Tough economic times in the 1980′s produced a lot of paper. The paper I’m talking about is Private Mortgages, Trust Deeds, Land Contracts, etc. This type of paper is created when one entity (person or company) sells Real Estate to another entity and carries back a mortgage from the buyer payable to the seller, also known as “Seller Financed Paper”.
During tough economic times you will see much more of this type of paper created. The 1980′s was such a time. Many of the holders of this paper (the sellers) didn’t really want the paper; however, it was the only way they could sell their property. In addition, in tough times is when people’s credit gets hurt and they can’t get regular bank or Mortgage Company financing, thus another reason for Seller Financing. Therefore, an abundance of paper was created during this time.
The 1990′s saw Institutional Investors discovering this multitude of paper and becoming involved in very aggressive buying of this type of paper. Private investors were buying it as well; however, the institutions (with more money and willingness to buy at lower yields) made it more difficult for the private investors who found fewer amounts of paper that they could buy.
For example, during the 90′s and early 2000′s, my company bought and sold over 200 million dollars in paper. Then in the late 90′s and early 2000′s Congress pressured the banks and Mortgage companies into making home loans almost to anyone who could fog a mirror. The result = The Sub-Prime mess funded by Fannie-Mae and Freddie-Mac. This affected Seller Financing greatly. No longer were buyers hard to find who could qualify for a bank loan, so sellers didn’t have to finance the property for the buyers. So what happened? You all know; Foreclosures by the millions and the creation of another severe economic downturn. THANKS, CONGRESS.
So, the cycle has come full circle. There is an abundance of paper being created. Just check the “Homes For Sale” in your local newspaper, and see how many ads offer Seller Financing. Now we have, and are going to have, more and more Seller Financed paper available for investors to buy.
The prudent paper investor, who does due diligence, can buy paper to produce 10% – 14% Yields. Compare this to 2% of whatever the banks are paying.
So, I would advise that if you are an investor or have investor clients, consider getting in the paper buying business. Sure beats the crap-shoot in Wall Street.
If you are interested, review some of my earlier Posts about doing diligence and how to find good paper @ www.RealEstateJack.net
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, September 24, 2010
Thursday, September 9, 2010
Buy Income Property With Shared Equity - Part II
WHAT TO DO? WHAT TO DO? Mr. Investor listed his property with commercial real estate broker, Charlie. Charlie, being a very conscientious & knowledgeable broker, got the word out that he had a great property available that needed a “hands on” type of investor/landlord. Someone who had the skills and drive to turn a property that was in vacancy trouble around.
Charlie received several responses to his marketing efforts. After interviewing the prospects, and selecting Mr. Eager, he proposed that he and Mr. Eager meet with Mr. Docile to see if a mutually agreeable solution could be worked out.
Mr. Eager was an experienced Landlord/Manager who already owned several income properties. He had sufficient income from his other properties to cover the “eat” on Mr. Docile’s property. A problem was that his cash resources were limited and with the negative cash flow on Mr. Docile’s property, everyone knew it would be difficult to obtain new financing from an institutional lender to pay off Mr. Eager’s loan.
Mr. Eager felt that his property had a value of $1,200,000, which might have been true with 90% or better occupancy; however, based on the current income and the current economy certainly was not valid now. After considerable brainstorming, broker Charlie proposed the following as a possible solution to give Mr. Docile his price and still make it workable for Mr. Eager.
1. Mr. Eager will Master Lease the property from Mr. Docile for a period of 5 years. (If this time length would violate the current loan terms, then lease for 2 or 3 years with options to renew.) The lease payments would be $4,800 per month. Mr. Eager would be responsible for taxes, insurance, and all other operating expenses.
2. Mr. Docile will grant Mr. Eager a 5 year option to purchase the property at a price of $1,200,000. The option consideration is $10,000. To exercise the option Mr. Eager would pay Mr. Docile $522,912 (Today’s Equity) plus 25% of the appreciation of value above $1,200,000 when the property is sold by Mr. Eager in the future.
