Today’s REI Classroom Lesson
Today, Steve Bighaus clarifies what constitutes a financed property, as there are common misconceptions.
REI Classroom Summary
Steve clears up confusion about what counts as a financed property since there’s many assumptions out there that simply aren’t true.
Listen to this REI Classroom Lesson
Real Estate Investing Classroom Show Transcripts:
Mike: Welcome back to the flipnerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Steve: This is Steve Bighaus with Guaranteed Rate, host of the REI Classroom. Today we’re going to talk about a subject that I’ve spoken about before, and that’s what constitutes a financed property.
Mike: This REI Classroom real estate lesson is sponsored by the investormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Steve: I still get a lot of confusion in this area with my client base, and it’s something that I felt that I needed to address again because it is important. When Fannie Mae and Freddie Mac both are looking at numbers of financed properties, they’re looking for financed properties. They’re not looking for number of loans, and they’re not looking for just stuff that’s put on the credit report.
They’re looking at if the property’s got financing on it, it counts. Basically, what that means in that is it doesn’t make any difference if it’s a conforming lender. It doesn’t make any difference if it’s a private lender. It could even be a family member. If it’s got financing on it, you have to disclose it.
In the past, and I’ve heard this before with not only in the past but still today, people make statements, “Well, I’ve been told that it only counts if it’s on the credit report,” and that’s not the case. As a lender, one of the things that I look for when I’m looking for borrowers that do own financed properties, I’m going to their tax returns. I’ll look and see if they declare interest expense on their tax returns on their Schedule A.
If that’s the case, I’m going to go back to you. I’m going to ask you for the information on that financing, so you’re going to have to provide me with, If you’ve got it with a private lender, I’m going to ask for a statement from them. We’re going to want to collect your information from your taxes insurance. That is big.
Secondly in that, I want to address that sometimes people will have, like, a first and second mortgage on their property, then I hear responses from clients that say well does that count as two. No, it only counts as one. Again, it’s not the number of loans. You could have a first, second and a third, but it still only counts as one financed property.
Then, another big one that I see is because I get a lot of customers who get pretty sophisticated with their financing as they move on. What they’ll do in that is they’ll get a commercial loan. Maybe they’ll go to a local bank and they’ll combine three or four single family residences within this one loan. Again, the mindset is that they’ve got one loan. Well, as a lender if you’ve got four financed properties in there it’s going to count as four financed properties. Again, it’s back to it’s not the number of loans but the number of financed properties.
People struggle with that a little bit. It’s hard for me to tell you any different because that’s just not the way it is. You get arguments all the time as far as that. People also talk about putting their homes in LLCs. If they put it in an LLC, “Does that still count against me?” And the answer is yes, simply because of the fact it’s still considered an obligated debt.
We could continue on with this, but like I said, there’s just a lot of confusion with the financed properties, what constitutes a financed property. I hope this helps out a little bit. I wish everybody to have a very good morning, and take care.
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