“My lender sure eliminated the stress of buying my home” – quote by Unknown

Personally, I’ve had both good and bad experiences with traditional mortgage lenders – and I can state with confidence that a good lender makes a huge difference in the home-buying process. I get it – lots of regulations – so I understand the red tape…

• I’m okay with the mountains of paperwork (thank you online bank statements!!)
• I’m okay with handing over my first born (thanks Kal, I’ll be sure to write!!)
• I’m even okay with the intrusion into my personal finances (thanks LifeLock!!)

What I’m NOT okay with is anything that puts our sellers in an uncomfortable position. We ran into this unfortunate situation at our most recent closing. For over FOUR hours after signing all closing documents, we sat around the table, just waiting for our lender to get things done on their end – staring at each other and trying to make small talk. It all worked out in the end, largely due to the awesome Title company facilitating the deal (props to First American Title Company at 134 North First Street, Brighton, MI 48116), but GEEZ. We decided then and there that we will not structure a deal where we repeat that process ever again.

Expectations

For this transaction, we opted to use a Hard Money lender to close the deal. We opted for a Hard Money loan for two reasons: 1) speed to close, and 2) ability to lend for the rehab work in addition to the property. The trade-off we made was a higher interest rate and additional points at closing. While expensive, the costs worked for the deal – and allowed us to leverage less capital rather than tie up large sums in one deal. We were counting on the “speed to close” so we could go from Purchase Agreement to Contractors On Site within a few weeks.

Part of the problem we faced included the expectations that our lender set. At the outset, we were given a closing date, and told that if we met our obligations (submission of documentation) by the dates specified, we could close on the date they gave us. The lender left out two critical details:

1. Just because they put a closing date out there for them to meet, doesn’t mean they are committing to meeting that date; if they slide, they’re all too willing to tell us that we need to tell our sellers to change plans!
2. Their Closing Date isn’t exactly a true closing date. To them, it was when the closing processes start, not finish. There was no sense of urgency on their part to complete the deal in time to wire the funds to our seller for same-day closing.

I learned that when doing investment loans, this will likely be a significant risk each and every time – not because of anything that we can proactively do – but because of the process in place used by all commercial lenders. I also learned that hard money lenders, who tout their ability to close fast so the transaction seems like it’s “just like cash to he seller” are still beholden to such practices. Hard Money lenders may be able start the closing process in 3-4 weeks instead of 4-6 weeks, but aside from that very minor gain, there is little difference outside the fact that they cover construction costs in the same loan.

Live and learn. Fail fast. Get up and do it again – better!

What to do next?

Our decision to avoid Hard Money if at all possible essentially leaves us with two choices as we build our business:

1. Continue with hard money as needed, and do everything we can to work ahead and/or prepare our sellers – setting proper expectations
2. Jump into the private financing arena

For us, the decision is easy. We are investigating private lending options. Hopefully when I look back at this post, I’ll be able to simply reminisce about the Hard Money Days. Fingers crossed.

As for who we hope to work with, I’ll create a post on that when I have it figured out. When we started, we didn’t want to bug our family and friends, asking for cash. I would still prefer not to ask. That tugs on the “obligation” strings a bit too much for me. If they ever come asking how to get involved or if it’s possible to park some stagnant savings where it might make a higher return, then I’m ready to discuss. I also know there are a lot of rules and regulations around solicitation for funds. Knowing only that, but nothing about the actual rules, I’m not asking anyone directly!

As of Today

As of today, we have a Hard Money loan for our first property. I’m discovering that including a construction loan in the mix makes this even more fun. The way the loan works is that we front the money, then get reimbursed for expenses through draws against the construction funding set-aside. My challenge now is to figure out how to make the receipts match the estimates – and how to address the overages. As long as we get the full amount from the set-aside back, I don’t mind absorbing any extra costs and chalking it up as “hard knocks”.

Once I have a better picture of the reimbursement process, I’ll post on that. This is something I wish I’d seen in detail before we jumped into the loan – it may have made a difference in our decision. I knew the framework, and I read/listened to a ton of material. I understood the numbers. I understood the risks and drawbacks, as well as the benefits. What I never realized was complexity of the logistics to actually carry out the terms of the loan, the lack of responsiveness, and the “on your own” approach this lender has taken.

