Commercial Loans and Fun Blog

On T.V. and at cocktail parties, you have probably heard all about people making big profits fixing and flipping houses.  The U.S. built only 1.2 million homes last year.  The U.S. must build 1.7 million new homes every year just to keep up with population growth.  How have we been filling that shortfall?  The answer is with fix and flips.   We are returning rundown homes to the housing stock.

When a fix and flipper renovates an older home, he is often providing a near-new home to some young couple, both of who are probably working.  They totally lack the time and experience to do the renovation themselves.  That fix and flipper is truly doing a good thing for that young couple.  The couple will enjoy a near-new home for 20% less than the cost of a new home.

Flipping homes is also great for the environment.  Think of all the trees that are spared because a new home is not constructed.  Lastly, think of the kids.  Older homes usually have much larger yards in which kids can romp and play, compared to new homes.

My point is that you should feel good about the work you are doing as a house flipper.

But How Do You Find a Home to Flip?

Here are some practical tips:

Consider using a wholesaler on your first deal.

Wholesalers are in the business of finding rehab properties, putting them under contract, and then finding a buyer who will execute the house flip.  You take the place of the wholesaler in the contract, paying a fee to the wholesaler for being the middleman.  Make sure the wholesaler doesn’t add a profit margin to himself that is so large that he doesn’t leave any profit for you.   I recently did a Google search, “home wholesalers Indianapolis”, and I found dozens of listings.

Hire an agent who specializes in REO’s. 

REO stands for "Real Estate Owned" and refers to property that is held by a lender as the result of a defaulted loan.  Most of these homes will have gone through an extensive foreclosure, and perhaps an eviction process.  In addition, the prior occupants probably did very little to care and maintain the property during the pendency of the mortgage default, foreclosure and eviction.  As a result, many of these properties are priced lower than the surrounding homes due to their neglected conditions, making them ripe for a house flip.  Many lenders and loan servicers align themselves with a small group of realtors that specialize in selling these types of properties.  The key to finding them for your house flip is to work with a realtor who has the inside track on these real estate listings and new rehab homes on the market.  You can find them by doing specific internet searches for REO real estate agents and brokers within a specific geographic area.  For example, I just did a Google search of “REO specialists Indianapolis” and found lots of listings.

Work with your favorite real estate agent using the MLS.

Have her set up email alerts for new listings based around key words, such as handyman’s special, fixer-upper, fix and flip opportunity, needs work, distress situation, divorce situation, neglected, needs repairs, foreclosure, REO, etc.

Attend foreclosure sales, estate sales, and auctions.

Real estate auctions, conducted at a public place, most often at the courthouse, are the best place to consistently source below-market real estate. The lenders are often times willing to take a discount from the amount owed.  This allows buyers to purchase a property at 60-80% of the market value. The investor can then quickly remodel (if needed) and resell the property for a profit. The downside is that oftentimes you need to pay all-cash for the purchase, and there is no title insurance or inspections on the properties.  Although there is some risk associated with this tip, with proper due diligence and patience you can do this profitably in any market in any area.  In addition, not every foreclosed home finds s a buyer at a foreclosure sale.  By attending foreclosure sales, you will be able to identify those lenders who are stuck with a foreclosed home that they do not want to own.

Most hard money lenders just want to get rid of their foreclosures quickly.

They are not interested in becoming landlords or home renovators.  Their loans are often made at low loan-to-value ratios, so there is often sizeable equity in their foreclosures.  If you can find and contact these individuals or companies, you’ll likely get access to some great deals.  I just did a Google search of “hard money lenders Indianapolis” and found dozens of companies listed.

Network-network-network!

Build yourself a network of finders and contacts that - because of their jobs - run across distressed home opportunities.  The next several tips will explain exactly how to do this.

Don’t be shy about offering to pay a finder’s fee for a home that you end up buying.

Folks, I am an attorney, and let me reassure you that finder’s fees are perfectly legal.  Advertise your finder’s fee offer boldly and with confidence.  “A finder is a person whose employment is limited solely to bringing the parties together so that they may negotiate their own contract.”

It is essential that your finder does not try to play real estate broker and negotiate terms.

If your finder negotiates any terms, it is illegal to pay him because he is not a licensed real estate broker.  Therefore limit your finder’s work to setting up an introduction.

