creative financing ideas?

Question

I have found a Fannie Mae house in my area and believe it is a real deal.  It is a 3 bedroom 1  1/2 bath built in 1935.  The wiring needs updated, exterior painted and bath remodeled, all of which I can do.  The house has been on the market 120+ days and is listed for $29,000.  I will offer much less.  I figure the upgrades at about 10,000 and rent in my area at 650 a month.

My problem is financing.  The banks won't loan for less than 40,000.  I was thinking of a private investor, but didn't want to beg for money.  So, how does one find an investor without time to do the "elevator talk"?   Also, this would be my first deal and I have no record that would ease the mind of a potential investor.  All I have is 20+ years in the construction industry.

Thanks in advance for any advice!!

Adam Johnson · Answer

Kevin,

I can't give you the magic sauce recipe you might be looking for, but can share with you some general advice that might be helpful.  When I started, I had no money, no investing experience, but lots of ambition as well as a strong construction background.  I learned to work with what I did have to overcome what I didn't have.

My experience has been that doing the "elevator talk" is essential.  I have also found that I have done the "talk" several times with the same private/hard money investors before I brought a juicy enough deal to the table to get them to take a chance on me.  One hard money lender gave me advice that I remember every single day - "...if you find the right deal, the money will find you..."

While my thoughts will not likely land you financing for the deal you are asking about, they might help you in the future.  If you are serious about investing and plan to use other people's money, you need to start building those relationships today for the deal that you might find tomorrow (or next year).

Eventually, you will put all of the pieces together and close a deal.  It might be this property or another one, who knows.  As you do your "elevator talk", listen to what the private/hard money lender gives you for feedback.  If they say no, ask why they said no and listen.  They will teach you a lot and it won't cost you much to learn from them.  Readjust and reapproach for the next deal.  Be persistent but not a nuisance.  Respect the value of their time at least as much as the value of their money.

Once you close a deal, follow through on your promises and keep in touch with them to show them that while you may not have a lot of investing experience, you know what you are doing and how to overcome the inevitable challenges that will arise.  By doing this you will gain their respect and the next deal will be easier to put together with their help.

Best of luck to you.  Happy investing!

Adam Johnson · Answer

Like nearly everything you will do in business, you will get better with practice.  I am an introvert, so walking up to people that I know little or nothing about is difficult all by itself, let alone to discuss possibly borrowing tens of thousands of dollars.  I have "learned" to be better at this by sucking it up, going way outside my comfort zone, and simply started to talk about what I do and how I do it.  You won't get far asking for money right out of the gate anyway, so this not only makes it easy to approach people, but it also breaks the ice and allows the conversation to work toward borrowing and lending more naturally.  This may not always be in one conversation either, it takes time.

I should have clarified private lender versus hard money lender.  As Bill Gulley said, a private lender is somebody that you know that has liquid assets (cash) that they will lend for a return on that cash.  In nearly all cases, this individual is not in the lending business, but may have some sophistication in the world of finance.  Usually, their terms are more negotiable and tend to be a little "softer".  It will likely still be more expensive money than the average advertised rates, but it is important to remember that private and hard-money lenders are MUCH more likely to lend on a speculative deal (rehab/etc) than traditional lenders.  Simply factor in the extra money cost into your deal analysis.

On the other hand, there are hard money lenders.  You will still need to spend a little time building a relationship with these lenders, but probably not quite as much effort as private lenders.  HML are usually in the business, know it well, and lend based more on the deal than on the people doing the deal.  Note that some HML's are more than willing to see you fail so that they can take the property and make money with it.  That is not always the case and don't let that scare you away.  I use HML's on a regular basis because I get a quick answer.  I work with the same people, generally, and know what they want to know in order to make their decision.  I have my elevator speech ready for the deal already prepared before I call them up and usually email information/pictures ahead of time in order to move the conversation quickly.  This is as much for my own efficiency as it is for theirs as well as being out of respect for their time.

As Bill G. mentioned, you need to build these relationships up now.  It is ok to keep looking at deals to hone those skills, but at the same time, you need to be working on how to pay for them.  Don't be surprised if the first few deals you pitch to either private lenders or HML's end up in the garbage can.  Ask why and learn from it.  I have become much better at putting together better deals because of this happening to me.  It has made me a better investor and made me a lot more money.

