How Should I Finance This? - Posted by Chris

Posted by John Corey on March 24, 2006 at 09:07:02:


Based on what you have said it sounds like you have been successful in the past.

OPM is not for every deal and every situation. At least not 100% OPM.

When you borrow money it comes at a price. Sometimes the price is more in time than cash. Other times it is the opposite or both.

If you have strong relationships with local banks then see what they can do in terms of a working line or credit. With a WLOC you will know what you are good for up to some limit. You do not pay interest on the money when you are not using it. You do not have much in the way of closing costs per deal. Hence a short term hold you can afford to pay WLOC interest rates as you will exit soon.

For a property that you expect to hold you will want long term financing. Maybe when you buy or maybe not until after you have done the improvements. Seasoning will be a slight issue in the second case but not for all lenders.

You have a great credit score. The more loans you take out the lower it will drift so expect that over time you might want to cap the number of loans in your personal name.

For this deal…

If you have the cash that is one option. Best to keep your cash as a general rule so use that option as a back up.

Check with the two banks. See what they can do for short term financing. They might want you tie up a bit of the cash (either as equity in the deal or cash held on deposit). A bit of leverage would improve the total returns as long as there were minimal up front costs.

Also continue the dialog with the seller. If they will take a note in 1st with $20K from you that might be the same or less cash than the bank expects to see. I am assuming the seller will charge a reasonable interest rate so you might be neutral or a head there.

Alternatively you can see if the bank will put a 1st in place for 50% LTV or something that is a slam dunk and low cost. Then have the seller carry the balance so you can use your $7K for repairs. The seller gets more cash up front, the bank puts up the 1st so you get 100% leverage. Create some soft terms on the second like no interest for 90 days and no payments until the property is sold or refinanced. You focus on getting the project done and tie up very little of your cash.

Consider using equity in another property. Create a note and offer it to the seller. That will be your down payment on this property. The bank lends the balance and you have 100% leverage by pulling dead equity from another property. You actually have equity in the subject property so the bank could be just fine (some like this and some don’t). You can even escrow the cash for the interest payments on the bank’s loan so they know they will be paid on time each month. Then get to work.

There are a lot more options when you have cash, good credit and other assets. You can slice and dice multiple ways to fit what everyone else wants while still having a great deal.

John Corey

How Should I Finance This? - Posted by Chris

Posted by Chris on March 21, 2006 at 22:42:11:

House worth $97k now, 1mo. old appraisal.
Comps are $115 in neighborhood, selling within 45 days.
Owner owes $30k
Will let me have it for $65k (needs to sell)
Needs $7k worth of cosmetics

Lets assume seller needs all 65k at once. Cash deal. How would you do it? I could go to bank and get the money. Some say only use OPM. How is that cheaper than using my own for quick flips like this? Also, some suggest getting loan for $65k from bank, then opening line of credit on equity to use for fix up and doing more deals. Better than just getting 85% LTV interest only? How? What would you do?

How about if I could convince the seller to take just $20k up front and hold the other 15?

I have 750+ FICO. I own other properties. I have 2 local banks that will approve me within a day. I’m just trying to learn how to finance smarter. (I’m 30). I live off my investments, so my D/I is probably too whacked to get prime with FULL DOC, but I’ve not tried. My banks don’t require it.

Thx for suggestions. I’m finance challanged, but trying to learn.