Why PMI is Not so Bad

PMI is Private Mortgage Insurance. Most people that apply for a loan will plan on paying PMI. PMI is required for anyone that is getting a loan on a property and does not have a 20% down payment. PMI is not a set amount. It varies depending on the borrower’s credit score and the amount of money they are putting down on the property. The rates range from .03%-1.5% of the original loan amount, and the payments are divided up over the 12 loan payments made throughout the year.

PMI benefits the borrower by helping them get in to a property without having to have a large down payment. This is a big advantage in today’s market, as trying to save for a 20% down payment while the prices of homes continue to increase at a rapid pace could have you chasing prices for awhile. Some PMI companies may even offer job loss insurance coverage, which is something that is not publicized.

There are several options available to get rid of PMI as well. The first option is to refinance your loan. If you have 20% equity in your property, you can get rid of the PMI payment. Another way is to just pay for a new appraisal. An appraisal will cost between $400- $600 out of pocket but can save you on a PMI payment every month. The 20% rule still holds true with this option. If your home has 20% equity in it, you can have your lender cancel your PMI. Another way to get rid of PMI is to improve or add on to your property to where it gives you 20% equity. To cancel your PMI, it must be done in writing, and you may have to prove you do not have any other liens on the property (for example a HELOC). You will also have to be current on your payments and have a good payment history.

PMI severs a big purpose in real estate by helping people without a lot of money get into homes. Talk to your lender about what benefits you have with your PMI. With an understanding of what PMI is and the purpose it serves, you will see that PMI is not so bad.

The Items Needed in a Business Proposal for Financing

To begin, there are 5 questions that all potential investors want answered before they will do a deal. Your entire presentation should center around answering these questions.

  1. How much money do you need?
  2. How much money will I make if I do this?
  3. When will I get my money?
  4. What are the risks involved?
  5. What if something goes wrong? Or more clearly, how do I protect myself if you screw this up?

The secret is to answer these questions quickly and not dwell on anything longer than necessary. For example, the longer you harp on how much money they will make, the less they may believe you. Hence, less is more! It’s not just what you say, but how you say it.

The best way to say anything is to show it as opposed to saying it. Let’s look at to following scientific study for proof:

Lenders are 100 times more likely to remember what they see than what you say!

 

 

 

 

 

The above chart is from Tor Norretranders’ book “The User Illusion: Cutting consciousness down to size.”

The point of the above study is simple. If people are paying attention to what you are saying, you have a 33% better chance of them remembering what you are saying if you make a visual presentation. If people are not paying attention to what you are saying, your chance of them remembering is 100 times better if you are making a visual presentation.

Since we have scientific documentation on the value of visual presentations, it makes sense to present our deal visually. The official term for this kind of presentation is a proposal. This is what will increase your chance of succeeding with your buyers and lenders. Hence, you should study what content a proposal should have. You will find a list of things like this:

Funding Proposals Should Include:

  1. Executive Summary
  2. Romance the Project
  3. Logic of Property Location
  4. Comparative Market Analysis
  5. Projected Profit
  6. Exit Strategies!
  7. About Your Company
  8. Financial Summary

There are 8 items on this list. Completing this proposal could take time. However, you may only need a one-page Executive Summary. Yes, only one page and it should answer all 5 questions that we began with above. You may never need to present anything else. Let’s look at how easy this can be:

Executive Summary

  1. Make a Summary
  2. Be Short and to the Point
  3. Include All Pertinent Information
  4. Make it only one Page!

The Executive Summary is just that, a SUMMARY that is short and to the point. All the pertinent information is included without all the details. Usually just one page with the highlights only. Remember, these are questions your investors and buyers want answered:

  1. How much money do you need from me, the lender, or from me, the buyer?
  2. How much profit for me, the buyer or the lender?
  3. How long does it take me, the lender or the buyer, to get my money?
  4. What are the risks I would take lending you the money?
  5. What if something goes wrong? What they think but don’t say is, “How do I, as the lender or buyer, protect myself if you screw this up?”

Next, let’s go over an example of how a “Real Estate Deal” can be presented so it answers the 5 questions on one page and looks good doing it:

Above is an actual deal where Jake got all the money he needed from John to do a deal. Just for the record, both Jake and John were students of mine. John was a former student at the time of this deal and Jake was a current student. Let’s look at how Jake was able to get John to invest the money based on the information above. Jake’s presentation answered all 5 of the critical questions and did it colorfully, using pictures and charts. See how this is achieved on the next page below:

Question 1: How much are we talking about?… is answered just below the subject property:

ARV = $215,500

Loan = $140,000

Will Pay 4 Points

15% Interest

6 Month Note

Jake is asking to borrow $140,000.00! Hence, he answers question one on the center of the page.

