Show Me The Money!Glen Gallucci
July 16, 2008 — 1,513 views
This is a subject everyone wants to know about because it deals with the one aspect of distressed property investing that scares people. And you know what it is. Money...Capital... "Moolah." It frees us or it makes us its slaves. And you certainly can't get the great distressed real estate deals you want without a certain amount of money invested. (No matter what the Gurus say.) Because don't forget, even if you do get a house by having the deed signed over to you for little or no money, most times the house will still need some work to get it in saleable condition. And that takes cash. Buying bank owned properties? Banks want cash at closing. If you've had some problems with funding over the years then you know what I am talking about.
Yes, CASH IS KING in the purchasing of distressed real estate.
I would venture to say that it is the single most important road block that stops people from investing in real estate, which is why I want to address this "so called" problem.
You cannot make any legitimate offer for real estate unless you have "all your ducks" in order. By that I mean, you have to have your financing lined up. In dealing with realtors, banks or a homeowner you have a reputation to uphold. If you go under contract with these folks, and you tell them you're going to close within 10 days-you should. Not that you have a legal responsibility to do it, but it helps your reputation. It shows that you're a player. Sure, things happen such as not getting clear title, and some minor inconveniences that you can't control. But the one thing you can control is after making an offer and the seller says yes, is not being a deer caught in headlights!
Now, I don't mean to say you have to actually have a stacks of cash sticking out of your pockets when you make a bid on the property. No. What I am saying is that you must establish relationships with funding sources BEFORE making an offer to a homeowner, bank or realtor. Nothing screams "amateur" more then when you tell these folks: "Uh... well...I... couldn't get the money. I know, I said I could... but... but...but... Having available cash gives you the confidence you need to make a great offer on any property.
Money Talks And You Know What Walks.
Cash, whether it's your cash, your credit lines, or someone else's cash, or a combination of all three. You need it. And you only need this cash to leverage your deal for about three to six months. With any of the following methods of obtaining cash, you're only exposing yourself to high-leverage for just a short time. Let's take a look at Hard Money Lenders vs. Private Lenders.
Hard Money Lenders
Many real estate investors use "hard money" lenders to fund their deals. These are usually private institutions or even groups of private individuals with money available for real estate investment purposes.
Most of these "hard money" lenders will lend you most of the capital to buy the property, make the necessary repairs and refurbish it. Many people ask me; "Why is it called ‘hard money'?" Does that mean it's hard to get? Well, actually, "hard money" is easier to get than you think. There are plenty of "hard money" lenders who have some very deep pockets. Hard money lenders have a strict and clearly defined repayment schedule, while "soft" money lenders (usually private lenders) have easier terms with more flexible repayment schedules.
Here is the basic process for acquiring Hard Money.
1) You fill out a questionnaire discussing your background.
2) State your employment, education and or training.
3) A summary of your financial position as to understand your asset and debt obligations. 4) List any references.
Many Hard Money lenders will be able to give you a preliminary review before filling out a full application. Once the application is completed, they will review it to see if you qualify for investment loans. After approval, they will give you a credit line limit. Then you can submit deals to them according to their guidelines. Each Hard Money lender will have slightly different guidelines.
The basic requirements before releasing money for your deal is you will need an appraisal, title insurance commitment, and property insurance binder. Your attorney will also give the lender a note and first mortgage on the property for the lenders security.
Hard Money lenders generally charge between 12% and 18% for a period of from 6 months to 3 to 5 years. Hard money lenders also charge points. I've seen lenders charge as little as 2 points to as many as 10 points on their loans. Each point is 1% of the value of the loan. So if a lender charges 5 points on a $100,000 loan, the points will cost you 5% of $100,000 or $5,000. I know you're not thrilled paying those rates, but unless your using your own money, this is the cost of doing business and it pales compared to what you will make when you sell the property for a nice profit. Don't get penny wise dollar foolish here!
Private lenders (or investors) are people that have thousands or even millions of dollars at their disposal. They're reputable businessmen and women, and like all business people they want a good return on their money. When the stock market goes on its seesaw ride and makes someone so nauseated that they want to take Dramamine...they start searching for alternative ways to invest their money. Do you think these folks want "a safe 3% return" on their money that comes from a bank CD? No! They invest in real estate! And they can and will invest in your real estate projects if they know you exist!
Finding these CASH COWS is really simple. You can easily find them by placing ads in local papers and in trade journals although financial ones are the best. They get the traffic, and let's face it; wealthy individuals read "The Wall Street Journal,"and "The New York Times" or "Investor's Business Daily." I advertise in different types of publications in such sections as "Business Opportunities," or "Capital Wanted" or in my local newspaper in the "Investment Property" section. Believe me, high income individuals are always looking for a good piece of property that will give them a good ROI (return on investment).
All you need is one investor that has the capital...preferably someone with a couple hundred thousand dollars. And all you have to do is qualify them over the phone.
The beauty of using private money lenders is that once you prove yourself and made them money-they will continue to want to work with you. Not only that...They're a heck of a lot more flexible. There is no application to fill out and no loan approval process. Your success will be solely based upon your deal and your ability to show your investor the great return on a safe real estate secured loan. You can offer them 10, 12, 15% interest. But NO POINTS! On a loan of $150,000 you can save $7,500 on points.
Naturally, no legitimate businessperson is going to just give you $150,000 on the phone because they like the sound of your voice. No, they're going to either want to see the property or have a certified appraiser see it and verify what you are telling them. You will also provide an agreement, appraisal, the title insurance commitment, the property insurance binder as well as a note and first mortgage prepared by your attorney. And that's fine, as you want him or her to feel as comfortable as a "bug in a rug." This is your potential "sugar daddy," or "sugar momma" that will fund your deals and allow you to make a ton of money on each property you acquire. Start looking for private investors. The health of your business depends on it!
Glen Gallucci, also known as "A Seasoned Investor" actively buys, rehabs and sells residential properties. He has invested, renovated and built numerous residential and commercial projects during his 30-year career. A well diversified businessman; Glen is also engaged in real estate education. From the trenches, and with his down to earth "tell it like it is" teaching style, makes Glen the "real deal" and a sought after speaker around the country as his business experience proves invaluable for the beginner as well as the seasoned investor regarding the successful structure of starting a wholesale or rehabbing business as well as securing private lenders when investing in "quick turn real estate."