All Forum Posts by: Jace Holt

@Gary Siver I think you're right that if they can't manage money to make things work before getting paid on completion, they should not be in this business.

I hired a contractor to do part of some renovations on a 40 unit complex. He was contracted for install on some of the units for LVP flooring, cabinets, counter tops, doors, base boards, some wall repair and a few other things. The contractor reached out to me through my craigslist ad when I was looking for a drywall guy. After some due diligence and calling his references, everything checked out and I hired him and paid 30% down. The arrangement was after 30% of the work was complete, he would get payment for the next 30% and the final 40% payment was due on completion. I am buying all materials for the job and just pay him for labor.

After a few weeks and about 15% completion, one of the subs came to me saying they weren't getting paid. I asked the contractor what was up and he told me the subs were contracted to get paid when 30% was complete. The subs said they need money now. I don't know the terms of their contract. I can tell the contractor is lying to me or the sub about some things because the sub's story and his story don't line up and some of his excuses for things don't add up. I am not sure if the sub is lying. I don't know whether their contract stated payment at 15% like the sub apparently thinks or 30% like the contractor told me.

Today I received a surprise letter by mail from the county stating that a lien was placed on the property by the sub for $9,000. 

There is another $16,000-$17,000 worth of labor which other subs were contracted to do and which are also about half way to complete for their first payday.

If I fire the contractor now, I will likely never see the money back from him and all of the other subs will file liens. Consequently, I will have to pay for the labor twice to make their liens go away. I will be left with suing him and I doubt he has much to fall on. Additionally, the $9,000 is more than I paid the general contractor for what labor they performed, so I'm not sure where that leaves me. It may include labor they did not perform. I don't know where that number came from. They may just be trying to extort a bit of extra cash by exploiting a contractor's upper hand in the lien laws.

I think the contractor "robbed Peter to pay Paul" with my initial payment to him and I think the money from the initial payment is gone. I think two or three subs he hired earlier on did get paid just a few thousand or less. There is a good chance that he would pay the subs for their first 30% with my second 30% payment to him, however, I definitely won't pay the contractor any more money with the discovery of the lien on the property and the subs not paid.

Fortunately, I built a big enough cash safety net for problems and the deal is good enough that it can handle this. That being said, what are your suggestions on the best way to receive the smallest loss from all of this?

@Maron Faulkner Glad it helps! When talking to the bank about a residential loan, it usually feels more like working with a checkout clerk at the store. The process is more transactional. There is a lot of box checking. Everything is very systematized. Commercial feels more like working with a floor salesman but less pushy. Things aren't set in stone, everything feels negotiable, and you get to work based on relationships. You can ask for things and offer things. I've had multiple commercial loan officers tell me they can't stand doing home mortgages. They feel like they are doing "real" business/finance with commercial and they feel like they are working the customer service desk of a department store with home mortgage.

DSCR is the ratio of NOI to debt service. Debt service is what you pay to service the loan which is principle and interest, aka your loan payment. When making a payment on a home through an escrow, they may include property taxes and insurance into your payment. Financial statements in the commercial world separate these out to where they are considered an expense and do not count as debt service. Typical DSCR minimums by banks are 1.25-1.3. As an example, lets say a property makes $1,250 in NOI per month and the debt service is $1,000. This is a DSCR of if 1.25 (1,250/1000).

@Maron Faulkner For starters, I normally look for commercial or multifamily loans. You said you are looking for SFR, but I'll give you my process. I'm sure you'll be doing commercial loans as well before too long!

When calling the banks, I start by asking who I can speak with about my type of projects. In a normal bank, it's the loan officer. Commercial loan officers are usually pretty casual and most don't answer the phone the first time. They usually come in later in the day, take lunch for about 2 hours, and leave by 3 or 4 so I normally try to call around 10-11AM or 2-3PM their time. Preferably the 10AM to 11AM slot. That gives me the best odds of reaching them. I make a note of their response time because nothing is worse than having a property under contract and having a lender who isn't answering their phone or isn't on top of things. Once I get an answer or call back, I ask them and then record their personal office number or cell, whichever they prefer, so I don't have to go through the phone maze next time I want to talk to them. 

Once I'm in touch with the right person, I tell them what I'm working on or looking for and ask them if their bank has an appetite for it. A big tip is to ask them what products they are heavy on (this means too many in their portfolio which means they want to diversify and loan on other things) such as multi family, new construction, storage units, etc. This can give you an idea of how willing to get your project done they are. I ask if they are pushing more for reserves or for loans right now. This lets you know how to negotiate with them when the loan goes to the board. At this point, most will then tell you they want you to have a banking relationship where you set up a personal bank account or run your rents through them. This is all negotiable, but it certainly helps the loan approval board.

General questions I ask are:

What size is your bank

What LTV do you require?

What DSCR do you require?

How long does it take to get a loan done and how does your process work? 

Is there a threshold such as 1 million dollars or 5 million where the loan gets elevated to another board?

Do you underwrite the loan yourself?

