No hitches in the normal sense, as the funding came through fine, we signed everything, got the key, all that happy stuff. The hitch was that we got hit with 2.5% origination fee on the mortgage, which basically translated into me setting a little over $2,000 on fire for no good reason.

Before I launch into ranting and spleening, I’m ultimately to blame here, as I could have avoided this if I were more diligent (and had heeded a warning sign or two about the behavior of our mortgage banker in the past). The short version is that we ended up going with a slightly different loan product midstream, and I took Mortgage Guy’s word when he assured me it was exactly the same as the first loan that I’d gotten a good faith estimate for (which had a loan origination fee of less than 1%).

His only explanation when confronted with the fact that I most definitely wasn’t expecting to pay a 2.5% loan origination fee was that such a fee was standard for loans for investment properties, as the potential for the property to be flipped quickly makes it necessary to charge a higher loan origination fee to protect a profit for the mortgage lender. The only problem with that is the first loan we were going with was for the same investment property, yet it had a much more reasonable origination fee. An additional problem with that explanation is many lenders chare very low origination fees (or none), as their real profit apparently comes from marking up the loan when they re-sell it.

Lesson learned, as far as taking his word on it and not insisting on seeing all of the fine point before it was too late.  I didn’t make too much of a stink at closing, as Mortgage Guy was there, as it was past the stage wheremaking a stink could cause anything constructive to happen, but I’ll be damned if he gets a penny of my business moving forward. If I had no other options when it came to getting a loan, that’d be one thing, but with our credit scores and general income/savings, it’s pretty ridiculous to get bent over like that.

In happier news, I did get to knock around in House #2 this weekend, and everything so far has been good news.  I knew the hardwood floors under the carpet were in good shape from peeling back carept where I could, but I was pretty amazed when I got in there after closing and was able to really rip back the carpet. I’m not even sure they need refinishing, as they’re mainly just dirty, and it honestly looks as if the hardwood floors were installed then immediately covered with carpet, 50+ years ago. They didn’t even use carpet tacks to install the carpet, as it was just sitting loose on top of the floor and only held down at the perimeter by shoe moulding and tape. Worst case scenario is that they just need screening with a floor buffer and sanding disc, which potentially saves me a whole ton of labor and expense.

I’m probably going to need to replace all of the windows, though, as they’re in rougher shape than I’d thought. The finished product is going to be on the mid/high end of the range of homes here, and I think new windows is pretty critical, aside from just the aesthetics.

Still not sure about a few details, especially where the bathroom addition should go.  I’m trying not to get too bogged down in those details at the moment, as a lot of the plans will depend on talking to contractors over the next few weeks, as far as firming up plans, seeing what’s possible, yada yada yada.

The only silver linings there is that July should be chalked up to a pretty large anomaly, due to the largely unsubstantiated complete freak-out that occured in the general markets at large and the lending industry in particular, and the rising foreclosures story continues to be pretty schizophrenic. Subprime borrowers continue to default like crazy, while prime borrowers continue to largely be good to go, with only a very slight rise in foreclosures by prime borrowers. Which is sort of good news, but not the best of news, as there still is likely a large overhang of dodgy subprime loans to work through, especially as ARMs reset.

As far as what that means to the real estate investor, well, who knows. Some people claim that the recent real estate bubble is the mother of all bubbles, and that we’re just at the beginning of a prolonged five to ten year slide, that will result in home values being roughly halved, across the board. Property values skyrocketed while interest rates were near historic lows, creating an unsustainable situation. To resolve it and return to equilibirium, interest rates have to climb dramatically (which the Fed seems very disinclined to do) or housing prices have to fall dramatically.

I just don’t buy that argument, though. Maybe it’s my relative inexperience and lack of having lived through such a thing firsthand, but housing seems to me to be a slightly different sort of commodity beast, much different from tulip bulbs or shares of stock in Koop.com. But, again, who knows.

As far as profiting from all this, the more I poke around, the more I’m intrigued by the idea of owner financing, after buying and rehabbing. The basic drill would be to pay cash for the property, complete your rehab, then get a loan based on the FMV of the rehabbed property (typically you can get a loan for 75-80% of the FMV in that situation).

Offer owner financing with a 5% down payment and an interest rate higher than your own (and possibly a 2-3 year balloon payment due to encourage the buyer to refinance.) Use the funds from the loan you received to purchase the next property with cash, pocket the 5% down payment, collect positive cash flow each month due to the difference in interest rates, and realize the bulk of your profits on the back end when they refinance.

