Don't Bury Your Head in the Sand

This post was first published: http://novacreinvest.wordpress.com/2013/12/18/dont-bury-your-head-in-the-sand/

Capital BP group met last night to discuss various types of real estate financing/funding options. We learned some of the best types of funding options available to an investor and how to obtain them. I think I would not be alone to say that I was excited to learn that funding is available to do what I want to do, and everyone should. After all, real estate investment is a business that requires vision and optimism. Without them, no developer would build anything new and no rehabbers would renovate anything.

To be a successful investor, you need to think like a funder.

Investors are opportunists. They act because they see an opportunity to create value or make a profit. They see the upside of the deal. Beginner investors sometimes let the upside potential blindside them to the potential downsides. We all do this! However, as we get excited about the possibilities out there, we NEED to think like a funder.

Funders do not only see the upsides of a deal, they are trained to anticipate the unforeseeable disasters and worst case scenarios. In fact, they don't look at the upside all that much because for the most part, they don't get to share in that upside. Therefore, contrary to an investors' desire to gain an out-sized return, a funder is looking for a modest return on their funds and more importantly, the "return of" capital. After all, it is their money/neck at risk. Funders have no control over a project on a day-to-day basis. Therefore, to manage potential risks, they must underwrite conservatively and use legal documents to create layers of protection against the downsides.

Don't bury your head in the sand!

We don't really need to talk about the situations where a deal is a success and everyone goes home happy (we covered that at the meeting). Instead, let's talk about what happens when projects don't.

No matter how good an investor's abilities are and no matter how good the funder's underwriting prowess, there is always risk. Inevitably, some deals are going to go "sideways." When it happens, don't do this!

Source: FT.com

Contrary to popular belief, ostriches actually do not bury their heads in the sand when they feel threatened. They are actually digging holes to nest. Humans on the other hand, do it when they feel threatened or distressed or just want to find a place to hide and hope what problems they face will go away. Don't do that!

In the few years of experience I have as a real estate investor, hard money lender and landlord, I've always had a policy, "I am only one phone call away, call me if you have difficulties and we can work it out." I believe that no one sets out in business intending to get into trouble (financial or otherwise). If you are dealing in good faith, the person on the other side will probably work with you.

I personally believe that failures in life are certain, so be brave, and deal with it when it hits you. If you have any doubt about that, read John C. Maxwell's Failing Forward. You will no longer fear failure, instead, you will start to see failures as learning and growing opportunities.

Every once in a while, one of my tenants or borrowers will run into financial problems. About 50% of the time, they face their problems head-on and call me to work something out. EVERY single time, we've been able to craft a solution that everyone can at least live with. Even if the solution does not resolve the problem completely, as long as they continue to talk to me and work with me, I am willing to work with them. I have a huge mess of a deal that I have been patiently nursing back to health for the last three years. I am beginning to see the light at the end of the tunnel and I believe everyone involved will be alright. This is only possible because the borrowers and I continue to communicate.

The people who bury their heads in the sand.

I once had a loan that went bad a few years back. After multiple fruitless attempts by me to reach out, I eventually had to start the foreclosure process. The house ended up going to auction when there was about 40% equity. There was enough money to pay the court, the filing fees, the county taxes, the attorney, me and there was about $3,000 left over for the guy who defaulted on his loan. If he had contacted me or responded to my attempts to reach out, I could have worked something out with him and he could have taken home about $30,000 instead of wasting all the money in the process and ruined his credit.

Now that I've depressed you...

I guess the lesson I am attempting to convey is go out and do deals and use some financing when you can get it. But if your deal goes sideways, don't bury your head in the sand! Work with people, people are creative and can usually figure out a solution. Don't give up! People actually learn more in failures than in successes, so don't squander a perfectly good learning opportunity by giving up. Do it again! If you are uncomfortable, find a mentor/experienced partner.