Strategies for Getting Started in Real Estate by Dan Auito - HTML preview
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Nobody seems to have enough! At least in the beginning anyway, there are so many ways to get the money that this little report could turn into a book the size of a New York phone directory if we explored all the potentials. Just remember this: When you find property that is being sold far below its true market value and you can present a solid plan for getting its full market value, people who have money sitting in banks and dead equity in their houses (home equity loans) that could be generating returns of 10 to 15 percent if they loaned it to you instead, will listen to what you have to say. You must present the plan and it has to make sense!
This last segment is me rambling on about finance, so take what you can from it and do the basic things we have been discussing along the way. Let’s get the paperwork together.
Before we get started, I want to ask you a question. Who loans money? The Federal Reserve, commercial banks, insurance companies, mortgage backed securities, lenders such as Fannie May, Freddie Mac/HUD, local savings and loans, credit unions, mortgage brokers, wealthy private individuals, the sellers themselves, and credit agencies of various organized structures including credit card products.
How about a wealthy family member, partner, or friend? Equity lines or yourself in the form of personal savings, or by using brainpower to creatively structure deals using no money at all?
If you’re counting on me to tell you one surefire, easy method, then keep reading. The only way I can do that is to bombard you with ideas and let you come to your own Magic Bullet solution. We all have a very different situation and as a result, your alternatives will be different than mine.
Here’s your first bullet. Institutions don’t lend money, people do! A building can’t approve or disapprove anything so you’re going to have to understand people and how they think in order to persuade them into seeing how you can help them by getting the loan. You fill their quotas.
The people who decide whether or not you’re getting financing have to know in their own mind that you’re not going to jeopardize their own financial security. They don’t want to be fired or go broke or have to fight you in court, or anything else that requires time, effort, and money just to break even. These people want a benefit not a headache.
The first thing you can do to build trust in the mind of your benefactor, or lender, is to show this person you have done your homework. This means you must have as many of the details as you can gather concerning why you need the money. People are reasoning creatures. If you don’t make sense, then your odds at success are marginal at best. So the number one way to get money is to create trust in the minds of those who control the purse strings.
You create trust through credit scores, tax returns, work history, and net worth assets and liabilities worksheets—i.e., loan applications. Every intelligent lender wants those things up front so gather them together and have copies ready for your first meeting. This is called preparation and due diligence.
The time to ask for a loan is when you don’t need it. Now does that make sense? Yes, it does! Here’s why: You need to build trust and you should take a little time beforehand to do that. Think about whom you personally could use to get a loan and then provide them with copies of your aforementioned self-worth documents. Let them research your documentation and then you will be entitled to their time in further discussing your wants, needs and desires. Once you build relationships, a phone call is all it takes to get whatever you want if it coincides or makes sense with what you have already discussed and planned for.
I started out by getting small loans of $60,000 to $70,000, and those were the hardest to get because the lenders had to verify and trust what I said, backed by my history, which was represented by pieces of paper. If you want to accelerate the trust-building phase of your financial relationship, provide collateral and high level references. That way you have something to lose and your high level references give you their permission to use their reputations and good name to validate you. Get a co-signer if you can!
So get the following things together: W-2s, tax returns for the previous two years, a credit report, a filled-out loan application, three months of bank statements, copies of titles to good collateral (if any), three references, and a person willing to co-sign if possible. Make copies and start shopping for loan providers.
Organization and planning will help you prepare for your loan. I also have encouraged you to attend a homebuyer’s education class. These are held free in your community and will give you a basic introduction to real estate finance at no charge. I go all the time to refresh my memory. Plus, I am informed of current loan products, rates, and programs that can be used to my advantage.
What types of loan products are available? We have veteran’s loan (VA) guarantees, first-time buyer loans, HUD 203 rehabilitation loans, FHA, conventional bank loans, fixed rate loans, variable rates, graduated payment loans, low income loans, personal loans, and hundreds more.
What category do you fit into? That’s for you to figure out—with some free help. Go to the homebuyer class and talk to some lenders. Don’t forget mortgage brokers. Mortgage brokers are a special type of animal. These wily beasts more often than not have more access to money than almost anyone you will meet. This is because they are brokers, in essence, middlemen. They find lenders and borrowers and create a marriage. They often know of many routes to take to obtain financing for your situation. They deal with banks, money markets, insurance companies, wealthy people, and private investors. Sometimes they themselves have money to lend. They can often get you a loan that the people they represent wouldn’t give you personally.
These brokers will package a bunch of loans together and sell them as one large financial interest-bearing product that has been scrutinized, verified, and prepared in accordance with the preapproved buyer’s guidelines. Insurance companies, pension funds, bond funds, financial stock purchasers will invest in you through this larger secured product. Your loan has been sold at that point to someone else as a long-term investment.
