• AJ Shepard

Funding Options after Contract Issues


Speaker 1:

All right. So today, I'm going to talk about funding options after contract issues a.k.a, financing woes. So... oh, we got...


Speaker 2:

Chris and Nicole.


Speaker 1:

... Chris and Nicole. So a.k.a. financing woes. Funding options after contract issues. So, the best way to avoid contract issues is to get pre-approved and get financing dialed in beforehand and know what you're doing. So, first of all, it's getting your client pre-approved. Knowing who that lender is that they get a pre-approval from. Not all pre-approvals are the same, especially with lenders that you know. Confirm property is financiable. If you know that it's not going to be, there's really not any sense in going through all that process. Make sure that your client's affairs are in order. A lot of times we're doing some credit repair, we're trying to make sure that they're ready to actually perform on the purchase. This is kind of one of those things as being a part of being a real estate agent.


Speaker 1:

The intent is, is that you have a lot of knowledge of how the process works and making sure that your client is ready and able to purchase as part of getting that process ready. I can't stress enough, talk with the lender directly, right? Without the client there, talk with them, see how they feel about it. I'm not saying get all of your client's information or everything, but I am saying, make sure you have conversations and know what your client's hurdles are going to be from a lender's perspective.


Speaker 1:

I'm sure you guys have played the game phone-tag where it's the message starts at one end and ends up at the other end, something completely different. So you just don't want that to happen. And then talk with your clients and understand what their cash position is. Man, if they're going for an FHA loan with 3% down, it's a big difference then them putting a hundred percent cash down. So, those are like the two ends of the spectrum. They're going to land somewhere in between there, but having a good understanding of how that works is going to be very helpful in the coming... if you run into problems.


Speaker 1:

So, what are issues that come up after contracts? Too many repairs required, it's uninhabitable, foundation issues, roof issues, permitting issues, the property doesn't appraise. So, all of this stuff, it happens in properties, usually, real estate agents try to get this stuff taken care of before they put it on the market for like a quote-unquote, retail price. So if you do have a listing and it's got some of these issues. Working with the owner, I'm trying to figure out how we can get these fixed before you put them on the market so that if you're on the sell side, you're not running into these problems unknown. So, that definitely helps to get a tour of the property, kind of know exactly what you're selling.


Speaker 3:

The question, sorry.


Speaker 1:

Yeah, go for it.


Speaker 3:

In what scenario would a property not appraise?


Speaker 1:

I mean, there have been cases where you have auctions and people keep bidding the price up. When the appraiser comes through the comps in the area just don't split. And typically you just go back to the seller and say, "I need you to bring the price down." But in some cases they say, "well, no."


Speaker 2:

And then what happens if they say no?


Speaker 1:

Well, what happens if any of these problems occur, right? So, how do we get the deal done? I'm sure that you guys know cash is absolutely King. If you guys haven't heard that yet, you will. It's all over the place. So the question is how do we get that cash offer into place? Or how do we, how do we manipulate the deal so that it can still happen? One of the easy things, it costs a lot of money, is hard money lenders. One of the ones that we know right now is about 10% in two points. With bridge lending, they go all the way up to like 18%. So, if you're going to do the deal and then get the work done and then refinance it afterward, you just want to make sure you know what the costs are.


Speaker 1:

Another option that not a lot of people go down, just because it's hard finding a loan officer that will actually do it, but a 203(b) loan is a principal plus construction cost loan and it's actually offered by the FHA. And if you guys have not found someone that will write these loans, this may be a great thing in your back pocket, but people will then come to you to be able to do it. They are difficult. They take a lot of work and there's not a lot of loan officers that know how to do them, but some of them do. They're mostly found at credit unions or a bank where the loan officers are not necessarily paid on commission. So this is the type of person that gets paid a salary to sit at the bank and bring in new clients. So if you are looking for that type of loan, I would suggest looking in those places.


Speaker 1:

Lines of credit, personal loans. If your client already has a place of residence, they can pull money from the line of credit, or maybe they have a rich uncle or something else. Ask them if that's a possibility. Negotiating some seller financing. When you're already in contract or you're coming up on a deal, you have two parties that want the same thing. One person wants to sell, one person wants to buy. The only thing that the problem is, is the in-between.


Speaker 1:

So, usually with some sort of negotiating or figuring out some way that there can be a win-win. Seller financing may be a possibility and maybe the seller doesn't want to do that. But what they're going to find is that it's just going to cost them more money. Another option is to wholesale the deal to other investors or bring on partners. And partners as a kind of like personal loans, but partnership and you give away a portion of the equity to control it. I'm trying to make this very broad so it's applicable to single-family homes and multi-family. So, if you guys have any questions I can dig into either one of those kinds of spaces.


Speaker 1:

So, answer the question. How do you put a value on the solution to a problem? So what I'm asking is, is the work that you guys do, how can that be valued? What I say is, know what your options are. What is the cost of whatever particular option you're going to do? If you're going to do seller financing, we know that that reduces financing costs. If you're going to use a hard money lender, that's going to very much increase in financing costs. Prior to getting into contracts, you have some sort of idea of what the value of a property is, but when you run into problems, there's also some sort of cost associated with that. So knowing what those options are and how much each of those is going to cost will ultimately allow you to control the deal or control the outcome and hopefully better into your favor or your client's favor.


