Financing Question: Our Take on It

The question posted earlier this month was a good one. Good enough for us to address it from our point of view. Here is the question:

"We are small time investors. We have 2 rental properties, as well as our primary home on acreage. My husband has good stable income, and I manage and work on the properties. We have a decent positive cash flow on the rentals.My dilemma..... I need to work on another house, but our debt to income ratios are out of whack. I still carry a large balance on our last remodel. Our credit is excellent, and our equity in properties is substantial. However, when I have talked with traditional lending, they can't finance us because of our debt/ income. So, do you have any sources of financing that you use? Or owner contracts? I am crazy about real estate, and absolutely love working on it, but I seem to have stalled out. My goal is to get my next project somehow, and sell it this time rather than renting it out."

It was great to get input from two knowledgeable lending professionals forthis blog, and we really appreciated it (thanks, Dean and John). I really liked how Dean laid out some options, and John explained some additional
information that is helpful for banks to know when we go to them for a loan.

Now my take on the subject....
Lay person's approach: for information only (I am not a lending professional).

THE BASICS

1. Income and Cash flow: We all have to start somewhere, but income at any level and a positive cash flow from each investment property is the best place to start. Playing the CASHFLOW game (see our web site for Skagit County CASHFLOW game events: Calendar Page) really illustrates that anyone from a janitor to a pilot can create passive income that exceeds expenses (incidentally, a high income in the game often makes it harder to "flip the card").

2. Debt to Income Ratio: This is a pretty important aspect, especially in today's lending climate. A poor ratio is not an insurmountable issue, but you want to understand Debt to Income. Some great information and a calculating tool can be found at http://www.usnews.com/usnews/biztech/tools/modebtratio.htm

3. Know your credit scores (all 3): Good credit is crucial. Be aware, too, multiple credit report requests will show up on your credit reports - and it can reflect negatively on your credit score. If you don't have good credit: seek counsel from someone knowledgeable and work on it.

4. Equity in Properties: If you are fortunate, and brave enough to have already gotten into deals that have provided you equity, it can be a great resource. Sometimes lenders can cross-collateralize properties with equity. If you have a good project, ask your lender if this is an option. Additionally, momentum is king.

5. Traditional Lending: Sometimes, in cases like this, it's a "numbers game." Put together a project summary, your financial statements, tax records, and credit reports, then meet with as many banks and mortgage companies as you can. Be sure they do NOT pull a credit report until they are pretty certain they can work with you in spite of any known issues such as poor debt/income ratio, etc.

6. Private Money or "Hard Money": You will want to put together the package just as you do with traditional lending: A detailed project information packet to "sell" your project to the lender, financial statements, tax records, and credit reports. We have found a lot of success getting financing this way. Although the financing costs and interest is higher, those costs are budgeted into the project. If the project still works with the higher financing costs and interest payments, a positive net gain that follows your investing rules is always a good thing. Don't rule out this option. Sharing the pie with a hard-working "Hard Money" lender can often be a very positive experience. A good rule of thumb: BE SURE you do what you say you'll do. If you borrow it, pay it back. Here is a link to our "Links" page, which includes lenders. Lenders Links Private Mortgage Investors (Jeff Langness) and Puget Sound Investors Group (Kent Haberly) are both great"Hard Money" contacts.

I hope that by sharing our approach to this question, even one investor is
helped. Comments are appreciated.

Tiffany Youngren, Co-Owner
Youngren & Associates
www.youngrens.com/re.htm

Financing Question from Investor

I received the following question from an investor, and forwarded it onto lending professionals and companies we have worked with for their input. I hope their responses are helpful to you. I expect entries from additional lenders, and will post them as they come in.

"We are small time investors. We have 2 rental properties, as well as our primary home on acreage. My husband has good stable income, and I manage and work on the properties. We have a decent positive cash flow on the rentals.

My dilemma..... I need to work on another house, but our debt to income ratios are out of whack. I still carry a large balance on our last remodel. Our credit is excellent, and our equity in properties is substantial. However, when I have talked with traditional lending, they can't finance us because of our debt/ income. So, do you have any sources of financing that you use? Or owner contracts? I am crazy about real estate, and absolutely love working on it, but I seem to have stalled out. My goal is to get my next project somehow, and sell it this time rather than renting it out."

First response:

Dean Hayes, Professional Mortgage Planner
Security First Financial Services
Burlington, WA

"There are several areas of financing when it comes to real estate. First, remember that all rewards should be relative to the risk involved. As a real estate investor yourself, you know this. If a property has a lower risk, you'll accept a lower rate of return. The higher the risk, the high rate of return you will demand.

Real estate financing works the same way and can be broken down into three main categories. The first is traditional lending. This is where the borrower discloses all their information and the guidelines are very tight. Everything is scrutinized from the borrowers' ability to repay (the history of their income, their debt-to-income ratios, credit history, etc.) to the quality of the collateral (the property). This type of financing has the lowest risk and usually has the best pricing.

The second is alternative financing, where either some information is not disclosed or guidelines are less restrictive. This could be in the form of higher debt-to-income ratios allowed, lower credit scores accepted or non-disclosure of certain information such as income, assets, and even employment history. Of course, the risk to the investor here is greater, so the cost can be higher.

