BiggerPockets

The ABOR Balance Of Power Shift

Monday, December 19

One of the things I used to preach consistently to my old coaching students was that contracts have very little meaning if they are below a certain dollar amount. This proved to be the case this week when I had a lot transaction where my funds were stuck in escrow because of a screw-up by the seller's Realtor and broker. The long and short is that the Realtor failed to have the seller fill out the net sheet correctly, which caused him to flip out just before closing when the HUD-1 came out. I originally thought that I would be screwed by the situation because my funds were sitting in escrow and were held hostage due to the stalemate between the seller's broker and the seller. Fortunately our broker was able to figure out a way to get the thing closed limiting the amount of commission he had to forfeit. I immediately placed a complaint with ABOR, our local board of Realtors and was surprised at how the situation was handled. I was expecting very little, but the complaint was taken extremely seriously. The enforcement person passed things on to the Ombudsman who called me the next day. The Ombudsman is mediating the claim with the seller's Realtor and broker and we expect to get made whole in the transaction. The most surprising thing is that I learned that the seller's broker had the following things hanging over her head: 1. The effort in fighting the claim 2. Possible additional education hours 3. A valid claim on her record that could increase E&O insurance 4. Possible fines So what was a situation where our funds would have been stuck in escrow and we would have had to sue for specific performance turned into a situation where we had the balance of power. Instead of worrying about a negative NPV situation of suing a seller with our money held hostage we closed and now will likely receive our full commission on the deal! In summary I am quite impressed with ABOR and how the transaction is turning out. It is nice to have a solution for the small contracts problem!

Big Bank Box Think - The Jaded Concept Of A Relationship

Thursday, December 08

The big banks and the box-like thinking certainly can wreak havoc on a real estate investor that has the naive notion that a relationship really is a relationship.  Try going into Wells Fargo or one of the other big-name banks sometime and ask them if they do business with the people that do business with them.  I am curious to know what answers you will get.  Undoubtedly the responses will all be centered around account structures, service, etc.  

It is completely baffling to me that most of the "bankers" that one approaches today are as unskilled as they are.  They are glorified order takers that input data into some prescribed box, ship the file off to a magical person in the sky, and later give you some completely non-helpful response about the file you spent days preparing.  What is equally baffling to me is that some of the smaller banks and credit unions exhibit the same behavior.  

A relationship between a businessperson and their lender should involve the borrower placing deposits with the lender and sending new clients the lender's way.  The lender should, in turn, lend money to the borrower on non-ganster-like terms.  Look around now and see how many "lenders" are really lending money on things like spec loans, lines of credit, etc.  

Once you find a couple of lenders willing to be rational you will undoubtedly find REAL bankers at the same location.  The people understand how to price risk, the value of character, how to collaterlize their position, the value of a personal guarantee from someone with a large income and lofty credit scores.  These lenders are who you want to do business with.  

The Almost Free Lunch - Techniques For Capturing More Cheap Capital

Wednesday, December 07

Recent posts have explored the so-called "trapped equity" present when purchasing property at a discount, forcing appreciation, or present in paid-down properties with outstanding loans.  The whole concept of having equity trapped is that these are dollars that could be used more optimally in other investments.  

 

There are obvious tradeoffs with this line of thinking.  Traditional lenders will still see the debt when you apply for loans and thus your borrowing will have to take place at higher rates or less favorable terms.  Higher rates or less favorable terms are real costs for future investments.  This squares with traditional finance theory that is based mostly on studying the publicly-traded securities.  

