The Rewards and Pit-Falls of being a “Rehabber”

Mortgage Equites House Front

The biggest reward for rehabbing a property is the profit, the satisfaction of a job well done, and the contribution you make to a neighborhood. However; from the point of purchase, through the renovation phase, to closing a sale, the rehabber assumes risks that may result in less than expected profit or even a significant loss. Whether you intend to flip the property or rent it out, success can be achieved as long as you don’t make the following mistakes.

Wrong Property

Selecting the correct property is key to having a successful rehab project. The ideal property for a rehab is one that just needs cosmetic fixes that can be made quickly and at a reasonable cost. Example of these items include, paint, carpeting, floor refinishing, updating of hardware and fixtures. The most costly elements of a property to repair or replace include the foundation, electrical, plumbing and roof. If more than one or two of these need major repair or replacement, the eventual sales price of the property may not justify the time and expense.  It is better to move on to a better rehab candidate. Finding a property that is undervalued due to its appearance and cosmetic issues, but has “good bones”, is the ideal subject for rehab.

Also as the old adage states: “success in real estate is location, location, location”. The location has a large impact on the value of a property and therefore should be substantial part of the purchase decision. Is the value of the property negatively impacted by a busy street, or proximity to schools, businesses, and churches? Is there poor access to the property due to a one way street, a badly placed driveway or lack of available parking? On the positive side does the property have a view, quite street, easy access to shopping or public transportation?   If a property does require extensive work, a great location will provide a handsome return from the extra time and money spent.

Wrong Price

Even if the property itself seems like a good fixer candidate, you need to crunch the numbers to increase the chance of a successful outcome. Whether you are buying to sell or rent; create a budget for the project. Be sure to include the purchase price, all loan fees/interest, insurance, taxes, utilities and a conservative rehab budget for the property. The biggest mistake you can make is paying too much for the property. If the price your can purchase the property doesn’t make financial sense today, it is a poor bet to assume that the upward trend in home prices, over the time it takes to rehab the property, will bale you out.

Not Allowing for Cost Over-runs

Ninety nine percent of the time, there will be unexpected costs that will impact the final cost of the project. During your inspection you are not going to be able to see every square inch of the building and inevitably there will be additional issues that arise. Successful rehabbers will spend the time and effort to understand the potential scope of the work and are not afraid to call in contractors with more experience in specific areas. All rehab budgets should have at least a 5%- 10% contingency to cover unexpected costs.

Wrong Timeline Estimate

In addition to the unforeseen costs, unforeseen circumstances may arise and make your timeline longer than expected. This can be due to extra work that needs to be done to the property, or the time it takes to obtain a permit. Many times it is attributed to scheduling challenges with your contractors or even working with your own schedule to balance the other demands on your time outside the project.  Also, your property may take longer to sell or rent than originally expected. Underestimating your timeline will   increase the amount of interest you will pay on your loan. Typically Lenders require an extension fee to buy more time.  At the start a six month loan maturity may seem like plenty of time, but there is a high probability of time delays.   You can protect yourself against additional loan costs by choosing a Lender that offers a 12 month term priced at the same interest rate and loan fee of a 6 month term.  Avoid extension fees and of course default interest!

Over Improving Property

When rehabbing, you are not creating your dream home, an architectural master piece or a monument to yourself. You are improving a property for investment purposes with the goal maximizing your profit from the sale. Any extra improvements should increase the property value (eventual sales price) by more than its cost both in money and time. Be careful not to overspend on items like light fixtures, hardware and faucets that the eventual buyer may immediately replace with items that are more suited to their preference and personal style.  With that said you shouldn’t cut corners, hide defects, or accept shoddy work!

Decide if you improving the property for sale or for rent.  Improving a rental property dictates  a different and sometimes lower cost level of finish than if you are improving property for immediate sale. Know your intended use of the property before you establish your rehab budget.

Pricing Too High

Once all of the improvements are completed, make sure to list the property at an asking price comparable to sales prices to similar houses in the neighborhood. If you do your homework you will know the market value of like type properties in the neighborhood before your offer to purchase the property. Also remember it is the price of homes that have actually sold that you want to focus on, not the asking price.  In today’s market some homes are bid up well above the asking price and other homes are sold at less than asking price. The price of closed sales determines the market.

It is never good for a property to be for sale too long due to an unreasonably high asking price. This will deter real estate agents and buyers from even showing/looking at the property. Pricing too high can only result in higher holding costs – interest, taxes, and insurance. Overpricing can result in a lower sales price than pricing the property correctly to begin with.

Purchasing and upgrading a “fixer” adds value -equity/profit.  Whether you engage full time or look finad an opportunity as an additional source of building wealth you will be required to “wear many hats” to be successful. We trust that above information and reminders will contribute to your success!

 

Not All Private Hard Money Real Estate Lenders Are The Same

When shopping for a private real estate loan a borrower should be as selective in choosing a lender as they are in choosing their accountant, lawyer or any other professional.

Many borrowers become so focused on getting loan approval and funded, they don’t pay attention to the obligations and requirements of the loan agreement or perhaps equally important the reputation and integrity of lender.