How much should you pay?

I recommend a cool $1,000.   Capitalism works, folks.

You need to institutionalize your marketing for homes to buy.

"Institutionalize?  That’s a big, boring, fluffy term.  I’m falling asleep here, George.”

By institutionalize, I mean that you need to develop a repeatable formula that works every time and which requires very little character on your part to implement.  For example, suppose I told you to get on the phone and call 15 people every day?  It’s a formula.  It would probably work; but who has the discipline to make 15 calls every day?  That requires an immense amount of character, so I don’t like it.   But how about this?  Could you develop a list of 70 to 1,000 particular people to whom you could forward a funny or interesting email once a week?  After the joke, you could have a signature block that reads, “I PAY $1,000 REFERRAL FEES FOR HOMES TO FLIP (in big, bold red print).  Please look for homes where someone has died, moved to a care home, or come back in foreclosure.”

 Choose your 70 to 1,000 finders by the nature of their work.

Certain people, because of the nature of their work, see good fix and flip candidates several times per year.   Here are the types of workers who see fix and flip opportunities on a regular basis - real estate agents who specialize in estates, antique dealers, estate sale professionals, clean-out guys, dumpster companies, divorce attorneys, and probate attorneys.

Don’t forget business cards.

You should have two types.  One should read in big, bold type:  “I PAY $1,000 FINDER’S FEES FOR HOMES TO FLIP. “ The other might say, “I’LL BUY YOUR HOME QUICKLY.”

Develop an elevator pitch.

What on earth is an elevator pitch?  An elevator pitch is a short, succinct sales pitch - something that you can deliver in the time it takes an elevator to go up four floors.  Here’s a hypothetical:  “Hello, my name is George Blackburne, and I own Blackburne & Sons.  I am a residential developer, and I specialize in restoring and repurposing run down homes.  I pay a $1,000 finder’s fee to people who find me homes to buy and flip.  May I give you one of my business cards?”

Put a magnetic sign on your car.

“$1,000 Finder’s Fee For Homes To Flip.  574-360-2486.”  You could find a great opportunity while your car is parked at the grocery store.

Get to know the mail carriers in the neighborhoods in which you want to buy.

Mail carriers know who is having financial difficulty, who is behind on their taxes, who is seriously ill, who is moving out, and more.  They know more than Google when it comes to the people on their routes, so get to know them.

Finding homes to flip is a skill that you will refine and improve over time.  Have you developed a great marketing trick of your own?  Would you please share it with me?  Write to me at george@blackburne.com, and please write in the Subject line, “Great Fix and Flip Tip For Old George.”  I would really, really appreciate it!

The following annual Christmas letter went out to all of our 1,300 wealthy private investors this week.  I hope you get a kick out of it too...  

Fortunately, the walkers were held back by a police barricade, but this did not stop them from snarling, gnashing their Zombie-like teeth, and reaching out for our delicate flesh with their angry, outstretched arms.  Was this the Zombie Apocalypse?  No.  These were the Inauguration Day J20 protesters, who so terrified my wife and my 64-year-old cousin, Patti. 

The three of us were walking towards the stands along Pennsylvania Avenue in order to watch my daughter, Jordan, ride her horse, along with the famous Culver Black Horse Troop (100 all black horses) and the Culver Equestriennes (20 lovely young ladies), in review past President Trump and Indiana’s own Vice President Mike Pence in the 2017 Inaugural Parade.  (I rode in President Nixon's Parade in 1971.  George IV rode in W's first parade, and Tom rode in in W's second parade.  A lot of legacy, huh?) 

There was a reason why the stands were so empty.  Police barricades were required to keep back the Zombies.  No, that’s unfair to the Zombies.  Even Zombies don’t behave this badly.  One of the protesters, a skinhead, targeted his rage at poor Cisca and Patti, shouting obscenities in their faces for absolutely no reason.  For all he knew, these two grandmothers might have voted for Hillary.  

With a daughter scheduled to ride in the parade, we were not to be dissuaded.  We eventually had to walk several miles to circle around the Zombie barriers, but finally we got to the stands.  We learned afterwards that most of the other Culver parents gave up trying to reach the stands.  Later, the press made great hay over the fact that the stands were so empty.  Helloooo? Would you want to be eaten by Zombies?  Plucking off your little toes.  Eating them like French fries.  Ketchup? 

