Beat the Rising Equity Down Trending Hitting the Market With a Hard Money Commercial Loan

Recent residential real estate conditions are making commercial real estate loans harder to obtain and the amount of money down is increasing substantially.  Today lenders are being more cautious when lending even for commercial real estate deals.  The market is seeing a 25% default rate on residential loans while commercial loan defaults are only 0.5%, but still lenders are raising their standards for commercial loan applicants.

Commercial real estate financing trends are stirring lenders to ask for more money down that in previous years.  In the past investors would use bridge loans and interest-only loans for their commercial real estate investment purchases with little or no money down.  Due to the slowing market many lenders are now asking for a minimum of 25 percent to 35 percent equity down to finance a deal.  Yikes!

These recent trends are making hard money lenders more popular when it comes to commercial real estate financing.   When using hard money to finance commercial property you should expect the loan to be a shorter term and have higher interest rates than you would normally see from a bank.  On the other hand, hard money lending for commercial property has many benefits to investors. Closing time can be a little as a couple weeks and depending on the value of the property the ability to finance 100% of the purchase price is possible.  Hard Money loans are asset based and depend primarily on real estate value, making it easier for people with imperfect credit history and little money to obtain financing.

For most of us 25 to 35 percent equity is hard to come by when investing in commercial real estate. Commercial hard money loans are an easy solution when the bank says no. 

Find commercial hard money lenders in your area today at http://www.RehabHardMoney.com/commercial.aspx and learn if a hard money loan makes sense for you.

I’ve run across a lot of folks who tell me they’d love to do what I do, but their wife is just not comfortable with it. That’s a powerful objection, and sometimes it’s one that cannot be overcome. Most times, I think it can be, if you really want to. All too often, I get the impression the potential investor doesn’t want to jump into rehab real estate bad enough to work through the spouses objections. It’s the old “it’s easier NOT to” mentality!

The issue is usually not that your spouse doesn’t want the financial rewards that accompany the real estate rehab business. The reasons spouses object is usually good ol’ fear. For example:

• fear of the unforeseen
• fear of financial loss
• fear that you don’t yet know what you’re doing (my favorite!)

The latter two are the big leaders. These fears may come from something they’ve heard, or they may be rooted in them not really understanding the transaction or what you’re trying to accomplish.

For my wife, her fears were that something would come up that I hadn’t thought of, or that a house may sit empty for several months thus depleting the bank account.

How to deal with the fears of your spouse regarding rehab real estate

• Sit down and discuss their fears. Find out what they really are. You always want to deal with a known entity.
• Be sure your spouse understands the importance of rehab real estate in your long term financial goals, and how it fits into your family’s security.
• Always encourage your spouse to ask questions!
• If your spouse expresses general fear of the whole thing, that may be because of a lack of understanding of the process or they are very intimidated by it.
• Encourage questions!
• Explain how the transactions will work
• Explain how you are minimizing the risk to your family. Yes, the numbers might be big, but if you aren’t putting a lot of your own money in it, then your risk of loss is minimal.
• Go over the worst case scenarios. Explain that worst case, the property could be quickly sold for SOME profit.
• Reveal to your spouse the folks you have working with you, such as your mortgage broker, your wholesaler (flipper), appraiser, and anyone else you’ve identified up to that point

  My wife was very distrustful of these folks in the beginning. I had to explain and show her that these folks had EVERYTHING to gain by my first deals going very well, if they wanted to continue making money with me.

• If the fear seems to be of the unforeseen
  • Explain that while this seems complicated, you’ve done your homework and you’ve learned about all you can learn without actually doing a deal for experience. (You reach a point where this is true!)
  • Explain that you won’t own the property a minute without enough insurance to cover anything that could happen.
• If the fear is financial loss
  • Depending on your personal financial situation, you should focus your spouse on how real estate can and does improve the lives of investors.
  • If you’ve already identified a property, reveal your worksheet and how much you stand to make off that property.
  • Agree with your spouse NOT to take on too much risk. Set your boundaries together. I assure you that you’ll easily revisit these the first time you bring home a large check.
• Fear that you don’t have the knowledge
• Be sure you are well studied! Remember, knowledge comes before the money! Spend the money on a good course, or book. Don’t rely on just one. Get several author’s take on the subject. There are inexpensive ways to do this!
• Explain that you have studied this thoroughly. Heck, you’ve got a head full of knowledge that needs to be put into action in order to move forward.
• Agree with your spouse. That’s why you are tapping into the knowledge of those real estate professionals around you! Explain who’s on your team, and what they have to gain from you. Remind your spouse that you are tapping into the knowledge of those around you, those that know your area very well.

