How to Get Private Lenders & Lines of Credit to Fund Your Business

Everyone’s worried.  The media and candidates are having a field day blaming their favorite scapegoat.  Should we fire bank CEO’s? Should we nationalize banks? And how can we “Make sure this never happens again?”

Congress wants to make laws (of course) with more stringent regulations (that will probably only screw the small investor).  So, let’s take a step back and take an objective view of how this problem developed.

Craig Nichols wrote me last month with a very perceptive comment about the “mortgage meltdown:  “The banks were fulfilling a mandate of Congress. Congress caused this mess. The Community Reinvestment Act of 1995 was revised/written to relax the underwriting standards, so that more people could qualify for loans to purchase houses.”

Let’s follow the trail from here. 

First, let’s understand, banks like insurance companies lend money (or write policies) based on a mathematical assessment of risk - it’s called underwriting.  For banks, based on credit score, debt to income ratio and other parameters, the lender can decide to whom and how much to lend to keep defaults (losing the investor’s money) to a minimum. 

Congress of course failed to understand this (or more likely ignored this) so they could get a social pat on the back from constituents who could now buy homes.

Now we get to the next disconnect.  The banks certainly knew the consequences of “relaxing their underwriting standards”.  However, with a mandate and pressure from Congress and the opportunity to make literally Billions in more revenue, the entire system of checks and balances was subverted.

Qualification requirements were certainly relaxed, but this is not what caused the major damage.    To really open the revenue floodgates that the banks’ shareholders were now expecting, the banks had to vastly expand the pool of available homebuyers.  They did this with the indiscriminate use of  ”no doc”, “stated income” and “adjustable rate mortgages (ARM)”. 

“No doc” and “stated income” allowed borrowers with decent credit scores to lie about their income.  Thus, allowing many who clearly would not qualify based on their ability to make the mortgage payments to get loans. 

The ARM’s gamed the underwriting system, since qualification was based on the income needed to make the payments on the abnormally low first 6 mo or 1 year “teaser rate”.   These rates got so ridiculous that homebuyers making $30,000 a year were qualifying to buy $500,000 homes!

But, the real killer with the ARM was, that when the rate re-adjusted, to a higher than average interest rate, default was virtually inevitable.  And this sowed the seeds for the enormous disaster that has come to pass.

So, how did the stock market become involved.  Well, most banks do not hold the mortgage notes they lend on.  They package these notes into “Mortgage Backed Securities” (MBS) and sell them to Wall St with the help of Freddie Mac and Fannie Mae - 2 semi-private (until now) corporations. 

 Now, these 2 corporations (probably also motivated by greed) did something that was financially unconscionable and unethical.  They packaged and sold these loans to Wall St as if they were “A” paper with investors paying premium pricing, for loans that were very likely to go into default.  That paper was actually worse than “sub-prime” because the possibility of default was almost certain.  I doubt Wall St would have bought these loans or at least downgraded them to junk bonds, if they knew the real risk.

So, when the foreclosures started mounting, everyone from the banks to the big Wall St brokerages houses went down, precipitating a worldwide financial crisis.  

Personally, I don’t know how to fix this.  It is certainly unclear whether the 100’s of billions of dollars are going to make a difference or even the right difference.  However, do have a suggestion to help avoid having this type of thing happen again.

First, we don’t need more regulations.  It wasn’t the banks that started this, it was Congress who made a bad law, whose consequences they didn’t forsee or chose to ignore.  After that, the profit motive, greed and human nature (none of which is going to change) took over.

So, what can we do, to protect us from our lawmakers.  In the Constitution, we have checks and balances.  An executive branch has the power veto, and the judiciary has power to strike down bad laws (after the fact).

What we need is a separate branch of government that can quash bad laws or laws with serious “unintended” consequences before everyone suffers.  So, let’s set up a new branch of government - the Oversight of Unintended Consequences”.  A branch that would be free political considerations and could point out to the American people and Congress the serious repercussions of ill-thought out laws and regulations.  Perhaps, there could a sort of “legal underwriting”  that could assign a “threat score” to any proposed regulation.  Only proposals with a threat score under a certain threshold would be eligible to become law.

What we have now is the consequence of a very bad law, that took 13 years to threaten total financial meltdown.  And by the way, even if the 700 billion solves the problem, it’s a cost that is coming out of our pockets, and is weaking the economic strength of our country. 

