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 Step #10 - Get The Best FinancingThe same technique you have used to find and evaluate the property, you will use to finance the property. The technique is preparation. Banks or loan companies shouldn't intimidate you. The business of the bank is to lend money. The bank has to lend money to survive. The bank is going to lend money. Like all businesses, the bank wants to minimize its risk while maximizing its profits. To assess its risk, the bank will evaluate you as a creditor and the property as collateral. Your job is to present yourself and the property in the best possible light. Look for: 1. A bank which holds a mortgage on other property you ownWhen you go to the bank, you'll fill out a mortgage loan application. This is a standardized form used to describe yourself and the property. Again, you've done a lot of preparation so you can add something to this standardized procedure. Give the mortgage loan officer a copy of your Personal Financial Statement. The Personal Financial Statement is your net worth sheet typed on a separate piece of paper. It is your financial resume. Like any resume, make it look good. For the property information section, give them a copy of the listing sheet. These are both small points, but they do separate you from the average applicant. You've done the work. Make sure you get the edge.  Don't be discouraged if, on occasion, your application is rejected, but do ask for a reason. Go to the next bank on your list and start over. If several banks turn you down, you'll at least know how your own credit must be improved before you will qualify for a mortgage. If you are being rejected because of problems with the property, then you will have reasons to renegotiate your deal with the seller. Be aware. Too many novice investors get caught up worrying about interest rates. Interest rates are important if you are securing a property to hold for 10 - 30 years. Interest rates are not so important if you are buying a property to flip in six months.  If your goal is to secure six core properties to hold for the long term, lock in the best fixed-interest rate. Otherwise, remember the deal. If you have negotiated a good deal or have found a diamond in the rough, your objective should be to close as soon as possible and not risk losing the deal because you want to wait a few weeks or a month to see if you can get a 7.5% interest rate rather than an 8.25% interest rate. Don't wait. Close the deal.
After you own the property, what happens if you don't like your initial financing? You do your calculations and if the numbers work, you refinance. Simple. Where should you borrow? Any legitimate source is a consideration. Whether you borrow from a bank or a mortgage company or your credit union is not particularly important. The important differentiation is made between most lenders who sell their mortgages on the secondary mortgage market, and the fewer number of lenders who hold their mortgages for investment. Most mortgage lenders sell their loans so that their funds are replenished and they can make more loans. If a lender doesn't sell its loans, its money supply is limited. Lenders who sell their mortgages are subject to the requirements of the buyers of those loans. Since most mortgages are sold to buyers with similar requirements, most banks and mortgage companies have minimal discretion when negotiating loan terms. The bottom line is that if you are dealing with lenders who sell their mortgages, the rate and terms are often not negotiable. If there is a lender or lenders in your area who retain their loans for investment, naturally the opportunity for dialogue increases. Such lenders may be more willing to consider creative financing and secondary financing. If you are dealing with a smaller local bank or a private lender, you will probably find that they routinely hire the same appraisal firm. Should this be your situation, you can start relationship building with the appraiser(s) from that firm. You will find that different appraisers take different approaches to their jobs. As with real estate agents, there is a range of professionalism found among real estate appraisers. Some are compulsive note takers who will need hours and hours of time. They will insist that every lock is opened and every closet checked. They will ask a seemingly endless series of questions that don't seem to have any relevance to estimating the value of the property. They will seem suspicious of everything and everyone. You will tell them the rents, but they will still want to see leases.  Some appraisers spend hours measuring everything and making drawings. Some appraisers seem obsessed with the plumbing and must turn on every faucet to check for water pressure and leaks. Some will take dozens of photos. Some will turn their noses up at "how other people live." On the flip side, you will find appraisers that are cavalier in their approach. They can inspect a six family house in less than twenty minutes. "OK, there's a basement, an attic, you said that there are three one-bedrooms, two studios and a two-bedroom apartment. That's fine. I don't have to see the inside of the apartments. I've been doing this job for 20 years. I'm all set. Where can I get a good cup of coffee around here?" 
