How can I solve a seller's problems if I'm using conventional mortgage?
Rental Property Investor · Cary, NC · Member since 2014 · 89 posts · 10 votes
Hi. From what I've been hearing and reading, direct mailing to motivated sellers work because I'm "solving their problems". This means I can help them by buying cash, closing fast, etc.
In YellowLetters.com, a lot of their pre-made postcards even have the word "CASH" displayed very prominently.
But it seems to me that I'm less useful to a motivated seller if I'm using conventional mortgage because I'm not able to close in a couple of weeks and I won't be able to pay them cash, I need to have the property inspected, etc.
But since I don't have any investment properties yet, I could use conventional mortgages for my first 8 or so properties. With the interest from conventional mortgage being lower than other loan sources, it seems like a no brainer to use it for my first deals.
But this leads me to the question: Am I not as "useful" to a motivated seller because I'll go through a conventional mortgage instead of offering them "cash"?
@Christopher R. - you don't need to have cash; you need access to cash. Here's how it works:
1. Your letter says - I'll pay cash... You find a deal whereby you can purchase property at 60-70 cents on the dollar. Let's just say it's a house that need $30,000 rehab, but when it's done the house is worth $150,000 and you can purchase it for $75,000... So - your PP of $75,000 + Rehab of $20,000 means that you'll be into the deal at $95,000.
2. You need either a partner or an investor. If it's a partner, then let's say you split profits 50/50. After holding costs and contingencies of about $10,000 more, having sold the house you'll be splitting $45,000. If it's an investor, then you will simply have to add the interest you owe them to your expenses. Thus, let's say that for financing the entire deal, you'll owe them $10,000 of interest - this'll bring your expenses to $125,000. Having sold for $150,000, you'll keep $25,000 of profit.
3. If you want, instead of selling the house, you can refinance it. But, with an appraised value of $150,000 and 70% LTV, the most you'll be able to pull out will be $105,000, which is not enough to cover your total costs of $125,000. Thus, in order to do a keeper, the numbers have to be better by 20k - you have to purchase this house for $55,000 ! But, if you can do it, then you can market Cash Purchase on your advertising :)
Just a reminder DNFTJG
If a title company cannot close in less than 30 days on a cash deal get a new title company.
Joe Gore
Joe and James, my comment as to the backlog of closing companies applies when there is a backload in all your closing companies which is common in mid size and smaller cities, I would think that Dallas or Memphis would have more options. If it's truly cash, you have many options and I agree, go somewhere else if you can, if you have a lender behind that cash offer, your lender will tell you where you will close.
Also agree, if you're using conventional financing shooting at REOs may not be the best strategy, look to conventional MLS deals. :)
One strategy that I'm trying to learn as much as I can about is Subject To... This is an option for those of us without a lot in the way of capital funds but still allows us to be able to work with many distressed buyers. This is obviously not the perfect solution to every situation, but it is definitely a viable solution to offer a lot of distressed homeowners.
I too would like to have someone else give a better explanation/example of "rehab to perm" as mentioned earlier in the thread.
Christopher and Scott -
A rehab-to-perm loan is a two-part loan process that allows real estate investors to purchase and rehab investment properties that they intend to retain as rentals.
The problem with purchase mortgages is three-fold. 1. mortgages take too long 2. you cannot get a mortgage on many distressed properties due to problems with foundation, roof, etc 3. you sink too much money into rentals when putting 20% down and then paying all rehab out-of-pocket without reimbursement
Cash is a great option, but you are limited by the amount of cash you have. Ultimately you can turn that cash acquisition into a mortgage, solving the aforementioned problems, but you still need the seed money up front.
Rehab-to-perm loans solve this problem. Close quickly with a "rehab loan", which is the same as cash for all intents and purposes. This is a hard money loan, but because it's predicated on refinance through the lender as your only exit strategy, it's at a reduced rate and cost.
While you rehab the property, the lender works on the refinance, and when you are done, the backend appraisal is completed, and the refinance can close.
