Loan Officer Training 09/05/2024 - How to Structure a Buy, Rehab, Rent, Refinance, Repeat Loans

Ready to unlock the secrets of the BRRRR strategy? In this episode of Loan Officer Training, we dive deep into the Buy, Rehab, Rent, Refinance, Repeat method—a game-changer for real estate investors. Learn how to expertly structure these loans to help your clients maximize their returns and build their real estate portfolios like pros.

We’ll guide you through each step of the process, from scouting the perfect property to refinancing with the best possible terms. Whether you're looking to sharpen your skills or add a powerful tool to your loan officer toolkit, this episode is packed with insights, tips, and strategies to help you thrive in the competitive real estate market.

Don’t miss out on mastering the BRRRR method and taking your career to the next level!

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About The Mortgage Calculator:

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

Loan Officers for Unlimited Free Non-QM Leads & Trainings Join The Mortgage Calculator at https://themortgagecalculator.com/join

The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Sep 05, 2024 • 11:05:04 PM: 0:13

So welcome everyone. My name is Kyle Hiersche. I'm the COO of the Mortgage Calculator joined here by our President Nick Hiersche and our CSO Jose Gonzalez. We are a lender that specializes in non QM loans and what we do every Tuesday, Wednesday, and Thursday evening at 7pm Eastern is go through a loan officer training topic and tonight's topic is going to be BRRRR loans. Jose, let's go ahead and get right into the presentation of one of our favorite topics. Yes, absolutely. One of the flagship strategies here that aligns, uh, with what we love to do, uh, working with the investors, DSCR loans. Multiple properties. Uh, when you hear the word six pack being thrown around here, we're not talking about a six pack of beer. We're talking about six properties from one investor, not on one loan, but just in one shot, right? We're, we're doing six of their properties and that happens all the time, but that a lot of times germinates right here in the initial purchase, the initial Flip purchase or actually, I mean, we refer to it as fixed flip loans, right? Uh, that, uh, finance these transactions, but really they're either a fix and flip. where they are selling the asset at the end of the flip or, you know, when the property is repaired, or they are holding the asset, cashing it out to get money to buy another one and keeping it as a rental property, which is what we're actually talking about here. The BRRRR transaction, right? We're not just, they're not just buying it, rehabbing it, but then they're going to rent it, refinance it. And get the cash out and buy some more and grow their portfolio of investment properties. And that's, uh, we definitely have a nice tool, uh, of products to assist the investors all the way to our zero seasoning for cash out to get the market value DSCR loans. So before I spill the beans and all the good stuff. Let's get right into it. You heard me talking about investors, right? Well, investors are definitely driving the market. They've been driving the market for the last couple of years as origination decreased a little bit due to the higher interest rates. Investors came in and filled in the slack. Why did they fill in the slack? Well, low property inventory for sale has made rehabbing even more profitable. There's a lot of reasons why we have low property inventory for sale. Less sellers have been putting their properties for sale due to the higher rates, they don't want to sell and then go into a high interest rate environment. Where they may have to pay higher costs, higher interest rates, obviously. So they've been holding back, makes rehabbing even more profitable to provide inventory of properties that can now be financed. Many of these are properties that maybe cannot be financed by a regular loan. You're a run of the mill borrower doing their 5 percent downloads. Can I get them? But now. Thanks to the rehabbers, they're giving us more inventory. We also know rents, right? It's, uh, now in keeping the property in the, in the rehab to keep, which is more what we're talking about now, the rents rising faster than interest rates are making the flip happen. The fix and hold strategy, the BRRRR we're talking about here, much more viable, especially with our, uh, lower rate, uh, zero seasoning DSCR loans that are extremely popular now. And obviously the increase in non QM products in general, combined with the more flexible guidelines of these non QM products has greatly increased the viability of the BRRRR strategy. With DSCR continuing to lead the way. So what exactly do we mean by Burr? You heard Kyle mentioned it right there. Buy, rehab, rent, refinance, and repeat. Now the, the, uh, loan of choice for these Burr transaction is 99. 