* What is relationship financing?
*How relationship financing can eliminate your investment property financing challenges forever.
*The 3 hottest (and most reliable) ways to fund your deals.
* How to take control of your investment property financing and eliminate your dependency on conventional lenders and brokers.
* Don’t have any money? That’s what you think. I’ll show you 2 previously “untappable” cash sources that you (and your potential private lenders) have that will fund your deals in 45 days or less.
* The 5 secrets to communicating your deals to potential funders and partners so that they WILL get funded.
* Plus much more.

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As an entrepreneur, it means that I need to constantly try new things but if something isn’t working I would rather that it fail fast. It’s less expensive and I don’t expend as many much needed brain cells.

In my main business, the conventional residential mortgage broker business, things are very volatile right now. I built my business to work exclusively with real estate investors in 2002 and the “pool” of investor clients back then was huge.

With the new Fannie and Freddie rules the pool of investors that I can work with as a conventional broker has shrunk by 80%.

Plus, the number of lenders left that I can broker loans to has been reduced by more than 80% and the lenders that are left are scrutinizing investor loans harder than a father screens his daughter’s prom date.

It doesn’t mean that I can’t still place financing for my investor clients. It means that I have to place the loans with lenders that don’t traditionally work with OR pay mortgage brokers. Lenders that are “off the grid”, so to speak.

Private Lending
In 2004, I began raising money from private lenders to broker to local rehabbers. The lending business model was great. We would loan up to 70% of the as-repaired value and roll in all the closing and constructions costs, too.

The lenders made 14-15% return on their investment and the loans were usually paid off within 4 months by either the investor refinancing to keep it as a rental or the rehabber selling it to a retail buyer.

And we always had another deal to put the money back into as soon as we received a payoff.

I went 4 years and funded $24,000,000 in loans without a single default in that program.

Since September we have had 4.

The rehabbers either couldn’t qualify for refinances themselves or their buyers couldn’t qualify for financing because of the new conventional mortgage rules.

We took the properties back deed in lieu of foreclosure and the lenders say they are fine with being landlords now instead of lenders, but it forced me to take a long hard look at that lending model and the liability that comes with it.

Especially since my state, Colorado, recently adopted a rule that mortgage brokers who are raising money from individuals to broker to borrowers must have a Series 63 securities license. I don’t have a Series 63 and am not particularly interested in pursuing one.

I have always run my businesses on two important precepts:

1. Don’t go to jail
2. Don’t lose the house

There are a few more but those really are the main ones.

My Decision
It seemed like no matter how hard we tried to conduct “business as usual”, it just wasn’t working. Albert Einstein said that insanity is doing the same thing over and over again and expecting different results. And he was a pretty smart guy.

Based on the volatility of the conventional mortgage markets and the difficulty in getting the short-term rehab loans “taken out” with refinances or new loans from conventional lenders, I made an executive decision that opened a major rift with my loan officer employee, Kevin.

I sent a letter to all our private lenders saying that I was discontinuing the rehab loan program as I feel that the loan model is obsolete. Because I cannot reasonably guarantee the loans they make will get paid back, I cannot ethically continue to broker them.

Kevin was offended and will continue to broker the loans through his own newly-formed company. He will continue to contribute to The Investor Insights but will chart his own course as a loan officer.

The Lessons
Here’s the thing…

Just because something has always worked and has been extremely profitable doesn’t mean that it will always work.

Things happen. Rules change.

In September I found myself with a million square pegs when all the holes were round. Nothing was working. And the stress was brutal; keeping me up at night pacing and worrying about the loans that we couldn’t get approved with conventional lenders.

The rehab loan model started to fail FAST and I made an equally fast decision to protect myself, my lenders and my company.

Does that mean that I’m out of business?

Hell, no.

Like many foreword thinking entrepreneurs before me I change the model. I adopt a new strategy that DOES work in the CURRENT environment.

And I already have.