Question 2: How much do I make if I give you the money?

ARV = $215,500

Loan = $140,000

Will Pay 4 Points

15% Interest

6 Month Note

Again, just below center page, Jake answers question two, “How much do I make?” Jake is offering to pay $5,600.00 in points just to borrow the money and 15% thereafter on a 6-month note.

This was an actual deal. Jake didn’t have two nickels to rub together and call a dime. The $140,000 Jake borrowed was everything Jake needed to do the deal. Jake never even made a deposit.

Question 3: How soon do I get my money? Comfort for this question is offered in the top left-hand corner of the one-page Executive Summary.

36 Day Rehab

See Gantt Chart

Here, top left-hand corner, Jake documents skill in organizing and managing a rehab. Further, he specifically shows how and when the rehab will be complete in 36 days. Add to this Jake’s conservative estimate of the ARV for his property and lenders can get a good feel for how quickly they will get their money back.

Below is a simple example of a Gantt Chart. I don’t have a copy of Jake’s. Jake got his funding approved without having to show the Gantt Chart. How he did this will be shown in a recap of question 5.

The Gantt Chart presents what needs to be done and when. Hence, the painting is done before the carpet is installed. The tile is laid before the plumber comes to install the toilet. Gantt Charts can look pretty with a lot of color and graphics.

This specific example above is used to show how you would outline one of the scariest items that could come up in a rehab: a cracked foundation. Jake didn’t have this problem, but you might. Stay calm, let your lenders and buyers know you have your game under control.

Question 4: What are the risks? This question is answered ambiently with this “One-Page Executive Summary.”

 

First. It is easy to see that the comps being shown are the same style, size and in the same neighborhood. This is comforting to buyers, investors, and money lenders because the more similar the comps, the more believable the ARV (After Repair Value).

On just one-page, serious documentation is given to assure this as a “killer deal.” The home styles are similar, the size is the same and they are in the same neighborhood. Conservatively, Jake’s ARV shows his property value at $215,000 and he only asks to borrow $140,000.00. The two comps Jake shows are similar homes that sold quickly. The first sold at $222,500.00 in 45 days. The second sold for $236,000.00 in 61 days. Lenders and buyers center their decision to lend or buy based on “Comps.” The mathematics of these comps is comforting to lenders and buyers. The graphic presentation of the properties themselves and their numbers reduces the fear of risk.

Question 5: “What if you screw this up?” This question is almost never asked at all, much less in such a bombastic manner. Yet it is often the most important question to answer because, it is often the first thing the buyer or lender worries about. You will want to answer this question. Showing that a rehab will rent at a profit if it doesn’t sell is assuring to lenders and buyers alike.

A lot of what Jake showed offered comfortable proof. But, this Rental Exit Strategy is where John decided to do the deal. This property would easily rent for more than $1,400.00 a month. The One-Percent Rule indicates renting at 1% or more of the investment is likely to be profitable. Jake is only asking to borrow $140,000. A profitable rental may be the ultimate exit strategy.

John, the lender, knows if he does the whole deal and lends the $140,000 to Jake he will be able to take a first position lien against the property. Hence, if Jake screws up the deal, John owns a cash-cow rental property. John and Jake did the deal. Thirty-Eight (38) days later, Jake had $36,000.00 cash from the deal on zero investment. John made more than that. Jake has done dozens of deals since, some of them with John.

While Jake was able to get his deal financed in one visit over the phone with John, many interested lenders will ask for more information. The same rules apply. Continue to:

  1. Romance the Project…

Tons of deals get lost because the deal-maker gets sloppy in their presentation. Make everything look neat, organized, colorful, and exciting. You will do a lot more deals and make a lot more money.

  1. Logic of Property Location…

Jake was able to prove that all his comps were in the same neighborhood. But, property location can mean a lot more. If your property is a 20-minute walk to a University, close to a military base, near a hospital, or a shopping center, renting a property can be easy.

Have things been happening to improve the value of the neighborhood, like improved public transportation, shopping centers, parks, etc? Lenders and buyers can be impressed by these things. Don’t forget to make these things a visual part of your presentation.