And how many other “bad laws” are going to have very unpleasant consequences that we have not yet forseen.  We have the intellectual resources and technology to make such forecasting a reality.  Maybe we should consider it before the next disaster overtakes us.

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This may sound a bit presumptuous.  And after investing in all levels of real estate for the last 10 years, I believe these insights will be very helpful to the general public suffering from the tightening of credit guidelines and especially our legislators, who could really stimulate the economy by acting on the suggestions in this article.

First, let’s be clear, that the “credit crisis” or “mortgage meltdown” was caused by institutional lenders gaming their own underwriting system by the way they approved adjustable rate mortgages or ARM’s.

You see, one of the primary determinants of whether a borrower gets approved for a mortgage is whether the borrower can afford to make the monthly payments, which in turn depends on income, debt payments and the amount of the monthly payments.  With fixed rate mortgages, the monthly payment is the same from the first payment to the last.  With ARM’s there’s a very low “teaser” rate for the 1st 6mos to 2 yrs, then the rate jumps enormously. 

So, when the banks decided to qualify the borrower based on the “teaser” rate, you had a situation where couples earning as little as $30,000 per year were qualifying to buy a half million dollar house!  Of course, when the rate adjusted, the monthly payment became almost as much as their monthly take home pay and foreclosure was inevitable.

The banks initially got away with this sleight-of-hand, because all these loans were packaged and sold to Wall St, before they defaulted.  It was the “meltdown” of these mortgage-backed securities that threw the market into turmoil.

The banks, decided to look like they were acting more responsibly by “tightening their credit requirements” across the board - basically making much, much harder for individuals, businesses and other credit suppliers to obtain loans.

Predictably, all this did was turn a problem into a huge crisis that is hurting the entire economy, and in particular is actually worsening the problem, the banks need to solve.  That problem is the accumulation of billions of dollars of foreclosed homes in the banks’ inventory–also known as non-performing assets.

Why did the credit tightening worsen the foreclosure issue? Because the only way to get rid of the banks’ inventory is to sell the property.  The tightened credit requirements have greatly shrunk the potential buyer pool for these properties.  And if you think about it, the foreclosures were and are being caused by lack of borrower income to pay the note, not their credit score!

So, what’s the solution that will get all these foreclosed homes off the banks’ books, and return the property to homeowners and relieve the burden on the economy.  It’s not going to be a government bail out, or the ludicrous Economic Stimulus Act, which is just a hand out to Fannie Mae and Freddie Mac.

What needs to be done, is for the banks to sell the properties they’ve accumulated at a sufficient discount so that investors will buy, fix them up, and then sell them to ender users.  Investors are, and have been a massive source of private money for this type of real estate acquisition.  And this is a common practice at most banks that has been going on for years. 

Now, what needs to be done, is that banks need to instruct their Loss Mitigators to sell these properties at whatever discounted price it takes.  And Corporate Management should incentivize them by giving them bonuses based on the number of properties sold.

Second, the banks need to roll back their credit requirements to the pre-2008 standards and tighten up the underwriting of ARM mortgages so that the adjusted payment (based on current interest rates) is used in the calculation of the debt ratio.

Why should the banks agree to do this?  First, they’ve written off these loans already.  Second, divesting themselves of these non-performing assets will increase their borrowing power.  Third, they are not going to recover any amount of their investment any other way, because these unoccupied homes are rapidly declining in value due to vandalism, and neglect.

This is a Perfect Solution, because it would remove the non-performing assets from the lender’s books and restore them to solvency.  Second, loosening up the credit requirements (which did not cause the problem in the first place), would stimulate commerce, and loan approvals which would increase the banks’ income.

And Best of All, it would stimulate the economy by restoring credit availability without costing the government or taxpayers a dime!

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You may have heard, the President signed the “Economic Stimulus Act of 2008″ into law.  Basically, it’s a big hand out to Fannie Mae, and Freddie Mac.  The Banks that caused the whole mortgage meltdown in the first place, are also likely to scoop up some of the cash.

But how will it affect us investors, let alone the homeowners?

Well, for starters, homeowners are still screwed.  You see, the act allows Fannie Mae to underwite mortgages to a higher amount, and it raises the limit for FHA loans requiring a 3% down payment.  Sounds, great, right? 

But think about it?  If you’re selling home and requiring your buyer to obtain financing, what is the major challenge?  It’s not the down payment or the limit on the loan amount–it’s the buyer’s credit qualification.  And as you are probably aware, banks have raised the bar considerably.  The minimum credit score is much higher, stated income loans and no doc loans are virtually non-existent, debt-to-income ratios are lower.  That has pretty much eliminated a large chunk of the buyer pool.

