Investor · Tyler, TX · Member since 2014 · 96 posts · 22 votes
Need some advice on how to pitch a deal to a large investor! I have a history with the guy, and he has already given me a private loan for a construction deal I worked out for my job. He is more of a pen and paper kind of a guy, and when I talked generally with him he is willing to hear me out on possibly investing $400-700k to act as a bank for my builder/partner and I on a deal.
My parter and I are looking at purchasing a lot for $102k and then building the house on that lot for $350k so we would be looking to borrow about $452k from him (we have run the numbers below based on a padded $475k). My partner can build the house in 6 months and we have drawn out a tentative draw schedule and the corresponding monthly interest payments based on our proposed 5% interest rate. The proposal to the investor would be that we would use his money for up to 12 months and pay him the 5%. If we hold it for the whole 12 months his total interest paid would be about $18k. We are thinking based on my partner's extensive experience and our understanding of the market we are building in that it is realistic to think that we would sell the home by month 8 of the project giving the investor approximately $10k.
I need help figuring out how to communicate this to my investor.
@Charlie Fitzgerald thank you! That is kind of what I did with him when the non profit organization I work for needed a private money loan on our new construction. I spoke with him for about an hour and he loaned us $575,000 for 7.5% interest only while construction and then after we finished the build it would amortize out for 30 years with a 5 year ballon. Of course we had about $200,000 already into the deal and he had first position on the whole deal. But we have worked with him for about a year on this with the draws and it has been a wonderful relationship. During that time he saw how we handled the transaction and I feel that has opened doors for me to reproach him regarding our personal venture we would like to do. I just want to make sure I don't come off sounding like an idiot lol. But then again when I met with him the first time I just asked him and he said no problem so I think your advice would be correct to just ask him again! Thank you!
I would pitch this as an opportunity to the investor.
Are you putting any money into the deal?
If only his money is on the line then he carries all the risk and 5% return for that much risk seems like not a very good deal for your investor.
I'm sure his money is sitting in some money market acct barely making 1%.....if he feels comfortable with you then then hopefully the risk is minimized.
@Steve Jones, Thank you for your input. I would not be putting any money into the deal. What I would be bringing to him would be the opportunity of 5% and a quick return on his money. Of course he would have first position on the deal. I asked him if he would buy the land and he said he would but he would have to have first position and he told me that no bank would give the loan for the construction unless they had first position. That is when he said, why don't you come back to me with an offer and I would be willing to be the bank for you for the whole project. So I am trying to figure out the best way to approach. Any advice would help. I have not spoken with him as of yet. I feel I have one shot at it.
@Jonathan G. I agree that you have one shot. @Charlie Fitzgerald has a lot of knowledge and I think he is right. Have all the information and the numbers available. Then just talk to him, and be real, don't make things up or give unrealistic future projections. HL are usually savvy but they are also realistic people.
5% for this sort of thing seems really low. Though maybe lots of people here see those kind of rates?
If he is interested in helping you out maybe he will give you a good deal but from a pure financial side it's tough. That said pitch him with the details and think through how he is protected and how high you can go on his interest. Maybe a fixed interest and a percent upon sale. How much are you going to make? How much cushion is there based on comps? 7.5% for a non-profit is nice, 5% for someone making $ with no money down is different
@Steve Dye, Thank you so much! That has been my concern. I think I have a good relationship and I think with the other investment that we did with our non profit organization, just made more sense to him because our Non profit put $200,000 down and he had first position, plus it was in one of the best area's in our city, and I think I made a convincing and honest argument for his money ;-). I also was able to establish a very good relationship with him and his money during those two years while we worked with his $575k.
I have heard that most of his deals with people who are trying to get into a house, but are unable get financing, he usually wants them to have at least 50% down and charges them 10% interest. So the deal he did above I felt was a huge win and was very grateful for it!
Now this is a little different because of what you pointed out. I will try and give you the best breakdown of the deal and maybe you can give me some options to maybe sweeten it or not lose it but at the same time of course I want to make as much as I can. But I really want it to be a win win. Obviously he would have the lien on the whole deal as collateral.
If comps are correct and we feel pretty good they are, houses in the area we are looking at are selling between $145 sq ft and $150 sq ft for new construction. That being said, the land is $96k, we also have an opportunity to hold 4 or 5 more lots and have first option to buy for $6,000.
We figure on building a house between 3,500 sq ft to 4,000 sq ft. The builder I am working with feels he can build it for $100 sq ft. So the amount of money for the build will be $350k to $400k plus the cost of the lot and option on the other lots $102k. So total from the investor would be anywhere between $452k - $502k.
Profit in the deal before interest paid out to investor would be between $73k-$98k. The builder believes he can finish the build and the final draw request on or before month 6. So if we borrowed $452k at 5% interest only, at month 6 we would of paid the investor $6,779. We are hoping to sell before month 8. If we do then we will have paid the investor $10,545 but if we don't and we go all the way to month 12 and then refinance out of the deal, we will have paid the investor $18,077.
Possible Profit
6 month - 73k - 10.5k (Intrest) = $62.5k
12 month - 73k - 18k (Intrest) = $55k
I have talked briefly with the builder about a 50/50 split. So $27k-$31k would be my profit.
Again, I am open to any feed back and maybe another way at looking at this. I really appreciate any input. This will be my first deal.
I obviously want to get the best deal I can but I also know that I need to make sure it is worth this investor's time.
@Jonathan G. I don't know - on the other deal that $200k gave him a pretty safe spot. In this case since you have zero down any risk of issues is all him: a partnership split, recession and the market gets tough etc. Everything looks manageable until there is a bump then this gets crazy.
Some random thoughts
- Can you put in $5k even? Some skin in the game feels better even if it doesn't really protect the investor.
- Some minimum $15k interest might be an option. For $10k on half a million meh. :)
- Make sure you have the comps and detailed math with some section for crazy. Besides the comps some data on what that market did last time there was a pullback.
- If it sits who decides when to lower the price? You won't be making payments to the investor and the money is trapped. If it doesn't sell in 14 months does he get to set the price to liquidate? Do you auction at some point?
At the end there is only so much you have to work with. Maybe explain the deal and get his thoughts. Don't focus too much on a yes or no but get advice on how it could work. Either way he will probably tell you what he would need to make it work.