99 percent of the time is going to be a short term fix flip loan. It's a type of bridge loan. Um, now the biggest benefit notice I have that there. bold, tight, red, right? The biggest benefit to the BRRRR strategy when they're using the, the fixed flip bridge loan is credit score preservation. Why do I say that? Because in using the short term bridge loan to fund the purchase, And the renovation, the investors are not using up their credit cards, charging them up to the max and driving down their credit score, right? That's that silent killer that they don't realize when, until they go to want to refinance the property. And they're not able to because of low credit scores. At that point, the only option, unfortunately, may be to sell the property against their will because now their credit score is a 560 and there's nothing they can do. And we do have a 575. middle score DSCR cashout, mind you, but that's only up to 65 percent LTV may not get to the LTV that is needed. One of the most important steps. of this strategy and the one where we as the MLO come into play so importantly here is planning the exit strategy. This is where we're going to help our borrower, right? Talk to them about all the bare, all the variables. Are they gonna sell it? At the end of, of the, uh, repairs, or are they going to hold it? Sell would be your traditional fixed flip and the hold would be the burr. Essential components to be able to plan for the industry strategy is, uh, you know, and for this, you probably, they probably would want to team up with their realtor, uh, if they don't have a realtor, you can suggest one, but they're going to need a good rental market study. If they're planning on keeping the property and a good comparable sales market analysis, whether they're keeping it or refinancing it, they need to have a real accurate ARV. The after repair value has to be very accurate to know there's going to be enough LTV available to cash out and still, you know, do what you want to do. With the cash has to be enough money. Now, all income types definitely are possible for the refinance loan to refinance out of the short term bridge loan, but DSCR continues to lead the way in popularity because it is the one that has the most flexible, um, seasoning on title policy, right? Our DSCRs have zero months seasoning options. And that's, uh, the investors usually think they're going to be in and out of the flip in two months, doesn't always happen, but you know what, if they are in and out of it in two months, you want to be there. With the DSCR loan, uh, giving them the market value instead of purchase price plus renovations, which tends to be the case if their seasoning requirement is not met. For that zero seasoning option, we have usually just showing some amount of renovation is going to get it for you. Worst case scenario, if there's no renovation, they may do a second appraisal, but this is for a loan where there is renovation, so there's never going to be any issue. being able to get the market value of with less than six months seasoning for our exit strategy. So mentioned a couple of times there about the fixed flip loan, but let's define it a little bit more because we all want to be a good consultants and be able to give the right guidance to our investors. So a fixed flip loan, It is a short term bridge loan designed to help investors purchase and renovate a property, usually to sell it at a profit, but also to facilitate the repairs if the investor decides to keep it and refinance out of the fixed flip loan into a long term loan like the DSCR. It is not a renovation loan in the traditional sense of the word like the FHA 203k and the Fannie Mae homestyle. These are not bridge loans, right? And, uh, Those are offered for investment properties. I mean, the, the conventional Fannie Mae homestyle offers a, an investment property option, but the FHA 203k definitely does not offer an investment property options, uh, loan amounts anywhere from 50, 000 to 5 million. Free payment penalty is never applicable. And most importantly, contrary to the situation you would have with one of the traditional renovation loans mentioned above, you will never have any EPO worries. And by EPO, I'm talking about an early payoff default, right? If you do an agency loan, Or any of these other renovation type loans like that. And the borrower pays it off in three or four months. You're probably going to have an early payoff default, and they're going to have issues with your secondary investors, which is another, uh, great reason, uh, to use a fixed flip loan when it's going to be short term use of the funds. I just had that conversation actually today with an MLO. Wanted to structure a scenario like this and she had was, uh, had not thought about the EPO component offering options to the borrower. Now you heard me talk about some of these, but again, I like to break it down because we, the aim here is to be a good consultant, to be able to discuss these matters with our investors. Gain their credibility and trust and get the load. So what type of terms are we talking about? You already heard me talk about seasoning on title. That's how long the property owner has been on title. The best cash out refi options, which is where seasoning on title comes into play, are with six months. seasoning, but three and I just, like I just mentioned, zero months are actually possible. Do the repairs in two weeks. You can, you know, theoretically, you're going to be refinancing out of that loan if they're ready that quick on the flip. And the repairs. Uh, recourse loan is where the borrower personally guarantees the loan, obviously non recourse. The borrower does not personally guarantee the loan. ARV is the after repair value, what it's going to be worth after the repairs are completed. Usually the market value is what we're talking about there. As is value is the value of the property and it's unrepaired state. That's usually also the purchase price renovation budget is the total cost to renovate the property, which is, um, divided into soft costs, which are expenses associated with the planning and development of the project, including architectural expenses, tests, permits, and hard costs, which is the actual