Tips...You Should Know When Using Private Money to Buy
Foreclosure and Short Sale Properties
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
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....
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.
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.
making an offer on a property that is or
alreadyrepossessed 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
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.
for a 10% Overage when calculating the repair cost
if the property requires rehab work.
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".
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.
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..
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.