Financing Rehab And Foreclosure Homes

Financing plays an important role in the whole flipping process. It can significantly impact the profit margin and the amount of time it takes you to flip the home. Here are several popular options in financing and funding a flip;

Using personal finances and a traditional mortgage
Using only personal finances
Obtaining a rehab/construction loan
Personal Financing with a Traditional Mortgage
Although a popular option, personally I don’t see this as a preferable one for first time home Ivestors. The way this works is simple. You find the house; you go to a mortgage broker, bank or lender and ask them to finance the house for you. The remaining costs of repairing and rebuilding the house are all out of pocket.

Let’s say the property you found is listed for $100,000. As long as the house is in livable condition, lenders will offer traditional financing for the property based on their guidelines. Now for financing this house you may need an additional down payment of 5% or 20% and etc. This all depends on how comfortable the lending institution is with your credit, income and mortgage history. You’d have to talk to your mortgage broker, loan officer or personal banker for more details on the down payment.

Once the bank approves the loan, double check to make sure there is no prepayment penalty for selling the home once you’ve completed the rehabilitation process.

Back to our example, we’ll say the bank required a 10% down payment from you to buy the home. Additionally, you’ve talked to your contractor and he’s told you that the costs of repair are going to be about another $30,000. So far, you’ve had to come up with about $40,000 out of pocket in expenses. Of course these aren’t the only things you’ll need to be spending money on. You will still have carrying costs and monthly mortgage payments for the house, insurance, utility and property tax payments as well. And of course, let’s not forget all of the unexpected items that seem to happen all the time.

Many people assume that this is the only real way to finance and work on a house flipping project. The problem becomes worst when hopeful investors tap into their personal and emergency savings accounts to fund their project.

On the plus side, by putting money into the project from personal finances, you save time and money. You don’t have to go back and forth with a bank to get a draw for a specific project and you only pay interest on the money you borrowed for the property. Construction and rehab loans typically have much higher interest rates which again, tap into your profit margin.

Personally, I only recommend moving forward with this type of financing after several properties have been flipped and a comfortable cushion has been made.

Using Only Personal Finances

The way this works is simple. You pay for everything from your own funds and put all of your own money on the line. This is good because you avoid closing costs, mortgage payments and most importantly you will be one of the top considerations for a seller when they have multiple offers. Someone that offers to close with cash has a much higher chance of getting the deal than a second offer willing to pay more, but has to wait for his financing to come through.

On the downside, you’re putting all of your money on the line and tying it up in the property. You have to wait to sell or refinance the property to get your money back out of it and continue with other projects. We’ll talk about refinancing a flip in a different article.

Some big time investors choose to go this way but many of them refrain. These investors would much prefer to make a little less in profits, but have the ability to spread their money into multiple projects at the same time.

Construction and Rehabilitation Loans

An investors favorite, rehab and construction loans are a popular method of financing investment projects. An initial down payment is usually required by the banking institution for purchasing the home. The amount is determined by the bank based on the sales price, future appraised value (when the project is completed), comparable houses in the neighborhood, and the sworn construction statement that has been given to you by your contractor.

The lender finances the property, and allots you a certain amount of funds in the form of a rehabilitation loan. To draw money from this loan, the bank might request the contractor to fill out a draw request schedule on the sworn construction statement and split the payments into a minimum of three parts. Remember, different banks have different guidelines so this is a general scenario. This ensures you and the bank of having a completed phase in the project done before any money is transferred to the contractor. On the down side, the contractor will have to cover all fees until each phase of the project has been completed.

Your monthly payments will be based on the total money borrowed at the current time. For example, you’ve borrowed $100,000 for the land and have drawn $10,000 from the rehab loan to pay the contractors. So your payment would be based on a total loan amount of $110,000. Depending on your lender, these monthly payments can be deducted from the total money you’re borrowing from the bank so you don’t have to immediately pay it out of pocket.

Why Early-Stage Startup Companies Should Hire a Lawyer

Many startup companies believe that they do not need a lawyer to help them with their business dealings. In the early stages, this may be true. However, as time goes on and your company grows, you will find yourself in situations where it is necessary to hire a business lawyer and begin to understand all the many benefits that come with hiring a lawyer for your legal needs.

The most straightforward approach to avoid any future legal issues is to employ a startup lawyer who is well-versed in your state’s company regulations and best practices. In addition, working with an attorney can help you better understand small company law. So, how can a startup lawyer help you in ensuring that your company’s launch runs smoothly?

