- Posted January 1, 2014 by
How to Get a Good Loan
When it comes down to loans, deal structure is incredibly important in terms of netting out and establishing your net proceeds. If at all possible, build the points on the backend of a loan, which means a higher interest rate. Of course, a higher interest rate is irrelevant since you may sell the home before you even make your first loan payment. Don’t be surprised if this happens. This has happened to me on several occasions. More often then not, the first loan payment is due within thirty to forty-five days after having closed your property. If you can put your property under contract within two weeks, and you have a thirty‑day escrow, you may technically be in a position—and this has occurred to me on three to four occasions—where you actually do not make a loan payment during your brief ownership period. It’s an amazing feeling. I hope you experience it someday.
Now with the latter stated in terms of my innermost feelings toward loan points and prepayment penalties—since these are instruments of evil that are manipulated by unscrupulous mortgage brokers and lenders—I do have a positive story of a mortgage broker. In 2005, I received a tip from Fahali
Campbell, a mortgage broker in Southern California. The tip was in connection to a small regional homebuilder, Empire Homes, based in Upland, California (Riverside County area) that was investor friendly. Amazingly, with this builder I was able to put five homes under contract at $3,000 apiece for a total of $15,000. The total value of the acquisition was $2,030,000. The deal structure had all the hallmarks of flip methodology at its best: Riverside County location, long build-out, entry-level home product, low initial deposit, minimal design deposit requirement as well, $10,000 closing costs incentive, and a hot market. Long story short, when the five homes came online in February 2006, my net profit was $210,000 in just under four to five months of marketing.
Fortunately, as it turned out, Fahali was an exception to the rule when it comes to mortgage brokers. As a stand-up professional, his selfless disposition was appreciated. Maybe the fact that he played tailback in the Pac 10 for Oregon State in the mid-nineties had something to do with it, since it may have instilled a sense of fair play to others—I don’t know. But I would certainly encourage those investors reading this article to seek out ethical professionals for your deal team. At the very least, your deal team should consist of a notary public that is prompt, a mortgage broker(s) that doesn’t try to cheat you, a lawyer that doesn’t double bill you, a home inspector that isn’t in a rush, an escrow company that is biased in your favor, and marketing services (i.e., e-flyer, broadcast fax) vendors that are reliable. I have found throughout my real estate career that former athletes and ex-military tend to operate within a code of ethics, rectitude, and professionalism that sets them apart from others. Perhaps it’s the experience of being out there on the field of play or the field of battle that constructs a mind-set that imparts the importance of helping others strive for success or survival, instead of thinking of oneself all the time—and that this mind-set translates into selfless acts for others.
Getting back to real estate, and now that we’ve discussed points, let’s talk about prepayment penalties, another vital component of mortgage financing and many a cause of prospective deal breakers. As a cardinal rule, never get a loan with a prepayment penalty. Depending upon the size of the flip, conservatively speaking, this could add $7,000 to $15,000 in closing costs when you resell your flip property. And once again, when you close the property—and depending upon whether or not your property has gone up $30,000 to $60,000—a prepayment penalty will factor heavily into what your net proceeds are at the end of the day. Having a $15,000 God-forbidden prepayment penalty on a property that has only gone up $30,000, may in fact cause you not to close on that property, since netting only $15,000 on a flip is too thin of a margin to take a chance on. But if you’ve got a property where you think you might net $30,000 and the only loans that are available to are those with a substantial prepayment penalty, then very likely you may have to walk away from this property. In view of the fact of a $15,000 prepayment penalty on a $30,000 net profit, that 50 percent cut into your net proceeds is a deal breaker. I would not advise closing on this type of deal scenario.
These are the bits of minutia that you really have to be exceedingly and meticulously aware of on your loan product. You do not want to be stunned on this type of fourth quarter surprise when you are in escrow and getting ready to sale the property. In fact, you may want to even check the prepayment penalty language once again before you go to escrow to sign loan docs. This is advisable just to make doubly sure of the prepayment penalty you’re getting or not getting.