Tips on Selling & Refinancing

Selling

While the common saying in real estate investing says “You make your money when you buy, not when you sell,” maximizing your sales prices is still an integral part of your overall return on investment.

Below are selling tips to improve the bottom line on your flip or rental property sale:

Price it Right

This is probably the most important factor to maximize your return on your real estate investment.  If the price is set too high, you might miss out on the typical buyer excitement with any new listing and price them out of the market.

Furthermore, lowering the price after an initial over-price will often lead to lowball offers. Now the seller is perceived as being desperate to unload, or prospective buyers will think  that there is an inherent flaw in the property.

An interesting, albeit more risky, strategy is to under price by around 15-20% to draw interest and potentially generate a bidding war.

Hiring the Right Real Estate Agent

Hiring the right real estate agent can ensure that you’re correctly pricing your property and that the property is presented in the best possible light.  Be wary of choosing an agent solely based on their sales price estimate or one offering the lowest commissions.

Make sure to find an agent who:

  • Has expertise listing and selling properties in your area
  • Has sold properties in the same price point as your property and understands your target buyer
  • Has current and sold listings of properties with good curb appeal. This includes well-staged photos and good marketing
  • Can help with design choices to stage and increase curb appeal
  • Charges typical commissions (should be around 5-6%, which half being offered to a potential buyer’s agent)

Kitchens and Bathrooms Sell

Make sure that both your kitchen and bathrooms in your property pop.

Depending on your property price point, the additional cost for even slightly upgraded cabinets, countertops, fixtures, appliances, and hardware will be well worth the investment.

Also consider hiring an interior designer to help with the layout and sourcing materials to maximize curb appeal and bring the bang-for-your-buck.

Hire a Designer

Unless you personally have a strong design eye, think about hiring an interior designer to help create the best layout, color schemes, and kitchen/bathroom designs that best appeal to your target buyer and their price point.

There are many options for budget –friendly designers who work remotely and are able to design an entire house at reasonable rates.  This is another investment which can add great returns to your sales price and is becoming more and more affordable.

The Crowdcopia team can provide recommendations if you need assistance.

Get Professional Photographs of Property

Your buyer’s first impression on your property will most likely be the photos in your MLS listing.  You want to put your property in the best possible light (literally!) so  potential buyers will immediately take the next step in scheduling a visit.

A professional photographer should be able to highlight the positives of your property to maximize a buyer’s perceived value of the space.

Stage Your Property

Another method of enhancing the perceived value of your property is staging the space.  Many buyers have a difficult time visualizing how a home will look from unfurnished listing photos, and oftentimes pass on visiting.  Buyers have also commented that “staged” rooms appear larger than those that are empty. Staging can help improve perception of the property’s interior and drive interest.

A recent trend has been in virtual staging, which allows the listing photos, as opposed to the actual property, to be “staged.”  With advantage technology, it is almost impossible to tell the difference in listing photos between virtually and physically staged properties.

While the buyer will not have the same experience when visiting the property in person, virtual staging has emerged as a cost-effective alternative to help prospective buyers visualize a space and incentivize them to schedule a visit.

Pre-Qualify Buyers

Once you receive an offer, it can be tempting to accept the highest bid (or the first buyer who makes an offer).  But be aware that the ability of the buyer to follow through and close on the deal is the most critical part of the deal.

So make sure that the buyer is qualified to purchase the property before you take it off the market and miss out on any potentially more qualified buyers.

What to look for in Pre-Qualifying Buyers:

  • Pre-approval for bank for financing
  • Makes Good Faith Deposit (typically 1-3% of purchase price)
  • Provides proof of funds for required down payment
  • Does not have more than standard contingencies (inspection and mortgage)

Refinancing

Properly refinancing out of your private money loan is a key component of any real estate investor’s long term buy-and-hold strategy.  Be prepared and understand the process, so you can save on carrying costs and replenish operating capital to fund your next deal.

Find a Tenant

Most conventional banks will only consider long-term financing on a property that has a tenant (and a signed lease!) in place.  Fewer and fewer banks are willing to accept an estimated market rental rate as part of their underwriting requirements.

