All Forum Posts by: Corey Dutton

This is something I had not thought of, thanks.

I have a client who does about 12 flips a year and he uses us for the rehab financing. His work is excellent and he has tremendous success.

Recently he called me and said he is thinking of doing higher-end flips. Right now he does flips in the range of $100K to $250K. He is looking to get into the $350K to $750K range.

Is there a huge leap in learning curve from one range to the next? Are there any red flags or lessons on the larger flips that someone would share?

Once again, Bank of America continues to earn its trademark as the worst bank in America. The SEC is now conducting an investigation of Bank of America and two of its subsidiaries for defrauding investors in 2008 through the sale of $855 MM in toxic, residential mortgage-back securities. In 2008, B of A conducted the said offering called “BOAMS 2008-A” without properly disclosing to investors that many of the mortgages that were backing the offering were wholesale channel loans. These were high risk loans described by B of A’s former CEO as “toxic waste.”

As per the SEC complaint, “Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws.” The Department of Justice filed a parallel action this week against B of A as well and alleges that these loans were “…riddled with ineligible appraisals, unsupported statements of income, misrepresentations regarding owner occupancy, and evidence of mortgage fraud.”

U.S. Attorney Tompkins was quoted Tuesday as saying, “Bank of America’s reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors…now, Bank of America will have to face the consequences of its actions.” (Read this article on the SEC investigation here: http://www.mpamag.com/mortgage-originator/sec-points-finger-at-brokers-in-bofa-suit-15586.aspx

In June, whistleblowers came forward and accused B of A of unscrupulous and downright illegal foreclosure practices where B of A bank officials were offering rewards to front line employees for meeting foreclosure quotas. (Read the whistleblower article here: http://www.huffingtonpost.com/ray-brescia/bank-of-america-whistleblowers_b_3464583.html

Despite how well you may be treated as a Bank of America banking customer, this is a pure example of bad business for investors and for America. Fraud, lies, deceit, are just some of B of A’s well earned trademarks.

Hi there Shoor,
Great question. Every lender is different. Typically you'll need to submit:

1. Purchase contract and escrow instructions, preliminary title report if available.
2. ARV
3. Comps to support the ARV number
4. Repair bid
5. Site visit to look at repairs to be completed and site visit of comps.
6. Some lenders will require an ARV appraisal. Some just do an informal BPO using #5 above.
7. Some lenders will require a basic loan application.
8. Proof of insurance

However, even if a lender gives you 100% of the purchase price and 100% of repairs on a rehab property, most lenders will require skin in the game by the borrower in the form of, points paid at closing to lender, closing costs paid, interest reserve for monthly payments, etc. Most lenders will want to see that you have some cash invested before giving you a loan for 100% financing.

Asset based financing is not well understood by most real estate investors. Asset based financing is different from bank financing. The primary difference between the two is the way loans are underwritten. For a bank to approve a loan, not only must the property meet its qualifications, but the characteristics of the borrower must also meet their qualifications. Asset based financing, on the other hand, is qualifying a loan primarily based on the characteristics of the property and not those of the borrower. For a bank loan, a borrower must meet specific credit and income requirements. For an asset-based loan, in most cases, only the property is analyzed.

Recently someone came to me asking for asset based financing and did not understand how this type of financing works. He thought because he was buying a property for $250,000, but it was really worth $500,000, that we should give him a loan for 100% of the purchase price of the property. He was shocked when I told him that he still would need to bring some of his own cash into the purchase to close on it. Then he asked me, “Well, aren’t you an asset based lender?”

The answer is yes, we are an asset based lender. But just like everything in life, there’s no such thing as a free lunch. This borrower had no money to buy a property, not even enough money to cover the closing costs or realtor fees. He wanted us to give him 100% of the purchase price of the property as a loan, roll in our loan fees, and cover the closing costs too!! How easy would it be for that borrower to walk away from the property when things start to get tough? With no money into the property, what’s the incentive for him to hold onto it if it starts to have problems? Unfortunately for that guy, this is not how asset based financing actually works. No matter how much you think a property is worth when you buy it, you still need to bring money to the table on a new purchase, no matter what lender you talk to. Even if it’s just the closing costs or loan fees!!!

However, for a refinance loan, asset based financing does work like you would expect. A good example is a rental property that is owned free of any debt. The owner of the property wants to refinance the property using asset based financing because she doesn’t have good credit. Her goal is to buy a 5 plex with the cash out from the loan. In this scenario, we would lend the borrower the max we could on that property because it is an asset with true equity. The owner of this property is not going to walk away because she has years invested in both time and money into the property. This is a different type of scenario from the one I presented above. This borrower will not have to bring any money to the table to close on this loan, in fact, all of the money will go to her to use to buy her new 5 plex.

Are you an asset based lender with an opinion on this topic or something to add? Or are you a borrower who has questions about asset based financing? Please share your comments below. Would love to hear from you.

Word of mouth is always the best. If you get a contractor that's slow to get you a bid, this is a good indication he is busy and you may want to look for someone else. Yes definitely ask around at your local Real Estate Investor Club because a lot of those guys come to the meetings because they are flippers themselves.

Thanks for your comment David...

Why do the interest rates charged on hard money loans vary so greatly from one State to another? Borrowers ask me this question all the time. For example, in California rates charged on hard money loans start as low as 9%, versus rates starting at 14% in New Jersey. But why such a wide difference in interest rates charged between these two States?

Unlike mortgage interest rates that are governed by specific factors, interest rates in private money are largely influenced by supply and demand as well as other unique factors. One of the biggest factors is related to “the going rate on the street,” which is the interest rates that other hard money lenders are charging in that particular City or State. This is likely the best reason for why hard money interest rates on the East Coast are so much higher than interest rates charged on the West Coast.

Because this is an active discussion, please share your thoughts on this topic. We would like to hear from you!

Hi Jake Maughan. Welcome. You will LOVE this forum. Probably the best real estate forum on the planet....

Hi Adam,
Welcome and hope you get a lot out of BP.