Love Austin Homes Investing Blog

Has it become more difficult to obtain a stated income loan since the mortgage industry is having such difficulties these days.
Dawn

ANSWER

Dawn,
Generally speaking, yes it has, but money is always available to people with good credit, and money is always available to fund good projects regardless of credit.

Question:
Hi,
I was looking for suggestions/referrals for a good source of an unsecured line of credit.

Thanks in advance,
Kevin

Answer:

Kevin,
The only way that I know of to acquire “an unsecured line of credit” is to get a credit line based on your own good credit.
This is a great idea for all investors. I recommend Wells Fargo for this, because they have a wide variety of investor-friendly products including an unsecured credit line, that you attached to your bank account as an overdraft account. This can provide $20-50K of credit depending on you. As you do more business with the bank, you can get the line extended.
For additional credit, you can apply for a Wells Fargo Visa card, and apply that as additional overdraft credit for an additional $15-40K (or more I suppose).

The other nice products that are available from Wells Fargo are no-cost home equity loans and no-cost home-equity line of credits (HELOCs). The loan is simply a low-interest fixed rate mortgage on the property. In other words, you can buy a property with your credit lines, and then refinance the property at a low-interest rate after the renovation (assuming you plan to keep it for a while). The other option is a HELOC – this is money that you can borrow at any time that is secured by the property. You can even get a loan and then later get a HELOC (on top of the loan) after the home appreciates and there is some equity you can borrow against.

A great was to get rich slow is to acquire rental properties, rent them to pay the mortgage, and then get HELOCs on them as they appreciate. This money you “take out” is tax free and low interet! As you acquire more and more rental properties and as those appreciate more and more, you end up with numerous HELOCs that will give you a lot of credit to invest with, enabling you to do more and more deals leading to more and more rental properties. Obviously, you don’t want to over-leverage, but usually this is not a problem, because lenders will not allow you to borrow all of your equity (as they should not).

This is my basic strategy. If you already have a little money and want to learn more about getting rich this way, give me a call…

Phill

Can anyone recommend a way to do this low hassle, low cost?
I had heard credit unions had some good programs.

Thanks,
Ashley

ANSWER

Ashley,
Home Equity lines are a great way to tap low-cost short-term cheap money.

Wells Fargo has a great home equity line of credit program. They do not charge any fees and usually don’t even require an appraisal (they go off the adjusted tax value, provided it is sufficient).

Wells Fargo will also give you a mortgage on the home after you have completed renovations, so you can cash-out all of your funds (and perhaps take profit on the refi as well). This too is a no-points low-cost loan, and great for homes you plan to keep as rentals, or when you want to get your money out to put to work on another project.

Phill

I’m looking for recommendations for attorneys who are well versed in
SEC regulations as they relate to raising capital from private investors.

Of course, if you are an attorney who has this expertise, please chime in.
Iain

ANSWER

Iain,
One of my mentor students, and a fellow club member, John Greytok, is an attorney that has done extensive research in this area. He can be reached at 512-474-4770.

Regards,
Phill Grove

A friend sent me a scan of an article regarding Texas House Bill 2207
(signed by the governor this summer) that goes into effect Jan 1, 2008
which appears at first glance to say that Sub2 deals now REQUIRE the
consent of the lender.

I’m not positive if attachments come through on this message board, but
it is the file “House bill 2207-2.pdf” OR you can find it by clicking
here (or copying and pasting into a web browser):

HYPERLINK “http://www.dadsbuyhouses.com/Housebill2207-2.pdf”http://www.dadsbuyh­ouses.com/­Housebill2207-­2.pdf

The article makes it sound like all of us that purchase property sub2
are screwed.

But I read the bill differently. Attached as “HB02207F[1]­.pdf is the
actual text of the bill. It can also be found here:

HYPERLINK “http://www.dadsbuyhouses.com/HB02207F”http://www.dadsbuyh­ouses.com/­HB02207F[1].pdf

MY interpretation is that we are all OK, but I really want to hear other
people’s interpretations about this bill.

****** THE FOLLOWING IS MY INTERPRETATION AND IS NOT LEGAL ADVISE.
PLEASE SEEK THE ADVICE OF A LICENSED ATTORNEY BEFORE ACTING FOOLISHLY ON
ANY OF THE INFORMATION PROVIDED ******

My interpretation is that this act obligates the SELLER (not the buyer)
to notify the buyer and each lien holder of certain risks involved in
taking a property Sub2.

However, a violation of this law by the Seller (most of whom won’t know
about the law), does not undo the conveyance. You can see that in
Section 1: (b): “A violation of this section does not invalidate a
conveyance.”

