Finding And Developing Trust With Your Private Lender

So, you want to do Real Estate projects; however, you don’t want to finance your deals through Conventional Lenders, banks, or other Institutional Lenders. Even though you may be financially able to borrow from banks, you prefer Private Lenders for many reasons; such as:

1. They will make loans on properties and projects that banks will not.
2. They are more aggressive and will fund deals much quicker than banks.
3. They will do small loans.
4. you will have more control with your project.

Now, how do we find these Private Lenders? They are everywhere, if you look around. Let’s consider some of the sources.

1. Friends and relatives. You would probably be surprised at the number of people you know who would invest in IRAs, CDs, Money Markets, etc., and who have the funds in which to do it. Most of these people would like to have better returns on their money. So, if you can convince them that you can provide them with better and SAFER yields; some will be interested.
2. Professional people you know who may have funds available. Doctors, lawyers, dentists, CPAs, etc., usually earn very good incomes; however, most don’t have time to personally pursue investing and therefore depend on other people, stockbrokers, etc. Again, if you can get their attention long enough to explain your program, some will be interested.
3. Newspaper ads – Look for ads such as: “Money To Loan”. Also, you can place your own ads ; for example: “Investor needed for local Real Estate Loans” or “Real Estate note For Sale – Excellent Return” NOTE: You may not have a note For Sale now, but your intention is to create one.
4. Talk to Title companies, attorneys who do Real Estate closings, and CPAs who have investor clients for leads to Private Investors.
5. Join local Real Estate Investment Clubs and meet other people who are doing what you want to do. Investors also belong to these clubs.
6. Consider offering classes to Private Investors or “Would Be” Private Investors to explain your program.

NOTE: Be careful with any advertisement you may place in the newspaper. Do Not propose any specific yield in your ads. Do Not ever Guarantee anything in your ads.
Once you have found an investor who expresses an interest in funding your Real Estate projects, you need to develop rapport and an element of trust with that investor. In other words, you have to prove to the investor that you know what you are doing. This is where your written business plan with referrals (if you have them) comes in. If you are new at this and don’t have business referrals connected with Real Estate, get referrals from friends, attorneys, CPAs, bankers, and anyone you know who has some stature.

The main thing to the investor is, as stated before, is your plan and attitude. Don’t be a beggar and don’t be a “Know It All” either. Just lay things out as they are. The investor, who most likely has financed Real Estate deals before, will sense that you are for real. Then you must demonstrate that he is in fact correct; You are for real.

If you need help preparing for this, get help from other Real Estate Club members or seek out someone who is doing these kinds of projects. You can also talk to Realtors, Title Companies, etc.

I would appreciate any comments you may have to this and any other Blog Posts we may write.

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.

Grow Your Own Investment Money Tree

OK, so now you have made the decision to become more active in investing in Real Estate; however, your funds are limited, plus your credit may not be too good. You don’t want to have to depend on the fickle banking industry to provide you with funds to do your investing. You know the old story of who a banker is, right? “A banker is a person who will lend you an umbrella; however, he wants it back if it starts raining.”

So, where are you going to get the money to do your investing? Ask yourself a question. Where do the banks get their money to lend to you or other investors? Mostly from private parties; deposits, CD buyers, etc. Well, why don’t you go to the same parties to find the money you need to do your investing? How much do you think the banks are paying people to put money in the bank? Regular depositions? – Nil. CD Buyers? (by the way, that’s Certificate of Deposit, NOT Compact Disc) – maybe 2% to 3%. Hard to get rich on a 2% or 3% Return.

Speaking of 2%, I’d like to break for a humorous story. Back when I was selling Real Estate as a broker, I met a crusty, older investor who eventually became my partner & dear friend. When I first met him I asked him what kind of Return he wanted on his money. His reply was “Two percent”. I repeated to him, “Two percent?” “Yeah”, he said, “If I invest one dollar, I want two dollars back; 2 for 1. Two percent!”

OK, back to more serious stuff. You then, are going to go to these folks who are putting their money in the bank and show them how they can work with you and get a much better Return on their money and do it safely. First though, you must develop a business plan and put it in writing. You are going to have to show these parties (potential investors) what you will do and how you will do it to earn them better yields on their money.

Your plan must be realistic and it must be specific. For example, let’s say that you are going to buy houses that need some fixing-up. After you fix them up and resell them at a profit, your plan should include the following:
1) A Mission Statement as outlined above, of all that you are going to do and how.
2) How the investor will always be protected in that he/she can always have more than
enough security for their investment – i.e.
a. They will hold a First Lien on the property they are lending on.
b. They will always have Title Insurance and Hazard Insurance.
c. They will never be more at risk than a safe percentage of the property value,
say 60% to 75% max.
3) You need to be able to answer questions, such as, “What happens if you can’t pay
me back when the loan is due to be paid off?” Your answer might be, for example:
a. I will pay you a bonus to extend the loan.
b. I will make a new loan with another investor and pay you off. And then,
the ULTIMATE answer,
c. If I can’t pay you off, then you will own the property at 65% – 75% of it’s resell
value, and it will be fixed up and ready to sell.

