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    Posted March 3, 2014 by
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    How to Negotiate with Your Loan Broker

     
    The crucible of leveraging is all about getting low-risk loans, and as such, some of those elements are defined by points on the loan and/or whether or not there’s a prepayment penalty. However, and contrarian as it may seem, the interest rate for the most part is not one of those crucial elements; this should be the least of your worries given that your hold time on the property will be truncated at best. In a nutshell, a low-risk loan is a loan where you put the least amount of money down for the most amount of money you can qualify for, without any of the after morning effects or regrets, such as excessive points or prepayment penalties to cope with. This is what leveraging is all about. Case in point: you buy a $200,000 home with 5 percent down, which equals $10,000. That way if things go south after you close a property—you’ve essentially limited your loss to your initial $10,000 investment. Ideally it would be 0 percent down, but given what you want and what you get are entirely two different concepts, let us conceptualize a reality based scenario, not an infomercial based fantasy that assumes 0 percent financing/down payment for anyone who has enough money to buy a four-part CD collection being hawked on late-night television. Now compare this scenario on the same $200,000 property if you put 30 percent down, which would mean $60,000 of your hard-earned money into a deal. If that deal goes south, that’s a very huge hit for any person.

    In terms of minimizing your acquisition costs and properly using leverage, consider getting licensed in the states that you invest in. By being licensed, you can essentially co‑op your own deals with developers who offer 3 percent to 6 percent brokerage referral fees or commissions to investors that are licensed in the states in which they are buying. To clarify, the term “co‑op” means that developers cooperate with other brokers and/or real estate licensees and accordingly, pay a commission for the purchase of a property.

    Now in a seller’s market, expect co‑op or commission fees to be anywhere from 1 percent to 3 percent. Or it could be that they may not exist at all since the developer may have the upper hand in the market and feels that they don’t have to offer a commission since they can sell their own product in an expeditious manner. However, in a buyer’s market, expect co‑op fees to be anywhere from 3 percent to 6 percent, maybe even 7 percent if the developer is exceptionally motivated. Once again, that’s a fee paid to investors or real estate licensees who are in fact licensed. From the developer’s perspective, this would be the same fee they would be paying to a regular real estate agent if they brought in a buyer, so why not extend the same courtesy to a licensed investor as well.

    In conclusion and with an additional example on the effective use of leverage, using the $200,000
    purchase scenario via 95 percent LTV non-owner occupied loan, let’s determine how those acquisition costs can be minimized to zero, based upon real estate licensure. For a $200,000 home with a 95 percent LTV, that means your loan would be $190,000, which will require $10,000 down. If you’re licensed, receiving a 3 percent to 6 percent fee from the developer, just as any real estate agent would receive, you could easily absorb the $10,000 down payment that you would have to otherwise pay in which to buy the property. With the expectation of having to pay $3,000 to $4,000 in closing costs, which the developer may already be picking up, given the typical incentives being provided to home buyers, the acquisition costs may be nominal or none at all.

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