Money in the Bank

I recently have had conversations with several entrepreneurs who were scrambling for investment for payroll, commitments made to vendors, or who thought they’d have a paycheck and lo and behold “it’s not going to happen this month.” This reminds me of other conversations over the past 20 years when a VC check didn’t arrive to close a round because something odd happened at the 11th hour that spooked the partner on the deal or a VC signed a term sheet without having done due diligence ahead of the I I recently have had conversations with several entrepreneurs who were scrambling for investment for payroll, commitments made to vendors, or who thought they’d have a paycheck and lo and behold “it’s not going to happen this month.” This reminds me of other conversations over the past 20 years when a VC check didn’t arrive to close a round because something odd happened at the 11th hour that spooked the partner on the deal or a VC signed a term sheet and the founders were star struck over who the VC was versus what their process was and how solid was that term sheet really. What all this has led me to is two things: 1) Hope is not a strategy 2) The money’s not in the bank and can’t be spent until the money’s in the bank. I have seen too many entrepreneurs believe wholeheartedly in an angel syndicate or a venture firm and not have a back-up plan should that deal not happen. The latest case is a family office investing $1.5M into a company. A tornado hit the region where the FO Leader lived and then a family member got very sick right after that. Needless to say, that person’s focus is not on you and your company but on their shelter and family member (rightfully so). In this situation there were other family offices interested in the deal but the founder put a hold on these since this was the “sure near term one.” There’s never a sure one. Stuff happens, life happens, interest wanes. And there’s bad luck in business just as there’s good luck. When it comes to financing I have not seen very many good luck scenarios versus bad luck scenarios. That’s because you need the money far more than the investor needs to invest in your company. Always remember that. That’s why I always recommend managing investor fundraising exactly as you manage enterprise sales with all being worked but with a different probability of close for each investor. Keep as many balls juggling and moving forward as you can (oh, yes, and run your business too!) until you actually have money in the bank. And by the way, don’t accrue debt thinking you will pay that back after funding closes. Investors are not putting money in to cover the past investments but are investing in the future. How many entrepreneurs have not made a payroll, have not paid the IRS or the state tax liability on payroll, have liquidated their 401K to cover payments thinking they’d just put that money back when sales or investors come through, or have foregone any funds for their own living expenses only to find that their credit now sucks and they’re paying interest only on their credit cards and not able to refinance their high priced mortgage never mind putting their 401K funds back in place. It’s a slippery slope and one that can ruin personal relationships and founder partnerships. Again, hope is NOT a strategy. When you liquidate that 401K just assume that money will never get put back. I have seen a founder do the smart thing and arrange a line of credit secured against an asset (their home is the most typical) before they’re in trouble since interest rates are quite low on these and it’s easier to have $100K or $200K lined up before you quit your job as a line of defense against a missed payroll or a sliding fundraising date. By the way, ask your VC for a bridge loan-that’s often a good way of testing their intent versus their using the “no shop” time-frame to see if they really want to do the deal with you. If you’re an investor, be open with the entrepreneur where you’re really at with respect to funding and any snafus or issues you’re personally dealing with that might affect timing of your investment. Being honest about your probability of doing a deal will win you lots of friends in the greater entrepreneurial community. A “fast no” is much better than a “slow maybe, let’s see how you evolve.”  It’s a small town so telling an entrepreneur how long you take in your due diligence, that you have 3 issues you want to see addressed, or that you want someone else to lead the round that you like to follow will pay you back in many ways re: word of mouth from entrepreneurs recommended investors and other angels who like doing deals with you.

Today's blog courtesy of Josh Maher Happy Investing!

Finding Private Lenders

My blog continues with tips from real estate investor Chris McClatchy on how to find private money. A lot of private money comes from sellers doing owner financing, or investors looking for a better return on their money than what they can get in the bank, or from people wanting to invest for higher returns in a self-directed IRA.

Other than sellers, how does a borrower find these folks with private money?

Again, speak up within your network and sphere of influence! Let people know what you need, by reaching out through various social media and "touches."

Touches may be coffee, lunch with a friend, phone calls, email, newsletter, blog, social media/websites.

McClatchy's lenders have included a friends mom, business owners, coworkers, other real estate investors, a banker referral to clients wanting more interest, even an NBA player and a bank employee.Tell everyone!
 

Borrowing private money is not about you, as much as it is about the lenders.  What are their goals and timelines?  Their financial situation.?  Do they want to increase their monthly income? Get a   return they can't find elsewhere?  

Real estate investors are creating jobs, supporting the local economy, building community and improving neighborhoods.  Give people the opportunity to invest in something that does so much good for their city. 

Private lenders want to avoid the Enrons, Bernie Madoffs and losses.  One way to prevent abuse is to be sure that a lender's funding is secured by property.  

It is up to the borrower to build relationships, educate potential lenders to get the appointment to sit down and discuss private money.  Send thank you notes and appreciate those who believe in you.  

Make prospective lenders curious with your elevator speech, e.g. "I rob banks legally."