When your spouse comes around and is resigned that you are going to do this, they may:

• Sign on and dig in beside you for the deal and what follows (throw total support behind you).
• Flatly say, they don’t agree, but if you must…
• Something in between, like “Honey, you do whatever you think is best.”

  This last possibility is what I predict will happen to most. This allows your spouse to give you the room you need, but at the same time not completely agree. That’s where my wife went. It was a safe position for her. And, it’s a safe position for you! You’ve got the go-ahead, so go ahead!

  I was in that position myself. If was a good feeling to watch her fears fall away as I complete my first couple of projects. Her eyes got nice and big when I refinanced my first two properties at the same time and brought home more money in one day than I’d ever held in my hands before. I also watched her understand the benefits more completely while sitting in my CPA’s office and having him say to her “These properties are saving you big time on your taxes.” I dare not say, I told her so, but I told her so

  Sure, there are challenges, but the paydays are great.

  So, over time, my bride is my full partner taking on whole aspects of the business freeing me up to do the parts I do best.

Spouse objections can be show-stoppers, but these suggestions will hopefully help you deal carefully with them. It’s not enough to merely brush them aside and charge ahead. I recommend a loving, cautious approach because in good time and bad, your spouse is your greatest ally. Keep them close!

As you go into distressed or abused homes (either by malicious behavior or neglect, or even just age), a common scene is beat up surfaces. The easiest solution is to empty the house completely and deal with the walls and ceiling.

I usually opt for texturing the walls. This hides tiny holes and imperfections in the wall such as scuffs and dings. It won’t hide larger holes, nor will it flatten out a bow in a wall. But, it’ll cover things nicely presenting a clean and neat appearance. That’s what we’re after.

I usually get a texture process done on the walls called "knockdown" (strange name for a process that does on WALLS!). Knockdown is usually a heavy spray that is applied, the just before drying, it’s knocked down, or flattened with a trough or scrapper. The advantage is that knockdown hides imperfections on the wall of these older homes. As a process, it’s relatively quick and easy to apply to an empty house.

You can also not knockdown the spray and you’re left with what some call "orange peel." Either one looks great and satisfies our goal. It dries hard and is a texture that lasts.

Now, you’d think you would not have to tell your workers to take out picture hangers before spraying. And, you’d think you would not have to tell them to take out curtain hangers and switch plates…but NO! You do! I’ve had my painter come back out a time or two to remove all the things he didn’t and re-texture those areas. Now I STRESS doing this before they start. I’ve seen spray so heavy on top of switch plates that they had to be cut around with a utility knife before removing else they would tear a big sheet of texture, sheet rock with them, forcing a lot of patch work.

When you remove curtain hangers, switch plates and nails AFTER spraying, it tends to pull up more texture and you’re left with a mess! Pull everything off the walls FIRST! Put scotch tape over the switches so spray doesn’t get down in the outlets.

Here are a few more resources on wall texturing.

DoItYourSelf.com Article

Need a course on it? Click here

Al’s Home Improvement Center

Introduction

Confession time:

I was a real estate investment guru junkie. In fact, I’d always wanted to buy and sell real estate, be the wheeler-dealer. It sounded incredibly cool!

But, for 8 YEARS I made excuses. True enough, I was in the Navy and moving frequently, but that was only a weak-minded excuse. I sometimes wonder sometimes where I would be financially IF I would have steadily bought property at every stop in my Navy career.

But, that’s water under the bridge!

I confessed that to you so that you understand that over those 8 years, I bought books, courses, and even attended seminars of my share of gurus.

