When a family buys a home, closing a mortgage takes 30 to 45 days and takes a lot of time because of onerous paperwork and complex workflows with many hand-offs. If you have gone through this process once, imagine doing it many times a year because you are a real estate investor.
We wanted to estimate the economic value of time real estate investors spend on financing, to demonstrate the real value of creating a completely digital mortgage for real estate investors.
Time Spent on Financing Activities
We estimate a full-time real estate investor, who completes five projects in a year and does not pay staff to perform financing tasks, spends 50–160 hours on financing, plus an additional 30–120 hours on construction draws when renovations are financed. The time goes to:
- Researching and comparing lenders
- Submitting loan application and lender-required documents
- Managing the process of closing a loan
- Resolving issues raised by the lender
- Loan closing activities
We break down these activities and estimate the range of time spent on them. The total estimated time spent per loan is 12 to 34 hours, plus 6 to 18 hours on construction draws if renovations are financed.
Financing Options (1-4 Hours)
- Figure out how much money to borrow for a project
- Research lending options
- Discuss financing needs with 4–7 lenders
- Compare quoted terms and pricing from lenders
Loan Application (1–4 Hours)
- Fill out loan application(s)
- Submit additional information required by the lender
- Complete repair scope of work and budget in lender’s form
- Managing the Process (2–6 Hours)
- Coordinate appraisal or broker’s price opinion and inspection with the seller’s realtor, lender, and companies
- Follow up with the lender, escrow, title, and seller on completion of milestones to close loan
Resolving Loan Issues (4–12 Hours)
- Submit additional information required by the lender’s underwriter
- Provide letter(s) of explanation, as needed, to document underwriting issues for the lender’s loan file
- Review and, if necessary, request correction of the property inspection and valuation
- Resolve pre-funding conditions communicated by the lender, so the loan can be approved
Loan Closing (2–6 Hours)
- Review loan documents for errors and omissions
- Sign loan documents, transfer funds, and close escrow
- Set up with loan servicer (e.g., to make monthly payment)
Drawing Funds if Renovations Financed (6–24 Hours)
- Request draw
- Submit payment details and other information to the draw administrator
- Coordinate inspection of the property for each draw request
- Resolve findings from third-party draw report, which could delay or reduce distribution of requested funds
- Obtain lien waivers and releases
Economic Value of Time
Sophisticated real estate businesses rigorously measure and control their hard and soft costs. Hard costs encompass the materials, labor and related expenses of physical construction. Soft costs cover everything else, unrelated to materials and labor. Often, entrepreneurs do not pay as much attention to the economic value of the entrepreneur’s time. Eliminating necessary but avoidable activities frees up time to acquire real estate, find reliable contractors, oversee their projects, develop business relationships, or simply enjoy life.
We roughly estimate the cost of time spent to arrange financing is $8,000 to $25,600 thousand per year. If construction draws are financed, the cost increases by $4,800 to $19,200 per year.
That’s right, a real estate investor incurs an opportunity cost of $12,800 to $44,800 per year by spending time on financing their projects. The opportunity is in addition to the points, fees, and interest paid to borrow money.
Here’s how we get to these numbers:
- A real estate investor spends 1,200 hours per year to acquire five properties. This encompasses time spent sourcing deals, touring properties, making offers, and closing purchases. In other words, each real estate acquisition requires 240 hours of a real estate investor’s time, plus or minus.
- A real estate investor averages $38,000 of profit on each project or $190,000 per annum. We derive this from an average acquisition price of $200,000; renovation, financing, holding and other costs of $48,000; exit price of $310,000, and net sale proceeds of $286,000.
- These assumptions, extrapolated from analyzing public records data and surveying real estate investors, imply an hourly cost of $160, after rounding up, to acquire real estate. Time spent on financing, if eliminated, can be allocated to acquiring additional real estate. Arguably, unless tasks are delegated to an inexpensive resource, as the number of property acquisitions goes up, the economic value of freeing up time also increases.
- If our assumptions are believable, and 50% of time spent on financing can be eliminated, a real estate investor who completes five projects in a year can save $4,000 to $12,800 on arranging financing and another $2,400 to $9,600 on construction draws, if they finance their renovations. Again, this is related to time spent and separate from the direct cost of borrowing money.
Ways Real Estate Investors Save Time
Experienced real estate investors employ tactics to minimize their time commitment. They start by organizing the information a lender will require, such as information about their real estate projects; the certificate of formation and operating agreement for their company; knowledge of their credit history; and easy access to recent bank statements and tax returns.
Real estate investors who finance with lenders that require more underwriting but offer better pricing like to form relationships and centralize their future loans. The first loan is more onerous because that’s when much of the laborious upfront underwriting takes place. On subsequent loans, the lender only has to update certain information, like the credit score, and focuses on underwriting the real estate and planned improvements to the property. While this reduces the time to apply for future loans, coordination with the lender and procedures for drawing renovation funds do not go away.
Along these lines, lenders are creating products, especially for experienced real estate investors, that attempt to streamline financing.
Some real estate investors — especially companies and individuals that are more active and whose time is relatively much more scarce — choose to borrow from hard-money lenders or finance with private capital that limits underwriting to the property. However, the borrowing cost is higher. These real estate investors are paying more for a fast close and convenience.
Engineering a Time-Efficient Mortgage
These techniques for saving time–including well-qualified and creditworthy small business entrepreneurs paying a higher debt cost for convenience that erodes their profit margin–should become less frequent and unnecessary with modern mortgage systems and processes. Technology built for the investment-property mortgage can organize information better, streamline activity, eliminate duplicative effort, and generally consume less time. Examples include the following:
- Applying once for financing and avoid filling out forms for each potential lender or financing option
- Comparing financing offers in one place, side by side, against the criteria of greatest importance to a particular situation or need
- Knowing up front the requirements for a lender to originate a loan and have explicit tasks to fulfill those requirements
- Tracking in one place the status of a loan being approved and closing, including any additional issues and tasks that come up as the lender completes its underwriting
- Relying on trusted, validated third-party services to provide data they would otherwise compile for the lender
- Handling construction draws through a simple, efficient user interface that eliminates being onsite for a third-party property inspection
Minimizing the time real-estate investors spend on financing is part of our holistic approach to engineering best execution for our Vontive partners and their customers. We are building our technology to shorten the time to close mortgages while expanding the scope of underwriting, relative to what traditional lenders can do without software. Better underwriting enables risk-based pricing–achieving a new and different kind of mortgage that is faster, cheaper, and generally better for well-qualified real estate investors.