Knowledge is power.
Whether you are new to real estate investing or have been around the proverbial block a few times, it pays to understand the lingo. Below are some commonly used terms with which any serious real estate investor should be familiar:
Private Lender—Real estate investors often have several options when it comes to financing their flips. They may choose to self-finance using cash (at significant opportunity cost), turn to traditional mortgage lenders (and face income requirements), or even consider hard money lenders. The wisest choice, however, is a local private lender like Navigator Private Capital (NavCap) which offers both flexibility in terms and rates as well as expert advice throughout the process.
Hard Money Lender—With an often formulaic approval process and non-negotiable terms, hard money lenders are commonly considered an option of last resort.
Origination Fees—An origination fee is a fee charged by a lender to establish a new loan. These fees are typically taken out of the loan before you receive the borrowed funds and paid at closing. Origination fees are quoted as a percentage of the total loan and are often referred to as points.
Loan to Value (LTV)—The ratio of the total loan amount (including the purchase price of the property plus the planned repairs) to the after repair value or ARV. Navigator Private Capital (NavCap) typically provides loans with an LTV up to 70%. The bottom line is that there has to be enough potential profit in the completed home to make the deal worthwhile for everyone involved.
After Repair Value (ARV)—The expected market value of the property after all repairs have been completed.
Comparative Market Analysis (CMA)—Performed by a real estate professional, a detailed comparison of recently sold or listed properties of similar size and location. The CMA allows borrowers the opportunity to estimate the potential market value of the renovated property or ARV.
Scope of Work (SOW)—A detailed estimated of all the repair work needed to update the property and prepare it for sale. To help our clients put together a workable SOW, we offer a downloadable template on our website.
Appraisal—Performed by a licensed professional, a home appraisal is a critical piece of the real estate investing puzzle. Before any loan with NavCap is finalized, the appraiser (contracted by the borrower) will inspect the property and do a thorough comparative sales analysis to determine the expected ARV.
Liens—An ownership claim against a property. This can be the result of mistakes in the transfer of title among previous owners or a contractor filing a mechanic’s lien for non-payment of services.
Title Insurance—The potential for liens against the property makes title insurance a critical element in the loan application process. By ensuring a clean title, this type of policy takes some of the risk out of the house flipping scenario.
It should be clear, by now, that in order to be successful in the real estate business, borrowers need to do a little homework. By understanding the basics, investors can make smart, informed decisions and pass on the deals that just don’t make sense.
NavCap wants to help make your next project a winner. Reach out to us to learn more about our innovative and flexible financing arrangements at email@example.com or 443.603.0193.