In this age real estate investing, it’s important for the savvy investor to have as many tools in their belt as they can to finance their projects and purchases. The strict underwriting, stacks of red tape, and slow approval process for traditional bank financing on real estate has led to alternative and creative ways to get the deals done. Here they are:
1. Hard Money Lending
There are a multitude of hard money lenders out there that would love to finance your real estate deals…provided you have the right LTV(Loan to Value). Most of them will take a deal that’s about 70% LTV on the purchase price. There are even some that will lend based on the ARV (After Repair Value) but it will usually come with inspections and draws. That’s where the lender will hold back a portion of the loan, and send someone to inspect the stages of work before they release it to you. This is to make sure you are actually doing the work of the project and on your way to a make a profit for both you and them.
And the best part is, they are less concerned with your credit and income and more concerned with whether or not you have a good deal on the property. I’ve seen lenders that will do stated income no-doc loans if you have enough cash reserves and the right LTV. You can find a very detailed state-by-state list of hard money and subprime lenders at Scotsman Guide.
2. Seller Financing
The single greatest way to cut banks out of the deal is with seller financing. This is where the investor buys from seller who is willing to accept a down payment plus installments for a certain number of years at an agreed upon interest rate. This is in essence creating a private mortgage note. And it can work the other way around as well, where instead of you selling to a bank-financed buyer, you can charge above retail price by taking a down payments and installments yourself. Lower credit buyers will pay a high premium for easier non-bank financing and almost always fork over a big down payment as well.
3. Buying Subject-To
This is a very controversial but commonly used method of acquiring properties where the investor simply takes over the mortgage payments of the distressed seller in exchange for the deed to the property. The mortgage stays on the sellers credit, but the investor is responsible for making the payments. It’s sometimes goes by the name contract-for-deed as well. Banks hate this because it violates the due-on-sale clause in most mortgage contracts. However, they rarely act on this because a bank is in the business of collecting interest and cash flow, not on foreclosing on property. Banks inevitably lose a lot of money on any foreclosure and any bad loans put them under increased scrutiny by the FDIC. So as a result most banks quietly look the other way on these sorts of deals.
As long as the investor holds up their end of the bargain and makes the payments on the property, this can be a powerful strategy to acquire a lot of houses fast. As a general rule, you’ll want a find a good real estate attorney in your area that is familiar with subject-to or contract-for-deed deals before engaging in this.
4. Private Money Lending
This is a powerful practice where the investor seeks out their own individual lender to fund the deal. It takes more work to find one but the advantages are immense. As the investor, if you can convince someone to fund your deal, you don’t have to worry about a credit check or income verification or any kind of underwriting at all. It’s strictly an agreement between you and your private lender who wants to make money on real estate without having to do all the work. You can negotiate whatever interest rate you want, and very rarely will you have to pay any points. However there’s always a risk of a novice private lender getting cold feet and backing out of the deal before closing, so you’ll always want to have a hard money lender in your pipeline as a backup in case of that.
Business Lines of Credit
The experienced investor eventually develops their own unsecured lines of credit that they can use like cash for anything from business expenses to purchasing real estate. This usually based solely on the business’s credit profile and has no impact on the investor’s personal credit.
It’s often a good idea to use this cash as your down payment and for your rehab costs if your flipping the property. Banks often don’t like borrowed down payments because they feel like that means the investor has no skin in the game. But there’s no way for them to know anyhow so that’s why this is such a powerful tool in any investor’s arsenal.
Watch how this real estate investor used business credit to jump start his real estate business.
6. Buying Non-Performing Notes
And lastly, a well kept secret by hedge funds and banks is the huge shadow market of non-performing notes. These are mortgages on properties where the borrower defaulted and but the bank has yet to foreclose on the property. Banks have whole collections of these that they sell to hedge funds and sometimes private investors.
This is where an investor can come in and buy the defaulted note at 30-50% of the property’s value and basically BECOME the bank/lender on that particular property. They can then work with the defaulted owner and modify the mortgage to more favorable terms and get the owner paying again and collect all those new payments for easy passive income. They can even turn around and sell that performing note at a higher value to a new investor. FCI Exchange is a place to find performing and non-performing real estate notes of all types all around the country.
So there you have it, 6 ways to get around the banks and get your hands on some hot real estate investments. I hope you enjoyed this article and use this information to the fullest. Have a great day!