After you secure OPM / creative financing (verbally)... what next?

Creative Real Estate Financing
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After you secure OPM / creative financing (verbally)... what next?

Holly Ross
Member since 2023 · 14 posts · 14 votes

Hi! I'm trying to figure out how to get into real estate at a low cost of entry (~$50k cash), and so I'm of course trying to learn about how to use OPM and other creative financing options. 

So far I've kind of got the general idea behind subto, wrap loans, lease to own. And I know OPM just means sourcing friends and family / within your network largely. 

But for as many podcasts as I read, books, etc. The one sort of obvious piece I'm missing is what do you do once you actually have these people on the hook? Say I was able to get 4 people in my network to commit an amount of money... at this point would I meet with an attorney and ask them to draw up paperwork? What type of paperwork am I even asking for? I'm just a little lost with what kind of legal binding is in place and how to get it set up. Also curious what a normal interest rate and turnaround time would be for OPM. 

I know these things are highly variable, but even just a rough example scenario would be helpful to wrap my head around it! Thanks so much to anyone who could weigh in or give pointers to connect the dots for me.

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  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    2y
    Quote from @Holly Ross:

    Hi! I'm trying to figure out how to get into real estate at a low cost of entry (~$50k cash), and so I'm of course trying to learn about how to use OPM and other creative financing options. 

    So far I've kind of got the general idea behind subto, wrap loans, lease to own. And I know OPM just means sourcing friends and family / within your network largely. 

    But for as many podcasts as I read, books, etc. The one sort of obvious piece I'm missing is what do you do once you actually have these people on the hook? Say I was able to get 4 people in my network to commit an amount of money... at this point would I meet with an attorney and ask them to draw up paperwork? What type of paperwork am I even asking for? I'm just a little lost with what kind of legal binding is in place and how to get it set up. Also curious what a normal interest rate and turnaround time would be for OPM. 

    I know these things are highly variable, but even just a rough example scenario would be helpful to wrap my head around it! Thanks so much to anyone who could weigh in or give pointers to connect the dots for me.

    Well, you could do a joint venture agreement. An attorney would draw up the agreement and inform you about how many investors under what conditions can join your joint venture with whatever restrictions. Then you open an escrow account and everybody wires funds, the escrow company gives an accounting and you put the money into the LLC account. From there you buy  and manage properties.
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  • Derek Dombeck
    Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
    2y

    The hardest part of using OPM is timing. Once you identify the money source, you have to find a deal that everyone likes before they invest their capital elsewhere. 

    Once you find a deal and negotiate the lending terms I would try to get them to escrow the funds prior to closing. This way you know the cash is available for your closing.

    On every transaction, you should have Promissory notes. Mortgages, lenders title insurance, and property insurance which list them as lenders in place to protect their investment. 

    If they are coming on as partners with ownership rights instead of lenders, you would likely have an LLC operating agreement or JV agreement that dictates everyone's roles and responsibilities.

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  • Holly Ross
    OP
    Member since 2023 · 14 posts · 14 votes
    2y

    This is so helpful, thank you. If I want to get some ducks in a row before pitching to my network, would I just be searching for an investor-friendly attorney and underwriter, and get them on board with my plan so that as soon as I have some folks hooked, they're ready to underwrite?

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    2y
    Quote from @Holly Ross:

    Hi! I'm trying to figure out how to get into real estate at a low cost of entry (~$50k cash), and so I'm of course trying to learn about how to use OPM and other creative financing options. 

    So far I've kind of got the general idea behind subto, wrap loans, lease to own. And I know OPM just means sourcing friends and family / within your network largely. 

    But for as many podcasts as I read, books, etc. The one sort of obvious piece I'm missing is what do you do once you actually have these people on the hook? Say I was able to get 4 people in my network to commit an amount of money... at this point would I meet with an attorney and ask them to draw up paperwork? What type of paperwork am I even asking for? I'm just a little lost with what kind of legal binding is in place and how to get it set up. Also curious what a normal interest rate and turnaround time would be for OPM. 

    I know these things are highly variable, but even just a rough example scenario would be helpful to wrap my head around it! Thanks so much to anyone who could weigh in or give pointers to connect the dots for me.


     OPM without any experience is extremely challenging. Also if you have $50k why not get bank financing? 

    If you are raising money from multiple people review the howey test, as you are selling a security in most instances and would need to get a SEC exemption which will cost you $10-$20k.

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  • Holly Ross
    OP
    Member since 2023 · 14 posts · 14 votes
    2y
    Quote from @Chris Seveney:
    Quote from @Holly Ross:

    Hi! I'm trying to figure out how to get into real estate at a low cost of entry (~$50k cash), and so I'm of course trying to learn about how to use OPM and other creative financing options. 

    So far I've kind of got the general idea behind subto, wrap loans, lease to own. And I know OPM just means sourcing friends and family / within your network largely. 

    But for as many podcasts as I read, books, etc. The one sort of obvious piece I'm missing is what do you do once you actually have these people on the hook? Say I was able to get 4 people in my network to commit an amount of money... at this point would I meet with an attorney and ask them to draw up paperwork? What type of paperwork am I even asking for? I'm just a little lost with what kind of legal binding is in place and how to get it set up. Also curious what a normal interest rate and turnaround time would be for OPM. 

    I know these things are highly variable, but even just a rough example scenario would be helpful to wrap my head around it! Thanks so much to anyone who could weigh in or give pointers to connect the dots for me.


     OPM without any experience is extremely challenging. Also if you have $50k why not get bank financing? 

    If you are raising money from multiple people review the howey test, as you are selling a security in most instances and would need to get a SEC exemption which will cost you $10-$20k.


    I've never heard of the howey test before, I'll read up! Thank you for pointing me in the right direction.

    I'm not against financing, I just thought it may be a little safer to borrow from friends and family for my first project since we could set more generous terms that give me some padding for when things don't go exactly to plan or on timeline. I expect I'll be failing and learning hard lessons quite a bit with my first property, and truthfully I'm just not sure what "worst case scenario" would look like with bank financing... Not that I expect to get there, but just want to make sure I'm never getting in a scenario where I lose my car, my primary home, or my savings to dig myself out of a hole. 

    I actually truly have no idea what "worst case scenario" looks like, so maybe those are silly fears and they just take the house back? But just saying this to explain why I'm poking around in creative financing / low cost of entry!

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