Meeting with Loan Officer

I was finally able to meet with the loan officer my RE agent referred me to late yesterday afternoon. I cam away from the meeting both excited and a little disappointed. I got the prequalification letter, which was one of the main reasons for my visit, and he talked about different loan types and processes of refinancing that sparked an interest for me. After telling him my objectives, he said that the best (but not only) thing I could do for buy-and-sells was this:

1. Get a purchase contract signed.
2. He would get a 100% ARM that would carry an 8-9% rate for the purchase price.
3. Close on the house.
4. After 1-2 weeks (or when the repairs are done), refinance the house at a lower rate with the ARV price to cash-out some equity.
5. Sell the house and get the remaining equity.

I hadn't really thought about cashing-out equity before selling the house, so that sounded like a promising idea. I could use some of the money for holding costs and some for cash reserves. Once my cash reserves reach $100k or so, I could then have a lot more flexibility when buying properties.

Another plus I found out when speaking to him was that he is an investor himself and he also deals with a lot of investors. He told me he partnered with his brother-in-law last year and bought 5/4-plexes. He closed the deal in mid-December 2003, and didn't have to pay his first loan payment until February. He said he collected prorated rent for December, full rent for January and February, paid the first loan payment in February and still had $22k in his pocket. IOW, immediate cashflow. He also said there were a flurry of other options he could do that we could discuss later.

At this point, your are probably asking why I also came away a little disappointed. Well, this came about when we went to discuss a few of the offers I just made with my RE agent - specifically Offer #1 (the major rehab). I told him the list price was $63k, but had an ARV of about $92-$93k. I also told him it needed a complete kitchen, new flooring, new appliances, maybe a new roof, etc., which I estimated at about $20-$25k. I also told him that after all my calculations, I offered $30k for it. Since this was an REO, he said the bank would immediately trash my offer - they wouldn't even counter. He said banks don't like to bargain. They'll just sit on a property until they can get a "reasonable" offer, which I gathered from him talking was no more than 5-10% less than asking price - regardless of repairs. I was taken aback by these comments, because every investor I know says banks (1) will go lower to unload inventory and (2) will offer substantially lower knowing there is a lot of repair work. After talking with him and running numbers, he suggested I submit another offer for $60k - just $3k less than asking. He said I could get a 100% loan, make repairs, refinance and cash-out some equity to pay repairs and hold costs, and resell for a nice profit. I was thinking at this point "What profit?" I buy for $60k, put $25k in repairs, add 3-6 months hold costs, add selling costs, and I'd be in the red on this property.

So, while I like most of his pitch, and will probably use him for some deals, I have to be careful in ignoring some of his advice and go with my own instincts. I respect his position and sevices he can offer me, but I'll have to make my own decisions when it comes to purchases. The last thing I need when just starting out is to have cashflow negative properties in my inventory.

But I got a prequal letter, which again was one of the main reasons for going. Now I can submit bids on HUD and VA properties.