If you find a bank that doesn’t require a tenant in place, they will likely be charging much higher rates for this concession.

Have Your Paperwork Ready

Outside of banks who offer no doc loans (and those are fewer and farther between these days), most banks will require the following documents:

  • Last Two Years Personal Tax Returns
  • Last Two Years Business Tax Returns (for any business in which you were an active participant) including K-1 Statements
  • Updated Personal Financial Statement (PFS)
  • Last Two Pay Stubs
  • Two Months Bank Statements

Have all of these documents on hand when you start the process. This will prevent unnecessary delays.  Every day you save refinancing out of your existing loan is money in your pocket!

Fix Your Credit

Most banks require a credit report with a minimum credit score (most likely 620 or higher).  Before applying for a loan, you should view your own credit report to know your current score.

One of the easiest and fastest ways to increase your score is to pay off your existing credit cards (even if they are not yet due).  This is a major factor in your Credit Utilization, which accounts for around 30% of your overall score.

If you want to explore other means of increasing your credit score, we suggest contacting a Credit Consultant to discuss alternative ways to do so.

Debt-to-Income (DTI) Ratio

This is a common metric used by banks to determine a borrower’s ability to pay their mortgage payment.  It’s more commonly used for residential/owner occupied homes, but is also considered for commercial investment loans.

DTI = Total Monthly Debt Payments / Total Gross Monthly Income

Important Info on DTI:

  • The Lower the DTI %, the better you look to a bank in your ability to pay the monthly payments on the loan
  • Many banks typically have a maximum DTI of 43%
  • The mortgage payment of the loan would be included in the Monthly Debt Payments
  • Alimony and child support payments, student loan payments, auto loan payments, other debts, and credit card minimum monthly payments are all included
  • Other monthly household expenses such as utilities, food, gas, and taxes are not included

Ways to Raise Your DTI:

  • Paying down your credit card and other debt. This will lower your monthly debt payment and lower your DTI %
  • Make sure that you add back any non-cash expenses on your tax returns to your income when calculating Monthly Income. Most banks only look at before tax income so make sure they are looking at the correct Gross Income number to lower the DTI %

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio is similar to the Debt-to-Income (DTI) Ratio in that both measure a lender’s ability to take on and pay for a loan.  The difference: DSCR is used more in commercial lending (to a business) and a DTI is often used for residential lending (primary residences).

Two DSCR calculations are usually made: one for just the individual property that you are looking to refinance and the other to calculate

Individual property DSCR = Net Operating Income of the Property / Total Debt Service of the Property

Global DSCR = Total Net Income of Borrower (including property) / Total Debt Service of Borrower (including property)

This Ratio on both calculations measures many $ in income is available to pay $1 in debt payment.  A typical DSCR that banks will look for is 1.2 – 1.25.  The higher the DSCR of the property and/or borrower the better as there will be more money available to pay the monthly debt service.

The same strategies to lower one’s DTI are also relevant for raising one’s global DSCR.

Loan-to-Value (LTV), Interest Rates, Fixed Rate Period, and Amortization Period

These are the most common loan terms that borrowers are typically most concerned with.

  • The Loan-to-Value (LTV) will dictate how large of a loan the borrower can get based upon the appraisal value.

LTV = Amount of Loan / Appraisal Value

A typical LTV on a refinance is typically between 60-75% of the appraised value

  • The Interest Rate is the main component of your monthly interest expense. The lower the rate, the lower your monthly payment
  • The Fixed Rate Period will dictate for how long the agreed upon interest rate will be paid until the rate becomes floating. Most banks will only allow the rate to increase above the previous fixed rate at the end of the fixed rate period so generally borrowers prefer this period to be longer than short.  The typical fixed rate period is between 5-10 years.
  • The Amortization Period determines over how long the principal portion of the loan payment will be paid off. This will impact the monthly loan payment as the longer the amortization period, the lower the principal portion of the loan payment each month.  The typical amortization period for a commercial loan is 20-25 years.

The combination of these terms varies between most banks and is typically the basis on a borrower making a decision on which loan program best suits their needs.

How can we help you?

Contact us today with your real estate investment questions!

Dan B.