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3 Non-Traditional Ways To Fund Your First House Flipping Project
Raising Funds is Difficult
Money is the largest barrier to entry in real estate investing. Whether you plan on renting out property, or flipping houses; convincing the banks to give you capital is a daunting task.
Banks have no interest in your plans, and they don't like risking their money on unproven investors, especially those without a base of assets already built up. The joke in real estate is that the banks are only interested in you when you no longer need them.
But dedicated investors have always found ways around the banks and their requirements. You can do the same.
You have the ability to find financing in today's market and I will show you three ways that investors use to obtain financing all the time.
Owner financing is one of the best ways to get started in real estate. It's also hard to find owners who want to take this route, but I have seen many investors find deals and close them for massive profits.
One of the best ways to find deals like this is to check websites like Zillow and Realtor.com for the FSBO (For Sale By Owner) listings. These owners are already signaling that they don't like the normal way of selling a home through a realtor.
They may be more likely to agree to owner financing than a seller with an agent. I can tell you from my experience as an agent that I saw many clients talked out of owner financing, because it's not good for the agent.
Agents don't like many non-traditional financing options because they can make it harder for them to get paid.
You can call these owners directly and ask to meet with them in order to see their property, after you meet and look at the property ask them to come get a cup of coffee with you in order to talk business.
This approach gets them in the mindset of making a deal, it also makes them feel important because you aren't just asking for a deal in the field.
When you sit down with them don't jump right to owner financing talk. Talk about them, what their plans are after the sale of the house, why are they selling such a lovely house?
Where are they moving? Do they need to sell the home in order to get their next property?
The answers to these questions will let you know how likely they are to agree with owner financing. After all if their next property contract is contingent on selling their current property you can safely assume that they are probably not interested in owner financing.
Closing the Deal
Regardless of their answers and your assumptions you should always try and close the deal. I assume that you've done your homework and know you can make money. I also assume you know what kind of price you need to make a profit.
Ask them plainly if they have ever considered investing in real estate themselves. If they are an investor already, you may be in luck.
If they are an investor you can frame owner financing as a way for you to get started chasing your dream. Appeal to their knowledge and experience and remind them of the passion they had when they were starting out.
Finish by asking if they would like to bolster their portfolio with some more monthly cash flow in the form of your debt payments, and remind them that they really have nothing to lose from a financial stand point. You either pay them or they keep the property.
Not an Investor? No Problem
If your seller is not an investor ask them if they would like some extra money coming in each month for the next 5 years. When they ask you what in the world you're talking about, tell them owner financing.
They will most likely give a knee-jerk response about how they are not interested. Tell them that you understand but you would like to tell them your idea anyway, if they still aren't interested you will pay for their coffee and go your separate ways.
Tell them that owner financing typically involves a contract no more than 5-10 years long, and that you pay an agreed upon amount each month. After the contract is up you pay off any remaining money due from the sale of the house.
Here's an example that will also serve as my way of showing you how the contract works.
You agree with an owner to buy a house for $150,000 and you agree to a 5 year contract at 4% interest amortized over thirty years. This means that you pay $716 a month for five years, and at the end of those 5 years you pay the remaining balance in full and end the contract.
Usually you can refinance a house before the five years is up, and you are flipping the property anyway so it shouldn't take that long.
Explain to the seller that you are planning on flipping the house, but you have a contingency plan (renting and refinancing before the five years is up).
Make sure they understand that they have no financial risk, you either pay them for a few years and fail while they pocket the cash and keep the house, or you succeed and they get their agreed upon sale price.
It's Not Easy
This was a long section because it isn't an easy option, it takes time to find owners willing to finance their property by themselves, and it takes some skill to convince them to do so for you.
This method is great but it's also time consuming, the next methods are not as labor intensive.
Hard Money Lenders
Hard money lenders are also a good way to get started. Be warned that this option, while easier than owner financing, has a much higher risk profile. If done improperly hard money can kill your project.
Hard money lenders are usually small groups of individuals or singular individuals willing to loan investors money without looking at their credit score and simply basing their lending decision on the property being purchased.
Since they are looking mainly at the property and not your credit or income you will pay more than a traditional mortgage. Often times you can expect to pay double the normal interest rate and you can also expect higher origination fees.
On the plus side these loans are a great way to cut through the red tape prominent in banking, and if you can develop a relationship with a local hard money lender you can get your money much faster than at the banks, sometimes within 2-3 days.
Another advantage for starting investors is that hard money loans will sometimes allow you to borrow up to 100% of the purchase price. That means no huge down payment.
A simple strategy, of course easier said than done, is to get a hard money loan and quickly fix up the house in order to raise it's market value. Once you have the higher valuation refinance the property through the bank and pay off the hard money lender.
Prices for hard money vary drastically around the states, your best option is to look into your local market and work with a local lender. Google can turn up lenders but you can also ask Realtors and bank loan officers in your area if they know any hard money lenders.
This is a good strategy for many new real estate investors, but it isn't for everyone since it's riskier than both owner financing and the next option I'll discuss. If you take this route make sure you know your numbers, and your profit potential.
Lending Sites and Services
The internet has made everything easier.What you can do with lending sites and services is use a third party to help you track down financing for your project.
Sites like Lending Tree, Prosper, Fundwise Capital and many others can help you navigate offers from banks until you find exactly what you need.
Lending Tree shows you offers from banks all over the U.S and is a great tool that allows you to see offers based on your specific needs. It can be a task to go through all the offers on your own, but it is a great way to find financing online.
Prosper is a peer-to-peer lending site that allows you to source financing from investors who buy a portion of your debt. You may be able to find better rates here so it's worth looking into.
Other lending services like Fundwise Capital specialize in helping you obtain financing for almost any project. These companies have specialists who will source financing options for you and help you secure the capital you need to get started on your first flip.
These three examples are not the only online financing services available, and plenty of other companies exist. Find the one that works for you and get started on your first flip.
Good Luck With Your Real Estate Adventure
I hope my 3 ways of securing financing help you get started in real estate, I have used all three methods in the past with varying levels of success. After all you can't close every deal, but you should try.
Here's a little rundown.
Owner financing is hard to set up but worth the effort.
Hard money is expensive, but if used properly it can get you started.
Lending sites and services are worth looking into, it's up to you to find one you like.
If you have any questions please leave a comment and I will do my best to help you out, you may even inspire my next article.
Thanks for reading and good luck in your endeavors.