Quick! How would you make this deal fly?

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Quick! How would you make this deal fly?

Page Huyette
Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes

I've been in the process of putting together a private money info packet, as I've not used anything other than conventional financing to date. HOWEVER, this deal has presented itself to me before my ducks are in a row, and is currently in the "too good to be true" category.

I'm still doing my research and have yet to apply my complete skeptical eye on it (i.e.: my contractor) but right now this looks like it could be my white whale if it pans out. I don't want to pass on it just because the timing is a little off.

It's a triplex, bank owned, which the numbers showing decent cash flow with room for raising the rents without much work. I'd like to make this deal work using private money for the down payment, financing the rest. Here are my questions:

1. I can't seem to come up with some natural jargon for friends and close colleagues to approach them about private money lending. It seems forced--anyone have an elevator pitch they'd care to throw at me?

2. As incentive for loaning the money, how do I offer them collateral? First lien? What if there are multiple investors? What's the best way to structure this so they have confidence in the deal and I don't have to take on a partner.

3. This is the first deal I'll do without actually living in the property (though I am considering doing an fha and living in it, but not my first choice due to pmi) so how do I complete the loan paperwork with the bank--it's a legal triplex but currently vacant due to a foreclosure a few months back. Would the bank look at rental history from the previous pm and take that into account.

Excited about the possibilities with this deal. Thanks in advance for any feedback or advice.

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Jon Klaus
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
13y

Try contacting the water company for historic usages.

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  • Gene HackerPro Member
    Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
    13y

    1 - you elevator pitch IMO should be simple and understated. Here is an example of what I might say..."Have you ever heard about private lending. It is something I am considering for this very solid deal I have lined. Basically it is a loan with 9% to 11% interest which backed by real estate. Not the risky loans that banks make at 80% LTV but more in the range of 60% to 65% LTV so there is a lot more collateral backing up the loan"...

    If they are interested you can dazzle them detailed report of the deal you are working on.

    Of course you would need a very good deal to be able to offer them 65% LTV.

    I am not always comfortable pitching to friends and family but it gets easier with practice.

    2 - Deed of trust, promissory note, title insurance and hazard insurance. Offer to pay all the fees and to do all the work to keep it simple for them

    3 - every bank will have their own rules and procedures. Many banks are going to want to see that you have skin in the game....most are not ok with you bringing in a second loan and not having your own funds in the deal.

    1Reply
  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    Gene,

    That's part of my question. Since the private money wouldn't be a partner on the loan, how is that money stated--personal savings, gift, ???? That's where I get lost. Banks like to know where the funds are coming from, and I want to be transparent but not stupid.

    When you refer to the title and hazard insurance, how does that secure their loan with collateral?

    I like your pitch ideas--thank you. I'm quite comfortable speaking in front of people, but it's funny how new approaches can trip you up sometimes.

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  • Gene HackerPro Member
    Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 974 posts · 488 votes
    13y

    If you could convince a private lender to carry a second you would need to disclose it as exactly that...a second loan to be secured by the property. Calling it something creative is likely not going to fly and imo not the right way to operate.

    Title insurance protects you lender by making sure there is reliable title on the property and that their loan is actually in 1st position (or what ever position they agree to).

    Hazard insurance protects them just as any insurance protects a party. If the collateral burns to the ground, their loan would be paid off out of the insurance claim.

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  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    Ok. I'm looking at bank financing, not private for the note. Just private for part of down payment and repairs.

    Thank you--

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  • Tim Delp
    Real Estate Investor · Jacksonville, FL · Member since 2012 · 109 posts · 22 votes
    13y

    a bank is going to require that you have your own money for your down payment. Your own money means that it is in your bank account and you can document it with 2 months statements with no large deposits.

    Banks are typically not going to want to do the financing with somoene else lending you the money for the downpayment and closing costs, especially on an investment properties. Banks typically look at the appraised value or sales price whichever is less in determining their loan to value

    You might find a local bank that is lending their own money not doing loan to fnma or fha guidelines that will entertain other options.

    The key if you end up looking to do fnma loan with 25% down is that you will need to be able to document your own funds for the downpayment and as mentioned above you will need 2 months bank statements with no unsourced large deposits.

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  • Fred Ramos
    Investor · San Antonio, TX · Member since 2013 · 153 posts · 36 votes
    13y

    A good incentive is a good return on their money.

    Have you heard of the lousy returns banks pay..? according to bankrate.com todays highest paying CD IS .999%? not even 1% !

    Would you be interested in learning how to get 7% to 9% interest on your money year in year out, fully secure against real estate?

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  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    Dang Tim, that there's some good hard facts you are presenting.