Be excited! Use simple language, not so much real estate terms.  For example, "The rent more than covers the loan I need;"  "I buy real estate with people tired of getting low returns and tired of the stock market gamble;"  " I share real estate deals with people looking to put money to work...private lenders"   

Be credible, be on time.  You must be sure about your deal and project confidence.  If you're not, why would they be?  

Protect their investment by sending money directly to the escrow company.  Ask if they have any questions?

Chris McClatchy usually asks for a 5 year term on a private loan.  But he adds that the lender could call the loan with 6 months notice.

Ask for and provide testimonials and referrals- "would you be comfortable telling people that we met your needs? and paid as promised or better."  

Pay your private lenders a week early,  and they usually re-up on your next real estate deal.  Send cards and notes with payments, letting your private lenders know how much you value their support, or keeping them posted on your progress.

So start searching for your private money today!

Happy New Year!
Happy Investing!

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Making Offers

Once you have a motivated seller respond to your marketing campaign, what do you offer?

Typically, I ask a lot of questions when I get a seller call: tell me about this house; what work have you done to the property? does it need any repairs? why are you thinking of selling? what will you do with the money from the sale? etc. At this point, I thank them and offer to get back in touch.

Depending on their answers, I may offer them different options. For example, if it is a listed property, I am likely dealing with a real estate broker. In this case, I may offer 10% down (to cover Seller's closing costs and real estate commissions), with payments over 120 months (assuming I believe I can cover these payments out of rental income).

If I am dealing with the Seller directly, my first offer might be 0% down, with payments over time. I might make at least three offers, if the Seller is willing to negotiate. See how this might play out below.

Mindset is important: Remember, we are not real estate investors, we are problem solvers. Zig Ziglar says, "Help enough people get what they want, and you get what you want."  Help solve the Seller's problems with your offers.

Before I make any offers, I might follow this seven-touch approach advocated by real estate guru Chris McClatchey. 50% of Chris' completed deals are done without advertising that he will be using creative financing. Here is his approach:

7 touch approach

1. Gather info. why are you selling? Thank you very much I'll be back in touch.
2. Set appointment; 
3. Call to confirm appointment.
4. Visit the house; speak with familiarity.  Let them lead the tour.  Make them feel in-control. Ask open-ended questions: "Tell me about..."  Ask what they need. Do not talk about price. Don't make an offer. Don't ask about seller finance. Do state: "I'm willing to give you more of what you are looking for if you can take some of the payments over time."  Make it a statement.  Redirect immediately to next question.
5. After leaving call to ask a question.
6. Set an appointment to discuss a "few options".  Don't do it over the phone.  The Sellers get choices, and it is much better to do in person. All people on deed must be there.
7. Present three offers, if possible.

Here is an example of a 3-offer proposition, using $100K as the market value:  

1. low cash offer 65% After Repair Value (ARV) less repairs: $60,000

2. Small down (10%), 0% interest and balloon payment. $75,000

3. Full price.  No money down.  0% interest, balloon at 10 to 15 years. 

Here is another example of how this might work on a $100K deal:

Buyer to pay seller $500 per month for 120 months, on the 121st month buyer to pay seller $30,000 as payment in full.

As I mentioned, the monthly payment needs to be covered by cash flow. Average rents for similar properties in the area can be found using websites such as Rentometer.com. Typically, your first offer is a lower amount  so you have room to negotiate a bigger percent if needed. For example, you might offer 60-70% of Net Operating Income (NOI) for cash flow; 70-80% of NOI to pay off the loan quicker,

Make your offer what you want, not what you think the seller will accept.  Never assume what a seller will and won't do.  Ask for what you intend to have.

Here are some good scripts for your presentation of offers:

1. I know this isn't what you're looking for.  Banks aren't lending, cash is at a premium, we have to be careful where we spend our cash. (Shake head no during this discussion.)
2. I can give you a little more of what you're looking for, if you can take some of the payments over time.
3. I can give you exactly what you're looking for if you can take payments over time.
4. Which option works best for you? 
5. I am sure you can appreciate that I make several offers every week. If another offer is accepted before this offer, then I may not be able to honor what I can do today. (Both deals). 

Offer deadline is the next day.  $500 to escrow as earnest money. 

1/3 of your prospects will accept an offer on the spot.  Leave the three offers behind for all of the prospects.

If you agree to a higher counteroffer- propose that the increase in purchase price is the interest, just simply rolling it into the purchase price.   

There are at least four ways to cover balloon payments at the end of a cash-out period.

1. Refinance with a conventional mortgage at this time.
2. Ask the seller to extend payments and payoff, with interest.
3. Bring in a private lender.
4. Sell the property and take a big profit.

There are some extra tips if you are purchasing multifamily apartments. As buyer, you should negotiate to close the transaction on the 7th of the month.  Here's why.

The Seller collects the rent that month.  

Let's say rent is $28,630 per month, prorated at $954.33 per day.  Times 23 days.  Equals $21,949 credit at closing to the Buyer for rent collected.  Then negotiate first payment due in 60 days.  $28,630 x 2= $57,260 rent collected before first payment to Seller;  equals $79,209 credits in the first couple months after purchase. Nice way to build up some cash reserves!

Tomorrow's blog will continue with tips on Negotiation.

Happy Holidays! Happy Investing!