*NOTE: The objective is to sell the property in the future when the market has turned around. To protect himself, Mr. Eager should have the option to renew or extend the option period.
BENEFITS - Let’s look at the benefits to each party of the transaction, Mr. Docile, the owner; Mr. Eager, the potential buyer; and let’s not forget Charlie, the broker. He was probably the most important factor in putting this deal together.
1) Benefits to Mr. Docile, the owner:
a – He solves his negative cash flow problem.
b – He retains all the tax benefits on the property.
c – He gets his full price plus shares in the appreciation of the property value.
d – Instead of receiving monthly interest which would be taxable, he defers the receipt
of income to the future.
e – He does not have to sell in a depressed market wherein he would not have received
a good price.
2) Benefits to Mr. Eager, the potential buyer:
a - He acquires control of excellent property without putting up much cash or having
to qualify for a new bank loan.
b – With his expertise he can get the vacancies leased-up and enjoy a positive cash flow.
c - If he exercises the option and resells the property after 5 years, he will receive $50,647
in reduction on the existing loan principal plus 75% of the appreciation above $1,200,000.
d - If for some reason he is unable to turn the property around, he can walk away.
If this happens he would lose his option consideration of $10,000 – However, better
to lose a finger than your whole hand.
3) Benefits to Charlie, the broker:
a - Receives $9,600 leasing commission (two months rent) up front.
b - Receives five percent of the sale price when Mr. Eager resells the property.
Seller & Buyer to each pay half.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Charlie received several responses to his marketing efforts. After interviewing the prospects, and selecting Mr. Eager, he proposed that he and Mr. Eager meet with Mr. Docile to see if a mutually agreeable solution could be worked out.
Mr. Eager was an experienced Landlord/Manager who already owned several income properties. He had sufficient income from his other properties to cover the “eat” on Mr. Docile’s property. A problem was that his cash resources were limited and with the negative cash flow on Mr. Docile’s property, everyone knew it would be difficult to obtain new financing from an institutional lender to pay off Mr. Eager’s loan.
Mr. Eager felt that his property had a value of $1,200,000, which might have been true with 90% or better occupancy; however, based on the current income and the current economy certainly was not valid now. After considerable brainstorming, broker Charlie proposed the following as a possible solution to give Mr. Docile his price and still make it workable for Mr. Eager.
1. Mr. Eager will Master Lease the property from Mr. Docile for a period of 5 years. (If this time length would violate the current loan terms, then lease for 2 or 3 years with options to renew.) The lease payments would be $4,800 per month. Mr. Eager would be responsible for taxes, insurance, and all other operating expenses.
2. Mr. Docile will grant Mr. Eager a 5 year option to purchase the property at a price of $1,200,000. The option consideration is $10,000. To exercise the option Mr. Eager would pay Mr. Docile $522,912 (Today’s Equity) plus 25% of the appreciation of value above $1,200,000 when the property is sold by Mr. Eager in the future.
*NOTE: The objective is to sell the property in the future when the market has turned around. To protect himself, Mr. Eager should have the option to renew or extend the option period.
BENEFITS - Let’s look at the benefits to each party of the transaction, Mr. Docile, the owner; Mr. Eager, the potential buyer; and let’s not forget Charlie, the broker. He was probably the most important factor in putting this deal together.
1) Benefits to Mr. Docile, the owner:
a – He solves his negative cash flow problem.
b – He retains all the tax benefits on the property.
c – He gets his full price plus shares in the appreciation of the property value.
d – Instead of receiving monthly interest which would be taxable, he defers the receipt
of income to the future.
e – He does not have to sell in a depressed market wherein he would not have received
a good price.