In the stands, we were within 30 feet of the President as he walked down the parade route.  Melania Trump was stunning, of course, but I was most impressed by the lovely Ivanka Trump, wearing a tasteful, but close-fitting, cream dress and very high heels.  When one of her little boys, around four years in age, started acting like a little boy-onster (half boy, half monster), she scooped him up, threw him on her hip, and continued walking and waving without missing a step.  Talk about the modern woman.  Wow. There is a special place in the corner for any little boy-onster who acts up during his grandfather’s big parade.

As the Culver horses rode past the reviewing box, Jordi was on the left side, closest to the President.  One television news network (CNN?) zoomed right in on Jordi, who rocked 20 million Americans with her radiant smile.  I paid a lot of orthodontist bills for that smile, but it was worth it!  If you are ever suffering from insomnia, be sure to ask Cisca to show you pictures, including her 4-second video clip of Jordi dazzling the world.  Very nice, Cisca… zzzz... head bounce...   

The J20 Zombies are on trial right now for smashing windows, trashing cars, and eating human flesh on Inauguration Day.  According to the legal arguments being advanced by the Federal prosecutor, if you are part of a Zombie horde, and even one Zombie rips off a human arm and begins munching, you are guilty of mayhem, even if you are a vegan Zombie.  Hmmm.  That’s a pretty dangerous argument for the future of free speech and non-violent protests.  I mean, c’mon, how are you going to keep every single Zombie from grabbing a quick snack.  Even I have to admit that my Cisca’s lovely ear lobes are irresistibly delicious.  Oh, my gosh, am I a Zombie?

This is Christmas time, and I should be spouting sweet nothings and warm wishes of love… but I simply must say that 2017 was a pretty lousy year for America.  The Zombies and the Nazis can no longer talk to each other.  A Republican friend of mine admitted that he has no more liberal friends.  I was part of an email string that contained a pretty funny, but politically insensitive, joke.  A liberal mortgage broker in the string of 20 brokers objected to the insensitivity of the joke, and my buddy wrote to him, “You are no longer my friend.”  Huh?  That broker had brought business to my lender-friend for 10 years!  What?  That’s it?  In the words of the great Rodney King, that world-renown humanitarian, “Can’t we all just get along?” 

And before any Zombies jump all over my Nazi friend, I must say, in all candor, that many Zombies no longer allow Nazis to even speak.  Apparently believing in free markets and self-help makes all Republicans to be fascists, nationalists, white supremacists, misogynists, or some other form of “ist”.  In the 1960’s, bras were first burned and the Vietnam War was famously protested at the University of California at Berkeley.  Berkeley was the epicenter of free speech… but apparently Ann Coulter, the conservative commentator, is not allowed to speak there.  Apparently she’s a misogynist.  No, that’s not it.  Must be some other form of –ist.  Security concerns?  Hmmm. 

And if you think I am over-blowing this whole speech thingee, just watch any “news” show today.  Apparently both the Zombies and the Nazis have forgotten all about common courtesy.  They constantly interrupt each other while the other is speaking.  Let’s play a game.  Turn on Fox News or CNN and set your timer for one minute.  I’ll bet that the speaker will be interrupted at least three times in a minute.  My dear mother would have smacked me upside the head.  [Smack!] 

Okay, so my daughter, Jordi, had graduated from Culver Girls Academy. Culver was incredibly expensive - far more expensive than most colleges. I’m not bragging… okay, I’m bragging… but Jordi won First Team, All State, starting goalie for high school lacrosse in Indiana.  Fortunately for my wallet, she had been recruited to play lacrosse for Earlham College, an hour east of Indy, and she had received an “academic” scholarship.  Phew!  My personal future was now clear.  I had done my duty.  Now it was finally golf time with my 300 buddies at Pretty Lake Golf Club.

But then I got the call.  “Dad, your only granddaughter, Reagan, hardly knows you.  You have to move to Indy.”  So we loaded up the truck and moved to Beverly… er, Indianapolis.  We found a pretty little brick house in a gorgeous subdivision, just two houses away from the prestigious Geist Reservoir.  All I want for Christmas, Santa, is to squeeze my little house between two of those 8,000 square foot “cottages” ($$$) on the lake.  

