By Rob Jafek, Principal of Boomerang Capital
You shouldn’t use a flat-head screwdriver to drive a Phillips head screw in the same way you shouldn’t use banks for financing when you are improving properties.
First, banks don’t actually have the experience of doing this type of loan. “Wait a minute,” you say, “these guys do home lending all the time.” That is only partially true as yes: they are the ones that help originate the loan but then sell that loan into the secondary market with the US Government holding about 2/3 of that. In this case, the bank is only a middleman which means that they are subject to what that ultimate buyer decides is interesting. If you’ve ever heard the terms ‘conforming’ and ‘non-conforming’ you know that you are dealing with a middleman. And if you are dealing with a regulated bank or credit union it goes even beyond that as short-term loans on non-income producing properties require those entities to carry more cash in order to remain in compliance, which makes for an inefficient capital structure.
Even if the bank wanted to hold it, they can only lend on current value and are unprepared to look at after-rehab value. Determining current value is easy: look at the price that the property just traded at. Maybe it requires some validation by looking at similar properties that have likewise just traded, but this valuation process is black and white, analytical.
Determination of after-rehab value is an art. Even if you can get a handle on deferred maintenance and other variables, you still must add (or subtract) for bringing the home back to the values of the neighborhood (or not). While also factoring in the investor’s plan and ability to execute. And lest you forget to estimate overall prices 6 months into the future, you have a lot of nuances to consider. It’s not an easy task, thus it is an art.
There are still plenty of homes that need work done, work that requires financing. And most real estate investors must spend time hunting financing to help them tackle their project. Lenders, like us and others, step in to fill that void. We’re the artists in the investing finance space.
In addition, this investing space is different in other ways too. Vanessa Montoya, one of Boomerang’s new loan officers, came from Arizona Bank and Trust. Moving to collateral-based loans, she noted some obvious differences. “I love the community aspect. It’s different lending to people who are going to improve these homes and neighborhoods and leave their stamp on it. Not everyone can do these projects – I am learning so much about what to look for in properties that you are going to invest in rather than live in for yourself. I really enjoy that investors look at properties with problems not just so that they can get a lower price, but so that they can fix it and make something nice for someone to live in.” This investing space is about value add.
Given that the lender and processes are different, here are a few tips she shares to make the process smoother for investors looking for financing:
Budget: Given that the budget matters so much, make it easy to understand and for a lender to evaluate.
Vision: You have a vision for this property, for how it is going to become more valuable and desirable. Be prepared to share that vision with us and help us see what you see. Be patient with us when you are asked questions as we are trying to figure it out with you.
Experience: Experience matters, and we need to know what to expect from you. Done a hundred of these? Great, let us know so we can engage with you on that level and can help appropriately. First time? Same answer. You need to help us know where you are so we can make the best use of time, for all of us.
Connect: Get to know your finance company, loan officer, and financial team members. The better we know you, the better we can support you and your vision. One of the best parts about this industry is being part of the process that leads to successful investors and fantastic properties that add value to the community around them, and we aim to do it again and again and again. Because we’re not a traditional lending bank that is beholden to our stockholders, we can develop relationships with our investors. And that’s where organizations like AZREIA come into play since they provide forums, events, and opportunities for us to connect with the investors in the real estate space and develop relationships that lead to successful outcomes. That’s why all our loan officers, like Vanessa, are active members of AZREIA that are always happy to connect with investors looking for help with their project financing.
Banks aren’t a great place to go looking for financing for your flip. You have options and understanding the differences and using the right tool for the task will help you be more successful.