Hey Lyal,
I’m enjoying your conversations on the board (couple years later!!)
I seem to be where you were two years ago. I am wanting to rehab and rent (two companies set up already) using a WLOC for the flips and traditional morts on the rentals. Actually will be selling from my rehab co. to my rental co. to get cheap rentals that cashflow a lot. Anyway, I too am pushing for a WLOC. Going the traditional route of rehabbing (getting a mortgage, then a rehab loan) is an easy base hit at this point, but its slow and ugly and you miss those cash-now-quick-close deals to people who DO HAVE a WLOC.
So…From my perspective, you are a seasoned pro by now. What words of wisdom could you impart to a newbie concerning obtaining a WLOC? Or anything for that matter? I can always use a few morsels of wisdom.
Also, how is your business going now? Brag a little!!!
Ed - Revolving nature of WLOC’s? - Posted by Tim_Cleveland
Posted by Tim_Cleveland on May 08, 2003 at 07:13:43:
Ed:
I just listened to the archive of your show on wsradio with JP and Terry. Very eye opening indeed. I am a newbie/wannabe so not to the point where I would use a WLOC but I was particularly interested in a point that you made in the show. Namely, I was interested in the fact that while you said that you obtain a WLOC based the merits of a particular deal, you metnioned that once you “exit” that particular deal and pay off the WLOC, you can continue to use the WLOC for other deals. Typically, do you have to re-sell subsequent deals to the loan officer before you can use it for that purchase, or is it more typical that once you have successfully made good on your promise to pay the original amount on the WLOC it turns into a regular LOC? I was curious about this and thougth I would ask. Hopefully one day when I “grow up” I can make use of this method.
A WLOC is given for an agreed amount. Lets say you obtained a WLOC of $500,000 for one year at 2 over prime and 11/2 points.
First of all, the line is secured by the properties as you buy them under the predetermined criteria you and the bank have agreed on. Usually that is 70 to 80% of MARKET VALUE. Hopefully you bought it some where between 60 and 70% of market value allowing you to do 100% financing.
The bank will even give you fix up money as long as you don’t go over the 70 or 80% agreed upon.
When the house is fixed up, you either sell it or if you desire to keep it, refinance it off the line with a new take-out loan (new first mortgage).
If your average purchase was somewhere between 70K to 100K, you could do between 5 and 6 houses at a time. Chances are you’ll have houses in various stages; a few sold and ready to come off the line, a few being rehabbed, and in the process of buying some.
Ed,
This is exactly what I was proposing to my local banks. Some liked it, some didn’t. None have agreed YET to work with me. The stumbling block was collateral (which is the properties) aka - assurance against them losing money. They understood that the properties would secure the line. What they did NOT like was the open line. They said basically, “What is to keep you from withdrawing all the money and running off to Belize leaving us holding the bag?” The only answer I had for this was our significant time and attention to detail in constructing our business plan. In other words, WHY IN THE WORLD WOULD WE RUN OFF WHEN WE’RE TRYING TO MAKE MONEY IN THIS BUSINESS. In retrospect, I could approach them with the idea of; They don’t release any money to me until I show them where its going. That may be a property purchase in which I can show them FMV comps and tax assessors comps, repair estimates, etc. In other words, I can’t just take out the money on a whim??? But that would seem to defeat some of the purpose of a WLOC, which is speed. Can you elaborate please?
Ed, I am also moving along this line of thought…
In this example, how would you assure the bank that you would not go over ~70% market value? Your word? A contract? Simply have it written into your business plan? The bank would need recourse if you went over that amount wouldn’t they? Of course, my model has me purchasing at 60-70% FMV, but the bank still needs assurance. How would you give it to them???
Thanks
Posted by Tim_Cleveland on May 08, 2003 at 12:26:26:
Ed:
Thanks for the reply. I was of the impression for some reason that the deal or deals you took the bank woudl dictate the amount of the WLOC. You take a deal worth $150K to the banker and he will give you a line to cover that deal and no more. Things are getting clearer, but this brings up another few questions, but I am sure you are used to tha atthis point.
The 70- 80% Market value cap that you agree with the bank on, is that current full market (retail) value or after repair value (ARV)? Or is this subject yet another area of negotiation with the bank?