Furthermore, the Seller becomes exempt from the law if either of these
conditions are true (in our case, both or true, but in your case, at
least the second is probably true):

1. From Section 1: (c): (10): “where the purchaser obtains a title
insurance policy insuring the transfer of title to the real property”

2. From Section 1: (c): (11): “to a person who has purchased,
conveyed, or entered into contracts to purchase or convey an interest in
real prperty four or more times in the preceding 12 months.”

So from MY interpretation, this law was meant to keep scammers from
selling property with liens and without title insurance to buyers who
are unaware of existing liens. That’s why it exempts “experienced
buyers” or where you got title insurance…­. because that person SHOULD
be aware of liens and it becomes a buyer beware kind of issue.

Would love for your comment. Thanks!
Daniel

ANSWER

Thanks for contributing this Dan!

Fellow Investors,
I do a lot of Sub-To deals. I do them in an LLC and WITH title insurance. I know many investors that buy sub-to by conveying the property into a land trust and not utilizing title insurance. This is quick and cheap, however, I believe these transactions are very problematic on many levels, and are soon probably illegal.

The reason this law was promoted, was because, unfortunately, there are a lot of crooked investors, and we as investors (and unlike realtors, builders, etc.), have done nothing to regulate our own industry. Unfortunately, some investors have been running scams where they buy properties sub-to, and then turn around and sell them with a down payment and wrap-around mortgage. The investor pockets the down payment, and keeps collecting the mortgage payments from the new buyer, but then stops making the underlying mortgage payments. Eventually, the underlying mortgage lender forecloses on the unwitting buyer – who looses their home and down payment, after making all their payments and having done nothing wrong. The original seller also gets screwed, because their credit is ruined. The crooked investor, however, just moves on to the next location.

The problem with this law, is that, although well intentioned, it probably does little to solve the problem. Crooked investors are probably not going to get title insurance or sell with title insurance, and are certainly not going to tell the lenders what they are doing. By the time the deals unravel, the money to fix things will be gone.

The investor is under assault in Texas. We now have laws on the books or pending that ban lease-options, now restrict sub-to deals, will make rehabbers have to register, certify, and warrantee homes that are remodeled. There are additional laws in effect or pending effecting leases and landlords. As people get burned by unscrupulous investors, more laws will be enacted restricting everything we do, until there is not much left.

Across the nation the situation is growing worse with special taxes restricting flipping, and onerous certifications limiting a homeowners ability to evict a non-paying tenents, and even the possibility that in the future, if you sell a home with owner financing to someone that declares bankruptcy, the court could retroactively reduce the sales price you sold the home for, what is owed to you, and restrict your ability to foreclose, even if you are not getting your payments. These laws get enacted in one state or another, and then get shopped from state to state with little resistance.

I believe, ultimately, we are either going to have to regulate our own industry, or the government will do it for us. Realtors, builders, lenders, and just about everyone else in real estate has already gone through this. Sort of like I always tell my short-sale clients – “you need to come up with a plan, or the creditors will come up with one for you, and you probably won’t like the plan they come up with”

Phill

I have a person whom is going through foreclosure, we agreed that
I will pay him walk away money and I will re-establish the mortgage
payments and he will in turn deed the property to me but he will remain in the
loan,possibly for 3 to 4 months while I find a buyer, I have never
done this before. Can anyone refer me to a title company or attorney who
can help me set up this transaction properly so my buyer and I can be
protected?

Regards,
J

ANSWER

Charlie Brown can be reached at 512-346-6000. He can sell you the paperwork necessary to buy this property “subject-to” the existing loan. He will probably charge you in excess of $1000, as this costs some $$ to develop, but don’t quote me.

In most cases, investors that buy properties this way, are more interested in protecting themselves, then the buyer, and thus the contracts are fairly one-sided. For example, the contract will basically say “I the buyer agree to make the mortgage payments if I can, but if I don’t, I’m not liable for anything that might happen to you the seller as a result.” In almost all cases in my experience the seller is fine with this. In other words, if their were better deals out there, they probably would have gone after those. That being said, when I buy a property “subject-to”­, I do go out of my way to make the seller feel more comfortable by giving them references, telling them a bit about my own financial situation (to show that I have the resources to make thair payments), and showing them other deals that I have done successfully.

Finally, one of the most troublesome transactions that less-reputable investors make is the subject-to deal where the investor takes the property and then lets it go into foreclosure.

In my opinion, when you buy a property ’subject-to’­, you have a moral obligation to not let that property go into foreclosure. If you are not sure you can ensure that, or if the deal is not good enough to make that happen, you should not do the deal.

