Wednesday, July 29, 2009
Two days ago a Twitter follower asked asked, "Have you done any creative real estate deals lately?" As far as I'm concerned, Clear Day Capital ONLY does creative deals, but I responded with a deal that we are working on that will close on today (July 29, 2009.)
A borrower is purchasing a property to rehab and is concerned about a personal guarantee. At the some time, the officers of Clear Day Capital have a goal to control our own destiny more in case a loan goes bad (refusal to repay or cooperate) or gets "stuck" (unable to sell or refinance, but cooperating and wanting to do the right thing.)
We have come up with this model:
1. A company controlled by Clear Day Capital's owners purchases the property through an assignment of the purchase contract and acts as a holding company.
2. The holding company sells an option to the client to purchase the property by a future date at a pre-determined price equal equal to the holding company's loan payoff amount.
3. Option extensions can be purchased if needed.
Fairly simple and provides these benefits:
To the Client: They don't personally guarantee the loan, but still get to complete their project.
To Clear Day Capital: We control the property and do not have to forclose if the clients don't perform.
Some interesting notes:
1. The solution was inspired by our client, who was making a general suggestion about how Clear Day Capital can secure itself better, not realizing that he would be the beneficiary of the suggestion.
2. The deal was dead two weeks ago, but we had done successful deals before, we wanted to do more together, and we made a mutual commitment to figure out how to do more. We just needed to get more creative.
What do you think? What was your last created real estate deal?
Tuesday, July 28, 2009
Wednesday, July 22, 2009
Last month I wrote about five questions that should be asked before investing with a hard money lender. (June 2009.) This month we look at five more questions with more depth. They should be asked after the first five questions are answered adequately.
1. What happens if a loan goes “bad?”
Most people think that business will always be smooth. Experience tells us that at some point a loan will go bad. When this happens, who is responsible for collecting interest, loan extension fees, or foreclose on the property owner? Is this your responsibility, or will the hard money lender take care of this?
What about the cost of collecting? Who pays for legal fees, registered mail, court filings, etc. if a loan goes into foreclosure? Will the lender who arranged the loan pay in full, in part, or not at all? Will the lender take the time and energy, and make the effort necessary, to go after the capital, interest, and penalties or do you need to do that yourself? Do they have a process in place, including a lawyer who can foreclose at a reasonable cost?There is a huge difference between collecting a loan on your own and having a responsive, knowledgeable company do it for you.
2. Can I call references before I invest?
A reputable company takes pride in its professional reference list. For a hard money lender this list could include accountants, bankers, escrow agents, real estate agents, and lawyers.If the lender does not have a list, ask "Why not?” The answer should be, “Because we haven’t put one together yet. Give us a day and you'll have it.” If not, then ask yourself if someone without professional references is someone you want to do business with.When you have the list, call the references and ask more questions to make sure the lender is a professional & trustworthy organization.
3. How does a loan close and does the property have a proper lien?
Does the loan close with a title and escrow company (or with an attorney, depending on local laws?) Is title insurance purchased so if title problems occur the title company pays to have them fixed? Was a title search done and all other title issues identified and paid off, or resolved during the closing process?Once the loan closes the lien needs to be recorded to ensure that the loan is in first position, ahead of any other liens to ensure that it is paid off first in the event of a foreclosure.
4. How does the hard money lender make money?
Is the hard money lender a broker, making money regardless of the quality of the loan and a successful outcome of you being paid back? Or does the hard money lender act as a principle in the transaction, making money with a successful outcome and potentially losing money if there is a problem with the loan. Does the lender give you a fixed of return regardless of the loan outcome?
How the hard money lender makes money will have a tremendous influence on the manner they conduct business: loan quality, borrower quality, risk, recovery systems in place, and who they borrow from. What is your risk vs. their risk in the loan?
5. Does the lender have a private placement that discloses your company’s financial statements and business plan, and what are the licensing requirements for the business?
