by Nate Pyles, expert real estate investor
So you find a house that you know you can make a lot of money on (or maybe you want to live in it) so you want it ASAP. If it’s a good deal there’s a good chance it will be gone soon so you need money now.
Here are sure-fire ways to acquire a foreclosure, short sale, or other distressed property – and do it quickly.
Q: “Can I get a bank loan to buy a distressed property?”
A: That’s a question I hear all the time as a full-time real estate investor. Well, the answer is surprisingly, yes. If you know what you’re doing and move forward wisely, you can easily wind up with a bank funded distressed property on your hands with deep equity in it.
Can You Pay Cash?
At the outset, my advice to you is always to buy with cash if you can. Cash is always easier and you can usually get a discount when you’re bringing cash to the table. But if you’re like most Americans, you might not have several hundred thousand dollars of cash on hand.
Cash is best because it’s quick. If you wait for a bank loan to come through you’ll have to wait 30 to 45 days and might lose the property to another buyer. So if you don’t have immediate access to cash and want the property right away, you need a plan to get the property and get it quickly.
So, What’s a Buyer to Do?
Home investors typically don’t want to be in the deal for more than 70% of the after repair value (ARV).
Here’s a quick definition of ARV.
So…because you won’t be able to get a conventional F.H.A., R.D., or V.A. loan for a distressed property, you’ll need to find another source of funding.
That’s where private lenders come in.
You can borrow money from a private party until the bank loan gets funded up to 45 days later. When the bank comes through, you refinance with the bank at a lower interest rate and pay back the private lender.
A very good strategy would be to get a Master Loan Commitment (MLC) from a bank or credit union. This tells anyone who reads it (i.e. your private money person) that the bank who gave you the MLC will fund your loan. It’s guaranteed.
Look at conventional loans first. It can be time-consuming to secure a rehab loan in combination with most VA, FHA and USDA financing. There is the FHA 203k loan, but that can take 90 days or more to complete.
So conventional is the path of least resistance. Still, you will need a 20 to 30 percent down payment if you choose conventional.
So this strategy will only work if you have some cash on hand. Let me show you a workable strategy to use cheap bank money to get a deep equity property.
An Example Flip Transaction
You find a home that you know you could make money on if you buy it for $100k or less. The seller is asking $120,000, but that’s too much to pay if you want to turn a profit. You have to buy it at $100,000 or less.
Don’t compromise on this. Seriously, don’t do it. Trust me.
So, assuming you can get it for $100k. (We’ll discuss how to negotiate with the seller before the end of this post.) Here’s what the deal looks like:
Bank Loan: $70k
Your Down Payment: $30k
Buying the Home: $100k
So you need a private money lender to loan you $70,000 so you can grab this house quickly. Now the private money guy is going to be more expensive, and here’s what they’ll want from you:
- Your Bank Loan Commitment Letter
- Proof of funds (showing them you have $30,000)
- On your first deal, they might even want to talk to your banker
Now it’s always better to do this in your business name, so you’re not putting your personal funds or house on the line. If you get the thumbs up from the private money guy and the bank, here’s how the deal needs to go down:
- You borrow $70,000 from a private lender who charges one to two percent of the loan amount.
- The lender secures the deal with a Deed of Trust, to be paid in full, principal and points, in 30 days.
- You bring your $30,000
- Your total cost to get this house: $101,400 (assuming a charge of two percentage points upfront).
Why pay more for the loan?
You’re trading time for equity. If you can get the house at a
discount, the equity you’re getting offsets the loan fees and points.
So after 30 days or so, you get your bank loan, your private money guy gets paid off, and now you have a house that’s funded by a bank at a cheaper interest rate than the private money lender.
Getting the Price Down
So this is all well and good, but how do you get the seller to come down to $100,000 (in our example deal). To make money here, you need the house for $100,000 but they want to sell it to you for 120,000.
Give them an offer they can’t refuse.
Every buyer wants cash and they want it quickly. And every buyer also wants to pay as little as they can to repair or rehab their house before they sell it. So, you make it easy for them.
A typical purchase contract usually has an escape clause for you the buyer. It’s called an “inspection contingency.” Basically this means that after the inspection if you don’t like what you see, you can bail. No harm no foul. Then the seller has to go back to the market and find someone else to jump through all the hoops in the purchasing process.
For each buyer they do this with, the home inspection process can tie up their house for 2 weeks (not to mention a 45 day close). That’s about 60 days before they see any cash, plus they might have to pay for any repairs (e.g. mold, new roof, earth to wood, etc.) and the buyer can always bail if they don’t want the property for whatever reason.
No seller wants to do that.
Your Sales Pitch
You approach the buyer who wants $120K and say this (roughly):
“Hi Mr. Buyer, My name is Nate and I want to buy your house. Now I know you’re asking $120,000 for it and I want to counter. I’m willing to give you $100,000 cash on Tuesday and I’ll buy your house as is, where is, with no inspection. This way you don’t have to worry about repairing your house, and you’ll have cash in hand next week. You don’t have to tie up your home in the inspection process, pay for any repairs, or wait 60 days before you see any money.”
Now your pitch has to look something like that. You have to sell it. They benefit because they get fast cash and don’t have to fix or repair ANYTHING. You benefit because when you buy at a discount, you’re getting equity in the deal and the money you’re saving will take care of any potential issues or problems you face post-purchase.
It’s a win for everyone involved. You just have to make sure you have your numbers right and can sell the deal.
Where to Find Private Money Lenders
Lastly, if you’re just starting out and have no clue where to find private money lenders, here’s a few ways I do and have found them in the past before I solidified the network of lenders that I work with now:
- Local networks, meetups, clubs, and groups. Google them and join ‘em all (e.g. Google “
“local R.E.I. Group” and check out The National REIA too).
- Go to your County Courthouse and pull up a private lenders list (yep you can do this).
- Craigslist. I don’t like to hop on Craigslist too much but if you must, there are a ton of people willing to fund deals for you.
- Ask around, stay local, network, and you’ll find these guys. They’re everywhere.
So that’s it for now. If you’re interested in getting a mortgage on a distressed property, now you know how to do it. You just have to network, sell, be diligent, and stick to your numbers and you can make it happen.
Nate Pyles is a long-term Real Estate Investor. He spends his week buying and selling houses for profit in the Boise, Idaho area. He runs House Flip Mentor, has 4 kids, a gorgeous wife, owns 2 airplanes, loves to fly, and even built his own Irish pub on his property. To learn more about how you can get started in real estate investing, download his free ebook, The All in One Guide to Buying and Selling Houses for Profit.