    That's what I thought the case would be with a traditional lender. What are my other options that are reasonable. I'm the sort of person that doesn't give up easily :) Can I do a 60-day seasoning on private money funds paying interest with an incentive?

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    13y

    I have been working with private money for a long time now. Unfortunately, I have found that private money doesn’t usually fall inline just because the deal is good. Hard money may, but private money will not. Private money wants trust – it wants a relationship. The relationship takes time! These people want to know that you are a winner before they jump onto your bandwagon. There are exceptions of course, but this has been my experience.

    The way you collateralize private money is either with a note and mortgage or a deed of trust, depending on whether you are in a lien theory or title theory state (I would talk to an atty.) Here is the problem, when you go to the bank, you are going to find that they likely will not want to play along on the residential side – if that was your plan. On the commercial side this is still tricky because we are talking about 100% financing, but it's doable. However, since this will be a lien in second position with a monthly payment attached to it, you need to be careful that the DSCR (debt service coverage ratio) is within the bank's guidelines. DSCR = NOI / Sum of all mortgage payments. Most banks will not touch anything less than 1.2 DSCR, and on an 100% financed deal they may want even higher.

    If you have more than one investor, you are better off structuring an LLC or another entity – I don't know why anyone would want to hang out in 3rd or 4th position.

    In terms of structure at the front door, it may be easier to purchase this thing with all cash and then refinance to get the private money out. Going this route, the 30-year residential is back in play.

    I strongly suggest that you have a banker in on this deal from the get go so there are no surprises. Well, that’s an oxymoron – a RE deal without surprises…Hope this helps a bit. Good luck

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  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    Ben, I appreciate your frankness regarding private money. I'll look into some of the other options you've proposed, including talking with a local banker I have a relationship with.

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  • Marc RamsayPro Member
    Investor · Ojochal, Costa Rica · Member since 2013 · 288 posts · 164 votes
    13y

    I agree with Ben's comments about Private Money. I had to work really hard to convince the holder of a private note to stay on as the lender for a MF acquisition I did last summer. He didn't know me from Adam and I can understand his reluctance. In the end it all worked out, but it was an interesting experience.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y

    Ok Page, I don't a agree with a lot of what has been stated thus far with exception of the conventional lender wanting to see your own cash for the down, etc. to structure a deal with conventional plus private investor money is not easy. If you had the down money, you could get the loan, then after you acquire, fund the private funds to reimburse the down plus the rehab costs. Keep in mind to do something like this, you must have a good enough deal that the private lender's combined LTV (loan to value) does not exceed 75% and my personal rule is 70% as a lender.

    Another way to do this is to use hard money, plus the private money, then once you have it rehabbed and cash flowing, refi into the conventional loan, of course this is risky because it depends on if the lender will fund and they will not for at least 6-12 months after.

    As to your elevator pitch, I would not use the terms and abbreviations mentioned in the example for the simple fact that most of the friends and family you will be speaking to are not seasoned or sophisticated investors and will likely get confused when you toss out what is to them, complicated terms. You must speak in simple to understand language and terms and avoid the investor lingo at first. Second, the best way in my opinion to attract such funding is not to ask for money, but offer an opportunity. With the correct play on words, the conversation should be more about what you do and what opportunities yo off to those looking for more secure, more profitable investment vehicles than the bank or stock market. In other words, never ask for money, offer them an opportunity.

    Structure is another important aspect and you should familiarize yourself with all the options of structure.

    Example, if you have 3 different private investors looking to each make smaller investments into the same project, you are not stuck with first position, second position, and third. You can actually have all 3 in first position and without forming a lending entity or partner entity. It is called a fractionalized note and there are rules to that too.

    You also must be cautions to not publically advertise (which could get you in a heap of SEC trouble) or violate any other SEC rules.

    Lastly, while I agree that trust and relationship RE extremely important, once you have a track record, it gets a lot easier. I have complete strangers from all over the country contact me to invest in my projects. It is not because I am so handsome or offer ridiculously high returns, it is because of my track record and exposure. THE most important thing is to keep yr investors safe and ALWAYS make sure they get paid back, even if you lose money!

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  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    13y

    Page, the way you outlined your plan, the bank would be in first position, and then if you had for example, 3 private lenders, they would go into 2nd, 3rd and 4th position mortgages or trust deeds, depending on your state. This is not going to fly with the bank, and if properly understood, it is probably not going to fly with the private lenders. Will referred to a fractionalized note, and unless the 3 private lenders already know each other, I believe you are running afowl of SEC regulations by bringing them together. You will need a good real estate attorney, preferably one well versed in private lending. Ask him/her about undivided interest.