2) Benefits to Mr. Eager, the potential buyer:
a - He acquires control of excellent property without putting up much cash or having
to qualify for a new bank loan.
b – With his expertise he can get the vacancies leased-up and enjoy a positive cash flow.
c - If he exercises the option and resells the property after 5 years, he will receive $50,647
in reduction on the existing loan principal plus 75% of the appreciation above $1,200,000.
d - If for some reason he is unable to turn the property around, he can walk away.
If this happens he would lose his option consideration of $10,000 – However, better
to lose a finger than your whole hand.
3) Benefits to Charlie, the broker:
a - Receives $9,600 leasing commission (two months rent) up front.
b - Receives five percent of the sale price when Mr. Eager resells the property.
Seller & Buyer to each pay half.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Buy Income Property With Shared Equity Appreciation Program
What is Equity Sharing? My definition is the sharing value of a property less any loans owed on the property. It is, in effect, a partnership wherein two or more parties own a portion of the equity in the property. Maybe we should also define equity. Equity is the value of a property less any and all loans owed on the property; sometimes known as “The Broadbent Formula”.
In my daily travels I see numerous commercial properties, especially Strip Centers, with several or many vacancies, and from what I hear there are quite a few vacancies in Office Buildings as well. This situation creates a problem for many owners of these properties because of lower or even negative cash flow. We call negative cash flow an ALLIGATOR. It eats your cash flow and profits. It could even cost the owners their property!
The flip side of this situation is that it creates opportunities for buyers who may not have large amounts of cash to put down or may not be able to get new financing. Institutional lenders are somewhat reluctant to make loans on income properties that have little income.
Many of the true values of these properties, based on current market conditions, has diminished considerably from what they were a few years ago. However, owners tend to want to hang onto those old values, not desiring to take a loss.
Lets see if we can put together a hypothetical transaction wherein with a little “creative” structuring we can get a sale and still preserve some of the owners pride.
SITUATION
1. A 10 unit Strip Center located in Anytown, U.S.A.
Gross Income when it was fully occupied was $15,000 per month or $180,000 per year.
2. Currently there are 5 vacancies, reducing the monthly gross income to $7,500.00
3. There is a loan on the property with 4th National Bank of $677,088 payable at $4,657 per month.
Operating expenses (management, taxes, insurance, maintenance, etc.) averages out to approx. $4,205 per month.
4. Base on these figures the monthly cash flow is <$1,362.00> negative. That’s a full grown ALLIGATOR.
The owner of the property is primarily an investor who does not have the time or expertise to work at solving the problem. The negative cash flow is unbearable and is affecting his other business.
What to do? What to do?
Comments? Ideas? Solutions?
Continued In Next Post
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
In my daily travels I see numerous commercial properties, especially Strip Centers, with several or many vacancies, and from what I hear there are quite a few vacancies in Office Buildings as well. This situation creates a problem for many owners of these properties because of lower or even negative cash flow. We call negative cash flow an ALLIGATOR. It eats your cash flow and profits. It could even cost the owners their property!
The flip side of this situation is that it creates opportunities for buyers who may not have large amounts of cash to put down or may not be able to get new financing. Institutional lenders are somewhat reluctant to make loans on income properties that have little income.
Many of the true values of these properties, based on current market conditions, has diminished considerably from what they were a few years ago. However, owners tend to want to hang onto those old values, not desiring to take a loss.
Lets see if we can put together a hypothetical transaction wherein with a little “creative” structuring we can get a sale and still preserve some of the owners pride.
SITUATION
1. A 10 unit Strip Center located in Anytown, U.S.A.
Gross Income when it was fully occupied was $15,000 per month or $180,000 per year.
2. Currently there are 5 vacancies, reducing the monthly gross income to $7,500.00
3. There is a loan on the property with 4th National Bank of $677,088 payable at $4,657 per month.
Operating expenses (management, taxes, insurance, maintenance, etc.) averages out to approx. $4,205 per month.
