What You Missed December 2012 General Meeting
by Robert Davis
Show Me The Money
Presented by: Panel of Experts
December 4, 2012
A panel of experts including Chuck Collova, John Parrot, and Jon Doss gave some insights into the lending business. John Parrot and Chuck have each been in the mortgage business for over 35 years. They mostly deal with private money as opposed to conventional money. They are familiar with the rental business as well.
Chuck said he acquired his first rental in 1967. He started in the mortgage business in 1966, and started C&C Finance in 1981. He said the reason conventional loans are currently taking so long to close is because of all the upside-down home owners clogging up the lenders. Usually they don’t get a principal reduction but just get a better interest rate. Chuck said some of the homeowners choose to just quit making payments. The bank may take a year or more before they actually foreclose on the owners. Remember the banks got bailed out but the homeowners got nothing.
Chuck also warned to be careful of whom you borrow hard money from. Avoid those that just want to take your deal. A legitimate lender is not interested in acquiring your deal. They just want to lend money, collect interest, and get their principal back when you sell the property. His company typically lends up to 60% LTV (Loan to Value). This usually makes the loan fairly safe for the lender to be able to quick sell a property to recover the principal if the investor defaults.
John Parrot said there is always money available for a good deal. The most expensive money was the deal lost because someone didn’t want to pay for available money to close the deal. The next most expensive money is using a partner and splitting the profit 50/50. The cheapest hard money is to borrow the necessary funds to buy, fix, hold, and sell a property. (His company may lend up to 70% LTV.) That way all the profit is kept for yourself. He said to figure that 20% of your profit will go to the lender. If you have to figure so close that a high percent of interest will break your deal then you don’t have a good deal. Most lenders will evaluate your deal before lending on it. They will often pull a credit report as well. If they feel you aren’t going to make a profit or they feel there isn’t enough profit to pay them back, they won’t lend the money. John’s organization is in the success business. Their investors must be successful for him to be successful.
Jon Doss said most hard money lenders want 12 to 15 percent interest and a one to three year balloon. Although this seems like high interest, if your deal is great, this will be only a small part of your profit. Jon Doss said his company handles all the paperwork for you. Most lenders do not have a pre-payment penalty anymore. However, they may require a minimum of perhaps three months interest. Usually a deal will last longer than that anyhow unless you are flipping immediately to another investor. In that case, you just figure in that interest cost to see if it is still worth the deal.
Some things to avoid were discussed by all three lenders. They said to avoid one-bedroom houses and any house in a war zone. Look for houses in the A and B areas, not the C or D areas of a town. The reason is conventional lenders may not lend money to your retail buyer. Also, the better retail buyers will not want to live in a war zone or a C or D area. Jon Doss said his organization sometimes helps an investor find a property. John Parrot said they do not help, but they have a list of wholesalers to aid an investor find a deal. Chuck said they just lend money. Chuck also reminded us that flipping houses is just another job. The true investor keeps maybe one out of four houses to build a portfolio of rentals. That is where the true wealth comes from.
Some final things to avoid were talked about. Short sales take too long. Some banks may wait until they get a short sale offer to actually complete a foreclosure process. This causes more delays. John Parrot also advised to be careful not to partner up with multiple unrelated partners. This may be viewed as a violation of SEC regulations and could be a jail-able offense. However there are new rules pending on this, so the laws may change. It turned out to be an informative evening.
