The 21 Common Mistakes Investors Make When Working

The21CommonMistakesInvestorsMakeWhen
WorkingWithHardMoneyLenders
Presentedby:JJPawlowski
IntroducBon
KansasCityInvestorFundingLLCisanassetbasedlenderforhardmoneyloans.It
providesdirectfundingintheGreaterKansasCityareaforinvestmentand
commercialprojects.KansasCityInvestorFundingLLCalsostructuresfundingfor
commercialprojectsnaBonwide.
KansasCityInvestorFundingLLCisownedandmanagedbyJJPawlowskiwho
personallyhasover13yearsofrealestateinvesBngaswellaslendingexperience.
InaddiBontohardmoney,JJPawlowskiisalocalrealestateinvestor,realestate
Broker,propertymanager,andexpertproblemsolverforrealestateinvestors.He
isalsoaspeaker,author,coach,andmentortorealestateinvestors.
Theinvestordoesn’tunderstandloantovalueraBos(LTV)
Mosthardmoneylenders(hmls)usetheLTVraBoinordertodeterminethe
maximumloanamountavailabletotheborrower
65%-70%LTVoftheARV(aZerrepairvalue)isacommonrangeinthehard
moneylendingbusiness.Forexample,anARVof$200,000mightprovidean
investoraloaninthe$130,000-$140,000
AninvestorcanwastealotofBmebynotunderstandingtheLTVraBoswiththe
hmlheorsheisworkingwith.Itisveryimportantfortheinvestortounderstand
howtheLTViscalculatedandwhatnumbersarerelevantforit
Theinvestorexpectstohavenomoneyinthedeal
Knownas“Skininthegame”
Thereareveryfew100%financedloansinthehmlbusiness
Evenifthehmlwilllendthemoneytheinvestorneedstobuyandrehabthe
property,theinvestorwillsBllneedmoneyforclosingcosts,interest,property
expenses,taxes,insurance,etc.
Theinvestordoesn’tpackagethedealappropriately
orpiecemailsinformaBon
Thismightbeaninvestorsendingmanydifferentemailstothelenderaboutthe
sameprojectandonlysporadicallyincludingdocumentsorneededinformaBon
Itismostefficienttohaveoneongoingemailchainaboutyourproject
ItistheneasytoreferbacktoearlierconversaBonsanddocumentaBonwithout
havingtospendalotofBmetofindoldemails
HavingeverythinginwriBngisgoodbusinesspracBceaswell
Theinvestor’sexitstrategyisnon-existentordoesn’tmakesense
Asolidexitstrategyisoneofthemostimportantaspectsforahml
Tellingthehml“I’llfigureouttheexitstrategylater”or“Ihaven’tthoughtthatfar
ahead”willsurelyguaranteetheinvestorwillnotgettheloan
Anexamplescenariowhereanexitstrategydoesn’tmakesensemightbean
investorwithpoorcreditandlackingstrongfinancialsexpectstorefinanceasthe
exitstrategyonthehml
TheinvestoroveresBmatesorarBficiallyinflates
theaZerrepairvalue(ARV)
ThisisoneofthemostcommonmistakesmadeandisbothBmeandfinancially
costlytotheinvestor
OveresBmaBngtheARVisusuallyduetolackofexperience,lackofapplicable
salescomparables,ormisinformaBon.“Itsoldfor$$$backin2006soitmustbe
worththatamounttoday”isnotthecorrectwaytoevaluateARV
ArBficiallyinflaBngtheARVisintenBonallygivingtheARVamuchhighervaluethan
themarketwillbear,orthatisrealisBc,justtomakethedealsoundbefer
Theinvestorcan’tarBculatetheloanrequestin2minutesorless
Itisimportanttohaveawellrehearsedelevatorpitch.Thismightbeinperson,
overthephone,email,orpreferablyalloftheabove
HMLshearaboutandseealotofdealsonaregularbasissothemorethorough
andspecifictheinvestoristhemorelikelihoodthehmlwillbeinterested
Havingagoodelevatorpitchisasigntheinvestorknowswhatheorsheisdoing
RememberwhatJoeFriday,fromTVSeriesDragnet,says“Justthefacts,ma’am”
Theinvestordoesn’thavetheimportantdocumentaBon
Mostloanrequestswill(eventually)needapurchasecontract,scopeofwork,
contractor’sagreement,copyofinsurance,companydocuments,etc.