Some appraisers will show up in fur coats and others wearing work boots. Whoever they are, whatever they are, how they choose to do their job is their business and not yours. Your business is to get the loan, and you don't get the loan without a favorable appraisal. This means that you are prepared to go along with the program whether the program takes thirty minutes or three hours. This appraiser could be the biggest jerk you've ever met. You still smile. You are cooperative. Focus on the loan approval.Some appraisers will act indignant if you try to show them a list of comparable sales and some will act indignant if you don't have the list. Obviously, it is better to have the list and not need the list then to not have the list and be asked for it. The comparable sales list is the sales record of similar properties in the recent past. If you are buying a six-family house in a specific investment area, it is possible that there haven't been any sales of other six-families in the last six months. Then, you go to four-families or eights or threes or twos. You go back a year or eighteen months. You come up with some kind of comparative price justification for your purchase. Your list should support your sales price. If some of the sales prices don't work to your advantage, don't include them on your list. When you are building your list of comparables, your objective is to get the appraiser thinking, "Yes, I can see why this guy is buying this property for $300,000. It's a good deal."  If you are following the advice in the Master Real Estate course, you will be well aware of comparables in your area. Especially during your portfolio-building years, sales price information should be tracked and kept reasonably current. You won't be very good at finding good deals if you don't know what constitutes a good deal. For example, you must be aware of sales anomalies. If you are paying $300,000 for a six-family and two recent six-families have sold for $200,000 and $240,000, you might be in trouble with an appraiser who is just looking at a computer-generated listing of addresses. The computer-generated comparable sales list is not going to say that the $240,000 price was for a six-family in very poor condition or that the $200,000 price was for a sale from a parent to a child. It is your job to know what the appraiser is going to find when she does her comparable sales investigation. If there are surprises, be sure to mention them before the fact. Don't be timid about making your case. Remember the big picture. You are the player. You are the investor. You are the one who stands to make the big bucks. The loan officer, the real estate agent, the appraiser, the property inspector and all the others in the cast of characters are all minor players who will disappear after you pass papers. But, on the path to riches, at some point, you need all of them. You smile. You are cooperative. You get the job done. Let's call this The Tao of Real Estate Success.  It is important that at some point during the appraisal tour of the subject property that you discreetly or not so discreetly mention your purchase price. Be absolutely sure that the appraiser knows that you are paying $300,000 for the property or whatever the price is. Make absolutely sure that the appraiser knows you are asking for a $240,000 mortgage. In the perfect world, the amount that you are paying for the property and the amount that you are financing should have no bearing at all on the appraiser's estimate of value. In the real world, the appraiser should be aware of the figure that will kill the deal. Remember that lenders are in business to lend money. Lenders want to lend money. Lenders advertise for borrowers. Lenders want the appraisal to be favorable. Lenders do not want to hire appraisers who kill all their deals. Of course, appraisers are also aware of their role, which is to be reasonable. Unreasonable appraisers don't get much work. For this reason, even if the appraiser on your deal seems like a frustrated Sherlock Holmes who is wasting your time taking a microscopic view of things, practice patience and come out a winner. The odds are excellent that the appraiser also wants the deal to proceed. The appraiser has little to gain by killing your deal.
During the tour, be Mr. or Ms. Positive. If you are going to put in new kitchens and baths or carpeting or heating systems, say so. If the apartment market is tight in your area, say so. If rents are going up, say so. Keep saying positive things. Technically, your comments on the market and your plans should have no bearing on the appraisal. Personally, they probably will. Remember, you are an expert on your specific investment area. Speak up. The appraiser probably does appraisals in a much, much larger area where values can vary dramatically. Speak up. Make your case. Near the end of the appraisal tour as farewell pleasantries are being exchanged, don't be shy about asking the appraiser if she sees any problems with her valuation of the property. You may get a straight answer. You will probably get less than a complete OK, but at least some kind of feedback that will indicate if there is a serious problem. The only serious problem for you is an appraisal below the number you need.  