It is possible that not all hard money lenders will be required by state or federal governments to have a private placement to raise or broker capital. However, if they have a private placement it should explain their business and disclose risks. It means that they take their business seriously enough to put together a plan and pay to register with the proper government regulatory agencies.The licensing requirements discussion should disclose if they are even aware that requirements exist or not. If they don’t know, it means that they don’t take their business seriously enough to make inquiries. If they do know and they need to be licensed, they should be able to provide documentation to confirm their license.
10.5 What is your reputation with your clients?
Their reputation should be good, with clients coming back for repeat business. They should offer clients as references, including clients whose loans did not go smoothly, and a workout had to be arranged. How was it worked out, is the relationship in tact, and would they do business with the hard money lender again?
A lender’s relationship with its clients says a lot about the lender.Tell Me What You Think about investing your money with hard money lenders. I know that there are HORROR STORIES out there!! Sthare the best one you know.
Wednesday, July 15, 2009
I just finished a three-day journey paying 22 mortgages for properties in which I have partial ownership. No big deal, right? It shouldn't be, but let me describe what happens when pretender-lenders get involved....
First of all, let me say that paying 15 of them worked just great. We use USBank, an almost-national bank with sound financials. They never got into the sub-prime mortgage business so they didn't need (nor want) a bail out. The have great on-line banking and I used the free bill-pay service to pay 15 of the mortgages as I do every month.
First delay to deal with- Homecomings Financial, a subsidiary of GMAC Mortgage, has sold its portfolio of loan serving to GMAC Mortgage and we now need to pay GMAC Mortgage. This means setting up 6 new bill pays at USBank. No fees for this, but it ads time to the process. We also need to change tracking on our spreadsheets for the mortgages, and I felt the need to call to verify what we need to do to make sure the payments are made before the 15-day grace period expired. (Note: We are late with the payments each month (after the first), but we have never had a 30-day late.)
So, I missed four mortgages out of the 22 and they needed to be paid today. The first was with Bank A. Their telephone touchpad system did not work well so I had to call in 5 times to just input the SS # and account number. Then they needed the bank routing and account number! So, I went to the operator who then repeated the request for my personal information. Not a big deal, but why can't they pick that up when the call is transfered by the computer?
Loan servicing company B (not a bank) was ok. The system worked and I was grateful.
The last two were with loan servicing company C and I needed to talk directly to a human being again. Again with the repeated SS # and account number. This time they needed the full address so they waited while I looked up the zip code on Google.
OK, this is a rant, but here is my point: Part of the problem that the country is facing right now is loans being sold to servicing companies. Most people cannot go back to where they originated the mortgage and talk to the loan officer or a bank officer to discuss their mortgage with a human being instead of an institution.
As for me, I am going start looking for human beings to work with- banks that keep their loan portfolio instead of selling them. Do you know any real banks? Let me know which ones so I can work with people again.
Thursday, July 9, 2009
Peter Fortunato is a real estate legend. He teaches only five times a year. His passion is real estate and he never uses bank financing.
Go to the Real Resources for Real Estate Investors blog to read some pearls of wisdom.
Saturday, July 4, 2009
1. Don’t believe everything you read or hear. Most real estate investors do not earn $1,000,000 or even $100,000 in their first year. Good luck trying, but don’t give up if you don’t.
2. Make offers. You can’t invest in real estate if you don’t make offers.
3. Not all mentors are created equal. Most fee-based “mentors” have a little to no experience mentoring and may have very little real estate investing experience.
4. Join a real estate club. A local real estate club can provide you with an instant network of other investors, contractors, real estate agents, and anything else you need to invest.
5. Develop a strong local network. It can make your investments soar and save you from making big mistakes.
6. It’s OK to spend money on your first property. It will probably be a better investment than a mentor or expensive class.
7. Don’t quit your day job. It is much easier to invest if you have capital, a job, and good credit.
8. Partner with an experienced investor. It is much easier to make money on first investments if you do.
9. You must know how to “run the numbers.” If you don’t know which numbers, then don’t invest.
10. Start today. The sooner you start, the sooner you will really learn how to invest. Reading books doesn’t count as investing.
10.5 Find capital sources. As many as you can- long term loan brokers, hard money brokers, friends and relatives with self-directed IRA’s.