  1. Comparative Market Analysis…

Notice how the numbers on the comps match the numbers on the map. Remember, your initial presentation should be one page. CMA’s and other details are to be presented once you have an interested buyer or lender.

  1. Projected Profit…

Don’t just scratch your numbers out on a piece of paper. Lay things out so it looks like you know what you are doing.

  1. Exit Strategies…

One of the most powerful exit strategies for a rehab flip is being able to rent it profitably. Because Jake is borrowing $140,000 and the rent rule says you should make money at $1,400 this looks very appealing to a lender. The importance of this exit strategy can’t be overstated. But, remember that a graphic and colorful presentation will seal the deal.

  1. About Your Company

This couple, like Jake, had never done a deal. However, they present their company elegantly. Good chance no one will ask for references. However, just use people who will speak well of you. Neighbors, friends or anyone else who will testify to your skills, likability, and honesty.

  1. Financial Summary…

Your Proposal can’t be too long. But, it can be too boring! Don’t be afraid to make your points graphically.

This is how to make winning proposals. But, don’t put a lot of time into the complete proposal until someone has shown interest from your One-Page Executive Summary.

 

How to Use a No-Seasoned Refinance

To use a no-seasoned refinance in your business, you must first understand what a no-seasoned refinance is.

 

There are two parts to a no-seasoned refinance:

  • Seasoning
  • Refinance

 

In the world of mortgages, seasoning is how long you have owned a property and paid the loan. For example: If you have owned a property for 12 months, it would be said that you have 12 months of seasoning. If you have owned a property for five months, again, it would be said that you have five months of seasoning. However, if you have less than three months of ownership, the seasoning would be called “no-seasoning.”

 

A refinance is, well, a refinance. It means that you had financing on a property and then obtained new financing to pay off the old financing. This refinancing can be done for a couple of reasons:

  • To pull out cash from a transaction, assuming you have enough equity in the property
  • Obtaining a better interest rate than you previously had

 

A great benefit of a no-seasoned refinance is that you can quickly refinance a property to pay off your old loan, potentially getting some money out and/or getting a better interest rate than you originally had. For example: You obtain a house with a hard money lender who is charging 15% interest rate. You then quickly turn around and refinance the loan, paying off the hard money lender and getting a new, better rate of 4.25%.

 

If used correctly, a no-seasoned refinance can help you buy and hold properties to rent with little to no money from your own pocket.

No-Seasoned Refinance Overview

In real estate, there is a little known, but highly effective, way to create large wealth using leverage. The method is knows as No-Seasoned Refinance.

 

To understand this concept, we will need to break the information down into two parts:

  • No-Seasoned
  • Refinance

 

You should, by now, know what a refinance is. This is the process of paying off an old loan for a more favorable interest rate or paying off an old loan to get additional cash out of a transaction. Here are a couple of examples of the two types of refinances:

  • You currently own a home on which you are paying 6.5% interest rate. You recently find out that current interest rates are around 4%. You then talk to a bank and refinance, paying off the old loan with 6.5% for a new loan with an interest rate of 4%.
  • You own a home, which you owe $100,000. That home has a value of $150,000. In this home you have $50,000 in equity. You decide to put some of that equity to use and build a new deck for the home. You go to a bank and refinance, paying off the old loan of $100,000 and replacing it with a new loan for $120,000. The additional $20,000 is paid out as cash.

 

Seasoning is a common term in the mortgage and financing industry. Simply said, it is the period of time that you own a home. For example, if you own a home for 12 months and have made 12 payments, it is said that you have 12 months of seasoning. If you have owned a home for 6 months and made 6 months of payments, you will have 6 months of seasoning. However, when you have a home that you have owned for less than 2-3 months, banks commonly reference this as “no-seasoning.”

 

The idea of a no-seasoned refinance is to purchase a home using financing, such as hard money financing, or your own cash, then quickly refinance pulling the cash out and either repaying yourself, if you used your own cash, or paying off the other financing. Once the money is free, you can use the financing or your own cash to purchase another property and continue the process.

First-Time Home Buyer Programs

Buying your first home is no easy task. You will go through stressful steps that include paying fees and dealing with people. Purchasing your first home is a huge responsibility but also an opportunity; an opportunity to design your own space. But before we jump to the paintings and landscape of your first home, you need to go through some important steps, like finding the right real estate agent and determining your budget.

