"Skin" in the game, Getting money, and Sweet old grandmas

One of the best aspects of real estate investing is the ability to derive funds from a variety of lending sources to help finance your deals. Meaning,”It’s possible to get started without having a lot of money of your own to do so."

Once you learn how to spot a "Good" deal, finding someone willing to lend

the money to fund said deal will not be so hard. But, there’s a catch. There's always a catch right?   You need to know the lingo and the different rules and criteria that lenders will be utilizing and looking for prior to ever handing you a dime.

The Math

The first thing you need to take into account is that unless you have a very gracious private lender on your hands, most professional lenders are not going to finance your deal 100%. The caveat of that being that your purchase price actually lays within the lenders specified lending rate percentage.  A safe bet is that most will give from 65-75% of the ARV.  Some only lend based on LTV (loan to value).

LTV

LTV is a ratio expressed as a percentage of the loan amount to the sale price or the appraised value whichever is less in a purchase transaction.

For example a sale price of $200K that appraised for $250K with a lender providing 70% LTV has a loan approved at $140k.

ARV

ARV is a ratio expressed as a percentage of the loan amount to the "after repaired value" of a property. Meaning that if the home was updated to meet the standard of similar updated homes selling at market price, the ARV would

be derived from the comparables of said recently sold homes.

Using the same numbers in the example above: a home with a sale price of $200k that appraised for $250k would produce a loan amount of $175k if the lenders max criteria is 70% of the ARV.

100% Funding (The Story)

So given the prior examples just discussed, it's not hard to see how getting 100% of your cost financed can become achievable. Let's say you're driving down the road one summer on a trip to go see your old grandma that you haven't seen forever. Grandma lives in an old, but well established neighborhood in a friendly part of town. While driving there you notice a somewhat beaten up house with some boarded up windows and its grass growing out of control, somewhat unfittingly nestled between two seemingly newly painted and refreshed homes. Being the smart investor you are, you turn right back around, look up the owner’s information, conduct a little market research, and have an offer submitted by the end of the day! Ok, ok... We won't quite do that, we promised grandma that we would stop by and eat some of her pie and we lover her and you like the neighborhood enough that your hoping when she goes she will leave the house in her favorite grandchild’s name... ehh hem.. moving on.

So now the property is under contract. Once you got home and did a little research you found out the most of the homes in the area are selling for about $160k. After contact the owner you find out the house was given to them from a relative that passed away "makes you think of poor old grandma". They are getting bombarded with tax payments and code violations from the grass being too tall and they live out of state so they can't do much about it. Based on your assessment of the current condition of the property, you decide to give them a fair offer of $70k and they accept!

You hire a couple of general contractors to give you some bids on bringing the property back into today's standards and they give you cost estimates ranging from $20-25k. Happy that you made that trip to grandmas, you drive to your local real estate meeting and present your deal. At the end of the meeting a local lender approaches you and tells you he will give you 70% of the ARV and charge you 3 points.

The lender orders an appraisal and since you did your homework, the ARV appraisal comes in right around $160k! Your loan amount will be $115k. So let's do some math. A $70K purchase price + $25k rehab = $95K. Add in the lenders 3 points so $95k plus another $3450 and now you’re in it for $98,450. Let's factor in closing cost and maybe a few other fees and let’s call the final amount $105K. You are well within your lenders $115k limit. Congratulations, 100% financing! Almost...

Skin in the game

Do you remember that catch I was talking about earlier? Well here is the other one. Even if you find a great deal where all cost can be bundled in into what the lender is willing to give you, you still should not expect not to spend any money out of your pocket whatsoever. More often that not, lenders will still want you to pay some portions of cost/fees upfront to show that you have "skin in the game". In their eyes, if you have nothing to lose, what is to stop you from abandoning the deal if things were to start going south? Long story short, be expecting to bring at least some money to the table and be prepared to do so before you even start talking to a lender.

Ending

Your contractors do a great job and you found a top notch agent  who advertises your property for you and gets it sold just one short month later after rehab for just around fair market value.  You're about $50k richer and now you visit grandma at least twice a month.  You're much happier and she is too!