All Forum Posts by: Kevin Yoo

Nicole Clemens

1. The interest rate that you should offer is determined by the market. In my market, private money is lent out around 12 to 15%. Some private money will accept as low as 8%, but you don't want your private investor to find out that some other private investors were getting more than you were paying. So, ask around.

2. If I was your private lender even if you pulled out money from the deal with a loan later, I would still ask for 50% for several reasons. You may not get a loan after all. You may need me to qualify for the loan or qualify with you. But you can negotiate all of this. Just offer what is fair. You want them to invest with you again.

3. As for examples, I will share with you what I do and others in BP will do the same. The process is very flexible and you make it what you want. There is no manual. When I have private money in a fix and flip, I offer them 2% per month with guaranteed principal and preferred return. This way their money makes more if I keep it longer. This way their investment is protected (which is easy to do). This way they get paid first before I do. With this setup, my investors are virtually insured of making 24% annualized return.

Nicole Clemens

The use of a private lender has some other issues that you must consider that complicates things. You certainly want to protect their investment and give them a good return but you must also think of how to limit their liabilties. So, this is how I do it.

I think of every deal in 3 parts. One, finding, acquiring, and managing the deal. Two, funding the deal. Three, qualifying for a loan for the deal. I just simply divide the reward of the the deal into 1/3 each.

But in your case, since you are doing all of one and your friend is doing all of two, and there is no three, then divide everything in half. Your partner should get 1/2 of the cashflow, expenses, tax deductions, and equity. This is what I prefer, but your partner must then be on the deed, liable for any problems with the property, and must be willing to put more capital into the property if needed.

If she does not want all that trouble, then make it a simple loan made against the property. Typical rate for investment is 10% or more. It all depends on how confident you are about the property and how much you want to please your investor. You can make it simple or amortized. You should put a balloon on it to make it better for your investor but that could make it harder for you. You may simply agree to sell the property at the best time and return her principal back to her.

Jose Garcia
We had our real estate company meeting today with couple of agents to strategize how we are going to work this market where we too are getting beaten out of so many properties and find that other rehabbers are doing not nearly as good work as we feel needs to be done.

We came up with three strategies.

1. We realized by taking into account the rapid appreciation of the CA market we can go above the 70% rule and still come out at 70% when the home is finished and sold at an ARV higher than we predicted. This is what is happening in San Diego so much so that sometimes we make more money on the sale of a home just by holding onto it longer. Before, we were always trying so hard to get the rehab done and property back on the market in as short period of time as possible. This is no longer the best strategy.

2. We also realized we need to spend less on rehab than we did before. This will help with our numbers so that our offers will be more aggressive. We don't plan to sell homes where we have done shoddy work, but we do not need to make the homes beautiful. Just making them clean and safe is enough in this market to sell at top dollars.

3. We plan to start a real estate brokerage where we will offer sellers to do rehab on their properties with our money if they will list it with us. We will place a lien on the property for the rehab work and charge a GC fee that will come out of escrow. This way the seller will get top dollars and we generate income from Contractor fee and listing commission. There is one company doing this in San Diego now and they are swamped with work. We do have a licensed broker on staff and our own construction company with a GC.

With these three strategies, we are changing our business model in order to better compete in this market. You are doing what we were doing a year or two ago. We have to accept what the market is giving us and face reality. Our old business plan of buying conservatively at less than 70% ARV and doing a top notch rehab work is keeping me and you out of the market. Now, the market is going to change again. It always does. I want to be better prepared when that occurs and I am constantly thinking of how to do this. No brilliant ideas yet. Hope all this helps.

Brian Burke
Excellent explanation. I have really only used CoC. I will have to use IRR more from now on. I would believe the IRR is more difficult to calculate and predict as one has to make the best educated guess on the future value of the asset at some distant time.

Lafi S.
Your plan sound very good. But it is really only good if it produces deals. Tell us what you mean by "it has worked out really well for me?"
How has this plan been successful for you?

A second question. A short sale listing most likely expires because the bank would not accept offers and probably is trying to get a price for the home the market won't bear. Why would an agent take on this listing and the same unrealistic bank again? And why would you have success where previous buyers and most likely investors did not have any success?

Third question. If this plan works, the other group of properties that could be farmed this way is properties that fall out of escrow. I just do not know how to get a list of properties that fall out. Does anyone know of such services?

Brian Burke

So, Brian, just as there are many different types of CAP rates, there are also many different ways to look at return. CAP rate is one, there is cash-on-cash return and internal rate of return to name a few. Which ones do you find most meaningful and why?

Tim G.

I believe what you say about yourself. I have seen your posts on good solid deals.

I also agree with you about the majority of wholesalers. And I too believe reputation is so important. We really need to instill in the newbies that this takes a lot of hard work and just attaching yourself to some deal for a quick buck is not the way to build your reputation.

Natasha Hylton,
Deborah Saddler

I am not sure I have relayed to you about the problems with daisy chaining. It is a term that has negative connotations. It seems as though you are very interested in how to protect yourself when you are in the middle of the chain, but for the buyer and perhaps the seller, the wholesalers in the middle are a problem. You are a problem because the deal is now more expensive. We have to go through you to get to the deal making it more cumbersome. And most commonly, you know very little about the deal and give us incomplete and inaccurate information.

If I was a wholesaler, I would either not do daisy chaining or if I do it, make sure I know everything about the deal and that it is worth the investor's time and money before presenting it to anyone. I do not know how good Tim G. is but, I have not met one wholesaler who actually does his homework at all let alone do it well.

Daisy chain means that you are tyring to sell a deal that someone else has under contract usually for a fee. This is most commonly seen in big REO tapes worth millions. But I am seeing it now in SFH rehab deals.

David Weiss
David, if you negotiated too high of a price and cannot find a buyer, then you should cancel. But you should get good at it so that you do not do this too often. And it is not the homeowner who will notice you tend to cancel your contracts. it is the real estate agents. That is what happened to me. When I first started buying, I wasn't sure of my price and cancelled a few times. Then the word got around that I could not perform. I am still trying to get over that. With my team of many in place, we have gotten a lot better about making good solid offers. The problem now is that since I did not perform before and never established a network of agents sending me deals, I am having trouble finding them.

But there are a lot of wholesalers in San Diego who send out deals that they have under contract that is too high of a price. Then they cancel on them. This makes it difficult for everyone and it happens too often. What is worse, there are wholesalers that send out deals form others and daisy chaining. They don't know anything about the deal but want to paid for being in the middle.

Just try to be good and honest at what you do. Build up a good reputation. It means everything.