construction costs. like materials, labor, and contractor overhead. And track record would normally be referring to the number of flip transactions that the borrower or flipper has completed in the last three years. That's what we mean by track record. Very important there. So what is the essential information needed to assess and quote A fixed flip loan for the BRRRR transaction. Notice that I have, um, put in bold red type there, the essential totally essential ones that are gonna either make or break the deal. Right. And probably in order of importance, it would be the number of flips for sale. Or for rent in the last three years, their track record, that's going to be the number one, right? They want to know that the borrower is good for it, that they're going to finish the project. That's the biggest risk here. That's why the investor experience is, is I would say number one. In consideration, because they want to make sure this person is going to be able to close the flip what I mean, it's terrible if they're 60 percent 70 percent in on the flip run out of money and abandoned the project, the lender has to foreclose and now they have an unfinished property. They have to sell probably us. So track record. Is a number one on the list. The ROI is number two on the list, which would be ARV rehab budget and purchase price or the components there. That's going to determine the ARV, right? Excuse me, the ROI, the return on investment. That's the profit. On the deal, that's the income for a fixed flip loan. Fixed flip loans typically do not consider income though. There may be some outlier options out there that do consider income because they're going to give you a hundred percent financing or whatever they offer, but the majority of the, uh, Fixed flip loans do not consider the borrower's personal income. They consider the ROI on the deal. Why? Okay, because investor experience, number one reason why the flip may not, um, finalize and end up in a profitable flip. And number two, ROI, just in the nature of having to be a profitable flip. If the ROI is too low, now you got cost overruns. Now all of a sudden you don't have a profitable flip. Do you think the investor is going to continue knowing that at the end they're going to have to pay money? Too close. No, they're probably going to walk away from it if, if possible. So you can see why that's such an important component. And then FICO score, the majority of the options FICO score is a consideration. Now there may be some outlier true hard money programs out there that don't consider FICO score. But the majority of the options do consider FICO score. The score that I like to throw around there as a minimum for most options is 600. That doesn't mean all options, but 600 is a pretty much the lowest I've seen out there, uh, for our fixed flip loans. So all of these options, all of these other items are necessary usually to get the quote in one form or another. Uh, especially if they're going to hold it, then, you know, you got to have those estimated rents as well. All right. So all important stuff here. So you understand what could, uh, present obstacles to obtaining a fixed flip loan option for your borrower. So bringing it down a little further, what are some of the frequently asked questions, right? This is where it gets good. This is one of the biggest benefits of the fixed flip loans is that yes, we can usually finance 100 percent of the rehab. Usually we're end up to 90%. of the total loan to cost, right? That's cost, cost of the rehab and cost of the flip, not the LTV, the loan to value, this is loan to cost. So that's the biggest thing there where experience is going to come into play. Track record is going to determine more the Percentage of the loan to cost that you're going to borrow. Usually the hundred percent of the rehab will always be offered, but where they're going to cut back is on the initial distribution at closing, which is where the loan to cost amount also comes in. The experience level, zero is possible. We have options with zero flip experience, but again, zero flip experience combined with acceptable credit and a good ROI on that flip. Those are always going to be the three components taken into consideration. Now, another great question is, do we need to make any payments during the rehab? And the great, it's great to know that not necessarily. It depends on the ROI of the flip. If the flip has a good profit, then there's more stuff you can build into it. So you can build in an interest reserve, which is what that's called, so that you can offset some. Or possibly all of the interest payments do on the loan. They'll basically be charged up front and then obviously you're going to pay interest on the interest payments, but you're not going to draw it out of the working capital, which is what the investors always like. They want to make money with other. people's money. I already answered this, but how, you know, in explanations, but how much income will you need to verify? And the answer is none personally, but the flip does have to be profitable, which is when we talk about the R, the profit on the flip. Now here's a real common one. We always get this question. It's very important that you listen to the answer. Bar is going to say, You know, Freddy Flipper is going to come over and say, Hey, Jose, can you pre approve me for a flip for, for a flip loan that I want to do? The answer is sort of. Why is the answer is sort of? Because, uh, that unless you have an actual property, right, with an address, and unless you have an actual ARV, And