All Forum Posts by: Thomas Franklin

@Josh Calcanis The FHA 203k loan is the agency's specialized home construction loan.

Available to both buyers and refinancing households, the 203k loan combines the traditional "home improvement" loan with a standard FHA mortgage, allowing mortgage borrowers to borrow their costs of construction.

The 203k loan comes in two varieties.

The first type of 203k loan is the Streamlined 203k. The Streamlined 203k loan is for less extensive projects and cost are limited to $35,000. The other 203k loan type is the "standard" 203k.

The standard 203k loan is meant for projects requiring structural changes to home including moving walls, replacing plumbing, or anything else which may prohibit you from living in the home while construction is underway.

There are no loan size limits with the standard 203k but there is a $5,000 loan size minimum.

All proceeds from the mortgage must be spent on home improvement. You may not use the 203k loan for "cash out" or any other purpose. Furthermore, the 203k mortgage may only be used on single-family homes; or homes of fewer than 4 units.

You may use the FHA 203k to convert a building of more than four units to a home of 4 units or fewer. The program is available for homes which will be owner-occupied only.

You would be better served getting off the couch and visiting a Community/ Regional Bank or a Credit Union and pose the questions regarding who determines rehab costs, etc. 

@Account Closed Since you are interested, in the future, in acquiring Residential Multifamily Property such as a Duplex, TriPlex, or a Four Plex please consider the following. Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a 203k Loan. A 203k Loan is where the purchase price and rehab costs are rolled into a single loan.

Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). Because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.

If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.

If you think you will go FHA, Conventional, 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.

Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.

@Account Closed Many Investors that flip homes use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.

I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.

ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).

ARV: After repaired value or what you think it will sell for once repaired.

Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.

Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.

Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.

Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, insurance premiums, property taxes, loan payments, etc.).

Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.

Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.

Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.

This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.

@Account Closed Since you are interested in fix and flips, I propose the following action plan. The first step would find an Investor Friendly Realtor assuming you do not have access, to the MLS. I would suggest that you interview several Realtors and ask them the following questions, to ascertain if they are truly Investor Friendly, or if they are throwing you a sales pitch.

1. How many investors do you currently work with and how many investors have you worked with, in the past?

2. How many transactions have you closed, with investors?

3. Do you currently own any Investment Properties? If so, what type do you own?

4. Are you a member of any REIAs?

The next step would be to work with the Realtor and determine the hot markets, in your County, with the greatest number of sales over the last 90 to 120 days. Personally, I would prefer 90 days because markets are always changing. This list would contain the zip code and corresponding name of the municipality. In addition, a breakdown of the number of SFRs, Townhouses, and Condos, with corresponding ADOM (Average Days On Market), and Median Sales Price, for each municipality. This will be your Farming Area. From this data, you can utilize a website bestplaces.net that will give you a breakdown of the percentage of homes that sold, in various price ranges, for a given zip code. You can identify the two highest retail price ranges, in greatest demand, per zip code where you can list the rehabbed property.

You can use the Realtor to help you find deals and also use Wholesalers. If you acquire a property, from a Wholesaler, once the property is rehabbed and ready for the Retail Market, allow the Realtor that provided you the zip codes, to list the property for sale. This creates a WIN-WIN Situation and gives the Realtor incentive, to work harder on your behalf. 

@Zarak Sharwani I have a thought. Either you know your property will not qualify for Bank Financing, or your objective is Cash Flow. You may want to offer more favorable terms, so your property would probably attract more BiggerPockets' Attention. The other two funding options are Conventional Financing (closing personally only) and Commercial Financing (ability to close in a LLC). If you offered a 30 year Amortization and a 7-10 year Ballon, you create a Win-Win Situation. Your market has experienced nominal year over year appreciation, so there would have to be forced equity, at the time of closing, to hedge against possibility having to satisfy a Ballon Note. These are things, for your consideration.

@Krista B. I am seeking an experienced Realtor, to aid me facilitating my Real Estate Endeavors, in the Tampa Area. I will send you a Private Message. 

@Daniel Roman The 10-15% down payment is the range I would propose. When an owner is willing to consider Seller Financing is because he/ she is motivated, to sell. In such a situation, you ask a thought provoking question such as: "Why are you selling?" Listen to their story, to learn their needs. You need to present yourself as problem solver and demonstrate that you sincerely want to help them. The ultimate goal is to create a Win-Win Situation, for all vested parties. 

Yes, you can close in a LLC and there is not PMI. PMI is only applicable, to mortgages where there is not 20% Property Equity...a combination of down payment and forced equity relative to Appraised Value.

@Daniel Roman You need to reread my post. I never stated a 25-20% down payment, for Seller Financing. I stated 10-15% as a down payment, for Seller Financing. 

If you use Bank Financing, lenders will require 6-12 months of reserves to cover mortgage payments, property taxes, and in some states property insurance. 

@Rick Gannon You may want to find a new Title Company, to work with as your current Title Company is not operating in your best interests. If you think you will Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays. In the eyes of a lender, a Title Transfer is deemed, to be a sale.

@Daniel Roman You appear to be set, on House Hacking despite the negative consequences either short or long term that I mention. If you want inexpensive, your best best is the Midwest. In these markets you will not have high year over year appreciation. Do not surprised to see 1-2% per annum. With that said, you need to make your money up front in the form of forced equity, at the time of closing, to help hedge against you being able to satisfy a Baloon Note.