Cisca and I love it here.  Indianapolis has two pro sports teams, Uber, and even food delivery.  Have you tried Uber Eats?  Works great.  We get to babysit Reagan three or four nights per month, and she even has her own bedroom.  I used to chase her up the stairs, pretending to pinch her little bottom.  “Make your run, Reagan.”  And she would squeal in delight.  But then she turned on me.  “Make your run, Gramp,” and she pinched my fat fanny all of the way up the stairs.  Smarty pants.  Actually she is.  She scored in the 99th percentile in math and 98 percentile in reading. 

Cisca is thriving here in Indy.  She found a Zumba Gold dancing class, and she is making lots of friends.  Then she got adopted by our homeowner’s association
representative, a warm, charming, and effervescent lady who lives just six houses down the street.  There are close to 1,800 homes in our homeowner’s association!  This wonderful lady actually came to greet us when we moved in, and she has convinced Cisca to volunteer on the home quality committee.  Cisca came home laughing one day.  One of the homeowners had painted, without permission, their gorgeous brick home “Pepto Bismal pink”.  The Gestapo whisked them away in the night, never to be seen again. 

George IV is absolutely killing it at work.  He will close $1.4 million in hard money loans this month.  Because I am George III and he is George IV, I get numerous calls for him by accident.  These brokers keep telling me what a great guy he is.  Makes a papa proud.  Sadly George IV recently broke up with his long-time love, but fortunately he has already met someone new.  Both of them are joining us for Christmas too, which makes me do dog-flips.  One big dog pile of love. 

Every workday, our second son, Tom (aka “M”, the neglected Middle child), comes over to my house, just nine minutes away, and we work together out of my walk-out basement.  (I have owned Blackburne & Sons now for 37 years.  Our big office with all of the bodies and machines is in Sacramento, California; but Cisca and I were financially blessed and able to move to Indiana to send our children to the fabulous Culver Academies 18 years ago.)  I now get to see my son every day.  Is this a great country or what?  Tom is working very hard these days.  He sounds great selling, and he is finally starting to produce some loans.  The renovation of his starter home is almost done.  Tom and his lovely girlfriend, Alex, take care of Reagan, our granddaughter, exactly half the time - one week on and one week off.  And then there is Bernie, their 70-pound, lovable, goofy, energetic, bouncing, flopping, playful, and absolutely adorable golden retriever puppy. 

Jordi is enjoying Earlham College, and because I am so close, I get to go to every game.  In soccer she started at center forward, as a freshman, until she severely twisted her ankle.  She still scored a lot of goals, including a last-minute game-winner (4-3) in the final game of the season.  I stood there quietly on the sidelines and barely cracked a smile.  Not!  I went crazy… crazy for loving you. 

As for me, I have a heart rhythm problem, where my heart doesn’t beat fast enough to pump out all of the fluids; but I am scheduled for another jump start right after Christmas.  I’ll still probably die at age 95, when Cisca catches me again not putting the dirty dishes in the dishwasher.  [Smack!]

What did I learn this year?  Frighteningly, I got a brief glance of just how easy it would be for this country to turn into a fascist state.  The Zombies played an important role in exposing the danger, but can’t we all just learn to fight a little nicer?  Just sayin’.  Merry Christmas, everyone!

Tom Goodfather was worried about his kids.  His beloved wife, Susan, had died last year of breast cancer, leaving Tom as the sole guardian of their three children, ages 9 and 7 (the last two were twins).  Ten days ago Tom's doctor delivered even more bad news.  Tom's thyroid cancer, which had been in remission for six years, was back.  The doctor had tried to be optimistic, but Tom understood his underlying message.  "Make your final arrangements."

The only good news is that Susan had died with $1 million in insurance, and Tom had not needed to touch any of it.  Another positive was the fact that Tom's burgeoning real estate empire of 147 apartment units was performing well.  The lack of new construction had left apartment rents climbing.

So Tom make an appointment with a trust officer at Bank of America and arrived there today to set up a trust for his three kids.  Have you ever noticed the NTSA at the end of Bank of America's name - Bank of America NTSA?  NTSA stands for National Trust and Savings Association.  This tell you that Bank of America has a trust department, as do many commercial banks.