If you have a specific property picked out which you want to borrow on, bring complete details on that property to present to the investor. Give him/her an inspection tour of the property. If you have details on other properties which you have bought, fixed-up and sold, be sure to present these case histories to the investor. Also, if you have positive references as to your past work, achievements, etc., present those as well – Even if they do not relate to this specific kind of project. What you are doing in these initial meetings is building confidence and trust with the investor.

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.

Private Financing For Your Real Estate Investments

Flipping houses for fun and profit?
THE BAD NEWS (For Some): The inventory of houses that are available for purchase is at an all time high. These houses range from older homes that may need remodeling to new or almost new homes. This situation has been created by: 1) The previous several years of selling and financing homes for buyers who could not afford them, resulting in record foreclosures at an all time high. And in addition, 2) The present unemployment situation has forced many people to give up their homes to move to lesser expensive lodging, and in extreme cases, resulting in homelessness.

THE GOOD NEWS(For Others): Anytime there is a situation as described above, it is bad news for many people. Conversely, at the same time, it is good news for others because of the opportunities created by the particular situation – In this case, INVESTING IN HOUSING.

Because of the glut inventory of product (houses) available, prices are down from the previous market period; the old “Supply and Demand” syndrome. Therefore, it is a great opportunity for investors, entrepreneurs, etc. to make profits by taking advantage of these favorable circumstances.

So, let’s assume you are or would like to be one of those who takes advantage of the situation. You have some experience in residential housing or you have a mentor to help you make good decisions whenever you may be buying, selling, and/or rehabbing houses.

There are basically two types of investors who would be interested in the housing market:
1. Those who buy for resale later at a profit (hopefully) or,
2. Those who buy to hold for rental income.
Of course an investor could, and many do, fill both roles.

Now, let’s assume you have the knowledge, experience or mentorship to become involved in the housing market that we are discussing. One more thing we need is the funds necessary to buy, fix-up if necessary, and sell the houses. Also, if you intend to hold houses for rental income, you will need long term financing. So, if you have funds of your own, good credit with banks and other commercial lenders, you are all set – AS LONG AS THEY ARE LENDING. BUT,

What if you don’t have your own funds, and you don’t have good credit, or for whatever reason you are unable to obtain institutional funding? What to do then? AND,
Even if you do have good credit with the banks, that could change tomorrow with the whim of the banks and/or government.

Therefore, let’s consider your options: What if you could create a scenario where in you could conduct unlimited business in this and other markets, and not have to contend with banks and other institutional lenders? What if you could depend on always having financing available, short term and long term, even if your credit was not that great?

Well, you know what? You can do that! How can you do that? With Private Financing. This Private Financing will be from Private Investors and individuals who are looking for better and safer investments than they now have access to.

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.

If All Banks Close Tomorrow

You pick up the morning paper and read the headline, “Government directs that ALL BANKS will invest all deposits in Government Securities. NO MORE REAL ESTATE LOANS to private companies or individuals!” You are in the business of acquiring Real Estate, houses, apartments, land, etc. for resale or for long term investment. Will this news TOTALLY shut you down? OR what if the banks are going to continue to make Real Estate Loans; but not to you? This could be for any number of reasons; too many loans all ready, marginal credit, bad location of Real Estate, etc., etc., etc. OR what if you’re just tired of jumping through hoops, kissing the banker’s rear end, and in general going through the hassle of dealing with banks.

There are great opportunities in our current economy for acquiring Real Estate at prices not seen in years. Bad times for some, good times for others. Therefore, for the Real Estate investor, entrepreneur, developer, etc. success will depend a great deal on being able to have or obtain funds with which to acquire said Real Estate.

So, what do we do if the banks are off limits to us? PRIVATE LENDERS ! Create your own funding sources with Private Lenders. There is an unlimited number of individual people and organizations that have funds available to invest. Most of these people and organizations are receiving low returns on their funds. They would obviously like to increase the return on their investments; however, either they don’t know how or they are afraid to invest their money wherein they have no say as to how the money is used. Examples: Stock Market, Mutual Funds, REIT’s, etc.

Investing in these ventures is, in my opinion, a sophisticated “Crap Shoot”. You roll the dice and sometimes win, but mostly lose. Investor’s would like a better way; however, they don’t have the time or knowledge to do better. You can educate these investors and convince them that you can show them how to dramatically increse their returns.

By being diligent, knowledgeable, and honest you can make them feel comfortable at investing with you in Real Estate. You can develop both short term and long term investment funds from these investors. You want to develop a “partnership” and feeling of trust between you and the investor. Once you are able to do that, the news will spread to other investors and you will not have to worry about the banks again.

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.

Opportunities To Buy Good Paper Are Here Now

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.

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.

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.