5 Ways to Help With Financing
In real estate, location is everything. In real estate investment, financing is a close second. There are the usual routes that most homeowners take, and then there are options available to real estate investors and home rehabbers.
What’s right for you? That depends on your exact situation, but you should know the ins and outs of the available options and how they relate to your business before making a decision. Additionally, you need to know exactly what you need so you can present the best possible case for why a lender should work with you to begin with.
Here are some starting points for financing:
Know your potential lenders
There are a great many options that may be available to you, and it’s in your best interest to understand them so you can make the best choice. There‘s always the option of going with a traditional lender for a mortgage, which works just fine for some investors. There are a few other options that you might consider, though.
Hard money lenders issue a specific type of asset-based loan financing through which a borrower receives funds secured by real property. Private investors rather than conventional lenders such as banks or credit unions fund hard money loans. The terms are usually around 12 months, but the loan term can be extended to longer terms. Because of this, they may be ideal for investors who are fixing and flipping homes but not necessarily for longer term plans such as renting.
Private money lenders are much the same as hard money lenders, but the lifespan of the loan may not be quite as rigid. A private lender may even be someone you know personally! As such, you’ll have a bit more flexibility with the terms of the loan.
Unsurprisingly, there are even less well-known options that often aren’t considered by some investors. Websites like seedinvest.com and fundrise.com allow what’s called equity based crowdfunding, in which multiple investors find your business plan online and invest into it, provided they like its structure and potential.
Still, no matter which option you choose, you still need to be able to sell investors on your project.
Prepare scenarios to present to potential financiers or be able to answer their questions
In order to do this, you need to assure investors of your project’s potential by demonstrating that you’ve thought through the details and have a solid plan. They’ll understandably have questions, and you’ll need to be able to answer them.
The best way to start is to run three or four hypothetical scenarios in your head and put them to paper. For example, what happens if your listing takes longer than expected to sell? Is there a minimum price you can accept below the one you’re asking?
If you’re an investor, you should be well-versed enough in the game of real estate to know and be able to predict reasonable occurrences, and they should inform your list of hypothetical scenarios as well as your answers to potential questions. In other words, rely on your experience while being willing to research and learn, and do your due diligence in answering the questions of the people or institutions you hope will invest.
This is all well and good, but in order to really sell an investor on a proposal, you need to be able to answer the fundamental question of why.
Why should lenders work with you? What do they get out of it?
This is important, and it will depend on the strength of your proposal, its attention to detail, and the solidity of the math behind it. That’s only one small piece of the puzzle though, because no matter how airtight a proposal may be, what really seals the deal is real-world examples.
To that end, have detailed financial records on hand. You want to demonstrate the solvency of your business and the success of past projects. Before/after books of rehabs are a great way to show how the process works apart from just the financial aspect of it. Potential investors may want to see the numbers, but images of homes purchased far below market price and then transformed to be sold at a huge profit have a powerful emotional effect. It gives a tangible, visual clue as to how the proposal will work, because images show how it has worked in the past.
You’ll also want to present realistic examples of past successes, even if they’re not yours. Obviously, a huge win by a much larger firm in another state probably isn’t applicable for a whole host of reasons, but local examples and records of closings will go a long way. It’s even better if it’s your own sale that you’re referring potential lenders to.
Follow up, but don’t be overbearing
Selling a lender on a proposal is a lot like the dating process in that you need to follow up, but at the same time you don’t want to wear them out. The “follow up” part of this is twofold: you want to demonstrate your commitment and seriousness, and you shouldn’t assume that they’d be the ones to call you back. That being said, being overbearing is plenty of reason for a lender to say, “no thanks.” No one needs one more annoyance in their life, and if you come across as desperate, the implication will be that you have no other options for financing. It’s not a good look at all, and undermines whatever merit your proposal may have.
The best way to stay on top of things is to just maintain lines of communication. This is your project, not theirs, so take the lead on matters. If they call or email, respond promptly. Otherwise, contact them only when necessary.
Body language: be confident and serious
When proposing a project to a lender, your demeanor says everything. It may even say more than your proposal itself. Much like images of past projects give a lender a tangible idea of what may happen, the way you carry yourself informs their perspective of you, and by extension, the merit of your proposal.
For example, if a potential private lender wants to talk about your proposal over cocktails one evening, that’s probably not the best time to order four glasses of scotch, neat. At best, you might get too intoxicated to accurately convey the details of your proposal and give off a less-than-ideal first impression, and at worst, it might suggest that you’re a high-functioning alcoholic. Neither is likely to be reassuring to the lender.
There are other examples, obviously, but remember that you’re the face of your proposal and lenders will judge it accordingly. Be confident, serious, and self-assured in what you’re proposing. After all, you should have put enough effort into it to where this is easy. Even more importantly, be likeable. Ask how their spouse is, and listen to their story about how their daughter’s high school varsity team made it to the state playoffs.
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- Get It Right Solutions