Hi All,
Girl and I are deciding to buy a fixer-upper. Both our credit is on the mend but not the best. I’m on the verge of getting my GC lic. here in SoCal. ( I get the urge every year or 2<G>) I’m wondering if banks are a bit freindlier towards “professionals” in regards to such projects.
I also work with GC and I have to pass on lots of jobs as I’m not a GC so it would be a good thing anyway. Any advice on the best approach to obtain said liscence down San Diego way? Schools etc…..?
Thanks,
W
Replies
Whatrix, the world of fixer uppers is the world of real estate investing. The financing aspect of the real estate investment world is a book all by itself!
I would suggest doing some basic research before you buy.....it will save you many, many, many thousands of dollars. Just start your research with authors like Robert G. Allen, Frank Gallinelli, William Bronchick, Robert Dahlstrom. There's more, but these will give you enough to go in the right direction. Follow their suggestions for more authors too.
Done right, real estate will be a very good choice for you. How you go about it will be up to you...make sure it fits your personality.
Rehabbing is one area that folks like us (skilled trades) can make huge leaps in wealth building by using sweat equity. Our knowlege of houses gives us huge advantages in assessing true costs. On the other hand, it can work against you, paying more than you should for fixers. Those books will give you very specific guidelines for buying.
Your opening question deals with financing. The answer is different for different sources. The book "ARE YOU DUMB ENOUGH TO BE RICH?" by G. William Barnett II is an excellent resource for understanding the financing game. You'll find that your credit is usually meaningless.
One of the biggest misconceptions about getting started is centered around needing cash. Every deal will need cash...but it doesn't need to be YOUR cash!
To anwer your question directly: All banks are not equal in their loan goals. Some banks look to primarily make loans that are sold on the after market. These typically follow the fannie mae and freddi mac guidelines. Their mortgages are based on the sale price of the fixer. You may be able to get a different loan for the repairs, but it won't be wrapped up into the mortgage. Your credit probably would be an issue.
Some banks make "portfolio" loans. These are generally higher risk loans. The guidelines are subjective because the loans will not be sold in the after market. Smaller hometown banks are more likely to make loans based on the properties in question and also you and your experience. If you walk into the bank with a mohawk, liprings and tattos on your head, and tak jive to them, you probably won't get a loan...but if you go in with a financial plan that makes sense, and you have experience in the art of remodeling, then they probably would like to take a chance on you.
HUD actually has programs that cater to people with credit problems. HUD also works with investors. Don't overlook this potential profit center if your going to rehab.
Private lenders (it could be me, your uncle, you neighbor, or someone in the classified) look to the property for it's security. IF the numbers are right, you can fund any project, in any city, in any condition with the worst credit score in less than 48 hours notice. The rates might seem high, but if the interest rate will make or break the deal, it's probably not a deal anyways!
blue
FRAMING ADVICE ALERT!!!! DON'T TAKE ANY FRAMING ADVICE FROM ME. I DON'T KNOW ANYTHING ABOUT IT. IF YOU WANT GOOD FRAMING ADVICE, JUST ASK GABE. DON'T ASK ANYONE ELSE....JUST ASK GABE! REMEMBER, I DON'T KNOW ANYTHING ABOUT FRAMING...I JUST BS ABOUT IT.
Thanks so much!
I will investigate based on your suggestions.
Whatrix
blue,
i've followed your posts on occasion and you allways came off as a grad from the school of hard knocks, good ol' boy with many years in the trades, and a wiley sense of humor. your post caught me by surprise. i'm getting into almost a similar situation. built a 2,000 square foot cape cod type spec home and it's all paid for cash. after two years of putting in my own capital, and weekdends/ downtime, i'm going for a loan to finish the inside and mechanicals. your right on the money with all you posted. plus, in my experience,,,, i did a blunder by not getting a loan from the beginning. banks are funny about lending after the fact. i never would have believed that being an established builder. but they gave me the worst time for not having blue prints, etc. i finally got it resolved showing them five other houses i had built with almost identical floor plans. my only guess is that it was a confidence issue. one knucklehead in a suit leaned forward from his chair and asked point blank,,, "you can build a house with no prints". my response was another question,,,, i asked him if he needed a set of directions to make every decision in his day. live and learn,,,, enjoyed your post,,, wished i'd asked a smilar question before i hauled myself headlong into a project!
j. jordan
http://www.jjordanbuilders.com
Thanks J. Jordan.
You're right, I have come from the school of hard knocks. I'm still in it too!
The credit issues, especially with someone like you....dumping all your capital into the spec, can easily ruin you if your not prepared or knowledgeable.
I keep running into the problem of not having enough cash flow. The bankers look at my financials and tell me that I don't make enough to live, let alone pay back a loan! I just tell them I'll give myself a raise, if and when I need one, but I'm not inclined to pay myself a lot right now because I have to tack on at least 30% more to cover taxes! I've spent a lifetime avoiding taxes and it kills me to have to cave in...just to get loans.
