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Soliciting private money for flipping vs. buy & holding

Question:

Hi Tony…and thanks a million for this invaluable forum!

Got one for you about private lenders. I’ve started talking it up. I’m going to focus primarily on flipping in the beginning but I want to hold some as well once I get rollin. When I explain the dual focus some are asking the rate difference. I explain that the rate to retail is higher than holding on rentals. I’d like a better answer.

What should the difference be? If retail is say 9% what would long term be?

(if that was answered in your course…plz forgive me!)

Last one…should the Note provide the ability for the lender to convert if they like? It seems prudent to craft that in with friendly language along the lines of “we have the right to convert” so people know it’s possible from the outset and so I don’t have to go back and explain it once things are in motion.

One person said straight out…”I like the rate and security but aren’t crazy about it being short term.” I’m guessing that on occasion I’ll need to finance out retail money with different lenders who would be happy with less for a longer term. But it would be nice to convert people if I choose and/or if I need to because the property isn’t selling for one reason or another.

Did I say thanks?

Many, many, MANY thanks Tony.

-M.

Answer:

Okay, out of the gate let me just make one point very clear. When you’re trying to solicit money from people that have it, they’re motivation for lending it is as varied and different from one to the other as are grains of sand in the ocean.

You’re job is to attract the money based on the probability of a successful outcome. The two things that anyone lending money is typically focused on is:

1. The return ON their investment
2. And the return OF their investment
(the latter being the most important).

How you structure the notes (conversion) or the interest rates is solely up to you. What they will accept, you’ll soon find out, is solely up to them. I have found that what buys me the most leverage when wanting to skew those negotiations or numbers in my direction, typically have to do more with how good my deals are and how good I am at making them reach a happy and profitable conclusion.

I cannot, in good conscience, give you specific advice on what interest rate you should offer between short-term and long-term money, as I honestly believe this is a moot issue. Industry standards on this topic are clear and available for anyone who cares to look for them. Most investors know they can easily place their money with professional, respected hard money lenders like The Norris Group and earn an easy, effortless 12% on short-term and 9% on eight year financing.

I have found that the more geographically local the investor lender to my specific Target Market, the more familiar they are with my individual properties, my level of knowledge and experience, and successful track record, the more motivated they are to jump on my wagon and the stronger position I hold for negotiating. This typically becomes a “their money is chasing my deals” rather than the other way around.

I hope this helps.

Your friend always,
The Big Cheese
Tony
;D

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Investor funding falls through, now what?

Question:

How can I keep my credibility intact with REO agents when submitting offers if my investor decides for what ever reason not to fund a deal I was expecting him to cover. This could also apply to rehab contractors I suppose.

Is this just the risks that go with using equity partners?…Any thoughts….

-M.

Answer:

To minimize the possibility of destroying your relationship with an REO agent before you even get started, you MUST make sure that you’re investor/partners are solid and committed. One of the ways you can do this is to have a joint venture entity and bank account that they have committed funds to prior to submitting your first offer. However, no amount of legal paperwork or promises are going to hold someones feet to the fire that becomes consumed with fear over their inability to choose wisely. You must spend time with your fellow investors, especially if they’re new to the business, to make sure that they understand the reality of this business and the true profitability of your proposed deals.

The worst thing you can do to yourself is to get anxious and partner up with just anyone because they have a fat bank account. The responsibility of making good decisions falls squarely on YOUR shoulders. You’re the one that has to be aware of who you’re dealing with. You’re the one who’s responsible for your team showing up and doing what they have to do or at least being prepared with one of several back up plans.

If you’re going to hunt bears, you better have more than just one high powered rifle and one bullet. If not, when you’re head’s rolling around on the ground, and your body’s still standing…you’ll have no one to blame but yourself for being way too optimistic.

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Hard Money vs. Private Money

Question:

What’s the difference between a hard money lender and a private investor and does using one have an advantage over the other?

Answer:

Hard money lender – higher costs/fees, higher interest rate, tougher qualifying.

Private investor – Individual, typically no fees, better rates; longer term.

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Does Tony make loans to Students?

Question:

The Norris Group is now offering 9% loans, that have 2yr prepayment penalty, 8 years amortization. Do you make loans to students?

-Student

Answer:

I do not make loans to students. What I do is, on occasion, I will go in on a deal or I will participate, I will facilitate, I will do all those kinds of things. But I don’t make loans to students; I make loans to real estate. And it really has to do with a lot of different elements. To be frank with you, I consider The Norris Group to be the best bet for loans.