So, selling to owner-occupying buyers is going to remain difficult, and if your potential buyer has to sell their current residence before they can buy yours- well… Let’s just say I would NOT advise a seller to allow a financing contingency in the purchase and sale agreement.

Now, how about another benign sounding provision–a hand out to cities and towns with high foreclosure rates to buy up REO’s, fix them and sell them.  It’s obvious, that if you are an investor competing against one of those grants, your out of luck.  Banks of course, are going to benefit, because they’ll be able recoup practically all their costs on these bad loans, with free money.

And what else will happen?  These grants are going to depress property values in any area they are used.  Why, because the government entity is going to be motivated “as a public service” to sell these houses cheap, so more of their residents can own the American dream.  If you’re in the real estate buying mode, wait for the drop before you buy.  If you’re in the selling mode, you are just going to have to wait even longer to cash out your equity.  Be sure you have a positive cashflow, because you’re going to be waiting for quite a while.

So, as usual, the government has meddled with the economy using our tax money, to support the big campaign donors - the banks and the mortgage establishment.  Everybody else, is just SOL.

The solution to the housing crisis is one heck of a lot simpler and straightforward.  To slow down the foreclosure firestorm, give all homeowners with adjustable mortgages the right to negotiate loan modifications to convert to fixed rate, retroactive to the beginning of first adjustment period.

Second, and most importantly, is get the lending institutions to roll back, some of their stiff borrowing requirements.  The lending criteria were not unsound in the first place.  It was the banks own underwriting sleight-of-hand, that caused the crisis.  Because, they allowed the borrower to qualify for the mortgage based on the artificially lowered 1st year (or 6mos or 2y) payment, instead of the rate when the loan readjusted.  This allowed them to collect big loan origination fees from people who couldn’t possibly afford to pay the mortage payments once they adjusted.

Of course, to implement this, banks would have to admit to their greed and avarice that caused the problem.  That ain’t gonna happen.  Speak about “truth in lending”! Ha.

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In real estate, you don’t get what you pay for.  Instead, successful investors pay for what they get.  This is especially true for buying income properties. 

I saw a recent article with the headline “Office Fundamentals weaken in the 2nd Quarter (2008)”.   The article went on to point out that the vacancy rate in office buildings nationally was increasing due to decreasing demand even with low delivery of new space.  And that surburban offices are feeling the biggest crunch.  In fact, an accountant friend of mine, just gave up his surburban office in favor of his downtown office.

Obviously, this is a symptom of a weakened economy, brought by greedy banks that caused a mortgage crisis and credit crunch that are percolating through the economy.

Does this mean you should not invest in office buidings.  Not necessarily–especially if you only pay for what you are buying. For example, if you are considering a half-empty office building only offer a price based on the income from a half-empty building. In fact, considering the trend in office occupancy is negative, it is crucial to examine the stability of the current tenants in the property.

Also, just like we advise investors in single family homes to build a buyer’s list, buyers of commercial property need to created a “tenants list”. You also need to expect that in a buyers market, your prospective tenants are going negotiate harder for greater concessions, and lower rents.

You’d better take all these factors into your projections and factor them in to your offering price. Now, you may be thinking, “but, Richard, if I do that, who’s going to take that deal?” Hah. The answer is only the sellers who are motivated to do business with you on your terms. If not, NEXT! At least you’ve saved yourself the financial stress of a money-sucking investment.

I know it can be quite a chore to go through the complex analysis of the kind I’m suggesting. Well, I’m happy to say, you can cut the time to minutes if you use my Expert System, called the ‘Deal Evaluation Tool.’ Not only can you project for up to 10 years in the future, the profit, and cashflow of any type of property, and model any kind of scenario of financing, rent, and occupancy changes, etc. You also get expert advice on the amount of financial risk you are taking. A rosy profit picture isn’t worth much if the chance of failure is high. Anyway, if you want to get a copy of this amazing tool, just click here. (or you can get it for Free if you are a member of our Inner Circle).

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Every real estate investor with half a brain, knew that when the banks started giving out ARM’s (adjustable rate mortgages) like candy, somebody was going to have to pay the piper someday.  Well that day has come!

But instead lambasting the banks who are now causing some much suffering throughout the economy, the Feds and Congress are devising “bail out” plans. Never mind the strapped homeowners who banks refuse to do workouts for… Nevermind the investors who can’t get lines of credit or investor home loans because of “tightened” credit requirements.