My mortgage guy tells me that he is in the same situation. He says I'm still way better off getting a no documentation loan and paying the 1% premium, instead of paying uncle sam. After you think clearly about it...he's right.
Getting a bank to loan you in the middle of a project is probably one of the hardest to do. They figure that if you didn't plan your funding before you start, you probably aren't smart enough to finish it and pay them back! They might have a point but the real reason is that if they have to take back an unfinished house, the discount is extreme when they try to market it to get back their loan money.
Good luck finishing the cap cod and have fun. When it's done, you'll be happier. Don't forget to put up the for sale sign right now...I know a builder that hasn't ever finished a house built on spec in 15 years...and he puts them up rather quickly!
Thanks too for the kind words.
blueBe cautious when taking any advice from me. Although I have a lifetime of framing experience, some of it is viewed as boogerin and not consistent with views of those who prefer to overbuild everything...including their own egos!
blue,
again, right on the money. thats where i'm at is trying to avoid the pitfalls of taxation after paying myself enough out of the corporation to be able to "afford" the loan. i've read some about the no-doc loan and am trying to understand the pitfalls, i'm thinkin' either that or a stated income which requires no verification might be the way. boy that i.r.s. stuff is a nightmare. i go round and round with my accountant just about every year. this year i'm goin' round about the issue of writing off the expense of my home office. used to be that you could only write off 20%. i found a site that had the legalities of tax-write offs and it clearly showed where you could write off the whole derned kit and kaboodle. what i got miffed about, was that i'm paying this "professional" to give advice to save me money. anyways, thanx for the information. about the house. i'm in a real good spot if the loan goes through. and if it don't then it'll take another years worth of my own profits and sweat to finish it, which is working on my patience. but all i gotta do is look in the mirror and blame the bonehead starin' back for the brilliant idea! i wonder if that flat tax stuff goes through that it will be a good deal for the contractor's. seems a lot less painful way to do the deal given the absence of so much paperwork. ahh that might sound too political, but i'll pick yer brain on that if you got an opinion. 'preciate the feedback, and the insight, this thread hit home in more ways than one. the things you learn on breaktime,,,,,,,
j. jordan
http://www.jjordanbuilders.com
My pleasure J.
Don't get discouraged if that loan doesn't go through. Just try another bank or better yet find and work with a good mortgage broker. They understand how to fill out the info to portray you in the best light.
You mentioned a stated income loan...which is slightly different from a no doc. No Docs require 20%equity and a high credit score. I've used them before...they work for me. Your situation is different and might call for a different approach. Your "problem" is that you don't have a C of O, and therefore can't get a conventional mortgage. You have to be seeking a construction loan, which should be easy enough, if you are working with a company that specializes in those types of loans.
If you are working with banks and mortgage companines that view your situation as risky, you'll just be beating your head against the wall to get financed. Just go find the other institutions that seek out your type of business.
If you continue to get turned down, don't overlook private financing. A private financer can be induced for several good reasons. First, understand that the four most important things that private lenders want is: 1) security 2) security 3) security and 4) fair rate of return/security (their tied for forth place!)
Your approach to private lenders goes something like this: "Who do you know that has money in CDs or money market accounts would like to earn a healty rate of return on their money, secured by a first mortgage on a house with at least 25 to 35% equity?"
(The above two paragraphs are taken from Making Big Money Investing in Foreclosues by peter conti and david finkel.)
The recent stock downturns have caused many investors to scramble looking for safe places to invest. You have all the pieces that would make you a safe risk....experience, equity, and a strong desire to finish and get it sold. You really wouldn't/shouldn't have a hard time finding investors if you can't locate a construction loan.
blue
Be cautious when taking any advice from me. Although I have a lifetime of framing experience, some of it is viewed as boogerin and not consistent with views of those who prefer to overbuild everything...including their own egos!
thanx again mr. blue, i think it'll go through, but if it don't,, i sincerely appreciate the heads up on the other directions i can take. i'm trying to ween (spelling?) myself off of clients. if i get my first spec home done i'll be set. i hope anyways. i have enjoyed all the clients i can stand for one life time. take care,
j. jordan
http://www.jjordanbuilders.com
Edited 11/1/2004 10:42 am ET by J Jordan Builders
WoW!
All great stuff.....But....
Does being a GC make the process easier? Will a lender be more apt to over look credit flaws and the actual numbers of the deal-if it's marginal-if you have a state license? As of now I'm a carpenter who works for others with about 15 years experience.
BTW I'm in Cali.
Thanks again for all the direction. I'm tempted to print out this thread for some reference.