Also, don't EVER talk yourself into doing a deal that is marginal, even if you can find funding for it.  I very rarely re-run my analysis numbers after I have done it the first time.  The reason is when you run the numbers the first time, you don't know yet if they will work or not, so you are likely to be the most honest with yourself.  But if you want the deal to work, then run the numbers and they don't work, if you go back and try to "tweak" here and there, you are probably starting to lie to yourself.  I have had deals that I was angry about because I really wanted them to work and they didn't on paper.  The numbers never lie.  This lesson will also make it much easier to borrow money.  If the deal is a good deal, the money will find you.

Don Harris · Answer

@Kevin Howell congrats on finding your deal that's half the battle but one that a lot of dreamers never conquer but as mentioned above you should have found the money first. Good news is that if it is a good deal you will find the money since HML and private lenders are looking at the collateral primarily as the criteria . You may also consider a joint venture with another lender or investor. Since you have construction skills , you bring a valuable asset to the table.  Half of a good deal is better than 100% of none , especially if you are building experience.

BP is great for making contacts but you need some local relationships. Have you done any rehab work for local investors? Start there.  They know your quality and reliability. Go to you ur local REIA meetings and meet others in the business. You will find business for your construction company and potential partners , lenders and investors. Persevere.

Bill Gulley · Answer

Kevin, you might search the forums and see the differences between "private money" from those you know or have had relationships with and "hard money lenders" those in the business of lending or willing to lend under their terms.

Building relationships takes time, most with money won't be receptive to any pitch without knowing you and your experience. They are more concerned with the return of their money than on their money.

You can also get into some deep legal issues soliciting private money, as investors or lenders, your pitch can violate security laws, which is pretty much why you need to be acquainted with people and approach them carefully, one on one.

Your HUD property isn't one you can take down as a deal without financing lined up, you have the cart before horse. Look into your sources of funds first, then look for properties that fit your ability to take down. If you can't pull down a deal on a 25,000 sq. ft. factory building, don't look at such properties, if financing is harder for you on a 40K sale price, might look at 65K properties, there are deals to be had throughout the price spectrum. :)

Jesse T. · Answer

Do you own your house?  Could you get a Home Equity loan to cover the purchase price and the repairs?  It would be risky, but the financing would be a lot cheaper.

If you don't own the house would you be willing to live in the property?  I think there are a number of loan products that will allow you to buy and rehab, but they generally have owner occupancy requirements.

Bruce Stayner · Answer

I think there is a little bit of difference in terms here. When I think of "elevator talk" I think of approaching random people who might have money but are not in the business of lending money. I can understand your reluctance in approaching these people as a newbie but it is a skill that you can develop with time.

The other term is hard money lender. These are people that are in the business of lending money and are going to look at your deal much as a bank would but with a different set of criteria. You might want to start here because it doesn't matter if you are shy or stutter or whatever, if you truly do have a good deal they will lend you the money. If it is not a good deal they will tell you why and you can apply your new knowledge to the next one.

I can't telll from this far away whether your deal is any good or not but I can tell you that the above has worked for me. I still haven't gotten to the stage of approaching random people because I have been able to find all of the money that I needed either through banks or hard money lenders. I would admit however that it would be one heck of a lot easier if I could find a few people who were capable of funding my deals.

Kevin Howell · Answer

@steven stokes, how do you start the conversation?  Are these potential investors or just random people you meet?  Have you ever asked family, or is that a bad idea?  I feel I'm pretty solid at building rapport but struggle in selling myself.

Thanks

Steven Stokes · Answer

@Kevin Howell my friend, you HAVE TO do the elevator talk, it's part of the process of marketing the property because even though you have a good deal on your hands you still have to SELL it.

You have to paint a picture for the investor so they see what they are getting. And being a beginning investor you might have to talk to 10, 20 or 50 investors before someone is willing to work with you. Don't be afraid of hard work and don't be afraid of hearing no because you will hear it a lot  but someone will say, YES but you might have to beat on a lot of doors before getting to that YES.

And the more people you talk to, the more you will hone your pitch about the property and about yourself and this is valuable for now and in the future. Don't be afraid, have fun and enjoy the ride!

I hope this helps and good luck in your real estate investing!

Kevin Howell · Answer

I appreciate the advice Adam.  I will definitely put it into practice. This has been a dresm for several years. I'm sure as a construction guy you understand wanting to rehab your own stuff. Thanks

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