I’m not complaining! (Although, at times I’m sure it may seem that way.) If I were, I’d most certainly be naming names. Instead, the purpose of this post to document my thoughts as a reminder to myself and hopefully as a piece of missing information for others who are considering a similar path.

Exciting, CHECK! Frustrating, CHECK! Stressful, CHECK! Satisfying, CHECK! It’s certainly been a bumpy ride to this point – and we already have a number of items added to our “Lessons Learned” bucket. Fail fast, learn fast, adjust, and succeed – right?!

This post is a “point in time” reference, taking place after closing on the purchase, before the rehab begins. I wanted to capture the moment at this milestone in the process. Check out our facebook page to see photos and accounts of progress as the project unfolds.

Direct Mail

We used standard postcard mailers. After the first round of about 3,000 postcards, we had about 40 phone calls. That’s 1.33% – actually a pretty good response rate for this business. From there, we were able to achieve:  five (5) appointments, three (3) offers, and eventually one (1) property under contract.

The Property

This property is located in Ann Arbor and has been vacant for about 2 or 3 years. It used to be a rental, and the last tenants weren’t very gentle when they left. We affectionately call it “The Bird House”, because until our cleanup started, there were about a half dozen dead birds on the floor throughout the house.

Contact and Offer

Stacey was the key player here. She made the initial contact, had the follow up calls, went to visit the property, and negotiated the offer. The hard part here was sticking to the numbers. During the negotiation process, we really wanted the deal – and nearly talked ourselves into an offer that could have turned things upside-down. If we stick to our budget for the rehab, we’ll come out in the black – not by much – but enough to claim success.

One of the best parts here is the connections we made. Yes, this was a deal to close, but more importantly, this opened the door to a relationship with another real estate investor, familiar with the area, familiar with the business, and extremely personable. Hopefully, someday we can become a valued contact to her. That’s what it’s all about, right?!

Purchase

This is where things started going from exciting to excruciating. We opted to use hard money for this deal, rather than self-fund it like we did the last one. Yes, it costs more and hits the margins pretty hard … but it allows us to use leverage so we can continue with the business. Otherwise, we’d have to stop marketing, offering, buying, and rehabbing other properties until we had the money back in our pocket!

Our lender was great during the upfront phases, helping us get started, gather the information, and get us pre-approved. Once it down to finalizing the loan and funding the deal, things got ugly. First, they pretty much forgot about us over the Thanksgiving holiday. We got an email that confirmed that – which turned into them saying they didn’t think they could make the closing date! Yikes. The last thing we wanted to do was blow the deal because financing fell through. Eventually, after a number of emails back and forth, they agreed to expedite the loan so they could make the date.

Great! Right?

No.

Once we got to the “closing”, our loan was suddenly handed off to another person, who insisted on even more paperwork. It was almost like starting from scratch. The real kicker was the insurance. They insisted on a paid receipt. We had worked out a deal with our broker already to pay by credit card immediately after closing (so we would be insuring a property that we actually owned) – and we had the paperwork from the insurance company guaranteeing that the policy was already bound to the property before closing. Unfortunately, this didn’t “check the box” for this lender. I had to race (drive) to the bank, get a cashiers check, race back, and have the Title company amend the closing documents to show that THEY paid the insurance company.

All that would have been fine, had we been told upfront what was needed. We had finished setting up the insurance weeks before closing – and it wasn’t until AT THE TABLE that we found out something was wrong. We basically sat around the table with our sellers, staring at each other, waiting for the Lender to pull through with their end of the deal, and hoping that the seller could walk away with a check. No such luck.

Ultimately, even though we got all paperwork completed, we closed in escrow (the Lender didn’t get their approval done in time). That means the Title company held all funds, keys, etc., until all money was approved, provided, and moved to the right spots. The lender finally funded the deal on Monday, and the check was sent overnight to the seller.

The sellers were very gracious, but those 4-5 hours at the Title company were absolutely miserable (and pretty embarrassing). Fortunately, in the end, the deal worked.

Learn and adjust, right?!

On to the next one!!