Want to Turn a Lender into a Partner? Exceed Their Expectations.

Approximately seven months after funding my first deal (I discuss this deal in several previous posts) I learned of a situation. An investor had a closing scheduled on a rental home purchase in a couple days. He thought he had a private lender lined up but when he made contact the day prior to the scheduled closing he learned that the potential lender had not yet even looked at the documents and was anything but certain to fund. The investor had an urgent situation. If he couldn’t close he would lose his earnest money and the deal. On a friend’s advice he posted to facebook. I did not know the poster very well but we were more than just facebook friends. We had both invested in a real estate project that was organized by a mutual friend (the one who advised this investor to post on facebook). I saw his post about five minutes after he posted and phoned him. After a very brief conversation I was able to determine that I had the required funds available and was comfortable with his business model. The borrower intended to hold this home long term and operate it as a rental property. The home was in an area that I had some familiarity with—it was easy for me to determine the value. He had approached a bank which gave preliminary approval to refinance the property in approximately 6 months—this was the first exit plan. The investor was putting 20% down from his own funds. He had not been operating rentals very long but the down payment went a long way toward convincing me that he was serious. The kicker…our mutual friend had already committed to funding approximately 12% of the deal. I didn’t have to call him to see what he thought about the deal and/or the borrower—he had already voted with his checkbook.

So I was asked to fund ~70% of the purchase price on a nice rental in a solid neighborhood that I knew was being purchased at a very good price. The borrower was going to make monthly payments that were easily covered by the rent receipts and in 6 months or so he was going to cash me out. If a catastrophe occurred and he couldn’t make the payments I would get the home back (I suspect this partner would not even force me to foreclose if he got into dire straights) and I would rent it myself. Actually, the other lender on this deal would probably manage the home since it is near some that he owns already. As I spoke about in a previous post, the worst case scenario for me in a situation like this is that the borrower would pay as agreed. I would expect to earn more if he defaulted.

From the very beginning, this borrower proved that he was not just a borrower but that he thought of me as a trusted partner and he gave me every reason to return his respect. The first monthly payment was made approximately one week before it was due. The borrower knew there was a delay in receiving payments into my self directed IRA and he wanted to make sure that the payment arrived on time. The borrower e-mailed me a copy of the check, the payment coupon and the tracking number for the mailing. I never asked him to do this. Want to make an impression on a business partner? It’s easy. Exceed their expectations.

The worst case scenario played out for this deal. The borrower made every payment a few days before they were due and the home was refinanced a little more than six months later. Three months into this deal my new partner found another home to add to his rental portfolio. I funded that one on similar terms except this time I did not require him to make a down payment. I have since funded two more homes for this partner and participated in other deals with him. I welcome the opportunity to work with him again.