Just read the following sweet deal that the 2 largest mortgage lenders are getting, even though they’re losing massive amounts of money, and the equity from their stock price is in the toilet:

“The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies “should such lending prove necessary.” They would pay 2.25 percent for any borrowed funds — the same rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies’ ability to “promote the availability of home mortgage credit during a period of stress in financial markets.”

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and buy shares of the companies — if needed.”

Do you think maybe these institutions could extend investors (who really are the creative engines in the real estate market) increased lines of credit at lower interest rates?

Especially since real estate is really a good deal now for those who know how to choose wisely.  If you’d like to start choosing more wisely, and be able to convince private lenders of that fact, you should check out my Expert System called the Deal Evaluation Tool.  In not only precisely calculates your profit and income for 10 years down the road, it also quantifies the risk so you know what to avoid, BEFORE you sign the contract!

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You know what really stops real estate investors from making a fortune. It’s not finding most of the funding for a deal–it’s finding that last bit. For example, almost anybody can get an 80% LTV mortgage. But the next 20%–there’s the rub.

Oh and you “subject to” investors where the seller is giving you their house or apartment? Isn’t it true that more often then not, there’s additional cash required for mortgage arrearage the seller left you with, or minor (sometimes major) repairs, other liens, marketing expenses, etc? You can easily go broke doing subject to deals without an additional source of money.

There are actually quite a few other sources of money, and they work quite well with primary funding strategies like institutional loans. I call it, the multiple funding strategy. These days with credit tighting, institutions lowering the loan to value ratios they’ll fund, and looking for more security from the investor, a multiple funding strategy is practically a necessity.

This is an especially good strategy to use with private lenders who expect a high return on their investment (20%+). Just do the math. If you use an investor’s money to buy a house worth $200,000. And let’s say you end up paying $160,000 for acquisition, repairs, etc. You put a tenant in the house for 3 years on a lease option which the tenant exercises for $230,000.

Okay, your profit is approx $70,000. However, if your investor put up the entire $160,000, what’s his return if you gave him the entire profit? It’s about 44%–that’s over 3 years. The investor’s annual return is only 14.5%. If the investor expected 20%, he’d be pretty disappointed.

And what do you get in this scenario? Just the cashflow from the property. Now with no mortgage, let’s say that’s about $1000/mo. You net $36,000. However, if you owed the investor the 20%/y interest, $26K would come out of your share to the investor, netting you only $10,000.

Now compare the same scenario with getting an 80% institutional loan at 7% for the $160,000 purchase price. Now, you’d only have to borrow $32,000 from the investor. 3 years at 20% would amount to $19,200. The investor is happy, and you’d net $50,800, plus the net cashflow from the property!

Which scenario would you prefer?

By the way, if you want to know how to fund every deal you do, I’ve created the absolute best and most comprehensive funding manual you will ever see called “Show Me the Money“. It contains step by step instructions on how to get money from private lenders, high net worth individuals, financial institutions, buyers, sellers, notes, and much, much more. And, it’s a ridiculously low investment (for now!). Click here and Get in NOW.

Posted to Business Lines of Credit, Institutional Lending, Multiple Funding Strategy, Nothing Down, Private Lending
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Today is the 4th of July. I love this country because it offers more opportunity for anyone to fulfill their dreams than any place on earth. And that goes for getting the money from private lenders or other funding sources (of which there are many). Yet many investors find funding the major challenge to success in their real estate investing business.

Let me give you a tip–I call it the ‘Trust Factor’. A saying I’ve learned from my Angel Investor acquaintances is “Bet on the Jockey, not the horse.” This means that when a potential private lender is considering a new investment, the people involved in the venture are a major focus. That means you and your team.

My 2 yr old granddaughter has taught me a profound insight about trust. She believes everything her Mama, Nana and Pa (that’s me) tells her. Why? Because she totally trusts us and we always tell her the truth and do what we say we’re going to do.

And aren’t those the characteristics of people that we trust in our life. So, if you tell a potential client or lender that you’ll call them tomorrow, make sure that you do, rather than calling later with an excuse. If you tell a loan officer that you’ll have the paperwork for them on Wednesday, make sure you do, and that the package is complete! Same goes for making payments on-time (or early), and so forth.

The interesting thing is that when you do this consistently, you train other people to treat you the same way–just like my granddaughter. And it’s such an easy thing to do–anybody is capable of it. Make it one of your principles.

