Just to make things nice and sparkling clear, what we’re discussing here is financing the purchase of an investment property in Tampa Florida at a wholesale price, for the purpose of keeping it as a rental.
While we do not oppose the use of conventional banks for Real Estate loans, we do not recommend pursuing this option to acquire these types of properties because it just does not work. Not only does it waste everyone’s time, it can potentially destroy a great deal in the process.
In this article, we will discuss the benefits of using hard money to acquire inexpensive wholesale properties as well as the dangers and pitfalls of being seduced by the low interest rates offered by conventional banks.
Dance With The Devil
This topic comes up frequently during many conversations with potential clients – whether they’re new investors or they’re accustomed to a higher end market somewhere out of town. A good analogy for this situation would be that old tale about making a deal with the Devil. As the story goes, the Devil seduces a man with the promise of eternal life in exchange for his immortal soul.
The man, acknowledging that the notion of eternal life would indefinitely postpone the need to fulfill his end of the bargain, takes the deal and is granted eternal life only to be rewarded with life in prison.
The conventional banks are offering the lowest interest rates in history. The only problem is they’re not lending any money. Realtors especially, are feeling this pain as a result of spending inordinate amounts of time serving prospective home buyers, driving them around, showing them multiple properties, only to have the deal fall apart because the banks will decide to not fund the deal for whatever reason. Since we do not behave like Realtors and we refuse to be treated like Realtors, we do not suffer their fate.
It would be helpful to know that the average property we deal with has a purchase price anywhere between $25,000 and $50,000. It is extremely rare that we go above $50k for a rental property simply because lower purchase prices equal higher capitalization rates, but that’s another story for another article.
Why banks won’t lend on these deals
To be fair, we’ve come up with some of the main reasons why a conventional bank will not fund a deal like ours. Here are some of those reasons.
Property Condition – As stated in the video, most of these major banks will not even consider lending money to purchase a property unless it is in immaculate condition. Even something as easily fixable as A broken door could be the issue that could make you loose your deposit. With that said, 99.9% of the deals we find are distressed properties which are in need of repairs in some way, shape, or form. To seriously chase after the low interest rates of a conventional bank, an investor would be required to risk sinking money into a property they do not yet own, by doing repairs before they even buy it and this is not a risk any sane person should be willing to take.
Appraisal – If the property appraises too low, the bank will decline the loan. Banks have gotten so busy these days, especially with Hillsborough County foreclosures, instead of sending an appraiser to inspect a property, they are using websites like Zillow.com for property valuation. It is commonly known that these websites are not usually accurate with estimated values, for various reasons.
Loan Amount Too Low – As stated in the video, a bank would be more inclined to spend time processing a $200,000 loan over a $30,000 loan any day of the week. They get bigger fees and bigger commissions for doing bigger loans, that’s just common sense. Since all or our deals are below $50,000 it is a huge waste of time to even bother with them. Most banks will not touch a loan for less than 50k. It is part of their policy.
Income – A major factor banks look for is job stability – they need to see proof that a borrower is getting stable income for more than 2 years. Another major factor is affordability – can the income support the borrower’s lifestyle plus the operating expenses on the investment. Rents on a property cannot be included on income unless the property has been generating rent for at least 2 years prior to the loan application and it must be claimed on the tax returns regardless if the property is held in an LLC or under a personal name. If the rental income is not reported, then it simply does not exist in the eyes of the bank.
Amount of Properties Owned – Through our experience over the past 5 years, we’ve noticed that Banks will not lend to LLCs or corporations for these types of properties at all. This leaves only one other option for conventional financing – making the purchase under one’s own name. The act of buying multiple properties for an individual is limited to maximum of 4 properties, as of the writing of this article. So if an investor already has 4 properties mortgaged under his or her name, the bank will not and can not lend on a fifth.
Bad Weather – When nothing else makes any sense, bad weather is as good an explanation as any.
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