It’s Okay To Get The Property Under Contract

This article is mostly for the new flippers, rehabbers, neighborhood renovation specialists, or whatever is the nom du jour. However, I hope there are some nuggets or motivation for the more seasoned investors too.

I probably deal with 15 to 20 people a day calling for rate quotes that haven’t even spoken to the seller yet. Over and over I hear, “I don’t want to make an offer until I know I’ve got the money.” There are so many other things that need to get done before taking time to get a rate quote. In fact, you should not even be looking for a quote until you have an asset.

The commercial finance market doesn’t play by the same rules.

I understand that there's a fear factor, which I'll address later on. However, I think there's some social engineering taking effect as well. Buyers and sellers are used to hearing the words from the residential real estate agents, “have you gotten your pre-qualification letter yet?” Your seller probably has an awful house (otherwise you wouldn't be looking at it), but the seller still thinks it's the Taj Mahal and is expecting a standard residential transaction. That's on you to talk him/her through it. Residential (owner occupied) and commercial (non owner occupied) mortgages are very different breeds. Residential mortgages have strict criteria for borrowers and lenders (the residential mortgage guys are going to get mad at me now), and there isn't much different between them. Residential loans have to conform to Fannie Mae and Freddie Mac criteria, and interest rates are based on the Fed prime rate or another similar index. Consequently, pre-qual letters are a slam dunk.

On the other hand, there are as many different types of commercial mortgages as there are properties, borrowers, sellers, and lenders. If you’re a first-time flipper, the least of your worries is getting a specific quote. You need guys swinging hammers.

Here's a quick rule. Look at your cash reserves, and multiply it by 4. That's the most you should pay for your property and rehab combined. In other words, if you've got $40k, don't look at projects that are going to cost more than $160k. Experienced flippers with good credit, doing 4 to 5 rehabs a year, can multiply it by 7 or 8. Yes there are 90%/100% loans. Relax. It's just a quick rule I recommend.

Hard money is everywhere. As long as you’ve got the cash (notice a trend?) and have made a good deal, it’s hard to get turned down. The interest rate and points will make you cringe on your first flip, but this isn’t your home. This is a business project. If you do your job right, you should be in and out of a flip within four to five months and that 12% interest rate only equals four percent of the total project cost.

Another quick rule: your contractors should be completing at least $10k of work per week. If your rehab is $40k and you're not done with construction in a month, start yelling ... unless it's your fault. Then grovel, beg, and offer overtime.

Treat your real estate business like a business (or Ready, Shoot!, Aim).

I’ve been flipping houses for more than 30 years now, and not once have I gotten a prequalification letter. That doesn’t mean that I don’t prequalify myself before looking for my next project. I know my financial capabilities (see the first quick rule above). I have a mortgage broker. I’ve got my list of contractors and sub-contractors and I know their pricing. I've got my list of "subject to" clauses written into my purchase agreements (consult your attorney). And when I go looking for my next project, I put an offer on every house I see. I have no expectation that every offer is going to be accepted. (My personal number is around 1 in 10.) Investments are about the numbers. If the numbers work, everyone's happy. If the numbers don’t add up, move on. And there’s no easier way to overcome fear if your business isn’t hanging on the balance of one offer.

You are not in the business of flipping houses if you don’t have a contract.

Contracts don’t happen if you don’t make offers. And you’re not making an offer if you’re calling a mortgage broker to see what rate you might get. As of the writing of this post, your rates are going to be between 8% to 16% interest, 4-7 points, and the total loan amount won’t exceed 70% of ARV. Will you get better rates and terms on your final loan? Probably. I sure hope so. I’m certainly going to fight to get you better terms. However, if your deal is so tight that a couple points will make or break the project, write a lower offer for that house, go do a rehab estimate on a new house, and write another offer. Rinse, repeat.

Final quick rule: You can never pay too little for a house and it never hurts to ask. I got a house for free once. Trust me. Even with a divorce, I still made money on that house.

Once the property is under contract, it's time to find the loan.

I'll let you in on a non-secret. Until you have the contract, I can't really tell you anymore about rates and terms than I did in the prior paragraph. (I guess. technically, I can, but I don't.) Commercial mortgages are mostly about the asset. Before the contract, all you’ve got is a dream and a prayer, and a guy on the other end of an email or phone saying, “Sure I make hard money loans and I’d love to work with you.” Once you have a contract, however, you’ve got an asset. If you don’t have the cash to flip the house yourself, you can still sell that asset for a profit to a flipper that does. (It's called wholesaling, and is a completely different article.) However, If you’ve got the cash and a good deal, you can turn the screws on the hard money lenders and squeeze every dime you can out of them. Why? While I can only speak for myself here, I bet it’s true across the business. Lenders have more money to lend than they have good projects.

Now go get a mortgage broker! (You didn’t really think there wouldn’t be a pitch in here, did you?)

My job, as the mortgage broker, is to take your project (when you actually have one!) and get those dimes for you. I’m not ashamed to say, “Hey, Lender 2, Lender 1 over here gave me 9% and 3 points. Joe’s gold. He’s got a sweet deal. The loan’s only 60% of ARV. How much can you beat Lender 1 by?” I do it all day long, and I do it without any money up front from you. None of that negotiating happens, however, if you don’t have an asset. So get out there, get your properties under contract, and let’s make some money!

The views and opinions in this article are not necessarily those of 11 Capital Finance, LLC., and are based solely on the original author's anecdotal experience and do not constitute legal or investment advice of any kind. All investing comes with risks, so always consult your own professional advisors before undertaking any investment activities.