5 Point Hard Money Loan Application Checklist

There is no doubt that when looking to make a real estate investment, choosing a hard money loan is a great option. However, many people do not get approved for the loan because they were caught off guard with the loan application requirements. To ensure a better chance of having the loan approved, check out The Hard Money Loan Application Checklist.


The Hard Money Loan Application Checklist


Location
It has taken some time, but you have found the right investment. However, the location may not be in the best of neighborhoods. This will quickly send a red flag to your lender. The collateral for the loan is intertwined with the investment property. The lender will only give you a loan if they feel that their investment is safe. You should have pictures of your property as well as the surrounding areas to give to your lender. This will allow them some visualization into what they are loaning their money to. Having a number of comps for the properties that surround yours will be helpful as well.

Repayment Plan
How are you going to repay the loan at the end of the term? Hard money loans are for a very short time period. You are going to need a plan on how you will be repaying the loan. Whether you hope to sell the property or refinance it, your lender is going to want to know your exit strategy.

Documentation
Even though the hard money loan is all about the investment property, your lender may need other documentation. They may ask for income verification, what other assets you may have, and what your credit is like. Having all your documentation together and organized will make for an easier process.

Bring Your Game Plan
The Hard Money Lender or Private Money investor is going to want to know what your game plan is. If you are going to renovate the property, make sure you bring all quotes from any contractor that you have talked to. By specifically laying out your plan and the costs associated with the plan, your loan is more likely to be approved. If you have made investments in properties before, show your lender what you did with them. Your experience and track record will count.

Step-Up
Make sure that you are ready to step-up to the plate. If your lender calls, do not wait two days to return their call. A sense of urgency is important with these lenders and they need to be reassured again and again that you really want this loan. If more documentation is requested, try to get it to them within a 24 hour window. This is not the time to lay back and wait to see what happens. If you want the loan, it’s up to you to communicate in a timely manner.

The Sandwich Lease Option

The Sandwich Lease Option is another lease option strategy that some real estate investors have had success with. However, there are more risks here than a straight lease option refinance so it may not be an appropriate strategy for a novice investor.

Still, if you’re having trouble coming up with investment funds or perhaps if your credit isn’t good enough to secure your own first mortgage on a property, then this strategy could be for you.

Let’s take a look at how the sandwich works.

Two Leases with  You in the MiddleThe way the Sandwich Lease Option strategy works is as follows.

1.    You find a distressed homeowner.

There are plenty of homeowners who are in dire financial situations and need to sell their homes. Often, these people have very little equity in their homes and are simply looking to get out from under their burden of debt.

If they had more equity in the home, perhaps they would be good candidates for a lease option refinance, but in this case, they don’t.

2.    You offer to lease their home from them

You come in and offer to take on their monthly mortgage payments, along with property tax and insurance. You offer to enter into a three year lease, with an option to purchase the home at an agreed-to price that is below current market value. Why? Because they’re problem is cashflow, and in order to relieve their cashflow burden, they would be willing to sell at a reduced price in three years.

The homeowners agree. They move out – usually to a rental – and pay their rent with your lease payments. They still own the home, but they don’t have to worry about their cashflow.

3.    You offer to lease the home to a new tenant-buyer using a traditional rent to own contract.

If the original homeowners are the first slice of bread, and you are the meat, then we need another slice of bread to complete the sandwich!

You now control the property but you have not invested anything in it yet. Before the original homeowner moves out, you advertise that you have a rent to own property coming available and start qualifying rent to own tenant-buyers.

Ideally, you will have a tenant-buyer ready to move in when the original homeowner moves out so that you don’t have to cover any gaps.

To make this work from a cashflow perspective, you’ll need to ensure a couple of things. First, the “rent” portion of the rent to own payment from your tenant-buyer must be greater than your lease payment to the original homeowner. Second, the “monthly credit” portion of the rent to own payment – that is, the cash that will go towards the tenant-buyer’s down payment – must still be kept separately in its own bank account.

