Two Loan Caveats to Look Out for as a Real Estate Investor

If you buy and sell homes for a living, then you are likely going to spend a fair amount of time looking for financing for those properties. Many real estate investors like to team up with a private investor or an “angel investor” who will loan them money in unconventional ways – e.g. for 24 hours or less than 90 days – in order to get deals done quickly and effectively. However, sometimes you will not have this option, and then you may need to turn to more conventional financing methods.

If you do use a conventional loan, there are two major caveats that are extremely common in the loan industry that you must look out for. One of these can often be worked with or around, while the other may make your transaction impossible to complete. Both will complicate matters greatly and should be avoided if possible.

The first issue is the “seasoning period.” This is a period of time that lenders used to require before refinancing. However, that seasoning period now extends to resale of the property in many cases, and is put in the loan in order to prevent short sale flipping and other types of wholesaling that many banks feel is not in their favor. If your loan has a seasoning period it is not necessarily a deal-breaker, but you need to be sure that you have the means to hold the property for the seasoning period and that your end-buyer understands that they may have to wait 3 or even 6 months before they close on the house.

The second potential issue in your conventional loan is a prepayment penalty. This is a fee that you have to pay if you pay off the loan early. If you do not plan on holding the property for the next 15 or 30 years (depending on the life of the loan), then you will be paying off the loan before the end of the loan. You need to either be prepared to pay the penalty or find a loan without a prepayment penalty in order to make this type of loan work for you.

Keeping an eye out for these types of lending pitfalls will help you establish real estate investing practices that keep your transactions running smoothly and effectively. What do you look for – or avoid like the plague – in a loan agreement?

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