In theory, you could basically rinse, lather, and repeat that same process infinitely, paying essentially no money down and 100% financing. The real upside, though, is that you’d be solving two of the major problems facing investors/rehabbers right now, not only finding a buyer to unlock your profits, but also securing financing for them.

Would that make up for the potential headaches of going the owner financed route? Quite possibly, especially if it remains difficult for some potential buyers to secure financing in coming months and/or years. That seems to be the biggest hurdle in my mind, more so than more and more inventory piling into the market as foreclosures continue to pile up.

It’s also a double whammy for real estate investors, as we have both falling home prices in much of the country as well as the possiblity of the pool of future buyers shrinking as well, as lenders tighten the screws and it becomes more difficult to get a loan to buy a new house. That could continue to drive down home prices, creating a vicious cycle that might send the overall economy toppling into a near-recession.

Does that means it’s a terrible time to invest in real estate? Honestly, who knows. That’s a pretty impossible question to ask, as the answer depends on the market you’re talking about, your own personal financial situation, the type of real estate investment you’re considering, your long-term investing goals, and any other number of mcomplicated moving parts that all influence the final answer.

Personally speaking, the next deal I do is probably going to be a rental property, quite possibly the foreclosure duplex I’ve mentioned before if it’s still on the market. Given the larger uncertainty, the idea of doing another SFR short-term flip makes me a bit nervous, and if I can eliminate even that bit of nervousness, well, that seems wise.

I’m definitely not in the doom-and-gloom, the-world-is-ending camp, as my best guess is that we continue to see a softly deflating housing bubble over the next six months, with things picking up slightly after that. But I like the added insurance of investing in a rental property next, as far as a slight hedge against the worst-case scenario, which still isn’t outside the realm of possibility at this point.

So here are the mortgage details and fees for this first flip property. (As far as a bit of general background info, my wife and I jointly applied for the mortgage, we’ve both got credit scores of +800, zero personal/consumer debt, and about 1x our combined annual salaries in savings and liquid assets, and we did a full-doc loan.)

Total loan amount: $60,000

Loan type: Conventional 30 year fixed mortgage, 100% financing

Interest rate: 10.25%

Down payment: $0

Monthly mortgage payment (mortgage/insurance/taxes): $690.33, with first payment due on May 1, 2007

Mortgage application fee: $399

UW review: $300

Administration fee: $300

Committment fee: $300

Processing fee: $300

Additional appraisal fee: $125

Document fee: $125

Closing fee: $200

Delivery fee: $60

Title insurance: $178.55

Escrow fee: $150

Total mortgage/title fees: $2,437.55

Looking back on the two other loans we’ve received to purchase homes, none of the fees look too gaudy, especially for a 100% financed loan for an investment property. The interest rate on the loan is obviously a bit high, but given that it’s a flip property that’s sort of a moot point.

I was pretty happy with the loan, all in all. It’s kind of eye-opening to really sit down and look at all the assorted fees, especially through the lens of a short-term property that I plan on flipping. When applying for loans in the past for our principal residences it was much easier to shrug off the mortgage fees as simply the cost of doing business, which we’d hopefully recoup through property appreciation, etc., but they hit home much more directly for the flip property, as they definitely eat into any potential profit I might pull out of the place.

I didn’t really have much choice for this first one, as I wasn’t willing to drain our reserves to the point that paying cash would have, but it’s definitely something to keep in mind moving forward, especially if I can build up some profits from flipping and the sale of the Austin house. While I still may end up financing some more properties, there’s a lot to be said for getting into pay-cash-mode as soon as possible, even if it takes me a bit outside of my comfort zone.

This is the part of the process that I’ve never been able to understand. Yeah, it’s a relatively large sum of money involved that I’m borrowing, but good lord, does it really have to be this hard? I could almost pay cash for the house, have excellent credit, and a pretty tiny debt to income ratio. With a month to make it happen, it seems like, umm, it should have happened before the absolute last minute.

To be fair, I’m all sorts of stressed and freaked out right now, for the silliest of reasons, as our pet rat (which is basically a surrogate child; yeah, yeah, I know, completely and utterly weird, deal with it) is all sorts of sick, with pneumonia, and barely hanging in there. So forgive me, mortgage lender gods, for spaking ill of you in my time of stress and need. Obviously your job is massively more complicated than such a mere mortal as I can understand, so forgive me my transgressions.