The New Model
Real estate investors need financing help now more than ever.  So, instead of being a commoditized mortgage broker, I am an investment real estate consultant.

With this model, I deliver even MORE value to my clients than ever before and I don’t rely on a third party (bankrupt lenders or underwriters) to “allow” me to earn income.

I can work with thousands more lenders – portfolio lenders – to get the tough deals done and save my clients money in the long run.

Private Money
Now, instead of BROKERING the private money I raise, the private lenders partner with me in acquiring undervalued properties (apartment buildings mostly) and discounted, performing mortgage notes.

Because I am an active partner and not just a broker I have a more active role in the partnership. I, again, don’t have to rely on a bankrupt lender or underwriter to determine the success of the investment.

Now I have round pegs to fit into the round holes. And less stress because I took control of the situation and reconciled it with my values.

The Fallout
Will everyone be on board if you make a decision like this in your business?

No.

If you change course as quickly and as drastically as I did, you will experience fallout in your organization just like I have. Some people hate change. That’s life.

But you know what? My vision is strong, I can sleep at night and my instincts have never failed me. I am certain I made the right decision.

A poor decision would have been to do nothing, try to fool myself into thinking that I could conduct “business as usual” and that things will get better. Fortunately, that’s not my style.

So, let’s raise a glass.

Here’s to the next phase of success and record profitability in the ever-evolving and crazy life of a real estate investor!

1. Get Real
Don’t expect to walk into a lender with a tiny down payment and have them even pretend to be interested in financing your deal. In hard times, lenders become “risk-averse.” One way to make them fall in love with your deal is to show that you have some skin in the game, that you are putting your own money on the table. Some of you – especially those who have read a ton of get-rich-quick real estate books or are trying to be a “creative” investor – don’t want to hear this, but you can’t expect the lender to take a risk in a tough market if you’re not prepared to do the same.

2. Check Your Facts
Do your due diligence and have it ready to show to the lender. Not only should you verify a property’s income by examining its leases, but you should also get an independent take on your local rental market to confirm that the rents are realistic. Visit rentslicer.com as a potential source of apartment rent data. RealtyRates.com should be able to give you info about prevailing capitalization rates in your market. RSMeans’ CostWorks can help you with construction costs if this is a development project.

3. Join the Pros
Consider joining one of the trade associations for your specialty. There’s NAA (National Apartment Association), and ULI (Urban Land Institute) to name just a few. Yes there are membership fees, but the data and trends you acquire can be a great help in building a successful strategy.

4. Sell Yourself
With investment property, a lender’s first concern is the viability of the property, but they’re going to be interested in you as well. This is where a detailed personal financial statement comes in. You should have it in a profession spreadsheet format and keep it current with all of your accounts, income, assets and liabilities so that it’s ready to update and use whenever to need to seek financing.

5. Make Your Case
I can’t tell you how many emails my company gets that say something like, “I saw a building on LoopNet that is listed for $500,000 and the NOI is $95,000. What kind of financing can I get?” You need to give me more to work with than that. You need to build a professional presentation to show the lender the ACTUAL financial details of the project.

For income-property investments you should provide at minimum, the last two years’ ACTUAL (not proforma or projected) income and expense statements and a current rent roll.

Make sure you write a good, solid Executive Summary. This will give the lender an overview of the deal. As the deal progresses, the loan officer or banker will ask, “How did you come up with this projection?” or “Where did these numbers come from?” That is when you start pulling out detailed reports to support your projections. You’ll not only answer the questions, but you’ll also demonstrate that you have a firm handle on this deal and you know what you’re talking about.

Of course, not every deal is going to qualify for financing, and that’s true even in non-crunch times. Still, you can stand out from others who are competing for limited funds and maximize your chances of success by using the kind of thorough, professional approach I’ve outlined for you.

More information about qualifying deals, running the numbers and preparing executive summaries and financial statements is available in my Finance It Right course.