All Forum Posts by: Doug Smith

Yes, I'm a lender, but we have an arm that's been investing for close to 20 years now. We've never used percentage-based criteria, like the 70% Rule, for purchases. Simply put, we start off with the As Repaired/Completed Value (ARV), then subtract from that number a reasonable profit, the rehab cost (scope of work), which we've gotten good at, a contingency reserve for any "unexpecteds", our cost of capital/carrying costs (interest and costs of the leverage used), and our costs/fees on the buy and sell sides of a flip. That gives us our "strike price", which is the highest amount we're willing to go to purchase a property. I've found that those percentage-based rules have mathematical flaws in them. MInd you, we've gotten really good at our scopes of work and we have one of our GCs go through the property with us to give us our scopes of work. We've also advised this method to our investor clients that borrow from us. I will die on the hill that the 70% Rule is flawed. We avoid lending to folks that don't really have their math/numbers together. I hope that helps you.

On another note, just because your offer isn't close, as you said in your narrative, doesn't mean you're wrong with your offer price. There are a lot of idiots out there overpaying for deals right now...well...that always seems to be the case. If you get your system and modeling down and follow what I mentioned above with respect to coming up with your strike price/offer price, you shouldn't look back if someone overpays for the property. It's just a math problem and if you've done the work up front you shouldn't second-guess yourself. There are many, many investors that don't do their math up front. 

We hate to call it "hard money". To us, its a "Bridge Loan" (lol). With flip loans, experience is key. For the first 4 loans or so, lenders are going to be less aggressive (requiring more down) than if you have several under your belt. Typlcally, a lender is going to lend 75% - 90% of the Cost of the project (property price plus rehab cost (scope of work)) or 70% - 75% of the ARV (As Repaired (as completed) Value). Those figures will vary from lender to lender, but that's around where most legit lenders are. They will usually want to see you have the capital for closing costs and some "reserves", meaning they want you to have a few months left over to cover any surprises. You can certainly negotiate some closing costs from the seller on the buy side. Even more than credit, the more experience and capital you have, the more aggressive a lender is going to be. One solution I see some people do is to partner with another investor on a couple of deals where each brings something to the table...more capital, experience, etc. That might be an option. Of course, there's a lot more to it than I put in this paragraph, but I hope it helps with general parameters.

I own a mortgage company now that does both residential and commercial finance, but I spent years as a commercial banker with both big banks (First Union/Wachovia) and 2 community banks. Huntington is a very conservative bank. If it were me, I would reach out to other franchisees in your area (perhaps your Development Agent might have some insight...see...I know the Subway lingo and I've done Subways in my banking days). I would also consider being a bigger fish in a smaller pond. By that I mean community banks. They tend to be less bureaucratic and more creative than big banks. I can likely do this loan, but in all fairness, with this type of loan I suspect a community bank is going to beat me out. I'll likely be higher priced on an owner-occupied restaurant franchise, but you've been around the block and have a significant track record. I think a community bank would be much more apt to put a deal together for you than a big national or regional bank like Huntington. Good luck to you!

Auctions are typically Post-Foreclosure, not Pre-Foreclosure unless the homeowner decides to hire an auctioneer to sell the property. Whether it be a deed theory or lien theory state, some action like in a lien theory state where a judgement is received, must happen to take the property to auction. I'm primarily a lender, but we've personally purchase several in FL over the years through foreclosure auctions. I am unfamiliar with SD's process, but you might get even more frustrated. Here in Florida, every Tom, Dick, and Harry try to buy foreclosed properties and they tend to way overpay. We did a ton of running around doing due diligence only to have some knucklehead way overbid. We ended up moving on to other ways of buying property. 

Many of our borrowers/clients have one LLC that owns the building and another than own the operating business. It's not uncommon, and actually normal, for the operating entity to lease from the LLC that owns the building. If you ever decided to sell the building but keep operating the business, it makes it much easier. I would keep it at "reasonable market rent" (whatever that means). Ask yourself if the IRS tried to say you were over/underpaying and they want $ from you, could you defend the lease amount? Would the rent amount seem unreasonble to a buyer if you tried to sell it. I'm not sure I would get to cute trying to squeeze every time out of it now with a lease that might cause you issues in the future, but the scenario you describe is common and probably smart.

I'm a lender and I have three different deals going on right now like that. In all three instances, the contractor underbid the jobs to get the business. One realized he couldn't do the job and walked off. We funded the first draw of another and now he's telling our borrower that he doesn't have the money to order materials. We vet the contractors that our borrowers use before we lend to a certain extent, but this happens more than you know. Make sure the contractor is paying the subs. Even if you think you've paid for something that the contractor did, they might have used that money "to pay Paul" and not the subs. The subs then have every right to slap a mechanic's lien on the property. Have your business/construction attorney look over your contract with the GC. I would start there instead of going directly to a complaint. A well-timed letter on a law firm's letterhead might shake the bushes a bit. I hope that helps just a bit.

One thing to be mindful of is the cash flow of the property as you get into higher LTVs. The other thing to think about is the length of time you've owned the property. Most DSCR programs will want you to have owned the property for more than 6 months to allow you to use appraised value instead of cost. There are lenders that will do 0% origination, but fees and rates are like two levers that usually have an inverse relationship. Often times if you lower the rate, the fees go up and vice versa. Make sure the lender you choose has a strong background in this type of lending...check them out on Linked In to see their experience level. Often times someone passes their NMLS test, hangs their license, does a few Fannie/Freddie deals, then tries to get into investor lending. It is a bit of a different animal. I wish you well in your real estate endeavors.

In Tampa here as well.That is a question for your asset protection attorney, but most of our borrowers/clients in FL have LLCs. You can set it up yourself at www.sunbiz.org , which is the website for the State of FL Division of Corporations. Under "Start a Business", choose "Limited Liability Company" and follow the directions. Lenders will want to see the filed Articles of Organization, an Operating Agreement that you can get from your attorney or, if you're brave and it's just you on the LLC, some people use Legal Zoom or Law Depot. Many if not most lenders will also want a Certificate of Standing that you get when you file your LLC on sunbiz. After that is done, head over to IRS.gov and apply for your EIN (Tax ID). You'll want to print and save the SS-4 Letter that you'll have the chance to download at the end of that process. Once again, consult your legal advisor on this stuff, but that's what most of our more savvy clients do. Good luck.

There will be people that do them on here. We do them, but for HELOCs we only do them in FL...other loans we go National with...but not HELOCs. There are, I'm sure, people on here that do them in MD. 

We're based in Tampa and, in addition to personally investing, I own a mortgage company that provides financing for tons of investors. Whatcha got?