1) They claim they can’t find a phone number to contact my employer to verify that I am indeed employed here. This is despite the fact that I’ve already provided it to them, and that I work for a subsidiary of a publicly-traded company that has a market cap in the billions.  Not. Hard. To. Find.

2) Aside from my day job, I own a Web development business that pays me a salary. I’m the sole owner/employee, it’s a C corporation, and I’ve paid myself a salary for the last three years. I gave them all of the W2 info from my business, as far as what was paid out in salary, as well as the corporate returns for the last two years.

Now they’re insisting that I provide a complete P&L statement for the corporation for the last two years, as part of the “verification” process.  This is the only time that I’ve flat out refused a request like that, but that’s more than a little ridiculous. I’m not applying for a line of credit or involving the business in any way, as far as the mortgage application. I’m simply including and listing the income it pays me, since, umm, it’s personal income. It’s documented and accounted for in two different documents they’ve already gotten from me. You not only don’t need to see a P&L statement, but it doesn’t even “verify” anything, as far as salary paid out to me.

3)  They claim they can’t confirm that we have a personal checking account with Bank of America. I’m going to go out on a limb here and say that BoA probably deals with a fair number of such requests, and that I imagine there’s a way to confirm such things. Aside from that, they have the last two months of statements, which we already provided to them.

Not sure what else you need there, hoss, in order to, you know, do your job, or what else you expect me to be able to do to aid you in, you know, doing your job.

We’d all love to have the option of simply paying cash for an investment property but the vast majority of us don’t have that much free cash lying around, especially when first starting out. That’s a great goal to shoot for, as paying cash lets you boost your profits and turnaround time by avoiding mortgage application and processing fees, but it’s just not a viable option for most investors.

The best bet for most flippers getting started as far as financing goes is to go the mortgage route, as far as borrowing the money to buy those house. This eats into your bottom line as far as profits (especially if you have to make multiple mortgage payments) but that’s a necessary evil at the beginning stages, and hard to avoid.

One nice thing about flipping is that you’re typically holding the property for a short period of time (usually less than 6 months), so you can consider a wide range of mortgages, from traditional 30 year mortgages to interest only mortgages, ARMs, even 40 or 40 year mortgages.

You’re also typically not as concerned about the actual interest rate, either, as your goal is to make very few actual payments (if any). That’s not to say you shouldn’t shop around for the best interest rate, just that you shouldn’t be scared by a high rate if it has other obvious pluses, such as requiring 0% down payment. If you later decide to hang onto the house as a rental or until the market improves, you almost always have the option of refinancing.

Like any loan, you’ll have to qualify for financing. If you’ve got little income and terrible credit, don’t expect lenders to fall over themselves to give you money to try to flip a house. I haven’t encountered this personally, but apparently some lenders require higher down payments if you’re looking to buy an investment property, as opposed to a loan for your primary residence.

Avoid any shenanigans as far as trying to wrangle cash back from sellers under the table, after inflating the purchase price. It’s tempting for flippers to try such things, as in a perfect world your loan would also include money for the projected repair costs, so that your out of pocket expenses were close to $0, but sadly, that ain’t the way it works.

While it’s legal and acceptable to increase the purchase price to cover some or all of your closing costs, most lenders don’t allow you to inflate the price in order to increase the loan amount to also include repair money.

If you can’t pay cash and have terrible credit and otherwise can’t get a standard loan to finance a flip, pretty much your last resort is a hard money lender. These are essentially investors and smaller companies that cater to the desperate (often people trying to avoid foreclosure at all cost) who don’t mind paying very high interest rates.

For flippers, though, a hard money loan isn’t that terrible an option, for reasons covered above. If you’re only going to hold the property for a few months, the fact that the interest rate is 15% doesn’t really matter to you. Hard money loans typically require much less paperwork and can be done quickly, as they often don’t involve verification of income, great credit, etc.

I can’t say I have much love in my bosom for underwriters. I understand the necessity and that most headaches they cause are simply them doing their job, but this stage has been consistently painful, in assorted ways, every time we’ve bought a house.

The headaches are never a matter of money or assets or income, either, but dumb stuff like the underwriter balking at the fact that my primary job is listed as being employed by XYZ, Inc., but my W2 is in the name of ABC, Inc.

