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Tag Archives: Banks

People We Work With: Bankers

To be honest, until we started this business, I didn’t know any “bankers,” really. I had worked with bank staff to set up accounts, get my 401Ks going, and a few things like that, but I never had any personal relationships with people in the banking business. I rarely saw the same people twice in the banks I went to, which were branches of very large banks.

Celebrating a closing with Thomas in Georgetown.

However, once we started buying and selling properties more than once or twice a year, it became clear to us that getting standard loans from faceless institutions wasn’t cutting it. For one thing, it took a long time, and for another, traditional financing can be problematic for people who buy, renovate and sell houses with problems.

So, Lee began to think, and it occurred to him that the staff at small banks might well be more interested in our business model and in working with us, so he began to chat with folks at smaller banks in our area. He asked people he met who they had worked with, went to networking meetings where bank representatives who were familiar with what we do made presentations, and made a lot of phone calls. Thanks to all of that, we now have options for financing purchases, rehabs, and other transactions. More important, we have personal relationships with bank officers who know who we are and what we do. They are happy to work with us, because we know we are honest, make all our payments, and bring in business to the banks.

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Emergency Call to Action

Texas Capitol Building at Night

Legislators have but one purpose. They legislate—sometimes well, sometimes harmfully. Please help stop some really harmful legislation from becoming law.
Photo by Kumar Appaiah

In all the time I’ve been writing this blog—can you believe it has been going since October of 2015? Time flies—I’ve never asked you to directly contribute money to anything except the charity of your choice. I wouldn’t do so now if the cause wasn’t so important.

A few weeks ago, I wrote about a series of bills before the Texas Senate that have the potential to ruin a lot of lives in the name of protecting people from unscrupulous “owner financiers.” The bills attempt to protect innocent buyers from being defrauded by these owner financiers who collect payment on a wraparound mortgage (wrap) but fail to make the payments on the underlying mortgage, causing the wrap buyers to lose a house to foreclosure when they were making the payments.

We all agree this behavior constitutes fraud and should be prevented and punished when it occurs.

The problem is that three otherwise well-meaning Texas Senators have written bills that make wraps illegal. That’s a bad thing because it severely limits the number of people honest investors and redevelopers can help. First, the bills make it more difficult to buy some properties at prices the sellers need by driving up the cost of money unnecessarily. Second, they make it harder to sell the properties, especially to people with less than perfect credit.

Let me put that last sentence into perspective. I don’t want to brag, but I’m what a lot of people would call rich. I have a lot of hard assets. I have decent income. I have a respectable credit score. I own or partner in several real estate business. I also have trouble getting a traditional mortgage on properties I want to purchase, as do many self-employed people.

Omro Cove

We purchased this house with a wrap because it reduced our costs enough to offer the homeowners, who needed to move quickly and didn’t want to handle the renovation themselves, the price they wanted. Both notes were paid off a few months later when we closed on the sale after renovation. This transaction helped two families.

If I have trouble securing a traditional mortgage, what about people with credit scores that fall below the median? Don’t they have a right to purchase a home if they want and they can find someone willing to take a risk on them? SB 1994 would reduce the number of people I can help buy a home from hundreds to exactly two. It would also mean we could not offer as many homeowners the price they need to sell their houses to us when they don’t want to renovate the house themselves.

As I stated earlier in this series, I support two of the bills (SB 880 and SB 1995). These two bills alone could solve the problem Kirk Watson and crew set out to solve. SB 1993 and SB 1994 are like using a sledge hammer to pound out the fender well on your car after a fender bender. They will hurt the people they intend to protect and could wreak havoc on the economy by forcing more people into foreclosure.

I’ve joined forces with a group of investors who have organized to fight this legislation. We hired a lobbyist, and things seemed to be going well. We actually thought the Senators would actually listen. Then last night I learned of two new developments:

  • The banking lobby got involved and threw their weight behind the most onerous provisions of the bill.
    We can trust Big Banks to screw the little guy every time. It’s like they want more foreclosures. Maybe they do.
  • One of the Senators—I don’t know which one—realized that the changes we wanted would eliminate his name from any legislation put forward this session.
    Our contact in the capitol reports, “And it’s very important to him that his name is on at least one law this session.” Scorpions gotta sting and Senators gotta legislate.

So now our efforts have transformed from working with the the Senate to make the best legislation possible to an outright effort to kill the bills, especially SB 1994. Toward that goal, I ask your help. Won’t you take time out of your busy day to do to things?

  • Contact your legislators to express your opposition to the bills you oppose, especially SB 1994.
    If you’re an investor, it would be helpful if you include stories of how you’ve helped save folks from foreclosure or helped families into safe, secure homes using wraps. You can find an example letter here.
  • Help us raise money to fight the legislation by contributing via the Go Fund Me page, sharing this article, or both.

Thank you for helping us help others.

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Other People’s Money

The first time you loan a substantial portion of your wealth to a rehabber, you may worry about this being your new home—no matter what your relationship with your borrower. When you stop worrying, it's probably time to stop lending.

