Transactional Funding

There has been much talk lately announcing the return of profitable flipping conditions in LA. California and Los Angeles County has been among the highest in the nation in foreclosures since the real estate bubble burst approximately three years ago, and we have seen our home prices plummet by as much as 50% in some areas. Simultaneously, this wave of foreclosures has created a demand for rental properties as former home owners become home renters. This has resulted in rents that have remained relatively stable as the prices of homes have steadily dropped. This unique set of circumstances has generated bargain investment property prices for investor buyers that haven't existed in LA since the mid 90's Northridge earthquake. It has also created a niche for those looking to flip properties once again. Purchase demand is still very strong in most areas despite a large backlog of inventory held by the banks.

Most of the foreclosures that are being sold at auction and through bank owned REO listings need only minor, cosmetic repairs to bring them up to rental or FHA financing standards. Investors willing to purchase these properties, can put $5K-$10K into them and then turn around and sell them to investors for a reasonable profit. These investors are still able to purchase the property at a price that makes it possible for the property to generate strong positive cash flow at prevailing market rents.

The catch in this process is that, in order to acquire a property at the Trustees' Auction, the prospective buyer has to come with cash. Many flippers lack the personal cash reserves to tie up more than one or two properties at a time. This is where transactional funders enter the picture. My transactional funders loan money on a very short term basis for investors to purchase properties at the auction or through the banks. They require that the end buyer (the person who the investor is selling to), must have loan approval and be under contract on the property. Once that happens the transactional lender will fund the loan to the investor and the investor will enter escrow with the buyer. The investor is coming up with little or none of their own money for the deal and making a hefty profit.

These transactional funds are always protected by a first position lien on the property. Once the properties have been successfully rehabbed or otherwise turned over,(Max 30 days holding time), they are resold and the transactional funders are repaid in full. The transactional funders usually see their money tied up for no more than 30 days and they are paid 3-6% on their investment. This equates to 50%-125% annualized returns on the average transaction for them, which is phenomonal. Everyone wins.

If you are seeking transactional funding, contact me here or call/sms 310-709-8283.

Stated income loans axed by new Obama bill.

Stated income loans were mortgage loans made to borrowers without proving their income sources. They were largely removed from circulation after the 2007 mortgage meltdown. After that, loans made without income and sometimes without assets became extremely rare and coveted. Several intrepid portfolio lenders getting their money from alternative sources like hedge funds and local pension funds would offer the loans and be completely swamped by eager borrowers. Their $500m portfolios would fill in a matter of months and they would stop funding new loans. For borrowers and brokers it became a hunt for a slot with the next lender before they filled up. The market for stated income loans (also called no-doc, SIVA, Low-doc, etc.) was on its last legs.

Today that dying market was given it's Coup De Grace. The reform bill signed in by Obama outlaws stated income and no doc loans. The market already did not want these loans and now the government has finished them, albeit with some degree of nebulous wording.

Part 1074 (b) of the bill reads:

“No creditor may make a loan secured by real property [i.e., a mortgage loan] unless the creditor, based on verified and documented information, determines that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan … and all applicable taxes, insurance, and assessments.”

The bill also outlines the steps mortgage lenders must take to verify a person’s ability to repay. As is the typical practice now they must review the borrower’s credit history, current income, current financial obligations, and debt-to-income ratio. To verify the borrower’s income, the lender must review IRS W2+1040 statements, tax returns, bank records, and payroll receipts / pay stubs. This means underwriter. Loan officers at banks or mortgage brokers cannot issue a pre-qualification without seeing all this documentation. This is already effectively in place now so it's not too big a shock.

I personally think that the lenders will find way to circumvent this regulation once the market will return. When prices+inventory+employment stabilize then support will be found for loans as risky as stated income. I am a believer in the market always finding ways to do what it will naturally despite outside influences. There have been quite a lot of outside influences in the mortgage market lately and the industry itself is in a state of flux. It is reinventing itself and rewriting its rules in the midst of the best interest rate environment in recent history. When the dust settles I think that stated income loans will return but until then, get those W2s and 1040s ready.

Rapid Fire FHA mortgage loan payment tables

For pocket reference, this is the all included PITI payment amount for an FHA loan assuming the borrower puts only 3.5% down.

Loan Amount=Monthly Payment
150k = $1197
250k = $1923
300k = $2012
500k = $3792
729k = $4280

Go forth and finance!