The money you borrow to buy your first home is usually considered a first mortgage loan. If the amount is a little less, it’s called a junior loan, enough to help you pay the down payment. The good news is there are many programs that can help you get ready. These programs come in a variety of forms. You just have to remember that, as a first-time home buyer, you need to be guided on what financial steps to take. This is why first-time homebuyer programs exist.

One common program is the FHA loan, where the lenders insure the mortgage. They are protected and will not take a loss if you default the loan. Some programs focus on the area you cover. If you are targeting a rural area for your first home, there are available programs that can help you, like the U.S Department of Agriculture assistance program. There are also loans specific for veterans and surviving spouses, which are usually provided by U.S Department of Veterans Affairs. Unique programs like Good Neighbour Next Door also exist. They provide housing aid for law enforcement officers, firefighters and emergency medical technicians.

You need to be prepared before finally experiencing the sweet taste of having your first home. That is the main purpose if these programs, to get you prepared. There are various organizations that can help you obtain affordable loans while also protecting the lenders against the borrowers’ defaults. There are also programs that will require you to attend a homebuyer education course if you are a first-time homebuyer. This course will help you understand the importance and responsibilities of homeownership.

Owning a home is equivalent to having the freedom to blueprint; the color of your walls, the garden, kitchen, and bedrooms, they are all in your hands. However, blueprinting will only be possible after taking the initial significant steps, which include getting approved for a mortgage, finding the real estate experts, and choosing the home that fits your financial capability. Now it is time to assess your eligibility and start evaluating the available programs that will help you get a hold of your first home.

Understanding the Amount of Your Buyer’s Profit on an Assignment Deal

One thing that is not stressed enough in our presentations to our buyers is how much profit is on the table for them. By understanding the buyer’s profit, we can better inform our buyers as to the amount they can expect to make. It also can strengthen our position when negotiating the wholesale fee.

When calculating an offer, understanding the type of market we are in will make us more effective. If we are in a cold market, the buyer has a stronger negotiating position. In a hot market, the seller has the advantage. We are currently in a hot market. Therefore, we need to use strategies that will strengthen our offers and help our bottom line.

Let’s run through some calculations and see what we can do to make our offer more competitive. As we run the numbers on an assignment deal, pay close attention to adjustments that can be made to strengthen our offer:

Asking Price- $179,000

ARV- $250,000

Buyer’s Profit- 20%

Rehab- $30,000

Wholesale Fee- $8,000

Now, let’s calculate what our max offer will be with this information:

$250,000- ARV

X .8- Buyers Profit 20%

$200,000- All-In Price

Less $30,000- Rehab

Less $8000- Wholesale Fee

$162,000 Max Offer

$179,000- Asking Price

 

Now, let’s calculate what our buyer can expect to make on this deal. We must first determine if we are in hot or cold market, as this will influence some of our decisions regarding the property. Our current conditions tell us that market conditions are hot. So, this is how to determine the profit our buyer will make from the above offer:

First, we must subtract the all-in price from the ARV. Next, because it is a hot market, our buyer should consider paying costs such as real estate fees, closing costs and holding costs. This would cost about 40% of the gross profit. The buyer would keep 60% of the gross profit or the net profit. Let’s look at it as a formula:

 

$250,000- ARV

Less $200,000- All-In Price

$50,000- Gross Profit

X .6- Buyers Percent of Gross

$30,000- Buyer’s Net Profit

 

This $30,000 profit would be attractive to most buyers. However, closing the gap between the asking price ($179,000) and our max offer ($162,000) may be hard to overcome. So, let’s look at the things we could adjust to present a more competitive offer:

$250,000- ARV

X .85- Buyer’s Profit 15%

$212,500- All-In Price

Less $30,000- Rehab

Less $5,000- Wholesale Fee

$177,500- Max Offer

 

As you can see, our new max offer ($177,500) is much more competitive and the gap with the asking

price ($179,000) is much easier to bridge. Let’s calculate the new buyer’s profit and see if it is a good

deal for our buyer:

 

$250,000- ARV

Less $212,500- All-In Price

$37,500- Gross Profit

X .6- Buyer’s expenses 40%

$22,500- Net profit for buyer

 

It is a smaller net profit for the buyer than the first offer. I will not try to tell you if the $22,500 is a good or bad profit because that is for each buyer to decide. With a few adjustments to our offer there is a greater chance that our second offer would be accepted. We don’t always make the money we want; however, $22,500 is better than nothing.

Best of luck in your investing. Be creative and you will complete more deals than those who do not think outside of the box.

