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.

Posted to Buyer Financing, Institutional Lending, Money & the World, Uncategorized
 Email This Post | Comments(0)

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!

Posted to Business Lines of Credit, Buyer Financing, Institutional Lending, Money & the World, Uncategorized
 Email This Post | Comments(1)

I got an email from a subscriber that asked: “If a investor can give you 100% money to invest in real estate. What is the best JV arrangement you can offer him to have a workable and sweet agreement acceptable to both parties? (investor is sophisticated accredited investor).”

This is a great question, and there are 2 issues you need to address to raach an answer:

1. What are the expectations of the lender?

2. What can your deal afford to offer?

The first question is easy.  Just ask the lender!  They’ll usually tell you.  Find out what kinds of returns they’ve gotten on other investments they’ve made.  Also, establish their risk level.  For example, someone who invests in start ups may have made a killing on one particular company, but other companies may have been a total bust.

It’s not likely you can offer 10 fold returns on a real estate investment if your investor is funding the total acquisition cost.  This is why it is important to establish with your investor, what their return and risk balance is.  Real estate has less risk and more security (when you know what your doing), than most other investments.  (Return OF investment is important to all investors).  And you can add an ”equity kicker” to your offer to increase the return for the investor.

However, how high you can go, or how much you can sweeten the pot depends on your deal.

To decide this question you need to consider:

1. The cashflow and profit generated by your transaction projected over the time until you pay off the investor.

2. The financial risk - that is, in the worst case scenario, you should be able to still pay your investor what you promise.  This is critical, because losing money for an investor is going to put a mighty big dent in your ability to raise money from other investors.

This is not a trivial exercise.  To project your return from the deal, you have to factor in rental increases, expense inflation, all the operational costs including managing the property, appreciation rates, carrying costs, selling or refinance costs, etc.  And you should make conservative assumptions.

The second and more difficult challenge is factoring in the financial consequences of what happens when things don’t go according to plan.  Like, what if you have to evict a tenant(s)?  What if the renovation takes longer and costs more than you predicted?  What if the property doesn’t appreciate as much as you’d hoped?

You cannot afford to look at your deal through “rose-colored” glasses.  You need to have a “Show Me the Money” attitude.  In other words, what do the numbers show when the deal is subjected to various “worst case” scenarios. 

And, finally, once all the numbers are in front of you, you have to decide how much you’re going to want to take away for yourself.  Once you have your bottom line, you can calculate the maximum amount the deal can pay your investor.

Now, all these analyses and calculations are probably daunting to most investors.  Especially the work of making the risk analysis.  However, there is one piece of software that can reduce this entire task to a 5 min exercise.  Just plug in the numbers and read off the results. 

It is an expert system we’ve developed, called the Deal Evaluation Tool.  It is the result of our 10 years experience doing all types of real estated deals, and conversations with many experts.

I use it for every opportunity that comes across my desk.  After fine tuning it with a nice return for us and our investors, and taking account of the risks, I use to to make offers, and negotiate deals.  With it, I am always in a strong negotiating position, because I know my bottomline and when to say “Deal or No Deal”.

Posted to Uncategorized
 Email This Post | Comments(0)

WIIFM

This acronym stands for “What’s in it for ME”. And if you want to interest anybody in your project, it is the first question in their mind that you have to answer. It’s not about your deal, or how much you know. It’s about them and what they want.

Remember Dale Carnegie’s famous book “How to Win Friends and Influence People”. It was published in the 1930’s and is as true today as it was then–because it talks about a fundamental truth of human nature! After all, what you are looking to do with a private lending prospect is to:

1. “win friends” - that is build their trust

2. “influence them” to invest in your project.

Well, it is part of human nature to ask “What’s in it for ME”. Even altruists, and saints ask that question same as a business person or a wealthy person. The only difference might be what they consider a good reward to be.

So, in order to communicate with anyone, you have to first get their attention, and keep their interest. And the best and simplest way to do that when you want their money, is to tell them what their going to potentially get if you listen to you.

You could start off a conversation by saying something like, “Joe, Do you have an IRA or other investment capital, that’s not earning 15% and secured by real estate?” Of course you will modify this depending what return your planning to give, and what security (if any) there is for the investment. Or you could try: “Pam, would you be interested in earning 15% on an investment secured by real estate?”

Now, if the person says no–end of conversation. However it’s been my experience that most people will at least want to hear you out. And, of course, it’s much easier talking about your deal to someone who is already interested, than someone who’s resisting or bored.

Now, a lot of students ask me “how much should I offer a private lender”. Well, the only true answer is that depends. The key is to know what kind of return the person is normally getting from their investments, and what would be a significant improvement over that.

