All Forum Posts by: Mike Klarman

How to use OPM....

Put yourself in their shoes.  You have one million dollars and some investor, who is admittedly a beginner would like a loan.  Would you?

OPM, at the beginning stage will most often be Private Money and I do not mean some PML that is lending no different than a HML, but true Private Money that you find in your Private Life.

Who would lend money to a beginner in any craft, you wouldn't and neither would I. There are some HML who will, but as far as someone individual handing you 100k and telling you to get in and out of deals using financing and the 100k to gap fund the closings, that would only happen if...

You have a track record of winning....

You know the market inside and out...

You have the ability to perform rehabs, you have the connections...

You understand what opportunity looks like in RE

You have other investors dying to work with you....

Then maybe you can use OPM, but other than the rich friend/Uncle/Sibling/Parent, you'll need 50k+ just to fart around in the small markets.

One of the issues is that you can't sell a lender. No such thing. You can't whip out a spreadsheet with numbers all broken down how everyone makes money and then say now see gimme the 75%. Boy, be nice if you need. First, you are dealing with a CU. CU is great for a straight 30yr DSCR with a decent cashflow. CU will give you great rate.

You are asking for a very, very outside the box loan. Not a cookie cutter to say the least. And you say the ARV of the portfolio is 360k and total cost (not including any loan fees, holding costs, or rehab overages, is 320. 320/360 is an 88.88% project cost. Even if there was some portfolio bridge loan product, and the ARV was a combined 360k, the max loan amount would be about 70% of that max, you in no way would get full leverage from a HML. This is not a cookie cutter loan, maybe less. But so much can go wrong. But all the rehab money would be covered (in escrow) and whatever is left goes back to you. The margins are so, so tight.

You will have a cash to close number, and if you can swing that number then you can close.  What you have to bring to close will depend on the deal spread, your credit, your exp.  The better all that is, the less you come with to close.

From the price range referenced, I'd be ready to lay out 20%, 25% with closing costs, if you get find 15% down that's a gift.  You actually get penalized for working in a higher price range like that - tougher to exit.

If you're out here asking for Hard Money references the points will be high, why?  It means you don't have the out so this is the one time I'd say it be ok to charge a little more and people will, that's just the business.  This is a deal with a nice spread I am guessing and lining up the financing is vital in doing it.  If someone charges you 3 points, it's probably a broker but if he/she has the out then that's just the price of doing business.

I can tell you if I brougt this to one of my outs, and you were brand new to me and brand new to them, this is what they would want to know:

Credit Score

REO Sheet

Bank Statement

If all that is good then you do an appraisal, and an appraisal for houses in that range will be 2k - 3k depending on market. And you hope the appraisal numbers match the theoretical numbers you've been working from (LOTS OF TIMES THEY DONT!!!!), and then the lender will offer final terms once ARV/AS-IS/Purchase Price have been established. If appraisal kills the deal then you are out the money and no deal.

I like to reverse engineer situations in order to uncover what the proper steps are to get to your goal.  You want to be able to show a healthy bank account to lock sellers into a wholesale contract with you.  That's your goal.  How did you get there?

You can get there with a generous gift from family friends....99.999% this is not the way but it's sure nice if it's an option.

Other than that, you raise the capital or borrow the capital.  Ok, so how do you do that? You have no track record, no experience, and no one knows of your knowledge base.  No one is going to lend you money.  So now what?

You need to start finding opportunity and laying it on the plate of capital heavy people, and maybe the first two times they do not bite, but rest assure that if the first two they passed on were winners, the third they will bite so hard they may break your line.   Now, you have a capital heavy investor in a deal and whatever small piece if yours on this first one, you just take it and hope that the real worth is in this being your calling card that you know what the hell you are doing and that you can pick winners and you know all the criteria that goes into finding quality investments.

Atlanta is an investor heavy market and there's a ton of cash buyers there cause it is one of those markets.  How else do you add value: Find a great contractor, find a great sales agent, find a great analytic agent, develop a network to churn direct from seller opportunity.  Buy a mempership to popstream or another skiptracing platform and learn how to use the software.  Make yourself super, duper valuable to an investor and you will build your buyer pool.

The 50% - 70% stuff does not happen in every market, some are more competitive than others, but in the markets where it happens it is one of 3 ways: Auction, Short Sale, Direct From Seller.

I know of a few lenders that have. the 100/100 programs.  The barrier to entry is good credit and top box experience and then also a great track record with the lender.

Not easy to get into and 99% of the investing world cannot get 100%/100% on their deals.

So, I'll do a proof of funds letter for people if they can show me an account with the money to close plus a cushion.  If an investor wants to buy a 100k house and they can show 60k in an account then they can afford the deal.

