I encounter a lot of investors who want real estate funding for nothing. In other words, they want to get funding for their projects without any out of money expense.
This is very unrealistic. For one thing, 100% financing is very hard to come by. Lenders are wary when funding even at 80% financing, and that risk triples when they do 100% financing.
Having said that, it’s not impossible to get 100% financing. But investors needs to be realistic regarding the terms and conditions set by the lender. There’s a saying that “He who has the gold, makes the rules”. I’m not trying to be biased here as I myself use financing for 90% of my deals. But I keep my expectations realistic when using 100% financing. A lot of investors are turned down by lenders because they want everything for nothing.
Let me give you a couple of examples of unrealistic expectations from investors:
1. An investor that I encountered wanted 100% financing. He has a decent credit score and was approved for $120,000 unsecured credit line. That means it’s as good as cash.
Now the term is 0% APR for the first 6-12 months and an 10% fee payable using their credit line. That means no money out of pocket for the investor. He didn’t go through because he thinks the fee is too high and it will cut his profit from $85,000 to about 60,000 on the conservative side.
As a result, the lender walked away and the investor lost the deal. That would have been a good deal for both sides because the lender limited their risk and earned enough money to be worth it and the investor would have earned $60,000 without using any of his own money. That is what I call an “infinite return”.
He could have used that money to put a certain percentage down for his next funding to get more favorable terms next time. Or he can just keep repeating the process and have more deals in the pipeline without ever having to use any of his own money.
2. I was reviewing a joint venture with an investor that wanted 100% financing on a fix and flip project. The investor has poor credit but because the project was asset-based, it didn’t matter.As a hard money lender, our term was 12% APR plus about 4 points and a 50/50 split on the back end. We would cover the entire purchase price including the rehab. The gross profit would be about $80,000, and splitting that would mean $40,000 for the investor. It was a minor rehab so we could be in and out quickly. The investor wanted to keep 80% of the profit which was unacceptable because the lender is taking on all the risk. Again this was an opportunity lost for both sides.
Investors need to be realistic with their expectations when doing 100% financing deals. they’re difficult–although not impossible–to find and they can make or break your real estate business.
You don’t always have to have money to be successful. You just need to be creative and open minded to have access to capital.