the, the, as is value and all the other components needed to assess the flip, you can't really pre pre approve that flip that doesn't yet exist. You can pre approve the borrower, like let them know, you know, based on your track record, you know, their experience level, and based on your credit score. As long as the ROI of the property, it meets the minimum standards. Yes, we could approve you, pre approve you for a flip, but without having an actual property and knowing what's going to be the ROI of that flip, can't really give a pre approval letter. Right. We, we need to have the specific information for, for the, uh, specific property to give, to assess it and be able to say yes or no and give them a term sheet, right? That term sheet that we provide with the terms of the flip of the transaction, that's basically going to be their pre approval. And here's a really important one. Can I do a refinance of my incomplete purchase. This could either be, usually they have run out of money. Maybe they had cost overruns or, you know, it's been six or eight months. There's been some good sales in the area. They feel the property's worth a hundred thousand dollars more. The rates have gone down a little bit. Also, they think they're going to get better terms and a new flip. So, you know, theoretically, uh, yes, you can refinance that. You know, and and in process. Let's call it that way because the incomplete flip could be incomplete because either a you started fixing it with cash money. I guess I should back up. You started fixing with cash money ran out of money. Now you're going to do a refinance of your flip. That's free and clear. Try to recoup some of your money or it could be an in process flip where you're running. So I guess I should have made that explanation before. But yes, you can do it. Uh, but the key to note here is when it's an in process flip, they may make the borrower put some additional skin into the game, right? There may be some additional liquidity requirements of some type or some additional conditions because it's an in process flip where they already proved the first time that maybe if it's they're at the end of their contract and what and if they ran out of money it's not a scenario of like sure I got money but I just want to refinance it. Then what proof is it that this situation is not going to happen again? So they may actually ask the borrower to bring some money to the table if it's an in process flip That's being refinanced and then of course with the BRRRR transaction the investor can definitely keep the property and refinance it into Uh, a permanent loan. So, uh, last but not least here, some final tips on quoting the BRRRR transaction and successfully closing the deal. You heard me mention this about when we're talking about pre approving the borrower, right? So now at this step, this stage of the game, you've already reviewed the guidelines for that lender where you're submitting the BRRRR transaction, confirm the borrower meets them. So you can then go to the portal, run the scenario through the Selective Pricer, and get your term sheets, right? But, uh, final points to note here. Experience, right? Borrower experience with flips is the biggest factor considered. The less the experience, the lower the leverage. In other words, the lower the loan to cost on the deal may require 30 percent down at closing of the purchase instead of 10 percent down at closing the ROI. You heard me mention that the profit from the deal is the income analyzed as a personal income or business income for the borrower has absolutely no impact on underwriting. 600 minimum credit score for most of these options assets to borrow. We'll need to demonstrate enough assets to cover the down payment, closing costs, and any reserve requirements. They like to call that in the, uh, burr world liquidity. Requirements. That's how you're going to see it in your terms. Most of the term sheets that you generate will say the liquidity requirements. That's what you have to verify in your borrower's bank accounts for reserves and property. All property types are possible, but 1 to 4 units are the most common. We have burr. We have fixed flip loans. For one to four units, five to eight units, for multifamily, for commercial properties, uh, we have them all. And then we obviously have the, uh, refinance loan options. So definitely look to the mortgage calculator for all your BRRRR transactions as we, as you can see, train our, uh, Loan originators to be consultants to our investors and a valuable member of the team Sorry about that. I was having trouble getting my camera working there all right, so I don't see any questions, but uh, just you know, I know we talked about fix and flips a lot there But just keep in mind with the burr method, you know, you can do it any way you want You could also just buy the property with a normal dscr loan fix it up with cash Or you could buy something with cash and fix it up with cash You Uh, the method itself is then, you know, rehabbing it, then renting it out to stabilize it, refinancing it, and repeating the process. So I still don't see any questions, so we will go ahead and wrap it up here. So we appreciate everybody tuning in, uh, and just a note, we actually are changing the time of these. So actually, instead of 7 p. m. Eastern on Tuesday, Wednesday, Thursday, these are now at noon Eastern, Tuesday, Wednesday, and Thursday, so the next time we will see you will be next Tuesday at 12 p. m. Eastern for the next episode of the Loan Officer Training Series with the Mortgage Calculator.