Holy smokes, do you feel like you’re just another number yet? Well, finance is based on numbers, and people who deal with numbers are more often than not left-brain thinkers. Back to Psychology 101, folks. I see it all the time…people thinking that the financial gods of Isaac are against them. These people who deal with numbers think analytically. They are
numbers-oriented and they deal with cold, hard facts. The numbers either
add up or they don’t, cut and dried. They are required to enforce policy standards. I’m trying not to offend these bright and intelligent people, because without their skill, this country would not exist.
Now picture this: Here is the right-brain thinkers’ view of things. The right-brain lives in space, seeing things in pictures and grandiosity. They always have an idea and a million questions to go with it. They ask, “Why can’t, what if, how about, why not, how come,” and to top it off, they will attempt to ring out the left-brain analytical types like a sponge, to collect further information to achieve their objective. These people include artists, salesman, public speakers, entertainers, designers, and politicians.
Well, when the smoke clears and the left brain numbers-cruncher gets over the initial shock of being blasted by the onslaught of right-brained gibberish, there’s usually a period of silence. You know what happens? Yep, the right-brain extrovert starts talking again. At this point, the financial person is being asked to find some financial solution to the problem.
Normally, they can’t do it and stubbornly refuse to even consider alternatives because of the approach used by the right-brainer. What often happens is you will get a request for more information, documentation and research. They’re looking for numbers because they use qualifying ratios to solve problems. Here’s what I mean.
If you’re talking standard home loan, they often use a 28/36 ratio. What that says is 28 percent of your monthly income can be used to pay the mortgage principle, mortgage interest, property taxes, and property insurance. If you make $3,000 a month, you can afford to spend $840 a month on housing. That’s the front ratio.
The back ratio is 36 percent. The lender says that up to 36 percent of your total monthly income can go toward paying for the mortgage plus credit card loans, auto/boat loans, student loans, and other similar loans, not to exceed 36 percent for everything.
Well, that leaves 64 percent leftover. Why don’t they count some of that? Here’s why. You often need that much a month to pay for electricity, phone, cable, water, sewer, garbage, heat, clothes, food, car insurance, gas and repairs, entertainment, furniture, toys, doodads, knickknacks, and
everything else you come across that sounds like a must-have.
The 28/36 ratios are the limits that say you won’t default on your loan. But a military veteran will get ratios of 41/41, so shop around and ask about ratios and whether or not there are any special programs that may help you qualify for a certain loan amount.
That’s the basic conventional bank financing and mortgage broker lending practice. There are a hundred different ways to do something with all the variables so you need to investigate which programs are available and the guidelines used to qualify to be eligible.
Owner financing is almost always a good deal if you can get it because you usually can put less money down. The transaction costs are lower and they don’t ask you to go through the process of being qualified like an organized financial organization would. No more ratios to deal with. Owner finance deals are usually used when the property for some reason can’t be financed any other way or when the owner has a lot of equity in the property but doesn’t need all the cash that would come as a result of a lender paying them off at closing. The seller can be the bank and get a good interest rate on their private mortgage to you. (Don’t forget to get your attorney involved!)
Private lenders are also a good source of funds. Sometimes they are called hardmoney lenders because they charge higher interest rates but they won’t qualify you to death. Paperwork is minimized and things can move swiftly. Once again use an attorney to review and approve any private deals! That’s a critical point. Use “legal man” to protect you from people who can and do take advantage of the needy.
Family members, uncles, aunts, parents, or grandparents are often willing to help with that down payment money that banks require. Family can sign a letter saying the money is a gift, not a loan. Otherwise, it gets factored into that 36-percent back ratio as a loan.
You could also go around the above by becoming joint owners, thus you rely on them to provide credit and down payment money. Buy them out later by refinancing in a year or so or pay them their share when you sell for a profit.
Here are some things not to do when preparing to take out a loan. Don’t go out and buy a new car, new furniture, or a boat, or charge up your credit cards. That is revolving debt on a pay-per-month plan and can sink you when it is applied toward your qualifying ratios. Wait until after you have closed on the property before you acquire any more liability for debt repayment.
Special note on credit cards: This can hurt you and you wouldn’t even know it. Say you have four credit cards with spending limits of $5,000 a piece in available credit. Now you’re a smart person so you have zero balances on all of them. You owe nothing but the lender says, “Hey, you could go into debt for $20,000 overnight just by taking cash advances.” They might say that $10,000 is as much potential debt as they would like to see. You would best be served by reducing your total ability to assume revolving debt overnight to a $10,000 limit. After you close, you can raise it if you have to.
