All Forum Posts by: Doug Smith

Ivan, I'm in Tampa too and I'm a lender with formal commercial credit background from two of the largest lenders in the world and 34 years of lending experience. I am not trying to be condescending, but your question is akin to "I have a really sharp knife. Do you think it would be a good idea to start performing discount surgeries for people?" I've seen some of the books on private lending and I can't help giggling when I see them. Go to the authors' Linked In profiles and see what real experience they have. If they've not got progressively more in depth lending experience on their resumes, don't listen to a damn word they say. That being said, $110K is a bit light to start a lending practice. Ivan, I didn't mean this to at all be condescending, so please don't take it that way. I just don't want to see you lose your money. Since I, too, am in Tampa, DM me and I'll buy you a cup of coffee. You can ask me any question you want. I would love to help...if nothing more than to ensure you don't miss something you didn't know existed and, therefore, loose your $110K. 

I, too, am in Tampa and I've been a lender/banker and a Real Estate investor in the market since 1996. We've used LLCs by going to sunbiz.org, setting up the LLC, and then heading over to IRS.gov to get the EIN (Tax ID) number. If you don't have a background in it, you're attorney can help...particularly with the Operating Agreement. Half of all marraiges end in divorce and no one goes into a marraige thinging that they will get divorced from the love of their life...the same is true for business partnerships. An old business associate once told me "There are two people in this world you make sure you pay...the IRS and your attorney." Don't try to save money by not using an attorney to draft docs. I had been a banker for 15 years and thought I knew everything when I entered into an LLC with some shady people. I didn't use an attorney and they had their attorney quietly sliding innocent-looking clauses into the contract. I literally lost everything because I was too tight to hire an attorney. Perhaps that isn't what you asked, but that's my advice that I learned the hard way. I'm in your market and although I set up our LLCs myself, if I have a partner I pay an attorney to handle the operating agreement. Good luck to you, Fellow Tampanian!

Hey Mario, We're doing several rehab loans right now...mainly in Pinellas...on Hurricane Milton-damaged homes. The FEMA 50% rule does come into play, but we do a lot of ground-up construction, so some investors that do have some new build/heavy rehab experience are tearing down and building back to current codes. If you aren't familiar with or aren't paying attention to the FEMA 50% Rule...educate yourself on it. I see it bite customers all the time. We get calls from newer investors often that have just bought a property in a flood zone that they want to rehab, but had no idea that the rehab was limited. I remember a saying someone told me a couple of decades ago that convey's to real estate investing: "If you've been sitting at the poker table for 15 minutes and you can't figure out who the patsy is, you're the patsy!" If your planning on listening to keyboard warriors on here to explain the process, you're gonna get a lot of bad info...some good, but some bad. My advice, find someone who really knows their stuff to partner with until you've figured it out...and then understand that you'll never stop learning. I'm still learning after 34 years. Good luck you to, fellow Tampanian! I wish you well in your investing endeavors.

I 100% agree. I did attend a local BP meet up for a while. Not that I got any business from it, but I really liked the young wholesalers (they were good kids that are just trying to do it the right way) that threw it as well as a few of the people that attended. Most of the stuff I attend now are higher-level conferences that cost a lot to get it. Not the ones the gurus throw, but professional conferences that they hedge funds attend. I'm finding grabbing coffee one-on-one has gotten me more business than doing meet ups. And REIAs? Total waste of time for a seasoned pro IMO. I tried attending one in my local market a couple of times but felt like I was in some hotel ballroom being pitched on how the 12 year-old kid up in front would teach us all how to run to the back of the room to swipe $10K on our AMEX for the secrets of real estate investing. I'm all the way across the country from you or I would invite you out for coffee to connect. I will tell you that IMN out of NU (IMN.org) throws some really good conferences in the Scottsdale area. They are expensive, but that keeps only the serious players coming back. Good luck to you Shiloh. I 100% agree with you. 

When we started this company, I had been a special assets officer (handling non-performing loans for banks trying to extricate them from the deals with as little damage to them as possible) during the last big crash. At that time, few realized that you can buy and sell loans, so the software didn't exist. Since we used small investor capital to buy and sell loans, we had some investors that were softward engineers. I agreed to handle one of their portfolios for free (he's actually still with us nearly 15 years later) if he would build out a system to help us build out the database system. The problem was that I kept tweaking the model. We ended up going back to the tried and true Excel Spreadsheet. We saved Settlement Statements from every closing and one of our former partners owned a national title company, so we had enough closing cost data to build a models for each state on the buy and sell side of the note buys. We had to enter in holding costs, holding time (time value of the money), ARVs, rehab costs, a contingency reserve (a little extra to cover unforseen stuff), a reasonable profit margin, etc to get to a "Strike Price" as we call it. That's the maximum amount we will pay for the note. We would also calculate two different "worst case scenarios"...what if they don't pay and what if they do...then go with the lowest strike price as our ceiling. I think our modeling has adapted to market changes over the years, so we've stuck with Excel as we can easily change the parameters to keep it "fresh". I hope that helps. 

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.