4. Base on these figures the monthly cash flow is <$1,362.00> negative. That’s a full grown ALLIGATOR.
The owner of the property is primarily an investor who does not have the time or expertise to work at solving the problem. The negative cash flow is unbearable and is affecting his other business.
What to do? What to do?
Comments? Ideas? Solutions?
Continued In Next Post
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
Friday, September 3, 2010
Create Your Own Private Money Source
This article is prompted by a question posed to me by a contact through eRealEstate Social Network.
The contact wrote, “Where can I find Private Lenders who are willing to work with Real Estate Investors? I have found a hard money lender, but it is very expensive. I could use some private Private Funds to help my purchases move faster. I am feverishly looking for houses to buy, fix up, and resell; however, often times I am beat out by someone who has Private Money readily on hand. I appreciate any help, direction, or referrals you may bring.” Jim Well Jim, you can develop your own Private Money source(s). However, it will take a little time, but if you treat them right (in fact, a little more than right) after a while you will have them calling you asking if you need to borrow some money.
Have I been on both ends of this Scenario? Yes, I have.
1. I have been the rehabber who borrowed funds from investors or partnered with investors. I haven’t done this
for a while; however, as mentioned above, I still get calls from some of those Investor-Lenders wanting to know
if I want to borrow some money.
2. Conversely, I have been the Lender-Investor who made loans or partnered with the rehabbers.
The key to success with these programs or any other partnered, is it has to be good for both parties. I could also write a book on failed partnerships.
Anyway, back to creating your own Private Money Source. I will list a couple of methods I have used to find Private Money Sources. First you should prepare a simple business plan to present to prospective Private Lenders. They will want to know how you plan to acquire, rehab and most importantly, sell the homes you wish to borrow funds on. If you have references or previous successful projects, put those as appendices to your plan. In any case, the Lender is going to want to feel comfortable that you know what you are doing.
1. Simply place an ad in the Classifieds, “Money wanted to finance a Purchase & Remodel of Real Estate
properties”, or “Experienced (if you are) Home Buyer, Rehabber needs funds for future projects”.
2. Talk to Title Companies, Escrow Companies, and Real Estate Attorneys for leads to Investors who loan to
rehabbers, like you.
3. If you know of other rehabbers who are closing deals, go to County Clerks and review the Deed of Trust or
Mortgages that were recorded on the property. These are Public Records that will reveal who the Lenders were.
Ads in the newspaper is the method that has worked best for me. With this Ad you should get a good response. Don’t try to make the loan over the phone. Set up a Face-to-Face meeting with your prospects. They will want to meet you before they get serious about lending you money. Set up the meeting in your office, a restaurant for coffee, lunch or whatever.
Have a copy of your plan to give to the Investor plus samples of some of your previous projects, if you have them. Be sure you can explain to your prospects how they will be protected by such as:
1. First Lien on the property
2. Title Policy
3. Hazard Insurance
If you have a specific property in mind, bring a presentation on that. Information like:
1. Purchase Price.
2. Rehab Costs – Include all costs, closing, Title work, and contingency amount; like 10%.
It seems like all projects overrun.
3. Details on the house – Bedrooms, baths, size, construction, etc. -
Pictures; inside and out.
4. Information on comparable Sales to reinforce your expected Sales Price after rehab.
The more prepared you are and the more detailed,
the more the prospects will be impressed.
You will have to offer a good return to your Investor Lender, say 10% to 12% interest, perhaps with a bonus after resale; either points or percentage of the profit. You may think this is expensive; however, consider this from the Investor Lender perspective. Most of these loans are short term so even though the interest rate may be high to you, the investor sees it as some type of administrative expense; taking their funds out of where they are invested in now, and getting interest for only 3 to 6 months on your deal. Also, once you have done a few successful projects with a Private Lender you can better negotiate on rates. Also, the word will get around that you are doing deals and other Private Lenders will be more inclined to want to do business with you.
