At CIVIC, our private loans aren’t designed to meet third party standards. They meet ours. Our mission is to provide competitive, private financing to real estate investors who want to buy and rehabilitate non-owner occupied homes. We don’t review pay check stubs, W2s or income tax returns. In fact, we don’t verify income at all. Instead, we review bank statements and calculate monthly cash flow and use those amounts for a loan approval. There are no minimum FICO scores needed in order to qualify. Of course, we have our internal standards and apply them every day but we do ask for an exit strategy. We’d like to know how our short-term financing will be paid off once the project has been finished. There are three primary ways our loans are retired.
The first is simply to pay all cash. The funds can come directly from a bank account or the sale of other assets. But if this is the exit strategy for a real estate investor, all that’s typically needed is to verify the source of the funds being used to pay off the private loan. Yet it’s probably clear that if cash is available to pay off a short-term loan then it may also be used to finance the purchase in the first place, negating the need for private money. Yet this is not a very common situation.
The second exit strategy is to sell the property once the home has been completed. This is perhaps the most common approach. An investor identifies a property that is in such a state of disrepair that no one can obtain a traditional mortgage. Yet with a private loan, the transaction can be completed. The unit is acquired and needed repairs are financed with the private loan, putting the property in such a condition for permanent financing. The exit strategy in this example can be validated by reviewing recent sales in the subject property’s area that are similar to see how much the property might sell for and how long it would take before a sale is consummated.
To bolster this approach, many real estate investors have ready buyers that work with the investor to find deals for those buyers who would rather someone else identify potential properties instead of doing it on their own. Investors can even have a signed sales contract along with a copy of an earnest money check for the property being acquired.
The third exit is for the investor to keep the property in-house once completed. Once the property is rehabilitated and brought up to conventional standards, most any mortgage company will provide the permanent financing needed for a long term hold while paying off the private note.
All three strategies work and they can all be used in different situations, but by providing documentation of a clear path to payoff, it makes the loan sail through.
Also Check Out: Big vs. Little: How to Evaluate a Private Lender