Does the bank come and inspect each deal that you come upon to be sure that you are not breaching the agreed upon 70 - 80% requirements?
At the end of the agreed term, say 1 year, are all balances on the line payable unless you can renegotiate or refi?
Presumable whiel negotiating the WLOC, banks will typically review your cash flow situation in addition to the deal, correct?
Thanks again. I am glad I listened to the show and I am starting to visit this forum more frequently in addition to the main forum.
Ed, in the posts where I have seen you discuss the WLOC, it always appears that this is mostly a short term financing tool, most useful to those who rehab or do quick flips.
In my current business plan, I am looking for more long term financing for acquiring properties that I subsequently resell on either a L/O or CFD, with a 3 or 5 year term/balloon. I would buy at about 80% to 85% of FMV. Would banks give a WLOC for purchases under these terms?
Echo,
Not Ed but, the WLOC will let you acquire the properties as a CASH buyer (no matter what anyone says, cash with quick closing, is still king and will get you great deals). You would then resell on L/O or CFD. Then you take the whole package (details of the purchase, before and after 8x10 glossies of any work you’ve done, copy of the CFD) to the bank and refinance it with the “take out mortgage” that Ed referred to previously to get it off your WLOC.
Just an aside, I’d think again about buying for 80% - 85%. In most cases the bank will only lend 80% LTV so you could possibly still have money (depending on the down payment and holding costs you have) in the deal. If you are a CASH buyer, you should be able to buy for less. If not they are likely not motivated.
All the best, Lyal
Echo,
I am replying to your post after two year…but this is where I am right now. You sound like you have experience with WLOCs.
Question: Cash definitely is king…However, do you not have to “clear” the deal with the bank before getting the cash so they know you are under the ~80% range of ARV with purchase and repairs? And if you have to clear it with the bank then you lose some of that speed that having cash gives you. On the other hand, if you DON’T have to clear it with the bank how do you assure them, give them security, that you won’t withdraw the entire WLOC and spend it on women and booze? I joke a little here, but I have presented to many banks in the past month and virtually all of them ask such a question…“What is to keep you from taking the money and running off?”
Thanks for sharing your expertise.
Lyal,
Thanks for the response. The transactional mechanics as you describe them seem quite logical and practical, and I will begin working towards that end.
With regard to buying at 80% to 85%, while I recognize that the bank may only refinance up to 80% (actually I have one broker who will do 90% for investor property), I expect to minimize or recover any funds that I have in the deal from the option consideration/CFD downpayment that I get from my buyer. Also posible is that the seller may carry back about 5% as a second, thereby getting me to the LTV required for refinance. This is a strategy I am in the process of developing so not all of the details have been ironed out yet.
Echo,
Please keep Ed’s rule number 1 in mind:
YOU MAKE YOUR MONEY ON THE BUY
In my experience, when you resell these types of properties, realistically, you’ll be looking at a down of 3% to 5%. You can hold out for more but it’s tough to find a buyer with 10% and your holding costs add up quickly while you wait.
When you refinance from the WLOC you’ll have closing costs that will chew up much of that money. Fix-up and holding costs will take even more. My point is if you buy for 85%, you’ll end up with a property with little to no equity to protect you in a market downturn or other unplanned event. Follow Ed’s rule by dealing with motivated sellers. Build in your equity up front by buying for 70% or less to prevent headaches down the road.
Don’t misunderstand, mixing in a few of these properties now and then is no big deal but if your portfolio becomes weighted towards low equity deals, it’s just a time bomb in your wallet.
One last point, the seller 5% thing is a gimmick that most sellers won’t understand. The whole purpose of setting up the WLOC is so you can offer a desperate seller CASH NOW to put this whole unpleasant situation they’ve found themselves in behind them. If you start talking about them “holding a second” etc, they’ll look for someone else to sell it to.
All the best, Lyal
Ed,
Thanks much. I’m a slow learner but I’m persistent. Still working on putting into practice what I learned in the Ontario lender’s workshop. Making good progress of late, closed on 4 properties in the last 8 months with my “small bank” loan officers help, each with lots of equity.
Still plodding away on the business plan (see I said I was slow!) and angling for that WLOC.
Thanks for all your help and support to everyone who comes by here.
All the best, Lyal