Love Austin Homes Investing Blog

I need some guidance on some deals that have been presented to me.
They basically look like this:

A small builder has a hard time getting enough credit from a lender to
get his project going as quickly as he would like.

Instead of using one bank and all his own credit, the builder offers a
profit-share to individual investors.

I, the investor, get a loan for construction of a home and the home
starts getting built.

Ideally, through the builder’s marketing efforts, the home is sold
before completion.

The builder and I split the profits. He is willing to do this because
we investors helped him get the project built much faster.

I know Maravilla in Austin has a program like this, and now I know of
an investor club that streamlines the process of hooking up investors
with builders.

Anyone have experience in this or can you tell me what pitfalls to
watch out for?

Thanks!

Andrew

ANSWER

Andrew,

Whereas this is probably a legitimate program with some builders, in general, I would say BEWARE of using your credit to help finance someone else’s project unless you really know what you are doing.

There are several scams going around where crooked investor-builders/­con-artists ask investor-civilians to ‘just use your good credit’ in order to ‘share in the profits’. This sounds great, but several things can go wrong:

1) The after repaired/after construction value is often over-estimated. In some cases, appraisers are in cahoots with the investor-builders. In other cases these deals involve difficult to appraise or highly subjective projects.

2) In some cases the builder will take his profit on the build and leave the investor with a home with zero or less equity.

3) Cost overruns can also leave the investor with zero or negative equity.

4) In some cases I have seem the investor-builder take cash out on the buy, or arrange a more complicated transaction where they are essentially flipping the home to the investor-civilian or taking an assignment fee on the sale of the home to the investor-civilian. Essentially, they are getting their $$ on the front end of the deal. After they get their $$, they have little or no incentive to hang around.

In one case I saw a woman from California finance an entire deal site-unseen. She got an inflated appraisal, inspection report done by the builder, and some pictures of the house. Compared to what she was paying for homes in CA, this home in Dallas looked like an awesome deal. She signed up and financed $350K for the home, only later to find out it was only worth about $280K on a good day. Net loss after resale - around $100K. Owch!

Phill

I’m representing both buyer and seller of a duplex in North Austin. He had mentioned to me at first that he was behind in his payments, but that his balance was $145k and that as long as he could “walk away” from the situation, he’d be happy.

There was enough room between $145k and market value to pay our commission and some repairs the property needs – we contracted at $159k.

We were to close this week, but after waiting 4 days for a payoff from Wells Fargo, we were told the guy is seriously delinquent and with late fees and other charges, his payoff is $158k.

At this price, the buyer walks and I find him something else, and the seller has his own fish to fry.

I know that it behooves me now to contact Wells Fargo’s “work out” department (anyone know what Wells Fargo calls it or have a contact there for this?); tell them that they basically can either let this deal go through and get the loan off their books OR they can continue trying to get blood from a stone, foreclose on the guy, and then get less money.

The buyers loan docs are already at title – literally, we could close in 24 hours. The bank would be wise to let the deal proceed.

So, in exchange for graciously allowing me to “re-gift” you a Fleming’s gift card I have sitting here in front of me, anyone able to help? J

Thanks - Robert

ANSWER

Robert,
Essentially, you are interested in doing a quick short-sale. Unfortunately, this is probably impossible.

You need to call Wells Fargo (the number is on the loan statement) and ask them to work out a short sale with you. With a willing buyer and seller and realtor, you have everything you need. They will tell you what you need to do. It will take 45-60 days or longer, in almost all cases, to get a response AFTER you turn in all of the documentation they require. You can beg and push for a faster response, and it will not matter.

During their review period, they will do their own appraisal. Depending on what that comes back at, and various other factors, they will tell you what they will accept for a payoff. It may or may not be less than what is owed.

Assuming you can keep everyone on the hook long enough to make this happen, you’ve got a shot. If you do represent both sides, I would recommend you put another realtor down representing the buyer (and work out a referral arrangement)­, because its is also likely that Wells Fargo will want to negotiate down your commission.

If this looks like something that won’t work for you, you can also refer this guy to me and we will take good care of him to ensure he does not get a foreclosure, and pay you a $500 referral fee.

Phill

Hi Friends,

I’m with Wells Fargo and heard that Chase and other banks are more
helpful to investors. I want to open some lines of credit, checking
accounts, etc. for business and personal.

Any recommendations or should I stick with Wells?
Dee

ANSWER

Dee,
I’ve done some research of my own and have found Wells Fargo to have the best products that I know of for variables lines of credit (low cost credit lines secured by equity you have in existing properties), and refinancing/­cash outs.

One product that I have taken advantage of several times is where you buy a home for cash, do the renovation, and then get a mortgage on it (to keep it as a rental). Wells Fargo is the only bank that I know of that will provide a low-cost 30-year fixed mortgage based only on the appraised value. In other words you can get your $$ back, plus additional cash, and keep the property as a rental to boot. The only catch is that they will only do up to 4-5 of these loans per customer.

If someone knows of another bank that offers this sort of product – please let me know!! I’m in the market for such loans.

Wells Fargo also has some great commercial products as you grow your business larger. What they are weak at, is construction/­rehab loans, but then, I don’t know any banks that do that well.

I have a personal banker at Wells Fargo, Eduardo Reash, 512-794-4026, who will ‘represent you’ at the bank, making all of their various products and resources available to your business. If you call him, say hello for me.

Phill

I have a Sub 2 available. $30K arrearage, can provide a 50% return on
investment with a maximum term of 4 to 5 months. Secured by $450K home
with $300K balance. Monthly payments on PITI will be covered by
current owner until property is sold. Appraisals and other docs in
place. Please respond asap for additonal information.

Jerry

ANSWER

Jerry,
Sounds like something I might be interested in. I’m doing a nearly identical deal in San Antonio. I assume the project is to pay up the arrearage and collect rent to cover the mortgage payments until the home is sold?

Can you tell me more about this?

Phill