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Tips...You Should Know When Using Private Money to Buy Foreclosure and Short Sale Properties

....when buying foreclosure and short sale properties, it's very important that you do the proper due diligence before you make an offer on the property that you may consider the "greatest investment" in town..

The biggest mistake made by many investors is not doing the proper research when determining the property's "Quick Sale Value" before actually going under contract.

In doing so, an investor may be surprised to learn that they are unable to obtain the appropriate financing because they overestimated the value of the property and are now unable to close the deal.

In such cases, investors who make this critical mistake often lose their initial deposit put down at the time the contract was signed..

If you are looking to purchase a Foreclosure or Short Sale Property, you may want to consider a few tips that we've put together....

  • Understand the "Quick Sale" value of the property you are buying? Ask yourself... "what would I need to sell this property for if I were unable to keep up with the payments?"...the value you come up when using this perspective may be closer to the valuation many investors would give your project when determining the amount they are willing to lend you.
  • In determining the "Quick Sale Value"...take into account the number of homes within 1/2 mile that are currently in a foreclosure status, ...that are currently listed for-sale, as well as those homes which have sold. The standard two mile radius in choosing your comparables not going to work when securing private money financing with a private money investor. You need to take a look at all properties in the same subdivision and or general area before going outside the 1/2 mile area.
  • When making an offer on a property that is or already repossessed by the bank, consider low balling your offer to equal 40%-50% of the "as-is" value. Many private investors have multiple deals sitting on their desks that fall in this LTV "Loan-to-Value" range. Also, if you are looking to roll-in your closing cost, rehab cost and purchase price....most, if not all private money investors will not lend over 65% of the "after-repair-value" of the property.
  • Never put down more than $500 at the time the purchase contract is presented to the seller. Regardless of what type of loan approval you have, always bring additional funds to closing at the time of signing if at all possible.
  • Allow for a 10% Overage when calculating the repair cost if the property requires rehab work.
  • Anticipate having to put 5%-10% of your own money into the transaction, regardless of the LTV...95% of all private money investors require "skin-in-the-game".
  • Anticipate a rate of 11%-18% to finance your project and understand how quickly the carrying cost of the loan may eat into your profits if you are unable to flip or refinance the property quickly.
  • Understand if your financing has a pre-payment penalty...most private investors have a 6-month prepayment penalty with an average cost of 5-6 months interest payments. This could be a significant issue if you plan to get out of the loan sooner than the term of the pre-payment penalty...Be aware of this going into the transaction and understand the terms of your pre-payment penalty if you have one..
  • Put together an exit strategy on your project.... Many investors who do not plan for the worse case scenarios are setting themselves up for not likely that you will be able to refinance the property within 12 months...Get a partner who has good credit to go into the deal with you and make sure they are on title at closing. This will allow you to refinance if you are unable to sell the quickly.

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