All Forum Posts by: Tom Goans

EDUCATION

It is the opinion of this investor who has been directly involved in originating, servicing, buying, and selling loans secured by real estate since the 1960s that investing in or participating in the complex real estate finance business REQUIRES a lot of education. Primarily law - federal and local.

• Just the way you communicate with a borrower is regulated.

• You may also be required by law to have a license.

To enhance the success of investing in or participating in real estate finance also requires a more thorough ability to determine realistic real estate value and understand the future value. Assumptions and appraisals will send you down the same road many institutional lenders traveled in recent years.

Another word of caution, do not set your borrower up for failure. This opens up many other cans of worms, including the cost and delays of foreclosure. Moreover, what if the borrower reports you as a predator lender? Right or wrong, should a government employee take an interest, there may be huge costs involved in defending your actions.

I do not recommend anyone play in the real estate finance world without extensive knowledge. Experience is another great partner.

Dealing with finance is dealing with peoples’ lives. There are many laws protecting borrowers and many government employees in charge of protecting borrower's rights. The government employees have endless funds backing them.

@Brandon Sturgill,

You mentioned "2 points over prime".

Have you included in your analysis the possibility of the interest rate on the loan balance could increase? (probably will increase in my opinion)

The lender probably stated how often the interest rate would be adjusted throughout the year. Keep this in mind. It is a major cost that is difficult to determine and include. But it must be a part of your analysis.

What the nuts do in Washington DC has a great affect on the interest rates. They may be losing the ability to keep the rates below where they should be. Review what took place in the late 1970s for an idea of what is possible.

Ask the pros.

Walk before you run.

Learn before you commit.

Learn and understand your strengths and weaknesses prior to any endeavor.

I would highly recommend you first work for someone prior to jumping into the deep end of the pool. Think of it this way, how successful would you be playing cash poker against the old-time pros? The odds will be very much against you. The same applies to any complex business endeavor.

A good way to get a toe in the real estate water is to purchase an older mobile home in a mobile home park to be a rental. This will expose you to may valuable lessons you will use for years to come.

Ask them.

@Ryan Stahr,

This old investor does not agree with most of the "numbers" methods used and embraced by many on this blog. This includes the questions you have asked.

My analysis methods are far more complex and inclusive. Keep in mind, you may have borrowed the purchase and renovation money, but you are still 100 percent responsible for repaying the loan(s). This should be part of the investment analysis that is many times ignored by “investors/wholesalers/flippers”. This goes beyond the loan payments consideration.

Some members accept returns and cash flow far too low for the investment to survive any challenges without becoming a money pit - thus the investment turns into a liability and a draw on the balance of the investment portfolio or other sources of cash flow. This is mostly the reason why so many “investors” go broke during the common real estate market down cycles. The same reason also explains why so many “investors” were considered large contributors to the last market down cycle that spread beyond real estate and affected the financial markets as well.

Nevertheless, I will share my opinion of one huge mistake many of the “investors/wholesalers/flippers” make when conducting investment analysis:

• The omission of personal time and personal expenses. Personal expenses can include equipment and other hard costs.
• Time is money. Not once have I seen in an analysis the accounting for the costs of screening tenants or buyers. Just placing ads, responding to prospects, and reviewing applications should be considered a cost. What about all the time driving around, showing properties, inspections, research, etc. Just because you are busy does not mean you are productive.

You are unique and so are your present status and goals. What works for one person may not work for another. Beware of using others’ acceptable reward (return) determination. It may be wiser for you to determine your own risk and workload vs. the reward (return) that is acceptable to you to meet your goals and family needs.

@Damian Baynes,

If I am understanding your post correctly ... your consideration may be incorrect and need further research.

I owned a home that included 2 adjacent vacant lots. The lots added to the value and desirability of the property as a whole. If the lots were sold separately, everything would lose value.

The property that caught your eye may be the same. Plus, there may be several reasons beyond adding value why the lot remains vacant.

Of more importance, do not assume you can sell or develop the lot and build a new structure. The process is very complex, costly, and requires many approvals from the city and county. This process is reserved for experts. Moreover, there is no guarantee the city or county will allow the building of any structure or approve any of your plans in any manner. Dealing with government employees can be a very long, costly, and frustrating nightmare. If not successful, it can be financially very destructive. By the way, from my experience, from start to all government agencies approval could easily take over 1 year. Do you have deep enough pockets? Lenders do not lend on such gambles to inexperienced investors.