Fair enough to balk at the discrepancy, except for the fact that XYZ, Inc. is a subsidiary of ABC, Inc., and is very publicly so, since ABC, Inc. is a Fortune 500 company, with billions in annual revenues, etc. Establishing the connection literally takes seconds via Google searches or, Jebus forbid, one simple phone call to Investor Relations at ABC, Inc.

Except the underwriter is insisting that I provide hard copy documentation to prove the relationship between the two companies, instead of doing any of the above themselves.

Which, again, would be fine if you were asking me to produce a W2 or pay stub, but asking me to somehow conjure up documentation spelling out the legal relationship between the two entities is kind of dumb. I’m just an employee. I don’t have that. I’ve never had that. I’m not even sure I can get that.

But if this is the only headache involved, then I’ll consider myself lucky. So, you know, fingers crossed.

In other random news, the fridge at the Austin rental house went kaput on Monday, and I ended up just buying a new one at Home Depot. I’m probably going to keep the old fridge and try to get it repaired, to put into a future rental, but it was fairly old and we had planned to upgrade the appliances in the Austin house anyway this year before selling it, so it seemed to make sense to go ahead and get a new one.

I’m not really including the Austin house in my schemings here, as my wife and I bought it as our primary residence, then rented it out to her brother when we moved last August to our current house.

The real purpose of this blog was to detail experiences in my dipping a toe into the world of investment properties, which is a bit different than hanging onto our last house for a bit before selling it. So it’s technically a rental property but only by proxy, and likely will be sold and off the books this year.

Total cash to close will be a bit over $2,600, which is psychologically going to make this first flip a lot easier to handle. I’d been prepared to pay up to 10-20% down if need be, and we could have done that without any real pain or pinch to the wallet, but it’s definitely nice to keep the initial outlay of cash that low.

Monthly mortgage payments will be a bit over $500, which again is pretty reassuring, as far as it not being too painful at all to make a few payments until the place gets sold.

So everything is pretty much a go at this point, knock on wood. I’m in the process of getting bids for replacing the furnace, and probably will go ahead and line up some bids for the roof.

I tried to make it clear at the beginning that we could pay up to 20% down and had no real preference on how the loan was structured, as I’d likely only be holding the property for 3 months or so, and the total loan amount was so low that making some payments didn’t bother me at all. Whatever the lowest cost loan was, as far as fees and what-not, sign me up.

Somehow or other, though, that got turned into me wanting to buy points so that I could potentially sell the house in a very short time span. I did express interest in possibly going that route, depending on what the numbers looked like, as I was willing to pay a bit more upfront for the flexibility of quickly flipping it, as opposed to holding it for at least three months. But not if it increased the loan cost a great deal, as this house realistically might sit on the market for 60-90 days, given the nature of the small town real estate market here.

Everything he worked up to show me today, though, involved buying points, and all those options were too pricey as far as the loan cost at closing, in the $4K range, which seems ridiculous to me for a loan of $54,000. As I understood it, removing buying points from the equation knocks about $2K off that, so if I go the normal route and don’t buy points, I’m looking at a little under $2k in loan costs. Which isn’t great, but decent enough, especially since he can do it all in-house and speed up the process.

That means I need to hold it for 90 days, but, again, I tried to make it clear in the beginning that I wasn’t opposed to that, if it was the lowest cost option for the loan.  So we ended up back at square one, as he’s now going to work up various options if I don’t buy points, etc. To be fair, I could have communicated my plans a bit clearer, and this is the first time I’ve dealt with buying points, prepayment penalties, etc.

So if we close on the 8th of March as planned, it’ll basically be the beginning of June before I can sell the place, which actually isn’t that terrible. It buys me some extra time as far as repairs go, and I’ll be able to get more done at our rental house, which we’ll likely sell later this year. There’s also approximately 9 million things left to do at our current home, too.

I have to admit that seeing the actual monthly payment on the potential loan was a surprise, as I’ve come to expect mortgage payments to be a certain amount, based on what we’ve paid in the past. But that’s always with much larger loans, so seeing that the potential monthly mortgage payment on the 1002 S. Main property would be around $400/month was a nice surprise, and opens up the possibility of renting the place, as it’d likely rent for $750-$800/month when fixed up. I really don’t want to be in the landlord business to that extent but it’s a nice option to have, if the house doesn’t move for some reason when I’m ready to sell.