I promised I would talk about the mistakes I make on this journey as well as the successes. As I look at the end of another year, it’s time to come clean about one of the mistakes.
I never understood the phrase “Penny wise, pound foolish” when I was going up. Half of the phrase was about a coin. The other half was about…”a pound of pennies?” I’m ashamed of how long it took me to associate the second half of the phrase with the British currency.
And that’s the type of mistake I’m talking about here. The monetary one, not the linguistic one.
Every business owner understands the need to focus on costs, especially when the cost is one of the largest expenditures in your business.
In my business, two costs fight it out for the top spot on every project. Labor and interest. Labor usually wins, but our lenders sometimes make more money on a project than we do, if for no other reason than the size of the loans involved. So you can understand why I was ecstatic to find solid bank financing at 6% APR with only two points in fees. The following table shows the relative costs of borrowing $100-thousand for a year.
|Cost||Hard Money||Other Investors||Private Money||Bank|
Given those numbers, you can understand why I focused on bank financing for the last couple of years. I have been penny wise and pound foolish in that focus. The reason is that banks, even investor-friendly banks, often can’t move fast enough to make them viable for some deals. They are required to have a lot of paperwork in place for their regulators. This paperwork takes at least a month to complete. So there is no way a bank can help keep someone out of foreclosure, and that is one of our core missions: To help keep as many people as possible out of foreclosure. Given the hot real estate market, there have been fewer foreclosures to save. Because of that, we focused on more traditional, slower moving transactions.
In doing so, I let our network of private investors down. Now that the market is cooling a little, I see more of the foreclosure-ish, faster moving deals are showing back up. Since I haven’t been putting their money to regular use—never mind that I pay more interest in a month than their banks do in a year—our private money network shrunk.
The lesson I’ve learned is to keep that private money working, even when bank financing is available and much less expensive—in the short run. In the long run, paying the extra interest is cheaper than missing out on a deal because all your resources are in use and the bank can’t move fast enough.
A solid private money network is key to success. Investor money is not as reliably available because it tends to stay in use. Hard money is always available, but it should be a last resort. The expense of hard money also makes it useful only when working a really, really good deal.