In general, for all parties, you and the lender and the appraiser, the appraisal process should be a formality. After all, you are an expert on value and your intentions certainly aren't to overpay. However, if you have a gut feeling that the appraisal isn't going to go your way, speak to your loan officer about your options. Can you give the appraiser more information? Can you pay for another appraisal? Perhaps, you have a firm that would be acceptable to the bank that you have used in the past. If this is the case, you should have made these arrangements earlier. Can you challenge the appraisal? Do you have any recourse except going to another bank? Even if you are rejected and have to go to another bank, this is a small bump on the long road. Yes, you may lose a few weeks and a few hundred dollars. Failure is a stepping-stone to success. Complete the mission. Get the property. This is your deal! If you are confident, you are probably the best person for the job. You should tell the others that you will be the person talking to the appraiser. If you need a question answered, you will ask each of them for an answer. This calls for your leadership. This calls for you having made in advance an assessment of the skills and attitudes of the personnel involved in the deal before the appraisal begins. You also don't need an army of semi-interested people walking through the apartments and making comments. Tenants are always nervous when a property is being sold. They think that they will have to move at worst, or pay a higher rent at best. Until the tenants know you for the wonderful person that you are, there is no reason to presume that they are on your side and that they want your deal to proceed. Whether it is true or not, your prospective tenants perceive you as a rich person just trying to get richer at their expense.  Be careful when owners are trying to deceive their tenants about the sale. Deception is a cowardly approach that often backfires. Some owners will want you to pose as an insurance person or contractor when you are being shown an apartment so that the tenants are not upset. Tenants aren't stupid. Honesty is the best policy. You may be willing to play a role in this play, but few appraisers will. Why should they lie if a tenant asks who they are? It is best to secure the cooperation of the tenants in advance. Tell them the truth and ask them to stay quiet. Being honest always means that tenants should know that if the dishwasher doesn't work, the appraiser isn't going to fix it. Go through a pre-appraisal tour drill. Make sure that keys work. If you are buying a 34-unit building, ask the appraiser in advance how many units they'll want to see. Have the seller or the seller's agent speak to those tenants or make sure that if they aren't home, they know that you'll be in their apartment. Make sure that there are lights in the hallways, basement, attic and other common areas. Make sure that the common areas, laundry room, etc. are clean. Make sure that you know where the electrical panel and heating units are located and that access to them isn't blocked. Make sure that the lawn is mowed. This is all the common sense advance work that an experienced investor would do to ensure a smooth appraisal.
If the average property you intend to purchase is $200,000 and you need a 25% downpayment, you need $50,000. However, if the seller will lend you 15% or $30,000, then you only need $20,000. Most investment property real estate sales involve some form of seller participation in the financing, so ask. If you can borrow 90% of the purchase price through first and second mortgages and if there is still a positive cash flow, then you probably have a very good deal. If your financial burden is so heavy that the cash flow is negative and you have to keep putting more money into the property each month, then, even though there is appreciation, amortization and tax benefits, owning investment real estate can get very old very quickly.  To ensure a positive cash flow, seconds are often written with payments figured on a longer-term schedule than the actual term of the second. In other words, the actual term of the second may be 3 years, but figured as if the term were 30 years. With such a loan structure, a large balloon payment would be due after three years. If a loan is completely paid at the end of a term, it is called a self-liquidating loan. If monies are due at the end of the loan, it is called a balloon loan. When you purchase a property using a short-term second with a balloon payment, your acquisition planning will include the steps you will take to retire this loan as soon as possible. Is the property worth more than you are paying for it? Normally, before you buy, you cannot borrow based on your estimate of value, but only on your negotiated purchase price. However, after you own the property, you are now the owner and you can go back to your lender or another lender and borrow again based on your estimate of the property's value. In other words, you may pay $250,000 for a property that you feel is worth $300,000. To buy this property, you can only borrow based on the $250,000 acquisition price. However, after you own the property, you are free to say that the value of the property is $300,000 and get a new mortgage based on this amount, presuming that the property appraises at this amount. You might ask if the property is worth $300,000 and you are paying $250,000 why wouldn't the initial appraisal come back at $300,000. This could happen, but rarely does. Usually the appraisal comes back at or near the purchase price.  Another presumption is that as a new owner you will be doing things that will enhance the value of the property. You may add new kitchen and baths. You may convert the heating systems. You may just raise the rents. In any event, value increases and presents an opportunity to refinance and retire the second mortgage. Can you move out of a primary residence and turn it into an investment property? Yes, find out when and how from your primary lender. Can you put a second or third mortgage on your property after you own the property? Yes, find out when and how from your primary lender. The primary lender does not have the right to rule your life, but they do have a right to protect their investment. Ignorance is not an excuse for breaking the law. Ask questions before problems arise. of an Equity Line of Credit The equity line of credit solves all of these problems.
Given the above situation, presuming you can show sufficient income to cover repayment, you could qualify for a $100,000 equity line of credit.  Continuing Education: FreddieMac.com This site offers a great deal of information about Freddie Mac and its efforts to provide homeowners and renters with lower housing costs and better access to home financing. Go to Lesson 6
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