The third is equity financing, where there is little to no consideration given to the borrower's history or ability to repay the loan. The only consideration is given to the collateral and the equity position. These are usually short term notes of one to five years and have the highest cost structure because of the higher risk.

Each borrower needs to find the category that best suits their situation and their needs. Sometimes a borrower starts in one category and later moves into a different category for one of many reasons. All of these categories are represented by different investors. You can either go hunting for different companies within these categories yourself, or you can work with an independent mortgage broker who will do the shopping for you, and can usually find better terms than you may be able to find on your own.

Just remember two things: 1) The total cost of ownership is almost always more important than the lowest rate - the two don't always go hand in hand, so don't position yourself where you're only comparing rates. That's were a mortgage broker can serve as your advisor to help you make an informed decision. 2) Guidelines are changing daily, so programs that were available just a few weeks ago have either tightened up or gone away, and this situation is likely to continue well into the end of next year. Funds will still be available, but this is a situation where sooner may be better than later."

Second Response

John Bendtsen, Real Estate Loan Officer
Business Bank of Skagit County
Burlington, WA

"A little more information is necessary to know just what options these borrowers would have. Conforming lenders are for the most part going to look at the same, or similar information. For 1-4 unit residential properties, the loan scenario is often run through an Automated Underwriting System that calculates risk based on a number of different factors, including down payment, debt-to-income ratios, and credit history. If an approval rating is not obtained through this system it does not mean it cannot be financed. There may be other options, but as everybody has read in the papers and seen on the news for the last few months, the more creative lending programs have become increasingly harder to find. Business Bank can often offer a solution by lending from our portfolio (loans that we keep and service in-house). This is a good option for qualified borrowers who need temporary financing to rehabilitate a property, or to perform such processes as a boundary line adjustment, or plat approval, etc. Also it is a good option for creative projects, developments, or commercial real estate deals. I would be happy to answer questions individually on a case by case basis."

Your comments and topic suggestions are appreciated.

Tiffany Youngren, Member
Skagit Synergy, LLC
and co-owner of Youngren & Associates

Tiffany Youngren is not a licensed real estate agent or broker, but invests in real estate with her husband, Duane (who is the broker of Youngren & Associates). Information on this blog is deemed reliable, but is by no means guaranteed. There are many factors to take into consideration for each person, and every transaction is different. If you are not currently working with a real estate agent, please contact Youngren & Associates at (360) 428-6800, or info@youngrens.com, to get connected with an investment-minded real estate agent.

For legal advice, please contact an attorney, and an accountant for sound financial advice.

Foreclosures: The Youngren Approach

As someone who loves looking for real estate properties, one question I get often is, "How do you find foreclosure properties?" As someone who sincerely likes helping people and tries hard to make business decisions based on doing the "right thing," the question is usually posed starting with "I feel bad even asking about foreclosure properties, because it's a sad situation."

First, let's talk about the "people" aspect. I certainly don't have all the answers, but I can tell you my opinion about it. I look forward to your ideas in response to this. Many people have been able to buy more house than they could afford. We used to call it being "house poor." Unfortunately today "house poor" has too many times become "house devastated." It is so sad, and my heart breaks for people having to face that reality. Ideally, Duane and I like to buy property before it goes to foreclosure if we can. We don't go into a deal trying to strip the homeowner of all the equity they have, but we do go in wanting a win-win situation. In our eyes, this is the criteria:

1. The seller wins: they get what they need to get out of the over-leveraged issue they are in.

2. We win: we can buy a property with room to make a profit that follows our investment rules (12% coming out of a flipper...pretty modest in this industry).

Foreclosures are properties siezed by the lenders (or other agency). The lender or agency needs to sell the property to try to recoup the money they are "out." It can be a lengthy process, and different lenders process it differently.

I personally do not have a problem with the concept of buying foreclosures, because the lender/agency was not repaid money they were owed by their customer, they followed the rules of the agreement they entered into, and it "is what it is." I do have a problem with past lending practices, but boycotting foreclosure properties isn't a logical solution in my opinion.

Second is the question of how to find a foreclosure property. I can give you just a few of the many ways to look:

1. Look on our web site we will be launching in the next week www.youngrens.com and click on "Investor Resources." I'm listing the links I use to search for foreclosure properties on that page.

2. Watch the newspaper classified ads. In the "Public Notices" section, when you see "Notice of Trustee's Sale," read the fine print. You fill find the address of the house and the date of a potential auction scheduled to take place on the courthouse steps. IF this is a listing in Skagit County, this is what I would suggest (please blog if you have suggestions)
>2-a. The next step is to go to our web site, click on "For Sale" and do an address search to see if the property is listed on the NWMLS.
>2-b. If you don't see it online, you can send me an e-mail and I can ask Duane to do a history search on the NWMLS
>2-c. If the property is listed and you like the property, it's a good time to negotiate.

It seems that the methods by which one searches for and purchases foreclosure properties change as often as the market environment does. Some lenders only list through real estate agents, some through trustees, some government entities even have online bidding.

This is pretty basic information, but I hope it is helpful. I appreciate your comments and suggestions.

Tiffany Youngren
Co-Owner Youngren & Associates
(Husband, Duane Youngren, Broker/Owner)