With a robust real estate market, you may be thinking about purchasing a property as an investment. If you are considering buying a rental property or flipping a house, you may be ready to act fast. For a commercial or residential investment property, hard money lenders may be the quickest way to secure financing.
Of course, purchasing real estate has many moving parts, from the offer to the financing and closing. You will want industry professionals on your side to help you navigate the process. Let’s look at the different people that may be involved in your real estate purchase.
What is the Role of the Real Estate Agent?
The real estate agent has the primary job of bringing buyers and sellers together. If you are looking to buy, a buyer’s agent will help you narrow the criteria, send you lists of prospective homes, and arrange the showings.
When it comes to the offer, the real estate agent will negotiate on your behalf and take care of the paperwork. This person will also facilitate the requirements of the transaction, such as any inspections and the closing date. Their compensation is in the form of commission, which is a percentage of the sale price.
Real estate agents must complete classes and pass state licensing exams. A real estate agent that is a REALTOR© is a member of the National Association of REALTORS©. REALTORS© are held to a higher ethical standard than licensed agents.
The real estate agent you choose should be working on your behalf. They serve as guides and advocates for you in the property buying process.
What is the Role of the Broker?
As you consider the purchase of a property, you will likely need to secure financing. While a real estate agent brings buyers and sellers together, a mortgage broker brings buyers and lenders together.
A broker is charged with finding you the most favorable interest rate and terms for your loan. They do not work for any specific lending institution, unlike a loan officer. Brokers have substantial knowledge of lending institutions and the different requirements for creditworthiness.
A licensed mortgage broker will have taken classes and passed the SAFE Mortgage Loan Originator test. There are also variations in state requirements. Along with the official test, these classes are part of the National Mortgage Licensure System (NMLS).
While real estate agents are less concerned with the financial details, the mortgage broker is all about the financial aspect of the transaction. Finding you the best lender is the broker’s job.
What is the Role of the Lender?
When financing your real estate property purchase, you will need a lender. The type of financing that you receive depends a lot on the transaction.
Everything from the application to the documents required can vary. Different lenders offer different options to their borrowers in terms of financing.
Applying for a loan with a traditional lender means walking into a bank or credit union or applying online. The terms are pre-defined based on the length of the loan, and approval will be dependent on your creditworthiness.
To determine creditworthiness, a traditional lender will look at factors like your credit score, your income, down payment, and your other debt, such as credit cards or car loans.
If you are looking at an investment property, this can become a bit trickier. Traditional lenders will typically want to see the type of return you will receive, and there are strict requirements that must be met.
If you do not have a history with investment properties, these requirements might become problematic. A rental property may not show the cash flow (initially) that a bank wants to see. An investment property that you intend to rehab and flip also may not look good on paper.
In these scenarios, you might have more success and better options with a private lender or private mortgage investor.
Unlike a bank, a private lender can be more flexible and more responsive. Private lenders use the money of private investors and make loans with these funds.
Private lenders can define their own criteria for making loans. While still subject to state and federal laws, they are considerably less regulated and can make different types of decisions about their customers. The approval process is less stringent.
These factors can work to your advantage when seeking funding for an investment loan.
Hard Money Lenders
A subset of private lending is a hard money loan. These loans are secured by real estate and based primarily on the collateral and not the creditworthiness of the borrower.
For investment properties, land development, or fix-and-flip, a hard money loan bypasses many of the requirements of a traditional bank, giving you faster access to capital. Whether short term or long term, the loans are structured based on the individual request.
Bringing Your Transaction Together
As you consider your investment, you’ll want to gather a team of experts to help you facilitate the best terms for your sale and your financing. The right real estate agent, broker, and lender can bring everything together.