    I like Will's suggestion better about using hard money for first position mortgage, and your private lenders for the downpayment money. But talk to your conventional lender about the conditions under which he would refinance before you make the commitment. You may find out he requires a full year of stabilized rents, in which case hard money rates might be too steep for the deal.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Page, sounds like you're treading in deep waters, first I suggest you never put any financing offer or advertisement in writing, that can get you into problems with the SEC. Secondly, you can have 3 investors without SEC issues. Loans made between 2 or more investors/lenders are participations, each lender participates in making or funding the loan or buys into the participation after it is made.

    Participation loans are difficult for non-lending types to collateralize sufficiently, I suggest they not do so because I've never heard of an investor actually protecting each investor equally, so it's best not to go there as a borrower.

    I suggest you see a mortgage broker, one who may have private investors and allow the brokerage to provide funding, but of course a conventional lender is the first stop as Ann mentioned.

    As to an elevator pitch, if it's to family just speak english. As to investors, speak english and don't start with lending terms as there are many borkers and loan officers who can't get the terms straight, lots of office slang has developed, so saying assignment or assumption for example is often misconstrued and they have ttotally different meanings. Best way to avoid such is not go there, just explain what you're thinking is, let the investor line up the opportunity as they see fit.

    A good mortgage broker who has access to private funds as well as conventional financing would be best I'd say. Good luck

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  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    Thank you to all of you who have provided advice in this post. I am humbled and grateful that you've taken your time to share your advice. Here's where this this deal stands as of 9:41 Mountain time today :)

    Instead of hard money, I'm looking into pulling equity out of our primary residence for the down. Looks reasonable as a way to come up with the down. I can cover the loc payments plus paying some extra principle and still cash flow with piti, maintenance, vacancy, etc.

    Viewed the interior and detailed exterior of the property today, and it needs $15k repairs if done by us (we are contractors) with another 7-10K down the road if we want to increase rents. Those numbers are generous, giving us some slack to sub out some work if needed to get the rentals filled earlier. But, still reasonable.

    The property is bank-owned, so we'll need to fill out a pre-qual letter with the bank. I've encountered this before, and assume they don't want to waste their time reviewing an app for someone who isn't qualified.

    My question to experience BP members: If I'm working with a local bank already, can I include pre-qual info on the offer instead of jumping through their hoops? I won't make an offer unless I'm confident (as much as one can be) that we could make the deal fly this way.

    ALSO--The property has been listed since Oct. 2012 at 249k and just had a price drop this week to 242,500. There have been several second showings. I'm assuming, based on my research, that it will go under contract within two weeks, likely much less (oh, the drama!) It needs work, but for the right buyer, it could end up being a nice property without a lot of time passing.

    The agent suggested that we provide a spreadsheet of anticipated costs with our offer, since she feels the bank may not fully realize what improvement it requires.

    What format would you suggest I use for the spreadsheet? I've already put together a spreadsheet for our personal use, and a spreadsheet of what I anticipate the lender would understand.

    Anyone out there have experience submitting this type of paperwork with an investment offer? I'm not worried about showing accurate costs, just want to get ducks in a row.

    Thanks guys!

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    It's not a short sale, so I'd ignore advice like prepare a list of repairs (that is commonly done in a short sale). The bank isn't interested in the repairs or they wouldn't be selling "as is".

    Not sure about the pre-qual, but I assume that the selling bank is using that to either filter those deemed unqualified, or they are looking to lock you in to their financing. Sometimes they instruct agents to not present offers without the bank's pre-qual. I offer all cash, so I don't have to play those games.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    13y
    Originally posted by Steve Babiak:
    It's not a short sale, so I'd ignore advice like prepare a list of repairs (that is commonly done in a short sale). The bank isn't interested in the repairs or they wouldn't be selling as is.
    In negotiating the best deal for yourself, regardless of the type of transaction, REO, short sale, etc., identifying deficiencies in the home that may have been missed by the seller, the BPO agent, the list agent, etc., is a good thing.
    As far as what format, just pick out the big items, ignoring things like "needs new paint" and send over explaining the costs associated with such repairs.
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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    get pre qualified and attach a copy to your offer, if a toilet is missing, take pics...or such and attach to your offer. The thing is, properties have issues that pop up after inspections, kids break in and repaint a room for example (LOL) so, yes, justify your offer. Justify it with proof, bids, not opinions. Some lenders will consider such issues as new conditions. If you noticed it another buyer may too.

    Steve is correct too, if it's a fairly new listing they aren't interested in looking so much, but new damages or after time, they will consider the justified input.

    Your financing plan sounds fine if you qualify with the new loan for the down payment, make sure the lender is aware, if it pops up on the credit report later while processing your new loan it could really slow you down or even have closing put off or denied. Good luck

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  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    The bank that owns the property couldn't pre-qual us because their requirements are much more stringent than the lender I'm working with. So, they've stated they can't provide an answer without a full application. I'll be attaching that statement with our offer and pre-approval from my lender, if I decide to move forward with this one.

