New niche in the current market: Investor relationship versus transactional clientRichard C. Rudekrehab loans, investment properties, transactional consumer
The increasing rate environment that we are experiencing has
resulted in a slowdown of refinancing and new loans. Many brokers
are pondering how to keep their loan origination volume growing.
Loans catering to real estate investors offer a great niche for
The residential rehab and investment marketplace is recession-
and inflation-proof. The market for investors or rehabbers who
purchase distressed properties to renovate and sell or to keep as
rentals continues to flourish. Rising rates trigger more
foreclosures, meaning increased buying opportunities. Additionally,
rising rates make buying a home a less appealing or unattainable
option for many consumers resulting in a higher demand for rental
properties. This creates additional opportunities for investors who
hold their properties.
Successful rehab investors often include a mortgage broker as part
of their financing strategy. A number of brokers and brokerage
firms have focused on this segment with great success. Capital,or
loans, are the lifeblood of an investor's business. There is always
a place for a broker who is responsive and can deliver in terms of
closed loans. Additionally, new investors who have grown wary of
the stock market roller coaster are joining the investor ranks
Value of a relationship
Establishing a relationship with a rehab investment client is a
profitable endeavor. However, it does mean changing the broker
mentality from "transactional" to "relationship." The transactional
approach entails finding a client and maximizing the return or
profit for one transaction. With investors, the approach must be
different. Since this is a business enterprise for investors, they
tend to be more savvy and cost-conscious. Therefore, the broker
must be willing to focus on the annuity or long-term value of the
relationship. The math is simple.
Loan Amount: $150,000
Profit - Permanent Loan: $4,500
Profit - Permanent Loan: $2,250
Total Profit: $4,500
Loan Amount/Project #2: $100,000
Profit - Rehab Loan: $2,500
Profit - Permanent Loan: $3,000
Total Profit: $5,500
Total Year One Profit: $4,500
Loan Amount/Project #1: $75,000
Profit - Rehab Loan: $1,875
Total Profit: $4,125
Total Year One Profit: $9,625
As the above chart illustrates, the investor client doing only
two deals per year is more profitable than the typical consumer
client who might close only one deal every five to seven years. The
power of the annuity nature of a rehab client and the ability to
double dip, or get paid twice for the rehab loan, and the permanent
financing is what makes these clients special.
Pros and cons
There are some challenges to dealing with the investor client, but
investors do provide great opportunity for originations.
- Two fees for the same property
- Annuity aspect of repeat deals with the same client
- Less marketing cost and effort, since one client results in many
- Typically educated on financing terms and requirements
- Gather information upfront on client and use for multiple
- Most lenders will require full documentation for the rehab
- May take additional time on front end to fully understand
investors business entities and to gather all pertinent
How to find the clients
The rehab client is somewhat stealthy in nature. They are family
members, friends and business acquaintances. They are full-time
investors and part-time investors. They do not wear a billboard or
T-shirt saying, "I am an investor." They do sometimes have car
magnets, billboards and flyers saying, "I buy houses!" According to
the 2006 National Association of
Realtors Profile of Second Home Owners, the median age of an
investment owner is 55 with an income of $98,600 in 2005; 75
percent of owners are married couples.
One way to attract experienced investors is to offer a free
evaluation of their entire portfolio and determine how cash flow
may be improved. Investors also network with other investors and
provide a great source for referrals. Real estate investor groups
are a great place to meet and network with real estate investors of
all experience levels. Visit the National Real Estate Investors
Association's Web site, www.nationalreia.com, to
find a group near you. Real estate agents who deal in real-estate
owned properties are a great referral source. Also, good old word
of mouth advertising, networking and asking current clients and
referral sources for leads is a good route.
Typical guidelines for loans
- Credit score: Investment loans carry considerable risk, so
lenders must rely on credit scores as part of their decision-making
- Sales comparables or appraisal: Appraisals can delay a closing,
while sales comparables give the borrower the best flexibility to
ensure a fast closing.
- Prepayment penalty: No prepayment penalty is good for both the
broker and the borrower.
- Disbursement of funds: Will the client be able to immediately
receive the improvement money, or will they be reimbursed?
- Closing time: Distressed properties often require fast closing.
The majority of investors will need their loan to close in two
weeks or less.
The value of establishing a relationship with even just a few
investor clients can build a platform of recurring revenue streams
that can carry a broker through the peaks and valleys of the real
Richard C. Rudek is president of ReCasa Financial Group.
He may be reached at (614) 221-6770 or e-mail firstname.lastname@example.org.