Finally, the agreed-to purchase price that your tenant-buyer will pay is going to be higher than the agreed-to purchase price you have with the original homeowner.

For example, let’s suppose you agree to pay the original homeowner a monthly lease payment of $500 and you agree to a purchase price of $150,000 in three years, even though market value is $175,000.

Then you lease the property to your tenant-buyer for a monthly payment of $800 that covers what you owe to the original homeowner, and puts extra cash into the future down payment. Then you agree to sell the home to the tenant-buyer for $200,000 in three years. You stand to gain some good profits.

So far, you have two leases on the property. The first is the lease you pay to the original homeowner. The second is the lease with the rent to own tenant-buyer.

4.    Sell the property to the tenant-buyer

At the end of three years, you exercise the option you have with the original homeowner and purchase the home at a reduced market price. In the example above, this would be for $150,000. At the same time, you will then turn around and sell it to your tenant-buyer for $200,000. Voila!

Setting Goals For Life & Business Success

Setting Goals - One of the themes of this real estate investing article is that I hope you’re catching on to is that there is more to being wealthy than just having money. I know plenty of rich people who are absolutely miserable. They have all the money they could ever want, but they are in terrible health, have no friends, their family despises them, they don’t have any spiritual beliefs, no hobbies,  and on and on.

Just having money doesn’t make you happy; therefore, setting all of your goals around money won’t make you happy. When establishing your goals, I recommend looking at more than just financial or business goals. Here are three tips I like to use when setting goals:

1. 1. Look at more segments of your life than just the financial/monetary. Take into consideration your spiritual goals, your family goals, your friendship goals, your hobbies, your mental growth, and your overall health. It does you no good to make a million dollars but have your wife leave you, your kids hate you, no friends to share in your new found fortunes, and have a heart attack because you haven’t been in a gym in five years. Have goals for every segment of your life.
2. Establish the “why” behind each of your goals. Why is this important to you? What benefits will you receive? This “why” allows you to prove to yourself that this goal is really important to you and puts a great deal of emphasis on your goals to help you keep persevering when times get rough. If your “why” is big enough, you’ll find a way to accomplish any goal you set.

Set Goals for Sacrificing.Yep, you read that right. Anytime you want to achieve something in one aspect of life, you will have to sacrifice something else. Prepare, establish, and embrace this sacrifice. For example, in order to start a part-time real estate business, you may have to sacrifice watching TV in the evenings. To improve your health, you may have to sacrifice sleeping in during the week, get up an hour early, and head to the gym. If you prepare yourself for these sacrifices and actually embrace them, then you will have an easier time sticking with your goals.

Here is a sample of my goal setting worksheet: Setting Goals Worksheet

Seller Financed Notes – What Should You Know?

If I offered you a seller financed note on an investment property that is due to collect 100 payments of $400 a month at 8% interest would you know how much to offer?  Do you know how much the note is worth?

Here are a Few Non-Calculator Items to Consider with Seller Financed Notes:The Legit Test: I am sure you know the importance of  keeping good notes & records when you originate a seller financed note. It is equally as important when it comes time to purchase a note. Here’s what you should want to see: a copy of the HUD settlement statement, a copy of the cashier’s check from the purchasers down payment, and copies of monthly payment checks. It is best to ask if this information is readily available before you do any calculations on the value of the note. Doing so will give you the opportunity to put the information under the microscope.

The Property Asset: When was the most recent appraisal and inspection done on the property that the note is based on?  You want to have a recent accredited appraisal that answers the question, “If I had to take the property back, would it enhance or hurt my initial investment?”

Potential Buyers: Find out as much as you can about the buyers of the property. What is their credit score? What is their job history? Most importantly, can you talk to the buyers? This last question can really tip the scales in your favor because you can use various techniques to increase your return on investment by working with the buyers.  The more screening conducted to find out about who you’re working with, the more successful you’ll be.

