First Investor Letter, What do you think?

Question

Hey All,

I'd love to hear your thoughts and feedback on this property and investor letter I'm sending out.  It's a bit nerve-racking, but I know it's a good deal, and I feel like the terms are fair and that I've built in a good margin of safety.

Alright, let me have it!

Thanks all!

Fred T. · Answer

Ok, I'm going to have to "Let You Have It" on this one.

1) This is NOT a deal IMHO, let alone a deal with a "Margin of Safety"

2) While I like the design of the Flyer, it still doesn't cover what a Private Money Lender would be looking for to feel comfortable with the transaction:

a) Skin in the game?

b) 2 clear Exit Strategies

3) How will the Investor Be paid during the renovations and vacancy period - Are these "Reserve" funds available now and verifiable?

4) How much is the total Acquisition and do you have enough funds to cover the Closing Costs?

5) You want a $56,000 loan, yet your total cost will exceed $66,000, do have those funds available now?

So aside from the Questions that your Flyer does not answer, let's look at the deal itself if we may:

1) Your advertised ARV: $80,000 (High End for Sure)

2) Purchase Price: $53,000

3) Your Rehab Estimate: $13,000 (Does that also cover the "Differentiating" costs of "Nicer Appliances, Security Lights and a Washer/Dryer"?)

-break-

So now, you are so far at $66,000 in "Disclosed Costs" relative to an ARV of $80,000 which is 83%...not such a good deal and we didn't account yet for the closing costs, refinancing costs and holding costs...not looking good so far :(

-break-

4) Interest Only Payments for 6 months with no rental income (this assumption is based on the fact that you mention starting your refinance at month 9 which is after you had a tenant in place for 3 months per your bank's direction...so I would read that as 6mths vacant): $2,100 in payments

-break 2-

Now, with the Interest Only Payments, your total cost is $68,100 which takes you to 85% ARV and most likely closer to the 90% mark with closing costs and the inevitable construction overage and delays...but I digress

-break 2-

Let's now talk about the Bank Refinancing for a minute.

Most banks will only do a R/T Refinance based on the original Acquisition Price if the Title Seasoning is less than 1-2yrs.

IF that's the case in this scenario, then one could expect a Refinance Loan of between $39,750 to $42,400 which means you will have to pay, out of pocket, at closing between $13,600 to 16,250 to close the existing mortgage lien.

Let's say your bank is different and they will do a R/T based on the ARV ($80,000) which will be a new loan amount of $56,000 (A R/T loan will not exceed the current Liens on the property up to their percentage of value limits).

Ok..ok..let's say your Bank is aggressive and will allow you to do a Cash Out Refinance based on a Revised Appraisal showing the $80,000 valuation...then the loan amount would be between $60,000 to $64,000 which will payoff the lien and put MINUS $2,000 to MINUS $8,100 in your pocket.

Not seeing the "Deal" yet....

Comps used, most likely, do not fall within the Appraisal Guidelines

When I ran comps, I show an ARV of between $67,100 to $79,000 but I'm not going to redo your numbers..just know the $80k is on the high side and would most likely need higher end materials to achieve that number which may through off your rehab budget. With that said, if you go all out, you might actually hit the $86,000 mark (like the comps you provided) but I didn't see a kitchen upgrade, floor upgrade or bathroom upgrade on your rehab list.

Rents are most likely going to fall between $800-950 so again you are at the high end in your proposal

Insurance for a Florida House seems low.

-In Closing-

In a nut shell, if this was presented to me as a Private Lender, I would do one of two things...one throw it in the trash or I would lend no more than $43,000 on it and you would have to have and verify the rest of the funds required to make it happen before I give you anything.

Not sure if this helped you, but since you have time to get out of this deal...may want to reconsider...but I'm only one opinion of course!

Good Luck!/

Jeremy Shinall · Answer

I just finished the "How to Evaluate and Market a Wholesale Real Estate Deal" webinar by Brandon Turner. One of the 4 C's Brandon mentioned in "Color" - a design that is aesthetically pleasing to cash buyers. Your letter is for investors, but I would think the principle still applies.

So, forget I asked about why you went with such an engaging (instead of 'boring') design. It's fantastic!

Freddy Evangelista · Answer

Hello Andrew,

I'm new to BP but I figure I would still try and give you some feedback based on what stood out for me while reading this.

I like how you presented the property and the format you used. It will definitely stand out and will motivate people to at the very least look at it and not cast it aside.  I like your plan and how you are thinking of carrying it out, but I feel that the exit strategy is lacking a bit (for the investor). You stated that even if the property is vacant for several months they "will still get pay".  I think it would be a good idea to elaborate on that a bit more. How will they get pay if you can't get a tenant to meet the refinancing requirements? That's something that an investor would probably want to know.

Best of luck on this deal!

Andrew Davis · Answer

Thanks @Loren Thomas , glad it was helpful to you!

Andrew Davis · Answer

@Andrew Cordle I'm sending it to people I know.  But, it may be worthwhile to bring it to local banks and lenders as well, what do you think?

Loren Thomas · Answer

I like the idea of this. It could almost be presented in a meeting as well. This is the first real example I've come across that serves it's purpose. I guess I need to look at what other people have come up with for a presentation. Thanks for putting the thoughts in my head sir!

Andrew Cordle · Answer

@Andrew Davis

Who are you sending this letter out to?

Meaning is it just a list of lenders or people you know etc?

AC

Andrew Davis · Answer

Hey @Fred T.

Thanks so much for your feedback.  I will definitely make some revisions going forward to include my skin in the game, exit strategies, and how I plan to pay investors during renovation and vacancy periods.

I also appreciate your thoughts on the ARV, refinancing and how you would approach it as a private lender.

Andrew Davis · Answer

@Freddy Evangelista Thanks so much for your feedback, and I definitely agree.  As I read back through it I realized I should have been a bit more specific about that.

@Jeremy Shinall Thanks for your positive comments and feedback.  To answer your question, I'm initially sending it out to people I know (for the most part).  However, the goal is that it get's forwarded along so I wanted it to look somewhat professional.  I definitely deliberated about making it much simpler, but in the end I'm glad I went with this format.

@Bogdan Cirlig Thanks for your thoughts!  There's definitely things I'm going to change in the next one.

Seriously, thank you all so much!

Bogdan Cirlig · Answer

That "hi there" should be a catch phrase, think of it like "email subject", it's a decisive factor if the rest gets read or not. I think it's a lot of text in first page. You should deliver your message in the following thresholds:

First 3 seconds, first 10 sec, first 30 sec. You must ensure you take the reader from one to the next. If in first 3 seconds you failed to arouse interest, you're following the beaten path to the trashcan.

The content is great, but I'd deliver it in steps so it won't look like "overwhelming".

First Investor Letter, What do you think?

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