Make sure they understand
People tend to naturally say “No” to things they aren’t familiar with. This is a reality real estate investor must overcome in order to get a “yes” on a creative deal structures when talking to sellers. You do that by making sure they understand what you’re proposing.
Take owner carry-back financing for instance. Most people are accustomed to the idea of making payments, especially when it comes to housing. So, when you approach a seller asking them to allow you to make them payment instead of paying all cash for the property, the reason they may decline is because they don’t understand how that structure works. It’s up to you to explain those details and especially how they will be financially secured in the deal. Once you do, the seller is more likely to say yes.
We had something happen during a recent deal with a private lender where their first response was a no. Here’s what was going on.
We had found a subject-to deal that we were planning to flip. The house was in preforeclosure, which meant it had arrears of about $11,000. The first mortgage balance was $66,000. It needed around $30,000 in rehab and the conservative after-repair value was $175,000, with an as-is value of $125,000.
That’s a pretty good house. At the as-is value, after catching up the arrears, the house had $48,000 in equity. And we stood to make another $20,000 once we did the rehab. The problem was that we were exactly $45,000 light of what it would take for us to do the deal.
No worries: we called one of our trusteed private money lenders and arranged to get the money from them.
When you are dealing with private money lenders you need to understand something. Trust is paramount. Private money lenders are regular people, with regular jobs, who are trusting you with their hard-earned life savings.
I want to stop there and let the weight of what I just said sink in.
When you are using a private money lender, they are regular people who don’t have the FDIC backing their loan to you.
It’s up to you, and you alone, to make sure they’re protected and that they get their investment back. And that’s a responsibility you should take very seriously.
Now, since this was a subject-to deal, we had to come up with some creative options for our lender. Normally, we want our lenders to have a first-position mortgage on the particular property we’re using as collateral. Since this house had a first mortgage from a bank already in place, that scenario was not going to be an option.
I talked to my lender about this fact and asked them what would make them feel secure. At first, they wanted to cross collateralize the loan. That meant we would use another property that we had, plus this one, as security for the loan. It didn’t make a lot of sense to Ashley or me to tie up two properties for the amount we were borrowing. So, we came up with a different scenario.
We planned to title this property into a land trust. So, we offered to give our lender part beneficial interest of that land trust as collateral for their second-position mortgage.
At first our lender said, “No.” When I asked what was making them uncomfortable about that situation, their response let me know they didn’t fully understand what we just offered them.
I started to explain that by giving them some beneficial interest in the land trust, we were, in essence, giving them part ownership of the property as collateral. That would be in addition to their mortgage being secured in second position on the property. And since beneficiaries direct trustees of a land trust on what to do with the property, that put them in a very secure position.
This arrangement made them feel very comfortable, and we did the deal.
So, just realize that the next time someone says “No” when you offer a creative solution, before you give up on it, make sure they understand.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.