By the way, if you want to learn the other 4 characteristics for private lending success, I’ve created the absolute best and most comprehensive funding manual you will ever see called “Show Me the Money“. It contains step by step instructions on how to get money from private lenders, high net worth individuals, financial institutions, buyers, sellers, notes, and much, much more. And, it’s a ridiculously low investment (for now!). Click here and Get in NOW.

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I was reading an article on senior housing.  The slow housing market has delayed the plans of seniors who want to move to an independent-type retirement community but who can’t sell their homes. It’s not so great an issue for senior care facilities since the move to them is more out of necessity.

Now, what about your buyer?  Does he or she have to sell their house in order to buy yours?  If you have a financing contingency in your purchase and sale agreement, you are opening yourself up to be held hostage by the entire housing market. This is not smart.  Instead you should charge an earnest money fee equal to the amount to cover your payments and then some over the time of the contract.  And you hold the earnest money!

However, because of the tightening of the credit markets, foreclosures and the general decline in home values, you need to have your exit strategy (the one that will make you money, despite the challenges), BEFORE you buy.  It could be flipping to other investors, offering owner financing, down payment assistance, rental, etc.  Whatever you do, make sure you have realistic (below market) numbers for rent or sale prices, and realistic holding times.  If you still calculate your makiig a profit, go for it.  If not, renegotiate terms, or pass.

Remember one bad deal can negate the profit from 5 good deals, or take you out of the game entirely.  So, don’t let anxiety or greed motivate you to make risky choices.  Believe me, it is not worth it.

If you want to learn all of our strategies for dealing with buyers (or renters) including finding them, negotiating and funding them, you need to join our Foreclosure Millionaire Club.  You can try it for just a buck.  Click here to Join.

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How would you like to learn a game that could bring you hundreds of thousands, even millions to buy all the property you wanted. Yes, well then you’re gonna love learning the real estate investor version of the bank financing game.

Truth is borrowing from banks is probably the easiest and cheapest money you’ll ever find. Why? Because you don’t need to make a presentation or convince anybody to give you money. You just fill out forms, follow the rules and play the right strategy–and voila the money comes rolling in!

Remember playing ‘Monopoly’ as a kid. That game was all about the real estate acquisition and income game. Let’s call this game ‘Financing Mogul’. The goal is to acquire as much financing as possible for buying property. So, set a goal: $100,000, $500,000, $1million, $10million, and let’s play.

Now, I know that most real estate investors are freaked out about going to a bank to borrow money–fear of rejection, fear of liability. That’s because they don’t know the rules and they don’t know the winning strategies.

Banks based their lending decisions on set of fixed guidelines and rules. So to win the ‘Financing Mogul’ game, you need to learn the rules, and play a winning strategy. Now, I devote 3 chapters to this game in my “Show Me the Money” training manual (scroll down the right side of this page to get it).

Now, here’s the first rule - you need a good credit score. These days, that means a 680 to 700. Now, don’t get all discouraged if your not at that level. This is actually easily fixed.

First, stop doing stuff that lowers your credit–like paying late on bills. The easiest way to do this is to arrange with your vendors to automatically draft amounts out of your bank account. Or bank online and set up automatic monthly bill paying.

Second, check out RECreditHelp.com.

And even if your credit is in the 680-700 range, you’ll get even more money, more easily and more cheaply if your credit is in the 750-800 range. So, if you want to win the real estate financing game, run, don’t walk to to find out how you can improve your credit yourself.

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I read an article where Donald Trump was quoted as saying:

“The problem that I see with the United States is that we’re no longer respected, we really aren’t,” lamented Trump, pointing out that there is plenty of blame to go around, starting with the political leadership. “I think that [perception] can be changed. We have the greatest people, the greatest businesses”

Now, Trump may be correct about less foreign investment in US real estate, but it’s not because we’re “no longer respected”.  That’s complete crap.  Whether we are respected or not, is not what determines how an investor invests.  It really has to do with Poor Marketing.  Now, the US government is certainly to blame for part of it.

For the rest, if you want to sell your property, you have to market.  And in a time of tight credit, you have to market harder.  That means understanding in detail  your target market.  And then with laser like accuracy, inundating that group with super-effective marketing campaigns.

So, stop worrying about what everyone else is doing or thinking.  Focus on increasing the power of your marketing.

Posted to Commercial Lending, Institutional Lending, Marketing in Real Estate
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