The more cash you can personally put into a deal, the more favorable lenders will look upon you. You may be offered lower interest rates, higher qualifying ratios, maybe even a toaster. That brings us to PMI, or private mortgage insurance. This is an ugly product you pay for to protect the lender. Basically, what it does is cover the top 20 percent of your loan.
Let’s say you were able to put down 3 percent to purchase a property but you didn’t make your payments like you promised in your lender’s mortgage note. The bank can foreclose and take back your property, and sell it quickly for 80 percent of its true value because you have given them 3 percent down and your PMI policy will pay them the other 17 percent. If you can afford to self-insure, then put down 20 percent of the value of the house when you buy it. That way, you don’t throw away your money on insurance that is no benefit to you. You get a lower house payment and the bank still has their margin of safety with no mortgage insurance required. (Don’t confuse this with homeowner’s insurance.)
15- or 30-Year Mortgage Pros and Cons
A standard 30-year mortgage is often easier to qualify for since your payments are lower, but in the long run you’re going to pay a lot more interest to your lender. If that’s all you can qualify for, take it because you can still shorten the duration of your loan by paying extra money toward the principle when you can afford to. Always ask if there are any prepayment penalties. These clauses prevent you from
accelerating your mortgage, or rather paying it off faster than the lender wants without paying a penalty. Most of these clauses have been outlawed but they do exist. After all, if you sold your house before the 30 years were up, they could penalize you for early repayment. That clause was and is a bad deal. Don’t accept it!
The 15-year mortgage saves you 15 years of payments but it takes more income to qualify for it and your monthly payments are higher, and unlike the 30-year mortgage, you can’t extend it by paying less. You must make your payments as agreed. Usually you will get 1/8 of a percentage point lower on your interest rate because the lender has the shorter period of risk exposure of 15 years, not 30.
Adjustable rate or fixed rate
Adjustable rates can go up or down. They are always lower than fixed rate loans in the beginning because the lender has the power and authority to raise them if the Federal Reserve raises its loan rate to the bank. Thus you’re betting that interest rates won’t go up and you’re getting a cheaper percentage rate for the risk you take in choosing that option.
Fixed rates in today’s rock-bottom interest-rate market just seem to be the best way to go. You still must decide for yourself but for me, I’m locking in my right to pay 5 or 6 percent forever. These are great rates—especially when you consider that back in the inflationary 1980s, interest rates climbed above 17 percent.
Once again, there must be 50 different versions of interest rate programs. Those are what can be called blended rates, so make your best deal according to what is currently available.
If you are not sure which way to go or don’t quite understand rates and mortgages, go get a book on the subject and read all about it. The lenders will also educate you on what’s available in the market.
This stuff is boring to the right-brained extrovert but it is a fact of life and an important one too. When it comes to financing, bear down on it and get through it. Make sure you do your best because you’re going to have to live with the end results of your efforts or refinance later and pay more fees.
All through my book, you will notice I don’t use all kinds of hypothetical math equations to get my point across. The reasons for that are at least fourfold. First, I’m right-brained. Second, real estate finance books can resemble phone books. Third, all the time you spend understanding some wild finance method is generally wasted because you won’t use it in real estate. Fourth, it’s dry as cat litter and it’s no fun to read about math.
My point is this: Rely on other people to educate you in your weak areas. We all have them. Simply call upon an expert in your field of weakness. Learn from them while they save you costly mistakes at the same time. Overcoming adversity was another strongly touted quality that Napoleon Hill, in his timeless book Think and Grow Rich, continually harped on. Go to www.magicbullets.com to download the e-book for free!
Courage, a positive mental attitude, mixed with purpose, passion, and a desire to succeed, will skyrocket your chance at success. Perseverance, willpower, and determination are like carbon is to steel. Don’t let anyone be a dream thief to you. Those people are the enemies of success. Shoot them down with Magic Bullets and succeed.
If you will trust me enough to go to www.magicbullets.com, then I can offer you everything I’ve learned over 15 years in the business. I’ve spent more than $60,000 dollars to develop the book Magic Bullets in Real Estate and the website to back you up. The book is less than $20 bucks for the soft cover and less than $15 if you want to download the whole 304 page hyperlinked, colorized, and illustrated edition. You’ll be reading everything you need to really take off in less than 5 minutes from now.Good luck and God bless, Dan P.S. As in all real estate investing:
Step 1—Learn a system (get a mentor to show you).
Step 2—Get your first deal done.
Step 3—Master the system.
Step 4—Get investors to put money into your deals.
Step 5—Pay out to investors their “cut” and keep the