Your out-of-pocket with cash is 100% + rehab; however you can get the purchase price back through delayed financing. With a purchase mortgage, your out-of-pocket is 20% (25% in many instances) + rehab. With "landlord loans", your out-of-pocket is significantly less (10%-15% of total deal cost, allowing you to acquire 6-8 properties with the same amount of cash you would use for one cash buy OR 2-3 purchase mortgages.
The cost go up slightly and the backend loan is higher, but your cash is retained.
This works better the larger the rehab and the more equity that is present in the property. If it's a retail purchase that just needs paint (rent ready), you are better off with a mortgage, and the seller is probably not in a huge hurry to sell/close, preferring instead to take the best offer.
@Account Closed - How do I convince the seller to sell his house at 25% below retail. Do I try to convince him that his house is just really worth 75% of what it's really worth? Or will he know that I'm walking away with a 25% profit but that I'm a good option because I'll be solving a few of his problems?
@Christopher R. You will never convince anyone to sell for below intrinsic value. They convince themselves - all you do is help them :)
They have to come to you!
@Account Closed - How do I convince the seller to sell his house at 25% below retail. Do I try to convince him that his house is just really worth 75% of what it's really worth? Or will he know that I'm walking away with a 25% profit but that I'm a good option because I'll be solving a few of his problems?
Going that route, most probably lie to owners, if a property is on the MLS, most of the time the price is set to market value and it will sell close to the listed amount. Trash houses, empties needing repairs that might be listed will give you more room.
You need to justify your price at what works for you, forget thinking it has to be 70% of asking price, it depends on what you're needing the property for.
Since you're really starting off, most small RE investors talk stuff, I bought 30% under market, in reality most paid market. To understand what market value really is, google it, "market value of real estate" you'll see the market conditions that must exist to determine market value, if those conditions don't exist, then you bought the property at a distressed value. Buying distressed properties is where you'll have a greater profit opportunity, the distress may be the owner's position or circumstance, property conditions or other factors. There are threads here that explain this, might do some searching and catch up with the basics.
You really need to get a real estate book for agents, that will take you through the conventional side of real estate basics most here skip. 70% of the questions asked on BP are answered from a basic knowledge of RE. What makes it hard is that newbies don't start out right, they listen to 15 opinions and 9 of them don't have a clue as they didn't learn the basics. When the questions get to financing, the odds of a correct answer go down even further.
The rehab-perm loan you asked about is better known at the bank as a construction perm loan. A bank can file a lien once under a future advance loan arrangement and they disburse funds in increments for construction or rehab projects, when completed the note is modified to a long term mortgage or the construction loan can be refinanced without going through the loan process all over again, the new loan simply pays of the old one and you move in.
If you're flipping, you don't really get a rehab/construction per loan, you get an extension on the construction loan until it sells. To hold the property, you'd get the "end loan" or the permanent loan.
I suggest you start reading and get the basics first. The investors here that are good sources of information often don't reply to minor basic questions as it shows two things, IMO. 1. the person asking has put forth little effort on their own and expects to be spoon fed every beginning detail and 2. those with knowledge are often addressing other newbie advice that was incorrect, those that jump on basic stuff are often those thinking they know but never really studied RE from the beginning (because it's seen as not providing any cash return for their effort). 3. What ends up happening is that a question is asked and then you follow up with another question that is unrelated, the person posting, in asking questions like that takes their own thread off topic. This has been mentioned on the site information, how to get the best response.
I'm not going into a long post explain some financing issue when the thread is under how to do something else, that means all that I offer is only going to pertain to that thread and those who do search for financing information may never find it. I, as well as others, don't offer advice in depth for just one person but for the tens of thousands interested in the same subject matter who may view it later on.
If you have a financing question, let's go to a new finance thread.
There are tons of thread on the internet where the title and first post is on an interesting topic and you get to page 6 to make a comment and people are discussing some other foreign topic that has no bearing on your post you meant to make.
To get the best responses, know what you're asking basically, be specific and stay on topic. Otherwise, you'll get posts from folks that just want to post and carry on some rag chewing session. :)
@Bill Gulley Thank you for your explanations for market value, construction perm loan, and how to maximize the use of this awesome forum.