They Know What’s Best for You

Lawyers that have experience with startups usually have worked in prestigious law firms, and as general counsel for significant corporations.

Their strategy creates more efficient, responsive, and, ultimately, more successful solutions – relies heavily on this high degree of broad legal and commercial knowledge.

They prioritize learning about a clients’ businesses and interests and obtaining the necessary outcomes as quickly as feasible.

Also, they provide an insider’s viewpoint and an intelligent methodology to produce agile, creative solutions for their clients, based on their many years of expertise as attorneys and experience dealing with corporations.

They Contribute to the Increase in the Value of Your Business

Startup attorneys help represent a wide range of entrepreneurs, operating companies, venture capital firms, and financiers in the education, fashion, finance, health care, internet, social media, technology, real estate, and television sectors.

They specialize in mergers and acquisitions as well as working with companies that have newly entered a market. They also can manage real estate, securities offerings, and SEC compliance, technology transactions, financing, employment, entertainment and media, and commercial contracts, among other things.

Focusing on success must include delivering the highest levels of representation in resolving the legal and business difficulties confronting clients now, tomorrow, and in the future, based on an unwavering dedication to the firm’s fundamental principles of quality, responsiveness, and business-centric service.

Wrapping Up

All in all, introducing a startup business can be overwhelming. You’re already charged with a host of responsibilities in which you’re untrained as a business owner. Legal problems are notoriously difficult to solve, and interpreting “legalese” is sometimes required. Experienced business lawyers know these complexities and can help you navigate them to avoid stumbling blocks.

Although many company owners wait until the last minute to deal with legal issues, they would benefit or profit greatly from hiring an experienced startup lawyer even before they begin. Reputable startup lawyers can give essential legal guidance, assist entrepreneurs in avoiding legal hazards, and improve their prospects of becoming a successful company.

Think Twice Before Getting Financial Advice From Your Bank

This startling figure comes from a recent review of the financial advice offered from the big four banks by the Australian Securities and Investment Commission (ASIC).

Even more startling: 10% of advice was found to leave investors in an even worse financial position.

Through a “vertically integrated business model”, Commonwealth Bank, National Australia Bank, Westpac, ANZ and AMP offer ‘in house’ financial advice, and collectively, control more than half of Australia’s financial planners.

It’s no surprise ASIC’s review found advisers at these banks favoured financial products that connected to their parent company, with 68% of client’s funds invested in ‘in house’ products as oppose to external products that may have been on the firms list.

Why the banks integrated financial advice model is flawed

It’s hard to believe the banks can keep a straight face and say they can abide by the duty for advisers to act absolutely in the best interests of a client.

Under the integrated financial advice model, there are layers of different fees including adviser fees, platform fees and investment management fees adding up to 2.5-3.5%

The typical breakdown of fees is usually as follows: an adviser charge of 0.8% to 1.1%, a platform fee of between 0.4% and 0.8%, and a managed fund fee of between 0.7% and 2.1%. These fees are not only opaque, but are sufficiently high to limit the ability of the client to quickly earn real rates of return.

Layers of fees placed into the business model used by the banks means there is not necessarily an incentive for the financial advice arm to make a profit, because the profits can be made in the upstream parts of the supply chain through the banks promoting their own products.

This business model, however, is flawed, and cannot survive in a world where people are demanding greater accountability for their investments, increased transparency in relation to fees and increased control over their investments.

It is noteworthy that the truly independent financial advisory firms in Australia that offer separately managed accounts have done everything in their power to avoid using managed funds and keep fee’s competitive.

The banks have refused to admit their integrated approach to advice is fatally flawed. When the Australian Financial Review approached the Financial Services Council (FSC), a peak body that represents the ‘for-profit’ wealth managers, for a defence if the layered fee arrangements, a spokesman said no generalisations could be made.

There are fundamental flaws in the advice model, and it will be interesting to see what the upcoming royal commission into banking will do to change some of the contentious issues surround integrated financial advice.

Many financial commentators are calling for a separation of financial advice attached to banks, with obvious bias and failure to meet the best interests of clients becoming more apparent.

Chris Brycki, CEO of Stockspot, says “investors should receive fair and unbiased financial advice from experts who will act in the best interests of their client. What Australians currently get is product pushing from salespeople who are paid by the banks.”

Brycki is calling for structural reform to fix the problems caused by the dominant market power of the banks to ensure that consumers are protected, advisers are better educated and incentives are aligned.

Stockspot’s annual research into high-fee-charging funds shows thousands of customers of banks are being recommended bank aligned investment products despite the potential of more appropriate alternatives being available.