The first time you loan a substantial portion of your wealth to a rehabber, you may worry about this being your new home—no matter what your relationship with your borrower. When you stop worrying, it’s probably time to stop lending.

In a previous post, I talked about the advantages to Hermit Haus of using other people’s money (OPM). I mentioned that I prefer using private money to every other source. I prefer private money because I really do believe in the big Win-Win and spreading the wealth around a bit. This post deals with why becoming a private money lender (PML) is good for you as the lender.

Let me start out by saying I am a PML. I have helped fund several other people’s projects. I don’t like lazy money. I want my money working all the time—even when I don’t have a deal in progress. (Yes, that does happen sometimes. It seems like this business is always going from one extreme to another. Either you don’t have any deals at all or someone accuses you of being a “house hoarder.”)

What’s the Worst That Can Happen?

A few years ago, I was at one of those massive networking events with vendor booths all along one wall. I got to chatting with a hard money lender who was willing to fund 70% of the after repair value (ARV). At that time, I had been doing one deal at a time, mostly with my own money. I asked him about the risk of lending money on an undone house. “What’s the worst that can happen?” he asked.

“I don’t know. I guess I default on the note,” I said, somewhat naively.

“No,” he said. “That’s my best case scenario. Then I get a $200,000 house for $140,000, and somebody else has done the renovation, or most of it.” He let that sink in. “The worst that can happen is you pay off the contract as written. Then I only make 14% on my money.”

That was an eye-opening conversation for me. The worst that could happen was for the borrower to honor the contract. Wow!

Why Lazy Money Is Bad

The Bank, Newry, March 2010 (06)

If you’re putting your money in Any bank, you might as well be putting it in The Bank, an Irish pub. You’d get more pleasure out of it, anyway.

Even though my hard money friend said the worst that could happen was that I paid back his loan, he was wrong. The worst that could happen was that I left my money in the bank. I want my money to work for me, not laze around in a bank. Here’s why:

Banks are pay ridiculously low interest rates. They can get away with these low rates because your money is “safe,” protected by government insurance. Even if the bank fails, you get your original deposits paid back. But that’s not really safe, is it? If you only get back what you put in you have really lost money. In fact, even at the interest rates banks pay today, you are losing money every day you let your lazy money vacation in a bank. Assuming the federal government’s core inflation rate of about 2.2% (January 2016), your money is worth 0.183% less every month. If you put $100,000 in a CD in January, it would be February before the interest rate you earned would overcome inflation. Think about that. It would be three full months before your money—including interest would buy as much as it would if you spent it all in January And that’s with the highest paying CD I could find on the market today!

At the end of the year, your $100,000 would have grown to $101,124, but it would only be worth $100,939 compared to January. That’s still $939 more than you had to begin with, and compounding would continue to make it grow faster each year. But if you needed to have a million dollars to retire and maintain your current lifestyle, how long would it take you to get there? Would you even still be alive?

Why You Should Be a Private Money Lender

The only way to beat the bank is to BE the bank. Become a PML.

PML vs CD ROI

Being a PML can earn you a Lot More Money than a bank CD. I think the rewards are worth the risk.

Let’s say you invested that same $100,000 with a reputable rehabber at 10% with one point paid at funding. You would earn $1,000 just for making the loan.

Think about that. You’d make almost as much money just for making a loan that could possibly be repaid the next day as you would for leaving your money in a CD for a full year. Then you would earn $833 in interest every month until the loan was repaid when the house was sold. That’s a lot more than the $183 the highest paying CD would give you.

Now as a PML, you could let your money compound, just as you would with a CD. But you could also take that interest payment every month and do with it what ever you want. Put it back for taxes. Make a car payment. Anything. What would it be like to drive a $100,000 car and have someone else make the payment for you every month? At the end of the day, you have the car and the $100,000.

The graphic at the right compares the money you’d earn as a PML to the money you’d earn in a CD. Even if one project finished and it took two months to find another project to fund, you’d still make $9,552 during the year. That’s $8,428 more than a CD. You’d make an additional $360 by letting the interest compound. Or you could drive an essentially free car.

The Bottom Line

The bottom line is simple. Find a local rehabber to work with. Fund their projects and let them do the work. Just make sure you have a good contract and a first position lien on the house. I would also recommend that you not loan more than 75% of ARV and stay involved with your rehabber. That way, if the loan goes south, you still have a $133,000 house for $100,000.

For more information about being a PML, sign up for our free booklet.

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The Saddest Sentence in the English Language

tsunami_haus

This is how foreclosure feels. First there’s the dread of the inexorably rising debt as the event draws near. Then your house gets swept away in an impersonal flood of legal procedure.
Photo by Carsten Knoche

Foreclosure is a financial tsunami.  It sweeps away years of good credit practices into a black hole of future agony.  For years, up to a decade, after a foreclosure,  foreclosed persons can’t escape the enormous gravitic pull of the black hole as it stretches pulls, stretches, and tears at them, trying to suck them down into a pit of financial oblivion.

Losing a house to foreclosure is just the start of a decade-long nightmare that makes Freddy Kruger look cuddly. Continue reading →

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