I Learned About Creative Financing When the Bank Cut Me Off

When I first started out investing in real estate, just as many do, I was taking a more traditional approach. I thought you just needed to work hard, save up some down payment money, and go down to the local mortgage lender to get a loan. Being a handy young realtor, this should be easy, right?

Well, in the beginning, it was. The first property I acquired was a duplex that I bought FHA, owner occupied. Then, I went in 50%-50% with my brother-in-law on a two-bedroom row home. I bought my next row home for $13,000 with a credit card, and so on and so forth.

What I Learned By Working With the Bank

At first, I did things like a regular realtor, a typical salesperson, who sent his clients to a nearby loan officer. Everything was good, but the banks would change the rules every now and then. I guess it was their way of managing risk.

For example, when I first started selling investment property in 1986, you could actually get an FHA investor loan with a 15% down payment. Later it increased to a 25% down payment, and then eventually the option went away, never to return.

Things went well working with the bank until I had “too many doorways,” and then they just said no… no more loans. The next step would usually be moving over to commercial financing for deals, but the risk profile changed, and it was even harder to cash flow and make money.

After the banks cut me off (I was getting turned down for loans left and right), one thing that I did learn was how they viewed risk.

What I Learned When the Bank Stopped Working With Me

Once the bank cuts you off for whatever reason — which may be anything from your debt to income ratio being whacked out, the amount of properties you own, or because they have too much of their own bank’s exposure with you — it’s time to get more creative.

For me, that meant joining my local REIA group to look for money and better financing. To be quite honest, I found a whole other world. A world that asked, “How can I?” instead of just saying, “I can’t.”

This is where I was first introduced to hard money, private money, seller financed notes, and you guessed it, notes in general. Thank God the traditional banks refused to lend money to me.

Opportunity 1: Doing What the Bank Doesn’t Want to Do

What an education it was, learning how to manage risk. But it wasn’t just learning which loans the bank would do; it was also learning which loans they wouldn’t do and why.

Why won’t the bank do certain loans — for example, why won’t they do rehab loans?

In this type of void, the opportunities begin to appear. For me, the opportunity began in private lending.

If you ever want to learn a lot about real estate investing, go find what you think is a deal and run it by a hard money lender (who by the way is in the note business), and trust me, you will learn a ton. Not only will you learn what constitutes a good deal, but you’ll learn their underwriting guidelines as well.

Opportunity 2: Being What the Bank No Longer Wants to Be

Today, I’ve come full circle — from real estate investing, private/hard money lending, and seller financed/owner financing to purchasing distressed notes directly from banks.

Now, our note business is essentially the type of bank that the bank no longer wants to be. Or in other words, we’re purchasing their distressed assets and making lemonade out of lemons.

When you think about it, if you’re buying assets pre-foreclosure (e.g. non-performing 1st liens) and you’re unable to come to an agreement with the borrower, you’re usually still ahead of the “I buy houses” guy, the sheriff sale gal, and even the courthouse lists.

Since real estate investing is such a finance driven business, all of the experience I had along the way is really what helped facilitate my continued wealth building in the notes space.

So, let me ask you, what bank phase are you in today?

Let’s talk — be sure to leave a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.