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Practicing good credit behavior improves credit and prevents financial hardships

National Mortgage Professional
Nov 10, 2006

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 mortgage brokers. 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. Secret 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 daily. 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. Transactional consumer 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 Investor relationship 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. Pros: - 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 deals - Typically educated on financing terms and requirements - Gather information upfront on client and use for multiple transactions Cons: - Most lenders will require full documentation for the rehab loans - May take additional time on front end to fully understand investors business entities and to gather all pertinent information 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,, 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 process. - 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 estate market. Richard C. Rudek is president of ReCasa Financial Group. He may be reached at (614) 221-6770 or e-mail
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