This is getting a little long, so I will stop for now. However, I want to show you how you can use and lock-in these Private Lenders to longer range Investments for them. This will also help you sell your finished projects faster, which means greater profits.
NEXT EPISODE WILL BE COMING SOON.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
The contact wrote, “Where can I find Private Lenders who are willing to work with Real Estate Investors? I have found a hard money lender, but it is very expensive. I could use some private Private Funds to help my purchases move faster. I am feverishly looking for houses to buy, fix up, and resell; however, often times I am beat out by someone who has Private Money readily on hand. I appreciate any help, direction, or referrals you may bring.” Jim Well Jim, you can develop your own Private Money source(s). However, it will take a little time, but if you treat them right (in fact, a little more than right) after a while you will have them calling you asking if you need to borrow some money.
Have I been on both ends of this Scenario? Yes, I have.
1. I have been the rehabber who borrowed funds from investors or partnered with investors. I haven’t done this
for a while; however, as mentioned above, I still get calls from some of those Investor-Lenders wanting to know
if I want to borrow some money.
2. Conversely, I have been the Lender-Investor who made loans or partnered with the rehabbers.
The key to success with these programs or any other partnered, is it has to be good for both parties. I could also write a book on failed partnerships.
Anyway, back to creating your own Private Money Source. I will list a couple of methods I have used to find Private Money Sources. First you should prepare a simple business plan to present to prospective Private Lenders. They will want to know how you plan to acquire, rehab and most importantly, sell the homes you wish to borrow funds on. If you have references or previous successful projects, put those as appendices to your plan. In any case, the Lender is going to want to feel comfortable that you know what you are doing.
1. Simply place an ad in the Classifieds, “Money wanted to finance a Purchase & Remodel of Real Estate
properties”, or “Experienced (if you are) Home Buyer, Rehabber needs funds for future projects”.
2. Talk to Title Companies, Escrow Companies, and Real Estate Attorneys for leads to Investors who loan to
rehabbers, like you.
3. If you know of other rehabbers who are closing deals, go to County Clerks and review the Deed of Trust or
Mortgages that were recorded on the property. These are Public Records that will reveal who the Lenders were.
Ads in the newspaper is the method that has worked best for me. With this Ad you should get a good response. Don’t try to make the loan over the phone. Set up a Face-to-Face meeting with your prospects. They will want to meet you before they get serious about lending you money. Set up the meeting in your office, a restaurant for coffee, lunch or whatever.
Have a copy of your plan to give to the Investor plus samples of some of your previous projects, if you have them. Be sure you can explain to your prospects how they will be protected by such as:
1. First Lien on the property
2. Title Policy
3. Hazard Insurance
If you have a specific property in mind, bring a presentation on that. Information like:
1. Purchase Price.
2. Rehab Costs – Include all costs, closing, Title work, and contingency amount; like 10%.
It seems like all projects overrun.
3. Details on the house – Bedrooms, baths, size, construction, etc. -
Pictures; inside and out.
4. Information on comparable Sales to reinforce your expected Sales Price after rehab.
The more prepared you are and the more detailed,
the more the prospects will be impressed.
You will have to offer a good return to your Investor Lender, say 10% to 12% interest, perhaps with a bonus after resale; either points or percentage of the profit. You may think this is expensive; however, consider this from the Investor Lender perspective. Most of these loans are short term so even though the interest rate may be high to you, the investor sees it as some type of administrative expense; taking their funds out of where they are invested in now, and getting interest for only 3 to 6 months on your deal. Also, once you have done a few successful projects with a Private Lender you can better negotiate on rates. Also, the word will get around that you are doing deals and other Private Lenders will be more inclined to want to do business with you.
This is getting a little long, so I will stop for now. However, I want to show you how you can use and lock-in these Private Lenders to longer range Investments for them. This will also help you sell your finished projects faster, which means greater profits.
NEXT EPISODE WILL BE COMING SOON.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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