By Lee Arnold, CEO of Cogo Capital — If you want to simplify hard money and almost guarantee that every deal you bring in will get funded, ask yourself this one question:
“If I were the lender, would I lend money on this deal?”
If you look at a deal and critically think whether or not you would accrue the risk involved, you can better understand if it’s worth the investment.
Now, that might seem too simple, and if you don’t understand how funding works, the question isn’t going to do you any good. But, if you do understand how to make sense of the numbers, and if you know what constitutes a good deal, then you’re more likely to make sense of why a deal isn’t getting approved.
That being said, let’s help you identify what constitutes a good deal.
First, you want to have a deal that is HIGH YIELD and LOW RISK.
How do you calculate this?
You need several numbers in front of you; the purchase price, the estimated repair costs, the ARV (after repair value) and the maximum percentage of the ARV a lender will give you for the project. This could be 55%, 65%, etc.
So, if you have found a house that has an ARV of $100,000 and the purchase price is $70,000, that’s 70% of the ARV and you aren’t going to get a loan to cover the full amount let alone the repair costs. 70 cents on the dollar looks like a good deal until you factor in repair and holding costs.
That’s why you need to start with the final selling price and work backward to deduct the selling cost, profit margin, renovation cost, and buying costs. Don’t forget to factor in holding costs and a margin of error.
Though you don’t need a background in real estate to flip a house, you do need to make sure that the time and money you are investing (whether the money is yours or a lender’s like at Cogo Capital) is well spent and maximized.
If you need help with this, getting an education can minimize your risk and maximize your profit potential. You’ll go into an offer confident and knowing what to do, when to do it, and why.
This is what we teach you at our Cogo Capital Funded (we pay for your tickets) “FUNDING TOUR.” Just go to: www.fundingtour.com/MFSlance for more information and to see if we’re coming to a city near you!
Remember, my fiduciary obligation to our lenders is to assure their money is going into good investments, but my fiduciary duty to YOU is to make sure you aren’t getting in over your head on a bad deal.