How to Fix Your Credit Score

Having good credit is an important part of investing in real estate. With good credit you can get financing easier and you can also get better interest rates. Now, if you have a poor credit score here are some steps you can take to improve your credit.

  • Pay all your bills on time. This is a no-brainer, but make sure all your bills are paid on time, even if it is the minimum payments.
  • Don’t open too many new accounts at once. One thing that credit agencies look at is the age of your accounts. By opening several new accounts at once, the average age of your accounts will be reduced.
  • Do not cancel any unused cards. Another aspect of credit is the amount of credit you have used compared to the amount of credit you have available. The lower the percentage used, the better. Ideally you want to keep the ratio of credit used to credit available below 30%.
  • Keep your credit balances low. This ties in with number 3 in that you should not max out your credit. Keeping your credit balances low will help keep your credit score high.
  • Have a variety of different credit types. Paying on a car loan, a credit card, and a mortgage will show you are able to juggle and maintain payments on different credit types.
  • Debts in collections needs to be paid off. If you have any accounts in collections they will need to be paid off. Until they are paid off, your credit will suffer.
  • Get a personal loan to pay off credit cards. This can be a very effective way to lower your interest rates and pay off your debt faster.

In real estate investing having good credit will increase your opportunities to invest. As mentioned, it will save you money, give you better interest rates and help you qualify for better loans. Keep these 7 tips in mind, as they are great ways to maintain and improve your credit score.

Steps to Pre-Qualify for a Mortgage Online

Pre-qualification is an estimate of how large of a mortgage you can afford.  It is the first step when looking for a home to buy.  It’s important because it helps you narrow down your options and focus on how much house you can really afford. It is based on your financial situation over the past two years. You will need proof of employment, tax returns from the previous two years (if your self-employed) and a credit report from all three bureaus: Experian, TransUnion and Equifax. You can think of it as a free consultation between you and the loan officer.

The lender will review your income to give you a general idea on how much you can borrow.  When you pre-qualify for a mortgage, you are only getting a rough idea of what you can borrow.

You can apply for pre-mortgage approval online by going to the mortgage loan websites.

Here is some example of questions you will need to fill out.

  • First and Last Name
  • Phone number
  • Email address
  • Zip code where you currently live
  • How soon you’ll be applying for a loan
  • Are you currently working with a real estate agent?
  • How you would like to be contacted (phone vs. email)
  • The purpose of the loan (e.g. purchase vs. refinance)
  • The amount you want to borrow
  • How you plan to use the loan (primary residence, income property, etc.)
  • The type of property you are buying (detached home, multifamily. Condo, etc.)

After providing this information, a representative will contact you regarding your request. They will give you a rough idea how much you can borrow, based on the information you’ve provided. Be prepared for some additional questions regarding your income level.

You can also get a pre-qualification letter. This will let the sellers know that you are serious and that you can qualify for a loan to buy their home.  

You can contact other mortgage lenders about your mortgage pre-approval if you want to.

Pre-qualification is not a commitment between you and the lender. The next step is loan pre-approval. Loan pre-approval is a more in-depth version of this process. The lender verifies your income, your debt level, and other aspects of your financial situation. They want to know whether you can qualify for a home loan and decide how much of a loan they are willing to lend you.

Benefits of Using Private Lenders

Private lenders and hard money lenders are very similar but have a key difference.  Private lenders differ from hard money lenders based on where their money comes from when they lend it to you.  Private lenders’ money will come from investments outside of real estate, whereas a hard money lenders’ money is part of a business built around real estate and real estate investing. 

Private lenders can often be new to real estate investing, which may make them a bit naïve.  However, that doesn’t mean you should avoid them.  Rather, be patient and willing to work with them, as their money might just be one of the greatest ways to obtain funding for your real estate transactions.

Here are a few reasons to use private lenders’ money for your real estate transactions:

  1. Private money is quickly accessible.  Because private money comes from investments such as CD’s, stocks, mutual funds and other similar investments, the money can be quickly converted to cash.  This accessibility can allow you great strength and speed when purchasing real estate.
  2. Private money is cash.  Cash gives us strength when making offers on real estate.  Buyers without cash have a hard time competing against those that can offer cash.
  3. Private financing is easy to obtain.  Private lenders often look at the quality of a real estate investment over you, the borrower.  If paperwork, credit checks, and income reviews are not part of what you want in your real estate investment career, private lenders will often over look all of this when the investment is good enough.

Purchasing real estate can be very rewarding and getting financing through private lenders can make the process easy, quick and additionally rewarding.