A private hard money lending transaction has two clients; the “Borrower Client” seeking a loan and an “Investor Client” seeking to receive monthly income from making a loan.  Private investors/companies making loans use investor money, their own funds or a combination of both.  Regardless of the source of the funds the borrower should not only pay careful attention to the loan terms but be mindful that you are about to engage in a temporary but unique partnership.  In terms of trust, communication, and attention to your concerns you want to feel comfortable on all accounts.

A good lender/partner will wholeheartedly want you the borrower to achieve a successful outcome.  What does that mean?   It means that you are able to achieve your intended goal and the lender receives the interest income and return of principal bargained for when making the loan.

We do view making a loan as partnering with a borrower.  We want to structure a loan with your success in mind and steer clear of problems.  As example, typically our loans do not cost more for a longer loan term.  Allowing enough time for a loan to payoff is one way to avoid a problem!  Another “partnering example” is a providing expertise.  We are a lending partner that collectively has decades of valuable real estate experience.  In addition to providing funding our real estate expertise often adds additional value to the borrower’s effort and can help avoid unforeseen problems. We view our loan process as collaboration – working with the borrower from the very beginning to put together a loan that makes sense and have a positive outcome.

It is important for anyone seeking a private real estate loan to take the time to seek references, ask questions and create a dialogue with the lender to obtain specific loan information and to assess (“gut check”) if you feel comfortable working with that lender.

Hard Money Construction Loan Builds A Bilingual Preschool On Top of A Convenience Store

picture of bi-lingual day care center built on top of gas station convenience store thanks to private construction loan from Mortgage EquitiesA bi-lingual pre-school for 65 kids built on top of a gas station’s convenience store was made possible by a construction loan from the private lending company, Mortgage Equities, Inc.  This is a significant community contribution that has fulfilled a growing need and given the opportunity for more kids to go to a top notch pre-school in their neighborhood.

In 2000 the Nguyen brothers purchased a Shell gas station, along with an antiquated cinder block convenience store, in an old established Seattle neighborhood.  Six years later their hard work and savings allowed them to build a two story building on a small unimproved adjacent lot that was part of the original gas station purchase.  As the building neared completion an inquiry from an experienced owner of a bi-lingual preschool resulted in a signed lease for the entire two floors of the new building.

La Esculita Pre School, operating for more than 30 years near the University of Washington, was now venturing to Columbia City to occupy a second location.  The space quickly filled with children and within 18 months the waiting list grew to 200 applicants prompting pre-school owner, Carmen Masso, to ask landlord Nguyen if he would build more space on top of the adjacent gas stations’ convenience store to accommodate another 65 students.

After investing considerable time and money in pre-development costs, the Nguyen’s were able to obtain a City of Seattle building permit, but they could not obtain a construction loan from a bank.  However, a bank did call Mortgage Equities on behalf of the Nguyen’s and they agreed to take a look at the project.  They felt the project was made sense,, and their careful underwriting culminated in a $900K construction loan that updated and expanded the convenience store and constructed a new 5,400 sq.ft. second story to accommodate 65 more preschoolers.

The loan enabled the Borrower to respond to the tenant’s need and lease more space to a highly regarded preschool that was so well received in the neighborhood, and provide a bright new convenience store for the community.

Mortgage Equities, Inc. provides real estate investment bridge and construction loans in Washington, Oregon, and Idaho.

 

Hard Money Lenders Confess to Being a Helpful Community Partner

photo of Seattle Gas Station / Day Care projectFrustrated with the “loan shark” image hard money lenders have, Seattle-based private lenders announce they do more than meets the eye, solving problems and positively impacting communities across Washington, Oregon, and Idaho at “not so hard money rates!”

It is not often that one associates a private hard money lender with the concept of service to a community.  More commonly they are correctly understood to be a lender that can be of service to property owners that are unable to secure a loan from a bank or other conventional lenders.

Yet, another side of private lending that benefits the borrower also has a positive impact on the local community where the loan is made.  This type of loan provides the additional satisfaction of serving a larger purpose.

During the course of their 25 years in business Ron Ralph and Sanford Lindstrom, partners at Mortgage Equities, have made loans secured by private schools, fraternal organizations, and churches.

Ron Ralph says, “Each one of these loans has a ‘story’ and an outcome that provided the borrowers with funds to achieve their goals and for us the satisfaction that we made good loans to good people who in turn were of benefit to their communities.”

These borrowers, whether they are non-profit organizations or for profit, have financing needs similar to many real estate investors, but cannot obtain a loan to address their need as they don’t fit the traditional underwriting models.

Their “turn downs” can be for any number of reasons and yes the “gatekeepers” can present underwriting challenges, but Mortgage Equities takes the time to work with the borrower to solve the problem.

Examples of past transactions Mortgage Equities has facilitated:

1.  A bridge loan to a church to allow time for a sale of one property and the purchase of another.

2. A non-profit needed immediate funding to make property improvements in order to accommodate a major community function.  A bank loan requiring an appraisal and additional time consuming processing wouldn’t work.

3.  A construction loan to a gas station/convenience store owner to build a second story to accommodate a bilingual preschool.

4.  A loan to a lumber mill in the process of re-opening and providing employment to 35 workers.

Grateful clients describe Ralph and Lindstrom as professional and honest, and say they work fast and with integrity.  Perhaps it’s time to look at hard money loans with a softer view.  Read more about how these hard money lenders have help communities.