Calculating the value of a note with Excel or a financial calculator is often the first of many steps towards purchasing your first note, yet, it’s the paperwork behind those calculations that give you the confidence to make the investment, and make it with confidence.

Here are some great free investing seller financing articles andvideos tips on using seller financing as part of your investment strategy.

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What To Look For On An Operating Statement

I believe quite strongly that a seller-provided pro forma is all but completely useless. I’ve even gone so far as to call them “pro-fake’as”. After all, the seller can put in whatever estimate they want. And you can pretty easily guess whether that estimate is going to be high or low. However, the operating statement is very useful. It provides the real numbers of how the property has performed over the last year and that is the basis for valuing it in the present and predicting its future returns.


That being said, one should not just take an operating statement at face value either. They most certainly aren’t useless, in fact, they are the most important thing to evaluate when it comes to valuing a prospective acquisition. Unfortunately, seller’s can still hide and obfuscate the real numbers in several ways. So here are the key things to look for in an operating statement.

Bad Debts

If the seller is using accrual accounting, it is extremely important to make sure that the seller has charged off all the bad debts or that you account for the bad debts somehow. With cash accounting, you will see how much money comes in, so there’s no hiding it (although cash accounting can make things messy in other areas and make the statement look more erratic, say if they pay their employees every two weeks and three payrolls fall in one month instead of two). But with accrual, all the potential rent is counted as collected and then what does not come in because of non-payment is charged off as a “bad debt.” That’s all fine and good, but it’s important to make sure those debts have actually been charged off on the P&L.

Seasonal Changes

If you have a full year (or T-12) statement, you can see all the seasonal adjustments. But if you only have a six month statement, be wary. First, you should ask why the trailing history is so short? Maybe it was a reposition, or maybe the property simply struggled for a long time and the owner doesn’t want to highlight that.

Regardless, expenses aren’t uniform throughout the year. Landscaping is highest in the Summer, snow removal in the Winter. Heating and cooling (if the owner pays the utilities) is highest in the Summer and Winter. So for example, if you have only six months and that includes the Summer but not the Winter and the tenants pay the electric but the owner pays for the gas (and there are gas furnaces), this could make the operating statement look better than it actually is. That’s because A/C uses electricity, but the furnaces use gas so the owner’s utility bills will be highest in the Winter. You need to be aware of such things.

In Jackson County, where I’m from, taxes are paid in December. If its cash accounting, often they won’t account for the taxes each month, so if you don’t look carefully, you may miss one of the biggest expenses. Also, it is important to know if they pay their insurance monthly or every six months or every year? A short statement could miss some of the insurance payments and leave you blind to another major expense.

CAPEX

This is the big one. A lot of owners will try to shove things into the capital expenses (i.e. below the line so it doesn’t effect the net operating income) that don’t belong there. Things like major upgrades belong under CAPEX, of course. Roof replacements do to, although I would argue that unless it was done when the property was bought to upgrade it, it is a recurring capital expense that should go above the line under a “Replacement Reserve”. You should account for some recurring CAPEX in your estimate regardless. HVAC replacement is definitely a recurring CAPEX expense, in my opinion. And often, things like turnover or carpet is even put in CAPEX when that is undoubtedly an operating expense. Make sure to look carefully at what the CAPEX expenditures are and add the one’s that should be in the operating expenses back to get an accurate picture of what has been going on.

Remember, never take anything a seller gives you on faith.

Self Employed 401k: What You Need To Know About Required Minimum Distribution

The day you start putting money into a self employed 401k is the day you start building a better retirement future. This plan, often called Solo 401k, offers a lot of benefits. Many real estate investors are taking advantage of its allowance for non-traditional investment classes. To make the most of the savings and tax deductible benefits, some people delay distribution as long as they can. However, there are certain regulations regarding required distribution that you need to know to avoid unnecessary penalties.

When does Required Minimum Distribution start?