ItisimportanttheinvestorgetsthedocumentaBontogetherassoonaspossible
inordertoexpediteandmoveforwardwiththeloanprocess
Missingdocumentswillsloworcanceltheloanrequestaltogether
Theinvestorwantstoliveinthesubjectproperty
Unlessspecificallystated,aninvestorshouldexpectahmltoonlyinvolve
investmentproperty,noowneroccupantproperty
TheloandocumentswillusuallyhavecondiBonsprohibiBngtheborrowerfrom
residingintheproperty
TherearesubstanBalregulaBondifferencesbetweenanowneroccupantversusan
investor(commercial)loan
Theinvestordoesn’texpecttosignapersonalguarantee
WhilemanyHMLsaremadetoanenBtysuchasaLLC,corporaBon,etc.,thesame
loanwillusuallyrequirethemembersorindividualstosignpersonalguarantee(s)
Non-recourseloans(noPGrequired)aresomeBmesavailableinthehmlbusiness
butarelenderanddealspecificsobesuretocheckwiththelenderyouare
planningonusingtofindoutwhatopBonsmightbeavailable
OZenBmesthePGextendstoallmembersofthecompany,includingspouses
Theinvestorexpectsrehabmoneytobefronted
Thismeanstheborrowerexpectstogetmoneytostarttherehabontheproperty
HMLsgenerallyreleaserehabfundsonadrawbasis.Drawprocessesareusually
readilyfoundonthelender’swebsiteinFAQssecBon
Rehabfundsarereleasedasworkprogresses/finishes
Ifacontractorneedsfundstostartaprojecttheinvestorborrowermayneedto
advancethefundsandthengetpaidbackatthefirstdrawrequest
Theinvestorcomplainstheloancostsorinterestaretoohigh
Hardmoneyiseasiertogetbutthereisapriceforit
Theinvestorshouldexpecthmlstohaveseveralpointsanda(much)higher
interestratethanconvenBonalfunding.NotmanyconvenBonallendersprovide
thetypesofloans,suchasarehabloan,thathmlsdo
HardmoneymightbeagoodopBonwhenaninvestordoesn’thavethecredit,
financials,orotherkeycomponentsneededforaconvenBonalloan
Theinvestorpaysforanappraisalbeforehand
Itisalmostalwaysamistaketogoaheadandgetanappraisalonyourprojectas
thelenderwillmostcertainlyorderitsownappraisaltoo
Theinvestormayhavetopayforseveralappraisalswhichcanbecomecostly
AbeferalternaBvemostoftheBmeissimplygetabroker’spriceopinion(BPO)or
perhapsadrivebyesBmateofvaluewhichanappraisermaydofortheinvestor
Theinvestordoesn’thaveacompleteandthorough
scopeofwork(SOW)
AcompleteandthoroughSOWincludeseverythingneededtobringthesubject
propertyuptoaretailcondiBonandvaluaBon
TheexitstrategycanhelpdeterminethecompletenessoftheSOW.Forexampleif
aninvestorisflippingthesubjectpropertyandthereare3layersofroofingonit,a
newroofisprobablygoingtobeneededinordertobeabletoreselltoanend
buyer.HMLs
Lackofexperienceinrehabbingisacommonreasonwhyinvestorsomitorsimply
don’tknowtoincludecertainlineitemsintheSOW
Theinvestordoesn’tdoaquickoverviewofthelender’sloan
informaBonandprocessesbeforesubmimngaloanrequest
Mostlendershavethetypesofloans,aswellasthebasicterms,ontheirwebsite
Itonlytakeafewminutestoseeifthelenderdoesthetypeofloantheinvestoris
seeking
Submimngaloanrequesttoalenderwhenthelenderdoesn’tprovidethattypeof
loanisawasteofeveryone’sBme.Forexample,manyhmlsdon’tprovide
financingonrawland
Theinvestordoesn’tdoanyduediligenceonthelenderorbroker
Itisimportanttoknowifyouareworkingwithadirectlenderoraloanbroker
Alenderhasthemoney,makesthedecisions,writesthecheck
Abrokerfindsalenderonbehalfoftheinvestor.Whopaysthebroker?
