Q. Where do I find the Money? A. Banks. Small, Local Banks with only a few branches. My bank has only one branch. These banks pride themselves on local involvement and “relationship banking� The president came to our first open house. These banks may offer a Line of Credit or may finance your project on a case by case basis. L.O.C. Rates are around 6%. 1-2 points They will want to collateralize something, house, savings, other property etc. This is how I have done all projects so far. 1
A2. Banks. Big Banks. Wells Fargo offers a “Renovation Loan” that is designed for our type of work. They loan 80% of ARV for non owner occupied. (90% for owner occupied) This loan is offered at their mortgage offices, not in the regular branches. It is at favorable rates but has some fees, appraisal, inspections etc. This loan takes 30 to 45 days to process so offer accordingly. The required cost breakdowns for appraisal and inspections are good exercises for beginners. They will help keep you safe. This loan is unique in that it is both “construction” and “take-out” in one package. Great if you have a project you want to live in. (Hi, Will) 2
A3. Hard Money Loans “Hard Money” isn’t as hard as it sounds. It may be the perfect solution for getting started, when collateral is not available. True Hard Money, doesn’t care about your credit or savings. The loan is made totally on the merit of the property. (They will take the property if you dont pay) So less paperwork and inspections are required. BrookView Financial caters to renovators 4-5 points, 15% interest. Getting qualified is a good exercise. (You want to graduate off of this type of funding ASAP) (The prequalification letter is valuable for offering) 3
A.4 Private Money, Investor, (for a portion of profits) There are thousands of people who have funds that are earning 2 to 4 %. Or less. 50 - 50 split is typical but not mandatory Grant deed can be with you or your investor. Do the math. This scenario may be the worst choice for you and the best for your money partner. This may be the easiest investor to find Because it is easiest to explain and understand. Note: If you overspend and the profit is zero The profit split is zero. 4
A.5 Private Money Investor (for interest only) 9% to 12% interest only is typical Some lenders will want points Investor security can be secured by placing the property in the name of the investor by grant deed. Multiple investors of this type should be cultivated. With multiple investors, you will shop without pressure They keep their money ready You find the deal They wire funds to the escrow company. You renovate and sell the project They are paid their interest. You keep the rest. (If there is no “rest� they still get their percentage.) (This is what I will do if I run out of bank money at 6%) 5
The back of my business card says: Learn and Share Energy-Wise Renovation Conference Call Tue 6pm Pacific Call In 605 475 4800 Access 795323# Invest in EnergyWise Renovation Beat Warren Buffet始s Results With Our Proven Systems 9 and 12% Guaranteed Programs
(9% if they finance the property purchase only) (12% if they finance the property and improvements) 6
A6. Credit Cards. Commercial cards usually go up to $50,000. You can get several. It’s a good idea to have these in the background in case other sources dry up or dont come thru. Google “Commercial Credit Cards” Or see Cardratings.com Look for introductory rates and check writing capabilities.
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A7. Many people have money in IRA and 401k accounts that are earning 0% or less. This money is not normally available for investment in Real Estate. But If certain custodians are selected, for “Self Directed IRA’s” the money can be invested in real estate. (Subject of another class) Google it. And get professional advice.
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A8. HELOC Home Equity Line of Credit. You only pay for the interest you use. Check around. The rates and terms vary greatly Currently, Credit Unions seem to be the best source. Golden One may be a good source.
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Q. Do I need the money or the deal first? A. This is a classic chicken and egg question. You need them both. Work on securing both. Whichever shows up first will speed the other’s arrival. If you find the right deal before your funding is totally secured: 1. It will heat up the search for money. 2. A real deal will be of more interest to the people you have been talking to than all the hypotheticals you have been talking to them about! 10
Q. Can I lose my earnest money doing this? A. Yes. This is for big boys and girls. Be responsible. Remember to put your “get out clauses” in place And be careful of your time lines. Standard inspection time in California is 17 days. “Approval of my partner” adds additional option if you feel you need it. I have only used the inspection clause. (Banks will play hardball and keep your earnest money if you go past your inspection period and then cancel) 11
A2. More protection. Use a photocopy of the check as long as you can. Negotiate the time before it becomes “live” To be as long as you possible. A3. “upon final acceptance” can mean when all contingencies are removed. Including even contingency upon financing. If you negotiate it that way. Everything is negotiable. You have not if you ask not.
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Q. What if they accept my offer? A. Yahoo! Remember this is only the first step of the “dance� that has several steps. You can still negotiate the times for inspections as well as the final price and what the seller will and will not provide and include. Some people need to just make an offer to get rid of the butterflies. Some need to get an offer accepted to get rid of the butterflies. 13
Q. What do I need to know about inspections? A1. If you cite inspections in your negotiations, you must provide them. You dont have to cite them, but they make the case stronger for your request for the lower price.
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A2. Some inspectors will wait to be paid from escrow. Ask. Some will offer cash discount for payment on site. A3. The realtor has to show up to give them access. So have them all come at the same time. The realtor may even call them all for you and arrange the inspection party. A4. Home inspectors (mostly) provide 45 pages of template boilerplate and a few good observations for approximately $250. What you really want is a “Cost to Cure� report which will have fairly close estimates to be used in your next negotiation step.
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A5. You can use a general contractor as a home inspector. It will be part of the cost of the job if you and he get the job. You pay him anyway if you dont get the job A6. Home inspectors can check with building departments for building permits or lack thereof. This may reveal too much information and you may not want to use the report.
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Q. Who is on the due diligence team? A. Home Inspector Sewer Line Inspector (plumber with camera) Roof Inspector Termite Inspector Pool Contractor (Other trades can be called but basic needs should be noted by the home inspector.) Examples: electrical panel adequacy, knob and tube wiring, aluminum wiring, ungrounded plugs, are electrical but can be noted by the home inspector.
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Q. I have my inspections. Now what? A. It’s time for the “haircut” You should write a compelling cover letter email to go along with the inspection reports that you include. Your realtor will add some language to the complete package. You can offer to proceed only if the price is changed to X Or you can just cancel the contract and make another offer at X with no contingencies. Cancelling and re-offering may be safer for your deposit. 18
Jennifer We have completed our inspections on XXXX N Eddy and unfortunately found more issues than were originally visible when we made our full price offer. We would not ask for an adjustment for the things that were obvious but the following points were not originally observable. 1. Sewer inspection. Reveals that the line has been replaced to the sidewalk. However, roots have penetrated the line from the sidewalk to the main in the center of the street. I have the CD of the camera going thru the pipe that Praytor & Sons Plumbing made during the inspection and the roots show very clearly. I have been unable to copy it in order to email it but it is available if you or the seller would like it. 2. Roof Structure. We knew we would have to replace the roof and that is not the issue. At issue is that the excessive weight of current roof overloading has damaged the structure and will require remedial purlins and bracing to take the sag out of the ridge, and the south side valley. See McClintock report item Exterior #3, & #4. 3. Unpermitted Items. Initial research shows no permit or inspections for the Patio Roof, The Fish Pond and the Garage conversion and Garage closet. See McClintock report Exterior #5,& 6 and Interior #8 4. Mold has been confirmed in the Garage closet which must be removed. 5. Firewall between house and garage has been breeched and must be replaced as a safety issue. See McClintock report Interior #9 The rest of the items are just wear and tear of a home of this age and were not a surprise to me. These items listed above, however, are going to break my planned budget. I would like to proceed with the project, but am requesting a $7800 adjustment. Please convey my request to the seller. Time is of the essence. ThankYou
This request resulted in a haircut of $5,000 Cost of all inspections was under $500
Dave Robinson 19