If you get into a weird situation in the future where you need to twist and bend things and try to figure out deals that don’t make any sense, Bill Tan is one of the best people for things like that. I’m talking about people that I trust. I don’t suggest names just because they’re out there doing stuff. I don’t accept money from anybody for anything except for what I do. And so when I give you advice on something it’s because it’s solid. The Norris Group, I think is a wonderful company and they’re a no-nonsense company. Bruce is a no-nonsense kind of person. When he makes a decision to make a loan he makes it because it’s a solid loan for YOU AND THEM. So if they tell you to walk on a deal, it’s because they realize you’re going to hurt yourself. So, I recommend them.

I get involved, but first and foremost is the stuff I’m doing. I have people bring me deals where the numbers make sense and yeah I bite down like a pit bull, why not? But, I have to be working closely with people to really understand them and trust them. More times than not, I’ll be honest with you, I’ll show you how to do it so you don’t need me, or you can have someone else involved and pay them. Here’s the reason, I don’t need the money.

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Making Hard Money Make Sense

Question:

I use a little hard money, but not very savy about it.

To buy and hold seems like you need to leave a lot of skin in the game. 20% on either conventional or hard money. Hard money at 60-65 of todays market value on longer terms . If I buy at a 20% discount … I still need about 20% down

With the average multi unit in the Hood of SD will cash flow 1000k a month with 100 percent financing @ 9 % and 200k-250 purchase price. Since that does seem possible, thats a 40k hit without repairs. I can only do so many of these deals…..I want to do a lot…..

How do I finance or purchase other wise with keeping some skin!???

P.S I ordered your REO 101 package yesterday…Im sure there will be some good stuff in there!

Answer:

First, thanks for the ordering course.

Now, on the stuff I buy to keep – my goal is always to refi and get 100% of my money out of the property and still have at least $100 of monthly “real net profit” (that means after ALL the expenses- PITI- vacancy & credit loss, maintenance & 10% management.) So I try to buy at 50% to 60 % of ARV (after repair value or fix-up value) This is does not happen everyday, but those type of buys must make up at least 50% of my purchases. Now keep in mind that those are fixers where I’m forecasting spending 10% to 20% of the ARV on buying & repair costs as well as 10% to 20% on holding and selling costs. Keep in mind that since I don’t read minds or crystal balls, I don’t know when the market will change so…

When I buy, the property must jump through 2 hurdles: buy & sell and buy & hold.

Many times I’m purchasing properties where the repairs or other costs are less than my worst case scenario and that is typically reflected in a higher purchase price or percentage of purchase price to ARV, such as paying 70% of ARV.

OK, keeping in mind that the real estate market can change at any one moment, you must plan your attack with several acquisition strategies to assure your desired outcome. You MUST have more than just one method of catching the prey, especially if your long-term goal is to “hold it,” until it gets fat and juicy, while eating the eggs it produces periodically, and that is as good an analogy as possible – the chicken!

Even if you are flush with cash, if you believe and are banking on benefiting from appreciation, financing will be both your salvation and your weakness. Part of your daily tasks should equally include both the pursuit of leverage and new inventory, for you cannot continue to grow without both.

Do not limit your thinking nor listen to your well-informed logical thought process when it comes to your acquisitions of both of these needed components because the secret to acquire both to fill your coffers will come from consistent, relentless and unrelenting pursuit of both simultaneously, regardless of your own thinking (past, present or future continued imagined results). Almost daily you will have to wipe your opinionated-mind clean of your own “bull shit” thoughts and perceived conclusions and re-fix your focus on your deliberate chosen actions.

Financing is available from one of several sources

1- your cash stores

2- conventional lenders (FNMA up to 10, but really 4 to 5 properties)

3- local commercial banks – 5 to 10 (but really limited only by your finances and relationships)

4- hard money- same as #3

5- true investors, as in older real estate people that have been in and understand the business and now just want to get checks instead of managing properties (they are everywhere) – search in real estate offices; start with agents and their clients, referrals. Also, ads in a large newspaper like the LA Times- although these folks are typically looking for short term type investments; it’s all about returns.

6- Other retirees looking for better returns than the bank can provide- there are thousands- try to stay local when looking for these folks. People that prepare tax returns such as CPA’s or enrolled agents are a great source for people that earn good wages and need to find investments to give them either tax shelter or additional income to off-set their increasing tax liability.

7- Other investors like yourself looking to partner up with someone who has any of the components they perceive (or have actually identified) as missing from their own tool box needed to do this business. Local investor clubs are a very good source for these folks.

8- Check out the Homepath financing available to investors on FNMA Homepath approved properties. You can get up to 10 and the financing is superior to anything on the market. You may be paying a higher price for the properties, but when you add in the financing component it may make mucho sense. I personally am trying to buy 10. They identify several approved lenders to work with on their site. Make sure to confirm they have closed prior deals and are presently active doing these type loans with FNMA.

These are just a few tips to sort of jar your own mind and get you to start thinking in a different direction instead of just hard money for long-term financing.