Times changed. A couple of years before finishing up my 20 years in the Navy, I DID conquer my fears and started buying distressed property. Heck, unless I wanted to go get a J-O-B after the Navy, it was time to fish or cut bait!

Now, I’m having a blast doing it, and let’s just say everything is different for me financially in a very positive way. ☺

All that time spent learning WAS NOT a waste of time by any means. The background knowledge I possessed as I got started was of tremendous value!

That said, I thought it would be a good idea to pass along what these Real Estate Investment Gurus didn’t prepare me for.

Disclaimer 1 I’m not naming names here or “telling” on anyone. Some gurus might have covered these points. My memory isn’t what it used to be ☺

Disclaimer 2 Some of these items are unpleasant surprises that I’ve encountered on the way. Don’t think for a minute they can dissuade me from charging forward and continuing my investing. Some of these were surprises to me, but dealing with all the negative this business has to offer is WELL WORTH IT!

Okay, let’s start with the realities that gurus don’t tell you that are unpleasant…

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Section 1.

  You’ve Got More At Risk Than Your Binder/Escrow Money!

When you plop down $1,000 as a binder to buy that wonderful piece of investment property, you are taught believe that you can always just walk away, no harm, no foul. Some gurus teach you to put in an inspection clause in the sales contract, so you’ve got that time to back out regardless of the real reason you want to back out. Worst case scenario is that you lose your inder. The reality. Everything above is TRUE, except for the no harm, no foul part. If you are buying from Joe and Judy Homeowner, and you decide to walk on the deal, you can probably get away with invoking the inspection clause or just walking and losing your binder. (In some cases, they’ll give it back to you anyway.) If you are working with a wholesaler (a smart way to begin), and you back out on a deal you are forcing your wholesaler into a very tight spot. They either have to find another investor to buy the property, or buy it themselves.

Wholesaler: A real estate investor who specializes in finding distressed property (physically or situationally), gets the property under contract, and then makes his money by assigning that contract to another investor (a rehabber) for a fee. They are always busy, often harried, and perpetually worried!

A wholesaler incurs risk each time he or she assigns a contract to you because if you do not perform (complete the sale), it’s the wholesaler’s name on the contract! Yikes! The wholesaler certainly is not going to damage his reputation by walking on the deal without good reason, so if the wholesaler cannot find another buyer, guess who buys it?

You can see where your name will fall on the wholesaler’s list if you back out on a deal, especially at the last minute…Dead last! This could cost you hundreds of thousands of dollars over time in lost opportunity.

I’m not telling you to never back out of a deal. If something comes to light that makes the deal an extreme stinker, by all means walk, or run away. I’m just saying to use this Trump card very, VERY carefully. Guard your reputation among fellow real estate professionals jealously!

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Section 2.

I’ve read book after book where the real estate investment guru explains the process of putting out some signs, hitting the courthouse records, then meeting Joe and Judy Homeowner who are divorcing, and convincing them to sell you their house. Then they tell you how to rehab it, market it, and eventually offer owner financing, selling the note and so on.

Hold on cowboy! That’s a little much for someone walking into this as a newbie!

Finding property on the wholesale market is a virtual art form in itself, and can be thought of as an entire genre of real estate investment. In fact, those that are good enough at it to make a decent living are good at it because:

1. They’ve got some experience in real estate investment (years!).

1. They are experts in the local real estate markets (yes plural).

1. They know how rehabbing real estate works.

Wholesaling property is a difficult entry point into real estate investment (more on that soon). Rehabbing is much easier for many reasons including

1. Wholesalers NEED you to stay in business.

1. You don’t have to do the work yourself.

1. You have some choice with what you are going to do with your own property.

Most gurus choose to BURY their student in information because it justifies the $500 or more you just spent! It also discourages many from even getting started!

So rather than trying to tackle the gamut of real estate investing, start with what you are most likely to succeed with (probably rehabbing a property). Sometime during the rehab, decide to retail the property or hang onto it. Get some of these manageable projects under your belt, enjoy the benefits of that, and then try branching out. Not the other way around!