W
i wish i could say, but honestly, i got more from reading what blue had posted, as far as experienced advice, than i ever could give. my situation was ironically similar, except, i put my own capital into a new home. i have a 2,000 square foot home completed to the stage of needing the mechanicals and the interior finishes to be ready to sell. i went and got it appraised last year and it was figured at around $200,000.00 to $225,000.00 once complete. i need around $50,000 to complete it and was trying to use the banks money at this stage instead of my own which has gotten a good amount done in the past two years but i'm allways broke because i've used my precious cash flow to finance the project myself. my advice would be to ask those in the know, like mr. Blue, and others who have already been where me and you are trying to go. i hope it works out for you and you get financing secured at a decent rate. best of luck!
j. jordan
http://www.jjordanbuilders.com
Whatrix, I'm not going to tell you that I'm some kind of expert on mortgages and loans. I have done a lot of research in the real estate investment area however.
Sometimes, the best advice comes right from the horses mouth. Don't be afraid to make an informal inquiry with a bank. Start with yours. Just ask them exactly what you are asking here. You might be surprised at how accomdating they might be. Remember, they are in the business of making loans, so people like you are important to them.
I'll say this about being a General Contractor....I don't really think it will help, nor hurt you if you intend to rehab houses. Rehabbing houses, one at a time, is a small segment of the real estate investment business. Most of the real estate business revolves around mortgages. The mortgage business is big business and lenders have their own set of rules..both governmental and practical. Probably the most important item in a mortgage is the property, the next piece of the pie is you and your ability to repay a loan. If you fit into their lending program, the matter of a GC license won't matter.
Rehabbing is a special business within the business. It poses different problems...especially for lenders. That's why HUD gets involved...conventional lenders don't like to make loans on junk properties...they're too risky...they don't meet minimum certificate of occupancy issues...they're uninsurable. There's lots of pitfalls....buyers with good intentions getting over their heads...mold....lead paint...bad neighborhoods. HUD offers loans on junk properties because it helps put bad housing back into productive use. The community benefits from business owners like you who are willing to work hard...but without HUD, or private money, many houses would never be repaired.
Do yourself a huge favor....go to a REIA meeting...I'm sure there is one near you. The website for the national real estate investors association is http://www.nationalreia.com/ . Just click on groups, then California for a list of groups near you. Also, start reading those books. After reading a few, you'll realize that you don't really need credit to do rehabbing.
Personally, I wouldn't choose conventional financing for buying junkers and rehabbing. The closing costs for conventional loans is too high....your throwing away a few thousand bucks on lowpriced stuff and a lot more on higher end houses.The books that I told you about will give you a ton of information on how to buy houses without ever talking to a banker.
If you want a ton of information ...go to dealmakerscafe.com. Once you go in there, you'll be getting the real deal from guys that do that full time. If you go into their archives, you'll get enough real information to start your rehabbing business in no time flat!
blueWarning! Be cautious when taking any advice from me. Although I have a lifetime of framing experience, some of it is viewed as boogerin and not consistent with views of those who prefer to overbuild everything...including their own egos
Additionally, don't take any political advice from me. I'm just a parrot for the Republican talking points. I get all my news from Rush Limbaugh and Fox and Friends (they are funny...try them out)!
whatrix,
Check out the HUD 203K program. Lots of paper work.
http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm
KK
KK, have you done any HUD financing?
blue FRAMING ADVICE ALERT!!!! DON'T TAKE ANY FRAMING ADVICE FROM ME. I DON'T KNOW ANYTHING ABOUT IT. IF YOU WANT GOOD FRAMING ADVICE, JUST ASK GABE. DON'T ASK ANYONE ELSE....JUST ASK GABE! REMEMBER, I DON'T KNOW ANYTHING ABOUT FRAMING...I JUST BS ABOUT IT.
END OF ALERT!
blue,
Not yet. I have been investigating. Even read a few Rich Dad books!
KK
We bought a duplex a few years ago on a 203K rehab loan - sweet (and assumable)
I love the Rich Dad series.
My favorite is still the Cashflow Quadrant. It helped me to understand myself, even though I already knew most of what he wrote. Its just kinda hard to accept about self employed people...
blue FRAMING ADVICE ALERT!!!! DON'T TAKE ANY FRAMING ADVICE FROM ME. I DON'T KNOW ANYTHING ABOUT IT. IF YOU WANT GOOD FRAMING ADVICE, JUST ASK GABE. DON'T ASK ANYONE ELSE....JUST ASK GABE! REMEMBER, I DON'T KNOW ANYTHING ABOUT FRAMING...I JUST BS ABOUT IT.
END OF ALERT!
Whatrix, I forgot to mention one other book that you should probably get. It has one of the best chapters on negotiating tactix that I've ever read...very simple, very productive. The book is called Making Big Money Investing in Foreclosures (without cash or credit) by Peter Conti and David Finkel.
The reason I forgot about it is because it is in the throne room...it's been my reading material lately.
I've got one other very excellent title in mind, but the book is out on loan and I can't remember the title or the author. I'll remember and postit.
blue
Be cautious when taking any advice from me. Although I have a lifetime of framing experience, some of it is viewed as boogerin and not consistent with views of those who prefer to overbuild everything...including their own egos!