Isthelenderreputable?Hasitbeeninbusinessawhile?Theinternetisa
powerfultoolforbothlendersandinvestorborrowers
Theinvestor’scompanydocumentsarenotinorder,
uptodate,orarenon-existent
Thiscommonmistakeusuallyhappenswellintotheloanprocessclosertothe
closing
ItisimportanttheenBtyisregisteredinthestatewherethesubjectpropertyis
ItoZentakessomeBmetoupdatecompanydocumentsinternallyandwiththe
statesoinvestorsshouldplanwellaheadanddoublecheckforcorrectdocuments
Theinvestordoesn’tcheckfororunderstandloanextensionopBons,
oranyofthesmallprintofthehmlterms
Readthefineprintinthecommitmentlefer,engagementlefer,loandocuments
Anextensionisnotalwaysoffered.Whenanextensionisoffereditisusually(very)
costlyandthiswillcutintotheborrower’sprofits
Thisisanotherreasonasolidexitstrategyissocrucial
TheinvestorunderesBmatesordeflatesthescopeofwork(SOW)
AdeflatedSOWisintenBonalandusuallybecausetheinvestoristryingtofitallof
thenumbersinthedeal(wewilltalkmoreaboutinafewminutes)
UnderesBmaBngtheSOWmayhappenduetolackofexperienceinrehabbing.
OnewaytokeepfromunderesBmaBngget3bidsfromcontractorsandcompare
WhentheSOWistoolowinthebeginning,andneedstobeincreasedlaterinthe
loanprocess,itwillusuallyincreasetheamountofmoneytheborrowerwillneed
atclosing
Theinvestortakestoolongtofindalenderormake
adecisiononwhichlendertogowith
Itisfullyexpectedtheinvestorwillshoplendersforthebestdeal(Hint,thebest
dealisn’talwaysthe“cheapest”)
TakingtoolongtofindalenderwillwasteBmeinthecontractprocessasthe
closingdatequicklyapproaches
Closingextensionsinthepurchasecontractaren’talwaysautomaBcsoaninvestor
couldlosethedealaltogetherbynotgoingwithalenderearlierintheprocess
Theinvestortriestofitallofthenumbersintotheloan
“Ican’tspendmorethan$20,000onthescopeofworkotherwiseIwillhaveto
bringmoremoneytoclosingandIdon’twanttodothat”wouldbeanexampleof
tryingtofitthenumbersinthedeal
Theproblemwithdoingthisistheinvestorcutscornersandwillmostlikelyhaveto
putmoneyintothedealsomewheredownthelinetomakeupforit
Evenifthelenderprovides100%financingforthepurchaseandrehab,itissBll
likelytheborrowerwillneedsomemoneyinthedealsomewhere
Theinvestorlies,conceals,misleads,oromitsnegaBveinformaBon
TheinvestorshoulddivulgeanyperBnentinformaBontothelenderevenifitisbad
asthelenderwillmostlikelyfindoutanyway
InthisdayoftechnologyitisveryeasyforalendertofindoutinformaBonabout
theinvestor’spast
Anyonewhohasbeeninrealestateforseveralyears,especially2008-2009,hasn’t
alwaysmademoney.Aninvestorhasamuchbeferchanceofgemngtheloan
evenwithnegaBvehistorysoaslongastheinformaBonisdivulgedearly
QuesBons?ClarificaBons?
JJPawlowski
|(816)916-4593