known as the FDA Food Safety Modernization Act, passed the senate before the holiday and was recently signed by President Obama. You might be asking why I'm writing about a food safety bill on a real estate blog? The answer lays in the actual text of the bill (soon to be law).
One of the tenets of the bill will require farm and food manufacturers to prepare safety reports for their food during many stages of production. Proponents of the bill argue this will be an economic boon for most farmland states adding jobs and boosting the economy. Those who propose the bill say that even doubling the amount of food inspectors won't do much to add safety in our food distribution system.
No matter which way you shake it, some manufacturers will likely need to add facilities to keep up with the new regulations. Until technology improves, cutting crop size to make room for new buildings is not an option because that would reduce crop yield. That means expanding into new territory, which could mean purchasing new tracts of land, development deals, and new construction contracts.
With some luck, real estate agents and brokers in the farm scape may see an economic boon to their businesses soon too!
Photo credit: dbking via Flickr.
Two years ago a heartbeat and a signature could get you 100% financing on a residential rehab project. Today, rehabbers are persona non grata to most commercial banks. Combine that with new financial regulations and exotic lending programs from banks will be sidelined for several years to come, no doubt.
The only problem is, the deals are happening now. Banks and servicers are selling properties at 30-50 cents on the dollar, others are liquidating notes for whatever cash they can find. The investors with cash are cleaning up and putting together portfolios of property that will explode in value over the next few years. But what about the investors without all that cash? Is there no hope for owning an investment property and taking their piece of the american dream?
That's where hard money comes in.
I'm a big fan of hard money, especially in our current credit market, though I will admit, hard money has changed quite a bit in the last two years. Absent of investing all cash, hard money loans are the next best method of taking down residential properties, rehabbing them, and wholesaling them out to other investors and potential homeowners.
For the newbies out there, hard money is a loan that is based purely on the value of the asset being pledged as collateral. They're much easier to qualify for than conventional loans, but are alsomuch more expensive.
Hard money loans are especially good when rehabbing and flipping properties, since you're in the property for much less time (hopefully) the added interest rates (10-18%) won't do too much damage to your profit margin. You will have to watch out for the front end costs,usually between 2 and 6 points, because those numbers will effect your bottom line, and can sometimes lower your net loan proceeds.
Even with hard money you'll still need to put some skin in the game. Most reputable hard money lenders are asking for 20% of the purchase price, though there are still a few holdouts who will fund 50% - 60% of the true property value, which might get you slightly more leverage. It's getting harder and harder to convince hard money lenders that the property you're picking up at has a "true value" twice what you're paying for it.
Before signing on the dotted line for a hard money loan, make sure you are being realistic with your rehab time line. You don't want a 3 month loan term if it will take four months to rehab and sell the property. It's better to pay more for a longer loan than to get it with default interest rates and fees. Give yourself enough time to get in and get out, and don't be afraid to ask for extensions. If you've made your payments on time and haven't fallen behind most hard money lenders will be more than happy to extend your loan, especially if they can charge you for it.
If you're new to the flipping world, or if you're an experienced rehabber but your short on cash these deals are great deals to strike up your first partnership. An $80,000 purchase price will require only $16,000 down payment. Split that two ways and you're into a property for only $8,000 each. $200 for a BPO, clean title, and that's pretty much all you need to get started with a hard money loan.
It's probably been a long time since you've been told to do your homework, but never has it been more important.
A few years ago a developer could practically walk into a local bank with a contractor's cost estimate written on a napkin and get 100% funding for their spec home or commercial project. Now, with the economy in shambles and lenders falling off the map by the dozens it's time to go back to the basics.
Sales and construction volume have dropped drastically in the last year and lenders are reserving their funds for those projects in the best areas, and for developers who have done the most research, and have the best loan requests. Those developers make sure to analyze their developments at each and every step of the process, especially during the feasibility stages, when one makes a go/no-go decision.
If you’re going to spend a year, or several years, working on a development project you want to make sure there will be a great pay off in the end. If the project is ill conceived from the start no loan product will save you from eventual disaster, and possible financial ruin. How can you increase your chances of success? Do your homework.
When we consult with developers the first thing we do is go back to the land. We try to understand why a developer wants to build in a particular area, and what they plan to get out of the project when it's complete. It's important to research the area demographics of your potential development to understand the local trends. Who's moving in, who's moving out, and why are they buying what they're buying. Is the area comprised of young families who need three bedrooms and homes with at least 1,500 sf, or are there more single seniors who want smaller, single story homes, with handicap accessible features?
Asking yourself these simple questions will helps you conceptualize the type of product you will build and what amenities you'll need to include in the project. Doing so will ensure your project fits well in the neighborhood and will be neither under nor over built. It also helps you draft your first run construction cost estimate, which in turn helps you determine your potential profit margins.
Surprisingly, these simple steps are often overlooked by many developers, thinking that if a nice neighborhood supported a certain level of sales in the past then it must support that same level in the future. I can't stress how dangerous that thinking can be. That is the type of gamble that has so many would-be developers facing foreclosure on their projects. Don't be that person. Only a thorough review of demographics can help you understand what buyers are likely to do in the future. No one can predict the sharp market changes that can happen at any time, but by doing your research you can make a fairly good educated guess at future trends. Do your homework.