    Thanks for all of your answers on providing details to back up my offer: I'll attach a pdf with a basic spreadsheet for repairs

    One issue I can't resolve which is frustrating is water cost. The units are all separately metered for gas/electric but there is only one main water meter. The property also has a coin op in the basement (separate gas/electric meter). I can't get past utility bills since its bank-owned, and the agent had to evict the tenants before taking over the listing, so the only water bills I have are without tenants. I do have bills for gas/electric.

    If I estimate high on the water, it really digs into my cash flow, but I don't want to assume they are lower and get caught with outrageous bills. I'm looking into submeters--anyone care to share if they've had success.

    I'm posting another topic on the coinop that is installed, to try to get a handle on how that will play out.

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  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Try contacting the water company for historic usages.

    2Reply
  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    Yes, tried that. It's a utility provided through the city, so they won't release information to anyone but the owner, and even then only usage under their ownership. So, I'm searching for utility info on comps in the area.

    0Reply
  • Kyle Hipp
    Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
    13y

    Page - I would try calling the utility again at a different time and just ask for average bill for the last year or two years. I have had some folks at the city owned utility not want to answer then call back later and get everything I need. Another option would be to just go on the utility website and get the rate information. For the most part you can estimate average usage by number of people in the Household.

    I am in the process regulating my water costs at several properties. I have found 3 options.
    1. Split up all water between the units and have the utility install new meters and have the tenants billed for their unit. I have found that this is usually pretty simple as usually each unit has their own water heater already so it is just spliting the cold off.
    2. Split up the water lines between units like in option 1 but just install your own submeters and then get readings monthly and charge each tenant accordingly.
    3. Leave water lines as they are. Estabish a base coverage each month, lets say $90/m in water and sewer charges for a 3 unit property. Any water and sewer charges over that $90/m are split between the units by number of residents. So if units 1 and 2 have 4 people each and unit 3 has 2 people and the month's water and sewer bill was $100 then unit one and two each owe an extra $4 for water surcharge and unit 3 owes an extra $2 water surcharge.

    I am doing option 1 for one place and option 3 for another place as modifications in that place might lead to code complicance complications with the grandfathered location of some stuff. Option 3 was laid out in my state's guildlines. I'd check your's for reference. Either way make it clear as possible in the lease.

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  • Ibrahim Hughes
    Real Estate Consultant · Bloomfield, NJ · Member since 2010 · 2k+ posts · 1k+ votes
    13y

    Page Huyette

    Originally posted by Page Huyette:
    Yes, tried that. It's a utility provided through the city, so they won't release information to anyone but the owner, and even then only usage under their ownership. So, I'm searching for utility info on comps in the area.

    Page, understand that municipal employees have been conditioned to say NO to any question they are not used to hearing. Generally speaking everything involving a municipality's business that doesn't point to a person's personal information is public info.

    Here in NJ, an Open Public Records Act (OPRA) request will practically give you all the information you need. Find out what the process is for such a request in your municipality ( the forms and instructions are usually on the municipality's website) and submit your request for the water billing history to the correct authority (here it would go to the City Clerk's office who then forwards it to the appropriate dept.). Good luck.

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  • Page Huyette
    OP
    Real Estate Broker · Bozeman, MT · Member since 2012 · 220 posts · 52 votes
    13y

    [Kyle Hipp] thanks for sharing your experience. [Ibrahim S]--Thanks for the reminder. I've dealt with city/county folks in planning regularly for my other business, even schooling homeowners on what to expect from municipal employees when going through the permit process. You are quite correct--I'll check on OPRA and try another approach at the water/utilities counter this week. Thanks!

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Kyle Hipp:
    ...

    I am in the process regulating my water costs at several properties. I have found 3 options.
    1. Split up all water between the units and have the utility install new meters and have the tenants billed for their unit. I have found that this is usually pretty simple as usually each unit has their own water heater already so it is just spliting the cold off.
    ...

    There is still one problem with that approach, and I've posted it previously elsewhere on BP.

    What happens when the utility company does not get paid by just one of the units? At some point they come out to shut off the utility service. When they come to do that, and there is only one water shut-off valve for the entire building, guess what happens ...

    So it only takes one non-paying tenant to screw things up for everybody in that scenario with only one shut-off. I actually encountered that once a while back when I was looking at a building where that happened; the owner ended up taking over paying the utility company as a result to avoid future shut off of all tenants.

    0Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    13y

    As it hasn't sold yet, are you sure it's the "deal of the century?"

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