• To answer one of your questions, most likely you will not need two separate loans.

@Matthew B.,

I would recommend finding other investment potentials with less upfront problems. There could be so many issues you have not considered that could turn this from an investment potential into a money pit.

Moreover, your time is money.

Ask yourself, "Would a seasoned investor consider this property?"

@John Fedro,

I have a long history of owing manufactured homes for the purpose of rental investment.

I see 3 major problems with your presentation.

1. Age of the home. Most parks will not accept homes that do not have HUD labels. The simple act of the sale may trigger problems.
2. Price.
3. "no repairs"

John, are you familiar with the laws governing manufactured homes and the building standards? Even some counties will not allow homes that are older than a certain age to be moved into the county.

Best of luck with your endeavors.

Determining Property Value

My method for determining the value of a property is to back into the numbers to see if an investment is a viable opportunity.

Before you begin, determine your personal/business risk and workload vs. acceptable reward. Each person and investment is unique. You must make this determination based on your personal comfort levels and goals with considerations for your family and future.

When I say back into the numbers, I mean begin with a thorough study of the target market, whether it is tenants or buyers. Understand the target market better than they understand themselves. Include considerations for income, employers, trends, desires, wishes, hobbies, and spending habits among others. This type of consideration is very local to the unique neighborhood where the investment opportunity is located. The neighborhood trend is much more important than a community/city trend.

The research from your study will provide critical information that determines the property value and investment potential. For example, determine what the target market is comfortable in paying. Determine the best payment methods.

From this, you can further back into the property value to you and your best offer price with cost considerations, such as vacancy, repairs, maintenance, replacement, insurance, taxes (property and income), overhead costs (daily and during vacancy), finance costs, and then your acceptable risk/workload vs. reward.

Now, you have arrived at the acceptable property value to you and your best offer price for the investment opportunity. If you pay more than your research suggests, this may be a big mistake.

This is just one method for determining the value of an investment opportunity. This method is based upon my long personal historical experience and what was learned from seasoned mentors.

In my opinion ...

The very best way to determine value is to do exactly the opposite of what is done by many.

• First, consider the target markets. Learn and understand everything there is to know about the target markets, including lifestyles, employment, stability, and desires.

• Secondly, learn and understand everything there is to learn and know about the neighborhood and its future. Consider the trends, including employment and neighborhood aging.

• Then, learn and understand everything about the neighbors.

• Then, if you still consider the property to be an investment opportunity that meets your personal/business established risk and workload vs. reward standards, explore the subject property and make a list of all repairs and improvements deemed necessary to bring the property to an above average in the neighborhood - above average to better ensure an enduring investment. I put firm numbers to the costs.

• Then determine the holding costs. Be realistic and try not to manipulate the numbers to make the deal work.

• Time Value of Money. Realistically determine how long you may be holding the property before the property sells or cash flows. Whatever is your estimate, allow twice as long.

Now, you have an excellent idea of the potential of this investment. Hopefully, you have realistically determined the amount of costs/risks and reward expected.

From all of this homework, you can realistically determine the value of the property based upon your research and investment plans. Your determination may differ from others. However, every investment opportunity is unique and so are you and your goals. Therefore, appraisals and Internet research of other properties is of minor value to your research.

I believe in becoming a neighborhood expert prior to any purchase consideration.

My mentors and experience have taught me to conduct thorough research and know more about the property, neighborhood, and target market prior to any purchase consideration. These factors rule far above playing with the numbers and cap rates on which many solely rely.

Comparables do not apply.

A realistic study of the cash flow, the target market, the neighborhood and its future, realistic determination of on-going expenses, realistic determination of repairs and maintenance, realistic determination of the costs of improvements, and a determination of your desired risk and workload vs. reward are, in my opinion, the best ways to determine the property value and your best offer price.

This is simply an opinion and just one method of determining investment value and the potential for a property. This is certainly not the only method, nor will it work for everyone. It does require more time, expertise, and consideration, but the results have proven to be more reliable.

Best of luck with all your endeavors.