 

Upon closer inspection there are a number of standard real estate techniques that produce an *almost* free lunch:  

 

1.  Private money - Potential private money lenders are unlikely to account for incremental risk for extra leverage because it is not their business to underwrite and price risk.  Thus one should be able to borrow at pretty much the same rate with or without the extra leverage that occurs when one untraps equity

 

2.  Private equity via a PPM - Investors are likely to place capital in a fund based on the strength of the opportunities or the management team running the fund.  A highly-leveraged sponsor that untraps equity is unlikely to get a lot of questions about the sponsor's personal balance sheet unless the investment relies critically on the promoter's personal guarantee for a loan.  This is not really common because funds this large frequently invest using asset-based financing or in project large enough where a personal guarantee is not required

 

3.  Subject-to purchases - One can purchase additional product subject-to.  This introduces call risk from the lender from the due-on-sale clause.  With servicers being compensated for performing loans on behalf of their investors in conforming product it is unlikely they will be in a rush to call the loan.  However, one can really design away much of this risk by employing an attorney like Torak that will defend suits if the sub-to purchase is done through his title company.  Torak even has a lender lined up to refinance the property if the loan is called.  The title company's closings cost more than traditional closings and the loan would presumably be on less favorable terms than one originally had, but the risk of the loan being called is so small that from a probability standpoint this is almost a free lunch

 

Traditional finance theory doesn't seem to work perfectly for real estate investing.  Additional borrowing and untrapping of equity carries little real cost if the investor has the tools needed to avoid traditional lending for financing future investments.  

Spec Loans Are Back!

Monday, December 05

After months of searching we have finally located not one, but TWO banks willing to loan money on the infill development projects we are currently actively participating in.  We purchase the land for cash and the banks each loan all of the funds to build the project.  Rates are roughly 6-7% with typical construction loan terms.  

 

This has to be a good sign for the economy heading into 2012.  Austin is on the leading edge of the recovery and what happens here likely signals what will take place to a smaller degree across the country going forward.  

 

I am anxious to see if our competitors find the same type of financing and what it does to the price dynamics of the markets we are participating in.  Both banks mentioned that they did not want us to alert others they are doing spec loans so it still seems like they are reluctant to lend without a solid introduction.  

The Entrepreneur Access to Capital Act

Wednesday, November 23

I have been reading about The Entrepreneur Access To Capital Act and it seems that the politicians in Washington may finally be doing something right.  My understanding of this act is that it will allow individuals to advertise for investors via social media as long as certain disclosures are made.  People can invest up to the lesser 10% of their net worth or $10k in unregistered securities.  Certain disclosures would need to be made so that state securities folks could track things.  

 

Access to capital is one of the main things holding the economy back right now.  Small businesses are choked off from bank lending for the most part and private placements are difficult to navigate with accredited investor money being scarce.  Small business is the engine that fuels job creation and subsequently economic growth.  This is the first large measure I have seen that addresses the root of the problem which is access to capital needed for growth.  

 

It will be interesting to see what the final changes look like and how people are allowed to advertise for investors.  It is also refreshing to see the government explore easing the completely idiotic rules around raising capital.  I think if you ask any entrepreneur about these rules and many folks that would love to invest in these opportunities you would get almost universal agreement that this is a positive step for capital formation in our country.  

The Accredited Investor Paradox

Tuesday, November 22

As time wears on and I become more seasoned at raising investment funds one thing becomes abundantly clear to me: most accredited investors don't need you and are well-versed at playing big league ball.  Of course there are doctors and plenty of folks too busy to manage their investments. However, the savvy business owners know how to negotiate a good deal and navigate the enviornment skillfully.  

 

This is quite challenging for people looking to raise funds in our current environment that is devoid of bank money.  You can have great projects with high yields and no funds to chase them down.  The government thinks they are protecting folks from spooky investment opportunities.  What the bureaucrats are really doing is building in barriers to entry for entrepreneurs that seek ACCESS to capital and not the lowest cost of capital.

 

The irony of this whole setup is that those folks with the accredited investor moniker are the very folks that don't need the extra yield that is baked into the best deals.  When you have a small capital stack seeking optimal yields is key to grow the size of your stack.  The money needs to work much harder for you to get to your goal.  If you already have access to a lot of cash your money doesn't need to work as hard and you can be more selective with your investments.  

 

The entrepreneur chasing down their dream can't raise money from those that need the yield the most.  They also have a hard time raising it from those that need the yield the least because of the built-in risk aversion or difficult terms.  The pool of investors that is left are the busy professionals with excess money to put to work.  These are the same folks that listen to the media for their investment advice.  The paradox is quite challenging to overcome!