Stop Waiting on Approvals and Giving Up your Equity to Fund your next Deal

In these current times banks, mortgage companies,  their underwriters, processors, and appraisers are all overwhelmed.  Covid-19 has not slowed down real estate sales or rentals in markets such as Nashville, Chattanooga, Clarksville, Huntsville, and many other cities in the southeast.   

Owner occupant refinance requests have flooded the mortgage industry since March due to extremely low-interest rates and the uncertainty with the coronavirus. 

Banks took on procuring the various Coronavirus relief loans administered by the SBA while still receiving all the normal loans requests from investors.  

Banks have also tightened their criteria on real estate loans due to the uncertainty from Covid-19 and from the bank regulators limiting their percentage of real estate loans. 

Meanwhile, since there was a "pause" and a lot of owner-occupants staying in place this has created a demand for homes for the ones that do need to relocate or choose to move during this time.  

This is great news for real estate investors as we are the ones that have the inventory of homes to sell or rent.

Investors are selling their homes fast, sometimes getting multiple offers.  Some end buyers are buying homes sight unseen due to relocating and dealing with travel constraints during this pandemic or simply to outbid the competition.  

However, these above factors are why more investors are turning to other alternatives for funding.  

One alternative is securing an "equity partner", aka a silent financial partner.  A standard agreement is that the partner funds the deal with their cash and the profits are split 50/50 between you, the active investor, and the silent partner.  

Having an equity partner has its perks.  Securing the money is easy with no underwriting or extra closing costs and you can close as soon as the title work is complete.  You also do not use any of your money since you are supplying the "sweat equity".  

The downfall is with zero underwriting your due diligence could be inaccurate and you can easily go over budget. You also do not get a second opinion on the value from an appraisal or other expert.  If you overvalue the after completed sales price you will have longer days on the market and your projected profit margin will shrink.  In addition, most likely your silent partner can only fund 1-2 deals at a time.  On top of all this, you are giving half of your profits to your silent partner.    

The other method for funding is a hard money loan.  

The reputable hard money lender will do some due diligence to lower the risk for them and for you, the investor.  The smaller hard money lenders are their own underwriters so you are working with the decision-maker. Some do not order an appraiser and do their own in-house evaluation on the value of the property.  Therefore they can act quickly, being able to fund the deal by the time the title work is complete.  They work within a framework based on the asset and this helps you stay within budget and sell for the price you both agree on.  They typically have more access to funds than one financial partner.  They might require a small down payment but as the relationship grows they may fund 100% of costs.   The interest rates and points of the loan are higher than bank and mortgage rates and lower than equity partners.  

Let's look at a comparison of deal using a commercial local bank, an equity partner, and a hard money lender. 

*Loan costs assuming principal of $80k for 1 month,  $120k for 2 months, $160k for 1 month.

In this scenario the bank loan is the most profitable but takes the longest time and more of your time.  The equity partner has a great cash on cash return (especially if you do not use any of your money) but is the least profitable.  The hard money loan is just $5350 less profitable than bank financing but less of your funds out of pocket, easier for you, and quicker to close.  When you factor in time to close you can accomplish more deals per year and thus the new profit could be higher than bank financing. 

In summary when you factor in your time, time waiting, your money, and net profit, using a hard money lender for funding your next deal may be your best choice.