Cameron, I know what you are trying to do and you are on the right track.  I am doing something similar in Pittsburgh market - much cheaper entry points than Atlanta.  You're trying to build up a buyer pool, yes?  Then essentially feed them with opportunity you have locked down for 60% - 75% of it's value and you lock them in for 95% - 100% and you can live off of spread and not be in for a nickel.  It's a great business model and I have spoken to those who have it working, it has its challenges in setting up and then also sourcing that 50 cents - 70 cents inventory.  By pure wholesale it will be difficult.  Atlanta is a hot market full with Agents/Investors/Wholesalers/Primary Home Buyers.  It's not going to be easy to nail down the inventory with skip tracing or mailers or door to door.  Those efforts only convert to sales maybe 1 -100.

The only real way is to be a cash buyer either direct from seller or at auction or short sales or foreclosures and make sure your 25% -40% margin is baked in. Then the inventory you pick up you either take to finish line yourself at about 50% - 60% project cost to ARV or you wholesale it to your buyer pool who are like little chicks in the nest peeping when momma comes by with the food.

You are 10000% correct in that, the above business model is the real way to become a millionaire as fast as possible, but that business model is cash intensive, risky, takes a sh!t ton of leg work to get ready, and much more.

but the people I have met in this industry, the ones who make the massive money and they have the huge portfolio - this is what they do and then you know what they do?  On top of all that, they start charging people 10k for a "course" on how to do it.

Doing the BRRRR with retail/today's wholesale pricing and combine that with finding a GC off the internet or some google review left by their mother, I want everyone to understand if you think it can be done like that and be successful, you are wrong. Your market, out of state market, does not matter. You will lose. The safety net for the investor purchasing at retail and working with a GC with a crazy markup is the size of cup of water.

For example, an investor who buys a house off of a wholesaler for 100k has to put 80k into the house to get the 275k ARV, does not have as much room for error as someone who can source the same property for 80k and source the same contracting for 70k.

Like I said, at market prices or even slightly below the BRRRR is more of a nightmare than a dream because of how many different moving parts can fail.

Hi Chris, I can definitely help you get the money if you can provide a solid credit score.  I have lots of great relationships with bridge loan lenders.

So, if the condo is worth 300k and you owe 180k there may be 30k - 40k there in a refi but your cashflow will go down.

I highly recommend staying away from the condos. Hard to get refinanced out. HOA dues eat into the DSCR and then there's a condo questionnaire you'll need filled out by the HOA and they are not the fastest ppl to respond. You'll need to get the master condo insurance policy as well from them. Condo deals you figure 60 days to close a refi all day. Plus some lenders steer clear of them altogether.

If capital is your issue, look into card stacking as a possibility.  There's a company called Fund n Grow that helps people raise capital using their business credit.

SBA also has a loan program where they will give you a 10 yr interest only loan on 30% of your gross rev of your LLC. So if you run 100k a yr through your LLC, you can borrow 30k and pay only $300/month on it. I'm doing one now.

Honestly, this is what I would do:

1) Open up credit cards, apply for credit, start getting your credit history reported on monthly.  Charge some things and pay it off.  Stay under 50% utilization.  This will build a credit footprint for you for when your credit is run

2) Open up an LLC. Get yourself ready.

3) Get an education.  There's a wealth of knowledge here, on youtube, facebook, local REIAs, books, podcasts - (but no you can't use Other People's Money - not to start anyway). Google top ten markets for the Brrrr, google Hard Money, Google risks of RE investing, start calling agents in markets and pose as an investor and ask a sh!t ton of questions, same with lenders.  Mentally handicap some houses and see where they move at and see if you can catch them when they re-list once done and see what the ask is.  What was the spread on their deal?  Roughly what kind of net can an investor expect from the gross spread?   If you can't bring money to the table, gotta bring the knowledge.

4) Raise money.  Speak so impassioned, so articulate, so intelligently about RE investing, particularly about specific markets that people can't wait to partner with you.

If you are not bringing the money, you gotta bring the deal or why does the money need you.  To bring the deals you gotta get a foothold in a good market.  Make deep connections with agents, wholesalers, brokerages.  Try to get these game pieces to filter through the inventory of the market for you and send you the best of the best and then have one of the GCs you connected with to do a full itemized budget.  Then you present to the money:

The purchase contract

The Rehab estimate

The comp package showing sales lst 6 months of same type

A breakdown of the financing, a term sheet

An estimation of close to close timeframe: Close the loan for purchase, rehab completed, listed for sale, close on the sale.

An estimation on the cost of the entire project close to close 

a Calculation of their return on capital with a standard deviation calculated for imperfect exit - which is more of a norm

Present all that to someone and now you bring a lot of value and you can even argue bring more to the table then just some dumb money.

So, no just because you work for a builder that will not add any experience to someone's deal.  You'd need to be a builder, the owner, and also preferably have personal projects and not just 3rd party projects.

But how it would work is that the investor and the builder jump into an LLC together and now the builder's experience can be used during the UW process which should bring the experience. The guarantor brings the credit and cash to close.

For GUC programs, the magic number is 1. With one project successfully exited, most lenders will consider you to have experience. Some lenders are 2 like projects for a min exp. JV agreements will not count as exp. You need to be in the borrowing LLC to get the experience and probably to be safe own 20% and then you will get credit.