Required Minimum Distributions are the minimum amounts that you must withdraw from your plan when you reach 701/2 years of age, or when you decide to retire later. This applies to all qualified plans, traditional IRAs and IRA-based plans. Whether you have to receive distribution at the age of 701/2 or whenever your retire is governed by the terms of the plan.

There are two exceptions for this rule:

- 5% owner of a company that sponsors the plan must receive distribution when they are 701/2 years old, even if they are not yet retired.

- A Roth IRA doesn’t have any required minimum distribution until the death of the account holder.

How much is required minimum distribution from my self employed 401k?

The minimum distribution is calculated based on a lot of factors. When the plan holder is receiving the distribution, it is generally calculated by dividing the account balance to the remaining life’s expectancy.

To find out the required minimum distribution for your account, you can use a calculator tool available here.

Note that when the plan holder passes away, the required minimum distribution will change depending on who the beneficiary is and how they choose to treat the plan.

What happens if I receive less or more than the required minimum distribution?

Account holder can choose to take out more than the yearly required minimum distribution with no consequences, as long as the minimum amount for each year is met. Note that the additional distributed amount of this year cannot be counted for the minimum contribution for next year. That means, you have to meet the minimum level or more for each year.

In case the account holder fails to meet the minimum distribution, they would have to pay a stiff penalty tax of 50% on the amount that was not distributed as required. The penalty tax can only be waived if the account holder can prove that the failure to meet minimum distribution is due to reasonable error and that he or she is working to remedy the error. Therefore, it is important to understand and follow this rule to avoid large tax charges that eat up your self employed 401k.

Investors When Asked To Co-sign A Loan – Don’t!

When you co-sign a loan for someone, you are taking on risk on with no return. When lenders refuse to give a loan to someone it is because they are too much of a risk. Consider the following about co-signing or guaranteeing a loan for someone else:

1. The lender does not have to go after the person you are co-signing for first if there is a default on the loan. Lenders actually often go after you first because they know you are more likely to have the means to pay off the loan. There is no legal obligation to go after the other person first.
2. You are not protected even if the lender goes after the other person first.Any “protection” here is illusionary. Often when someone cannot make a payment on a loan it is because they are insolvent or have disappeared. The lender will then be free to go after you for the full amount of the loan.
3. The lender will not necessarily let you know if there is a missed payment so that you can correct the problem. Lenders have no obligation to notify the co-signor or guarantee about the status of the loan unless it is written in to the loan documents. If you are going to co-sign make sure that the contract requires that you receive regular notice as to the status of the loan. By the time people find out that loan payments have not been made,  it is often too late and legal actions such as foreclosure have already started.
4. If your name is on the title, you are liable for any problems that arise from its use. Many times parents decide if they are going to co-sign on a loan they want some type of control over the asset that is being bought by the loan. They will insist on putting their name on the title or deed. By doing this they have just agreed to be liable for any problems that arise from the use of the automobile or house. Someone hit by the automobile or that slips and falls on the property can go after them as an owner and probably will because they usually have the deeper pockets.
5. Even if you do not put your name on the title, you can still have added liability. In Vermont there was a case where a grandmother co-signed for a grandson to get an auto loan. The grandmother knew that her grandson was a bad driver.  Soon afterward, she was held liable when he hit someone with the new car.
6. You do not have to be liable for the entire loan.  When you guarantee a loan you do not have to guarantee the entire loan. It depends on what you can get the lender to agree to. You may only have to guarantee the loan amount and not the late fees or attorney fees or only part of the loan. However, if you co-sign you agree to pay everything that the person you are co-signing for would have to pay.

When you are asked by your child to co-sign or guarantee a loan for them because they do not have the credit to get the loan, be very careful. In deciding that you will co-sign you may be taking on more than you realize.  When you co-sign or guarantee a loan for someone you are taking on risk on with no return. Along with the monetary risk you may be also risking your relationship with the person you are co-signing or guaranteeing for. If the loan goes bad that relationship is often damaged, so our basic advice is to avoid co-signing or guaranteeing a loan.