For example, with friends and family who I would generally classify as unsophisticated investors, their investment experience consists of savings, CD’s, stocks and mutual funds. Savings and Cd’s don’t even keep up with inflation. The stock market has been rather pathetic over the last ten years producing a measly 2.5% annual return. So for these private money prospects, a 10-15% return should sound pretty good.

For more sophisticated investors and high net worth individuals, a higher rate of return is expected since they have many more investment options.

However, there is one more key consideration: How much can your deal or project afford to pay an investor. If you are offering regular interest payments is the cashflow sufficient so that you can pay your investors, even in the worse case scenario. The answer had better be yes. More on that next time.

By the way, if you want to learn everything you need to know 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.

Posted to Friends & Family, Private Lending, Uncategorized
 Email This Post | Comments(0)

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).

.

Posted to Commercial Lending, Institutional Lending, Marketing in Real Estate, Money & the World, Uncategorized
 Email This Post | Comments(0)

I my experience, most investors feel about business plans the way many people feel about exercise.  They know it’s really good for them, but they just can’t find the time to get around to it.  Other things always seem to come up. 

Now, you probably know the saying (and the truth) that “if you fail to plan, you plan to fail.”  I know I’m preaching to the chior, but let me give you some other reasons why a business plan can boost your success in obtaining large sums of money from private lenders:

1. Having a well-thought out business plan, is a powerful and positive marketing document for sophisticated and wealthy private lenders and angel investors. 

2. Your business plan will enormously boost your credibility with private lenders (even friends and family)

Let me explain. 

Most most investors get into real estate, strongly motivated to be working for themselves and achieving financial freedom.  And my guess is that even if you have a company (and you should), it’s really a one-man (or one woman) show.  Sure, you may use an attorney to close, but it’s pretty much you. 

That may be great for you, but scares the heck out of private investors.  Why? because they are used to evaluating Companies, as investment prospects.  A company is an entity that is not dependent on one individual.  If the individual gets sick or goes on vacation, the company’s business continues, and doesn’t put the investment at risk.  Having a business plan that shows you have or are building a strong organization that knows where it’s going is a major factor in addressing that concern.

In fact, all of the sophisticated and wealthy private investors that I know, expect to see a business plan to evaluate an investment. 

As a marketing tool, a business plan will help you create your story that will attract the interest of private lenders.  In fact, having a “good story” is absolutely essential if you want to be successful in raising private money.

I know that sitting down to write a business plan is a daunting prospect.  Would having a template to follow, and even being able to get a plan written for you be of interest?  If so, you are invited to join our inner circle where we have a whole training session on just this topic.

Posted to Angel Investors, High Net Worth Lenders, Million Dollar Slush Fund, Private Lending, SEC, Uncategorized
 Email This Post | Comments(2)

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.

Posted to Buyer Financing, Institutional Lending, Uncategorized
 Email This Post | Comments(1)

Sherril wrote a comment on my previous article of “private lending - the best times are the worst times”, saying that us investors will just have to wait until the market becomes more positive. Well,
I don’t like the idea of waiting til the market does something. Rather let’s respond creatively to the current market negativity to make some money.

First, let’s recognize that the truth is that home values a falling in many areas of the country. This is definitely not good for people who want to sell their home. Despite the fact that this particular downturn has been triggered by the adjustable mortgage debacle, it is really just part of the cycle of real estate values that occurs with a period of 8-15 years. We’ve been in a up cycle so long, most investors haven’t a experienced a down period. And values will eventually come up again.

But what is the investor supposed to do now? First, let’s go back to the first principle I believe every investor should live by: “You make your money when you buy” This means that your profit is built into the price and terms of the offer your willing to accept.

For example, if you are flipping houses, start with the calculation of what your investor buyers are willing to pay for these properties. It may still be 70% of after repair value (ARV) - repairs, but what is the percieved ARV?

In a falling market comps are deceptive. They are a backward looking measure of value, of people were paying for similar properties 6 mos to 1 year ago. The trick is to be able to project with some safety margin how low the price will be 6 mos to a year from now! In some places the depreciation rate is 5%. The percieved depreciation rate of your potential buyers may be higher. And that’s the real value of the ARV.

Start with that value, factor in your costs and profit, and you’ll get the maximum about you can offer to pay your seller.

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 Buyer Financing, Marketing in Real Estate, Uncategorized
 Email This Post | Comments(0)

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.

Posted to Business Lines of Credit, Commercial Lending, Institutional Lending, Uncategorized
 Email This Post | Comments(2)