What You Missed February 2012 General Meeting
by Rob Earhart
How to Raise Capital and Work With Lenders
February 7, 2012
Mr. Bob Beckman introduced us to “How to Raise Capital and Work With Lenders” at our General Meeting on Tuesday.
Bob asked “Who has a website?” and “How many people go to the Yellow Pages for information?" It seems that no one looks to the paper; we go to the web to see how credible the company is.
Your website will be the greatest tool you can have and it’s relatively inexpensive. You can get business management software, do property analysis, document creation, your own repair list and many other things on the Web. Mr. Beckman told us to “make sure you come to the luncheon at 10:00 tomorrow. Bring your laptops, we’ll explain it, install it and set it up for you.”
This is going to be the most important seminar you will ever attend. “What is the one thing that concerns you the most?” Who thinks that getting money is the biggest concern? (Some raised their hands). “That is it!” exclaimed Bob.
“I started a company called Rehab Funding, and turned down over twenty thousand people,” he said, describing the complex interaction with lenders. “I can show you what to do to become successful with lenders,” proclaimed Bob.
I got my degree but decided to go out and buy a property I liked, then tried to get a mortgage but was turned down from many lenders. Since then I’ve made it my life study to get money.
“Who has spent time mastering the ways to deal with money?” Bob found there are three kinds of borrowers.
- One finds a property and tries to get money, gets turned down, then quits.
- The second one finds some properties and gets some money at times and plods along just getting by. 98% fall into this category.
- The third masters money-capturing and becomes successful.
Build your financial foundation on a firm footing for it to last.
What is Hard Money? “Money that is hard to get”. Hard money is loaned based on the intrinsic value of the property. Banks used to offer: Stated Income; No Doc; Sub Prime loans; and Teaser loans, where it is at a very low interest rate, then accelerates and resets. Those loans lead to disaster.
What’s changed? Now states have become Judicial states, with more consumer protections to prevent further collapsing of the housing crisis and the credit crisis.
What are the advantages of using Hard money or private money in your deals?
- Short term loans with no pre-payment penalties
- Turn around time
- Minimum loan size
- Fear of construction loans
- Creative or unique financing
- Reporting to the major credit bureaus: typically they are not reporting
- Ability to buy in the name of a corporate entity.
Cost? 10-20%, 5-10 points for hard money.
Is it worth it? It depends. Always remember it’s not important what others make on a deal, it only matters what you stand to make on the deal.
Differences in hard money and private money:
Hard money lenders look at equity in a property and follow an established criteria.
Private money focuses more on the character of the borrower and is more flexible.
Hard money advantages
- More established/professional track record
- Established underwriting
- Experienced working with real estate investors
- Experienced with distressed properties
- More streamlined
- More consistently funded
Private money advantages
- Brings a human element to decision making
- Less red tape / less underwriting
- May consider different types of properties
- A well-funded private lender can write a check immediately
What is the best way to find hard money lenders
- Subchapter groups
- Talk to other real estate investors, they will tell you all
- Search engines
- REI websites
These are the first steps to getting a loan: Look at every deal through the eyes of the lender. If it was your money, would you look at it through their eyes, or yours?
Things that lenders want to know
- How much money do I stand to lose? What are the opportunity costs where they could loan to a performing loan if your does not?
- Types of repairs? What are they comfortable with?
- Are there adequate inspectors or appraisers to check on your progress?
- How difficult is it to take back a property in that area?
- How many vacancies in the immediate area?
- Is there something uniquely negative about the property? Settling, sinkholes? Look at it from the lender’s perspective. If there is a problem, disclose it to the lender.
- Are there past title issues. You want it clear for you and your lender.
- Property “as is” value, and after repaired value: the lender is more concerned with the “as is,” because the "after" is “some day.”
- Rental rates for properties in that area. If they are above the loan cost, the lender will be comfortable.
- Is the potential borrower overseeing the repairs or do they have a GC (general contractor)? Keep docs to show the work you have done.
- Have you used this contractor in the past? Pictures, testimonials?
- Is the property properly insured?
Do what others don’t do to comfort your lender.
You have to address the lender’s concerns and do all you can to secure the lender’s money. One tip is “Never ask for more money at one time than the ‘as is’ price.” This lets the lender know he/she is not at risk for more than the amount it can be sold to recoup their money.
These are some of the questions lenders have about borrowers:
- What has their pay history been?
- Do they currently own other properties?
- What type of properties have they owned in the past? Show documentation of what you did. Put together a little book.
- Where are the properties that they currently own?
- How much do they have in “seasoned reserves”?
- What is their debt-to-income ratio?
- Will they buy more properties during the course of the loan?
- Do they have children near college age?
- Are they currently employed?
- How long have they been employed?
- How much do they make?
- Will the borrower continue their employment? Get a letter from your employer; it only needs to state that you "are an employee in good standing.”
- Has the borrower ever declared bankruptcy?
Find blocks where work has been done but there is a dog that can be repaired. Find a property that lenders will want to do on the street.
Present yourself in the best way, but be truthful.
Inexperienced = unencumbered by other properties
Too many properties = excellent experience, document pix, leases
Past bankruptcy = clean history since bankruptcy
Anticipate the question that you will answer
Learn the golden rule: “He who has the gold, RULES.”
Learn the specific questions that you should ask your lender and how to best ask them.
31 questions you should never ask.
When asking questions learn to be subtle.
Win friends and influence underwriters. Tips:
They want to turn you down. Request a senior underwriter, they have standing in the company and are not afraid to say yes.
Get them all the documentation they request immediately and exactly as they requested.
They will ask to review all financial information.
You need to understand the specific info they want
- Structural issues
- Underground oil tanks
- Flood zones
- Termite or pest
Picking the best lender for your loan is imperative. Check for:
- Underwriting standards
- Property types they loan on
- Max/min values
- Rehab types and sizes
- Experienced vs. inexperienced buyers
- Their overall comfort zone
Learn how to:
Convince a lender to joint venture with you.
Convince a lender to pair you with a partner.
Establish your credibility.
Write a formal business plan that your hard money lender will love.
Work on your pre-Exit strategy. It turns them on. Will you get:
- A refinance pre-approval
- Pre-sell agreement with a non refundable deposit
- A signed lease with non refundable deposit
Bob then introduced us to his cd’s on how to do everything to find a good lender and get that loan you need. And, he invited all to his presentation at the Luncheon the next day.