Phill

Hi,
I am a new investor and have done a few flips with my own money. Now I would like to learn about leverage and use a bank loan and buy a rental property – with the intention of holding it for 5 -10 years.

Oh, yeh I do have an LLC that I have run all real estate investing through in the past. Yes, I paid cash and there were no issues holding the property in the name of the LLC.

Here is my question – Why are the banks telling me they will not lend money on property held in an LLC?

Am I structuring this properly?

How do other investors do this?

I understand a commercial loan is at a higher rate, is that what the banks need to assume I am doing? One loan officer mentioned transferring the property to the LLC after closing. Is that what you do?

Ok….that was more than one question… I am genuinely baffled.

Barbara

ANSWER

Barbara,
Corporations, such as LLC’s, have to get commercial loans. These are available from commercial lending institutions, but usually at 2-3 interest points higher than personally guaranteed loans.

Buy your properties in your own name and then transfer them into an LLC or other entity. I suggest you have a separate entity for buy and hold properties, than your ‘flipping LLC’. Presumably you are using an LLC to flip properties for liability protection, and thus you logically don’t want that entity to have assets in it long term.

You may also consider an LP (Limited Partnership) or FLP (Family Limited Partnership)­, which costs a little more to set up, but may save you in taxes due to the franchise tax imposed on LLC’s that make profits. This is what I do. Coombs Property Holdings, LP has a nice ring to it. Some people also suggest creating a new entity for every 1-3 properties. Frankly, I think this creates far too much paperwork, tax filing, and overhead, especially after you own 10, 15, 20 properties…

Some people bring up the concern about having a loan called due if the deed is transferred (The ‘Due on Sales’ clause found in every loan agreement). While this is legally possible, no matter what you do (and I’ve done some crazy stuff) it’s much more likely that you will win the lottery than get your loan called, as long as you are making the payments. So, if you are one to worry about such things, just buy a lottery ticket each time you get a loan and each time you win, use the winnings to pay off the mortgage

Another trick people use to disguise the transfer of ownership of a property into an entity, is to use a trust. You can move a property into a trust and then transfer the interest in the trust to your entity. The trust itself offers no liability protection, and indeed the lender can still call the loan (because the deed is still being transferred)­, however, some people believe that this extra layer of shielding of ownership may make it less likely that the lender will find out that a deed was transferred (mostly because the beneficial interest in the trust is not recorded). I don’t personally use trusts, because they also creates more paperwork, you have to assign a trustee, etc. but I have considered this for other reasons.

Additionally, don’t forget about insurance – the topic the so-called experts seem to gloss over when dealing with these issues. You will need to make sure that your policy is changed to a corporate policy (or a policy that will cover a corporation) from a personal policy when you transfer ownership, else you are insuring something you don’t personally own, which is a waste of money… The corporate policy may cost a little more. The property will probably no longer be covered under your own personally liability umbrella. You’ll want to get the balance of the original personal policy refunded to you (explain all this to your insurance agent before you buy). The problem with all of this is that it does create additional paperwork, and a paper trail documenting that the deed was transferred. Does that matter – no, buy lotto.

Finally, from time to time you may have to provide the new insurance declaration to your lender. Have yourself, and your LP/FLP, and the lender all listed as insured by the policy, and you should be fine. If you escrow for insurance (I don’t recommend this), you will want to file the new insurance declaration with the lender many months before the policy payment is due, so that they pay the right policy. Unfortunately, for some reason, lenders always screw this up and pay the wrong policy anyway, causing me to have to repeat this step, so you may need to do this last step a couple of times…

Regards,

Phill

Hi Y’all! I have an investor friend down in San Antonio that asked me
to find out if there were any private money lenders up here in the
Austin area that would consider lending money for a longer term; like 3-
5 years. If any of y’all know of someone that will or will do so
yourselves, please let let me know and I’ll give you his contact info
so you two can talk details.

Also, let me know what other types of $$ are available for investors?

Thanks in advance!
Dawn

ANSWER

Dawn,
Some considerations on Hard vs. Private $$$

Hard $$

Hard money (money lent based on property and not on borrower) is usually institutional – from a fund contributed to by several investors. For example, besides borrowing from hard money lenders, you can loan money to them. Usually, hard money lenders keep the points and fees from loans and pay their investors all or most of the high interest back along with a secured note. Because the money is brokered by a lender and it’s agents, there are more overhead costs (more people taking a cut), which are passed onto the borrower.

Hard money lenders and their agents have experience in evaluating deals quickly and lending money quickly, and, time rather than terms is often the driving factor in deals needing hard money. If you need $250K by Friday, it’s unlikely you’ll be able to find a private lender to make such a loan (unless you already are doing business with them).