Rather than waiting for that wholesale deal, use a wholesaler to help you find a good property where you’ll get started right. Believe me, that wholesaler has a vested interest in you getting started. If you turn a good deal, make some money you will become a repeat customer, and that is a valuable commodity in any business! Let a wholesaler find that property for you, and you concentrate on the other aspects of the deal…and there is plenty to concentrate on.

I hope you find a couple of wholesalers like I have. They bring me great deal after great deal. They work fulltime while I work maybe 10 hours a week at this.

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Section 3.

I don’t know about where you live, but I see “We Buy Houses” signs everywhere, but I don’t know anyone who puts them out. I don’t use them. I get most of my property from wholesalers who are allied closely with bankruptcy lawyers, real estate attorneys, banks, finance companies and the like. They buy them on the courthouse steps. They snatch them up in pre-foreclosure,

they wrestle them away from Real Estate Owned (REO) departments at banks. It’s a tough business.

So, when you start doing wholesaler stuff…sniffing around where they get their property, you become competition. This goes over like a lead balloon. Wholesaler alliances are tight and well protected.

Know that you may be stepping on toes, and be seen as a threat if you venture into the wholesale business. You probably won’t get beat up, but you might not find much cooperation if you ever happen to need it.

Now let’s say your wholesaler brings you a property that you can turn around and assign to an investor you know for a fee. More power to you. That’s legal and fine.

Here’s what you probably should not do:

I noticed on my closing paperwork that I bought several properties from a big time investor in my town named Mr. Bigs. But, I bought these through a wholesaler and paid the wholesaling (assignment) fee. Now, if I start courting Mr. Bigs directly for more property, trying to cut out my wholesaler, I can probably bet that my wholesaler won’t be bringing me more good property, and it pays me big time to be at the top of my wholesalers list! In addition, Mr. Bigs might have a soft spot for the poor ol’, hard-working wholesaler and hate what he calls “back-stabbers”

(who try to cut out wholesalers) and never deal with you again. In fact, he might put the word out on you.

While this did not happen to me, I’ve heard tell of very similar scenarios taking place.

No real estate investment guru prepared me for this reality.

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Section 4.

Gurus aren’t real keen on telling you this, but they don’t have the answers you need to make you a successful real estate investor. Sure, they have a lot of background knowledge about the GENERAL dos and don’ts of real estate investing, but that’s only a piece of the puzzle.  

Each guru is “tainted” by their own experience and the deals they’ve done. They may be influenced by their likes and dislikes. For instance, if a particular guru was a lawyer prior to attaining “guru-hood” perhaps his presentation tends to contain more legal information. That guru will stick closely to what he or she knows and is comfortable with.

The point is that the best way to be successful is to keep the gurus in their place…that being in the business of providing background or general knowledge. But, KNOW THAT YOU MUST TAKE YOUR OWN EDUCATION TO THE NEXT LEVEL by getting started buying real estate. In your very first transaction I guarantee you will learn more than what you’ve studied in books and courses.

Perhaps in this business more than others, there is no substitute for experience!

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Section 5.

Even if I will get it all back at the closing table, I still have to pay my binder (or assignment fee) to buy a house. Sometimes the appraisal is paid prior to closing as well. You also might need to do a fair bit of driving and looking before you buy that first property. So, at least for awhile, there are some up-front expenses.

I bought my first two investment properties within days of each other and the initial binders hit me hard at $1000 each. I really wasn’t prepared for that.

Here’s a funny story! When I finally got up the nerve and bought my first properties, I was so book smart but but lacked practical experience!

I was under the false impression that the binder would not be cashed until we closed. Man was I surprised when my overdraft was hit for $2,000! Ouch!

It just goes to show that books and courses are no match for the experience of actually doing it.

In the course of my first deal, not only did I make back everything I spent on books, courses, etc. but I got 10 times the education!

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Section 6.

With all the real estate investors out there peppering the streets with tacky “We Buy Houses” signs, real estate investors might not have the best reputation. Imagine that!

Let’s face it, there are a lot of unscrupulous real estate investors out there and they HURT us that do it right. Be prepared to deal with the stigma that exists in some areas. Be aware that real estate investors are considered in the same category as fast-talking used car salesmen, ambulance-chasing lawyers, and telemarketers.

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