If you are searching for a particular vendor such as a contractor, this is a great chance to ask a local immersed in the market who likely deals with contractors. Without asking, I have even gotten referrals of people who want to invest in my type of projects. 

Yes, I live in the IF area. I'm working on a few projects here and some out of state. 

@Maron Faulkner Have you considered talking to another bank/lender? When I try to find financing in a new place, I look up every small to midsize bank/credit union in the region. I make a new excel spreadsheet to keep track of them and call every single one and ask them some questions. Some I find out don't do what I need. Others can work better than what I was expecting. Banks can vary significantly in what they can offer so give that a shot. Also, banks/credit unions aren't the only ones who lend.  

@Derrick U. 

Short answer: 

It completely depends on what you are looking for. 

Long answers: 

I found a property for sale which is still on the market. I have the ability to make 30% or greater cash on cash returns investing on the property. The problem is, the main employer in this small town in going out of business in 3 years. The 3 year COC may look awesome but there is more to the deal than cash on cash. That deal may or may not be better than .02% at the bank. It just depends on how you play your hand with financing, rental rates, short-term vs long-term rents, taking a cash out refi, over-leveraging, under-leveraging, etc. The ability to be in control and have a dynamic operation with real estate is why I would say "depends". With commercial paper, annuities, bonds, certificates of deposit, etc., its easier to take a CoC return approach.

I would also recommend analyzing your properties through the lens of IRR. This accounts for the time value of money, the cash flow, and any exit/refinance if applicable. If you are ever going to sell or refinance, don't forget to factor that in.

You asked Spencer "As long as I have cash flow positive isn't that all that matters?". If I understand the question correctly, you asking that as long as you cover expenses, debt service, and a little extra, then aren't you good on your investment? Sure, I guess the answer could be yes if all you wanted was paying down the mortgage over 10 or 25 years and then having cash flow to retire on. Putting 25% down in a presumably stable market and paying down the mortgage is a clean, simple way to invest, but you aren't going to get as high of returns as you could. I only look for very high percent ROI deals but I utilize seller financing, creative leverage, refinancing, investors, etc. It is less simple than the conventional strategy, but you can get 10x the return you would have otherwise gotten.

@Jonathan Reed Keep in mind that while there are only so many houses on the market at any given moment but the low average days on market multiplies that to reach a much higher number of homes sold per year. And also keep in mind that there are sales with both a buying agent and a selling agent. 

@William Coet This price varies significantly from market to market. Your going to need to name the specific market the construction is being done. In East Idaho, everyone I have talked to recently is well over $100. In 2017, I had a quote for $83-85 per sq/ft for a very large project that unfortunately did not got through. In 2018 those same building costs went up 15%. 

I just want to add: Be careful with your projections when investing in Lawton for rentals. After walk through inspections on some mid size apartment complexes for purchase, we found some issues with the rental market and really high vacancy at multiple locations. According to all of the local real estate agents and contractors I met with, Ft. Sill recently built a bunch of housing on base. Many of those stationed at Ft. Sill wanted to live off base in Lawton. A higher-up came to the base and asked why all of the on base housing was vacant. To make it look like the on-base housing wasn't a waste, he made a rule that they would make the lower ranked members rent on base until it was full. That drove the rents down into the 350-550 range. If anyone has a different explanation as to why the rents were low, please share. I would love to hear from anyone with local experience.

@Hen Ley In response to your question about how the refinance part of the BRRRR strategy works, I think the answer is not every flip is good enough to refinance some cash out. It only works if you get a good enough deal and build enough of both equity and cash flow. Each market is different on how easy it is to find a BRRRR deal. And then within each market, each class of property is different.

What specific loan products are you looking for? Are you just looking for single family conventional loans? Even with those you may have difficulty buying distressed property. I have had banking relationships with all of the banks mentioned above except MACU. MACU looked great both times I started looking at getting a loan with them. However I ended up finding comparable products for my needs at other banks and, I also used to care about having a face to face relationship with the lender. Their commercial lender for the whole state was located in Boise. The face to face relationship is a non-issue to me now. 

Even if a bank is a portfolio lender, lenders care that you have both experience and good personal financials. While commercial lenders primarily analyze the income statement and situation, everyone I have worked with absolutely cared that the lender also looked financially sound.

I personally like CCB and Zion's for local commercial.

I would recommend bringing on a partner.

You have mentioned avoiding hard money, but I would not rule that out. If you only want to do a small handful of deals, then I could see only wanting to use conventional financing. However, if you are making a long term business out of this, you may be better off using hard money. The cost, per deal may be higher especially at first but you need to compare cost per deal against IRR. IRR will provide a much better measure of your wealth building. If your turn around is half the time and your cash into the deal is only half of what conventional financing is, that means you can do 4 deals in the time you only did 1-2 with regular financing. If your profit per deal is 30K, and you do 4 deals in 7 weeks instead of 1.5, then who cares that they paid 3 percent higher on interest or 2 or 3 points. That may be as little $5K more per deal. Take a step back and be honest with yourself about what your trying to do here. If you're going to be doing a lot, you may be stepping over dollars to pick up dimes.