Another consideration is that hard money lenders lend based on the deal and not on the borrower. In other words a borrower with bad credit and/or a history of making bad decisions can still get hard money if they find a property at 65-70% of fair market value (including any money the borrower puts in).

Finally, hard money lenders are more likely to have many fees for various inspections, draws, etc.

My own observations are that as hard money lenders get more established and experienced, they tend to look and act more like traditional lenders in that they require more due diligences, may pull credit checks, may order multiple appraisals, and may take longer than expected. All that being said, hard money is a great resource for many deals, and should be used as needed.

Private $$

Private money lenders are just individuals with extra cash looking for return. Many private money lenders are real estate professionals that have cashed out of various deals and want to still generate some income, but don’t want to do the work associated with finding and improving more properties themselves. In theory, private money lending is easier (more passive) than being a real estate investor, and we should all aspire to becoming private money lenders after achieving our net worth goals.

Other private money lenders are friends, family members, or individuals that have made their wealth wherever, and are again, looking for a good return. These people are less likely to have real estate experience, and thus more likely to rely on some level of relationship with the borrower in additional to whatever other (if any) due diligence they require. These are the best resources in our business, although the hardest to find.

Interestingly enough, most borrowers that have private money resources, will never share their names, because they want to make sure that someone else does not borrow the money they might need for a new project. This creates a fascinating phenomena where private money lenders are always looking for good people to lend to and good borrows are always looking for private money lenders, yet it’s pretty hard for the two to meet

My own observations are that this business requires a ton a loot to make a ton of loot. Most people that make it big, have private money resources behind them.

One last alternative… Partner $$

There are investors, such as myself, that are willing and ready to fund projects in exchange for dividing the profits. Partnering is what forums like this are all about.

Partner lenders, like private lenders, have money and are looking for a good return, but unlike private lenders, partner lenders are actively involved in applying their time and experience to make sure the project is as successful as possible. Some advantages to using a partner lender are: 1) The investor does not need to necessarily come up with any money (not even interest payments, fees, etc.), 2) The investor will learn a lot from working with an experienced partner, 3) The investor will have access to the partner’s experience, contractors, and other resources, and 4) The investor can probably make more $$ overall, because although they are splitting the profits on each deal, they are also splitting the time needed to manage the deal, thus allowing more deals to be possible…

Some projects make much more return than others, and no matter how much experience you have, unexpected thing will happen and you can’t know ahead of time, for sure, if your return will be 15% or 50%… Personally, I prefer to do 2x the projects and share the profits, because I find that it evens out the income stream, increase my experience and network, and mitigates overall risk. When your looking on how to fund your next project, consider a partner lender!

Regards,

Phill

Does anyone here have a recommendation for a good, experienced small
business CPA? Thank you very much.

ANSWER

Yes,
I use I Jay Arrons 512-451-2800.

Phill

Went to the RE club this past Tuesday. Learned that REICA’s position is not to do lease option but do a wrap. My question is how do you do a wrap if there is an existing loan on the property? Loan not assumable. Wouldn’t a wrap trigger ‘due on sale’? Thanks.

Rex

ANSWER

Rex,

Any title company can help you do a wrap. Just tell them the terms of the note, and their attorney will draw it up for you. Or you can use your own attorney.

When I do a wrap, I like to get a down payment (if possible) of 3-5% (or more, if possible), and ask for a balloon payment in 3-5 years (forcing them to refinance and pay me off). In most cases you are going to ask for a premium interest rate, perhaps 10-12%. You may also include terms that say that you have the option to renegotiate the terms if they do not refinance (this could include calling the note and/or foreclosing, changing the payment terms, etc.).

In most cases there IS an existing loan on the property. That’s why is called a wrap – you are ‘wrapping’ the new loan around the existing financing. It makes no difference if the existing loan in your own name or one in someone else’s name.

If the home and loan is in someone else’s name, you will almost certainly have to purchase the property ‘subject-to’. This is a technique where you take over the payments of a loan in exchange for getting the deed. This technique can be quite complex and beyond what I have time to explain here. With only a few exceptions, almost no loans are assumable, however virtually all homes can be purchased subject-to.

Regarding ‘due on sale’, yes, whenever you transfer ownership, which you are doing with a wrap, you risk having the underlying loan called. There are many advanced techniques to help reduce this risk. That being said, it would be an extremely rare (i.e. 1 in a 1000) event for a lender to actually call a loan in which the payments are being regularly made, regardless of what other terms of the note are violated. I have bought scores of homes subject-to, and never had a problem.

Phill