Speaker 1:

So, knowing how long it's going to take to complete whatever construction or issue that you run into. If you're partnering with someone, what can your partners expect? What are the costs? What are potential pitfalls or unexpected items that maybe aren't identified in this particular problem? And then next, I always have, "be conservative and realistic," make sure that if there are things that are going to change, that they're going to change in your favor.


Speaker 1:

I kind of have a slide here that's, "if you want to be taken seriously," when you're presenting these options, "also take the preparation seriously." Put together schedules, put together budgets, put together items that the other party can visualize and see. It's probably going to be unexpected to them that they're in this situation. It may not be their most ideal situation, but when people do come to terms with it, that what they are selling or what you were buying is only worth what it's actually worth. You want someone else who's willing to pay for or sell for. So I had a mock-up here of a little schedule or something, but...


Speaker 1:

I kind of modeled this after the one Trent was looking at. If we purchased the property and it's taken a couple of months to obtain permits and engineering, maybe finish construction and then start financing the property and then completely re-finance. We're looking at like nine to 12 months of operation. And that's the type of experience that as real estate agents and being in the business, you guys are able to bring to the table and it's going to make your partners and the clients feel much better when you're confident and you come to the table prepared.


Speaker 1:

So, recap, step one, identify the problem. Step two, negotiate acceptable solutions for all parties. And then step three, perform on those and exceed expectations. Very broad. Anybody else has any questions?


Speaker 2:

If a property doesn't appraise, but the buyers don't want to let it go and let's say it comes up 15 grand short of the purchase price. What's the best option for that?


Speaker 1:

Well, from your client's perspective, probably talking with the seller to see if they're willing to come down. Present them with the issue that the appraisal didn't... it didn't even come out to appraise and if they're going to go try to do this with someone else, they're going to run into the same problem. And see if first of all, they'll come down. If they won't come down then question, "well, what about, my clients don't have the cash for this. Are you willing to finance that additional amount on a second note at 0%? You get the money, but it's just going to take a little while for us to pay it off."


Speaker 1:

No, not willing to do that. Well then, your lender's going to require you to come up with that additional 15,000 in the capital in order to buy the property. Like if the sellers are really that unwilling, maybe they can finance the whole thing. Maybe you give them 20% down they give you a balloon later on five years on the rest of the note, and then you can go and refinance it in a couple of years and the value is appreciated and they get their money.


Speaker 1:

So, three good options, maybe progressive, but options nonetheless. And then maybe even split the difference with them too, "well, it's 15 grand, we'll pay an extra 7,500 and you bring the price down 7,500."


Speaker 4:

If you get into contract on a property and find out that there was work that was not permitted. How would you go about factoring that into a price reduction or some type of request? I would imagine you value what the permitting process would cost, ask for some of that or something along those lines?


Speaker 1:

So, you're on the buyer side?


Speaker 4:

Correct, helping someone buy.


Speaker 1:

Helping someone buy. So definitely knowing which jurisdiction you're buying in is a huge difference. Portland's significantly harder than Hillsborough or Washington County. You kind of got like Portland being the toughest, Hillsborough in the middle, Washington County's the easiest. [inaudible 00:13:17] is pretty easy too if you're nice, just the facts.


Speaker 1:

So, first of all, is trying to understand we'll get records and find out which... what scope of work is not permanent. Those degrees vary from, is this an extra bathroom too, is this an additional thousand square feet? Or is this a carport that got put up and was not permitted?


Speaker 1:

I can tell you from Chris and I's experience in Portland, the property that we actually just took Jesse to over there, we enclosed the carport, like an RV carport, and when they put it up they never got a permit and they actually got fined for it. And then they never finaled out the final permit when they actually got the permit. So it appeared that they had permits, but they never got it finaled out. And the reason was is they built it first, tried to permit it later, and then the engineer designed footings and they never put the footings in so they couldn't get it finaled out.


Speaker 1:

So, trying to figure out what scope of work actually needs to be done in order to get it permitted, will help you figure out what the cost is. And then overestimate, talk to other professionals that know definitely having an architect or designer that is good contact and get a timeframe from them and tell them to be conservative on how much it would cost to develop drawings for this.


Speaker 1:

And then also permitting costs of fairly... they're usually based off the contracting costs. So getting kind of a number for what that contracting would be. And just making sure you know exactly what the scope is of those. If you can, go through records and check to see if there are any permits that weren't finaled out. But just seeing the permits there doesn't necessarily mean that they were completed.


Speaker 4:

How do you verify [inaudible 00:15:34] housing bureau?


Speaker 1:

In Portland, you can usually do it on Portland maps. If there are permits within the last 20 years, they're usually up there, and you can usually get drawings for them or whatever stuff that they have that's on there. Washington County, you're going to have to go out to the County and actually pull records and mostly the other cities too, but they're not [inaudible 00:15:53] digitally. And records, usually, it's like 10, 15 bucks. And they let you search through whatever's there.


Speaker 1:

And again, that sort of stuff is like just being knowledgeable and providing good things for your... value to your clients. The way they use us as real estate agents is we have dealt with that stuff before whereas, most real estate agents [inaudible 00:16:24]... a permit that hasn't been finaled out.


Speaker 1:

So, any other questions? Cool. Did you guys like it?


Speaker 2:

It was solid.


Speaker 2:

Great.


Speaker 1:

Oops.

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