Investopedia defines a trust company as follows:  A trust company is a legal entity that acts as a fiduciary, agent or trustee on behalf of a person or business entity for the purpose of administration, management and the eventual transfer of assets to a beneficial party.

Huh? What?  Sorry, I nodded off.  How about a definition in English, George?  A trust company is a company that is super-honest and reliable.  It is also a company that follows written instructions to the letter.  A rich person, known as the trustor or settlor, hands over cash, stocks, bonds, real estate and other assets to the trusteeeeee (trustee) who receeeeeeives (receives) the assets.  The trustee then follows the written instructions in the trust agreement for the benefit of the beneficiary, in this case the kids.  The total of all of the cash, stocks, bonds, and real estate handed over to the trust is called the corpus (body) of a trust.

Tom instructs the trustee, Bank of America's trust department, upon his death, to deliver to Tom's sister-in-law, Mary, $4,000 per month to pay for the three kid's care and welfare.  Tom also instructs the trust company to invest $2 million in S&P-listed stocks and investment grade bonds in order to pay for their college.  Finally, upon the last child reaching the age of 25, the trust is to dissolve and divide the assets between the three kids.

Pop quiz:  What is an investment grade bond?  An investment grade bond is one that is rated BBB or better by Standard & Poors or Moody's.  Investment quality bonds are usually from large, old, and established companies.

The reason this whole subject came up this week is because we recently added a new bank to C-Loans that does not even have the word "Bank" in their name - U.S. Trust.  Remember, folks, the majority of all banks have trust departments, so you will see banks names such as First Bank & Trust and Guaranty Bank & Trust.  Now you know what the word, "Trust", means.

There is another hot term sweeping through the secondary market for hard money loans - "buy-to- rent".  Buy-to-rent loans are loans made to real estate investors who buy up single family homes and just rent them out for the long term.

This all started around 2009, when the Blackstone Group, the huge private equity firm, realized that it could buy up REO's, fix them up slightly, rent them out, and earn cash-on-cash yields in the range of 6% to 9%.  Initially this financial sector was known as the REO-to-rental industry.

Cash-on-cash yields of 6% to 9% were huge, considering that CD's were paying less than 1% and ten-year Treasuries, curiously known as the long bond, were paying less than 2.75%.  We have all heard of stories of New York investment bankers, flying out to the suburbs of football team cities, driving around for five hours, and then buying 30 to 50 homes in a single day.  These were the Blackstone guys, and this brilliant move by the Blackstone Group marked the bottom of the Great Recession.

Want to know just how brilliant?  Many of these rental homes went on to appreciate 25% or more, on top of the 6% to 9% cash-on-cash returns. This is capitalism in its most admirable form.  "Greedy capitalists" played a major and very beneficial role in ending of the Great Recession.  They created a floor on housing prices, when housing prices were in a free fall.  They replaced fear with greed.

By the way, REO stands for Real Estate Owned.  It is a term used by banks to record on their books properties upon which they have foreclosed.  There is a huge accounting penalty imposed upon commercial banks for maintaining REO's on the books.  This is why commercial banks are desperate to dump their REO's as soon as possible, even though it means the bank has to take a painful haircut (a painful loss of part of its initial investment). 

A cash-on-cash return is your cash return on your downpayment or on your purchase price, if you pay all cash.  The Blackstone boys paid all cash; hence their very handsome cash-on-cash returns.

Example:

Herb Black buys a rental home for $100,000, putting down $40,000 in cash and obtaining a $60,000 first mortgage from a bank.  He rents the house out for $1,100 per month.  His real estate taxes, insurance, repairs, and other expenses amount to $300 per month.  His mortgage payments are $400 per month.  He therefore has a positive cash flow of $400 per month or $4,800 per year.  His cash-on-cash return is therefore 12% ($4,800 divided by $40,000 times 100%).

Today the number of bank foreclosures is way-way down.  Gone are the days when millions of homes were in foreclosure, and houses could be purchased for a fraction of their replacement cost.  The REO-to-rental industry to winding down to just a memory.

However, bond yields remain at very low levels.  Certificates of deposit are still paying less than 1%, and the long bond is still yielding less than 2.75%.  It therefore still makes sense for an investor in search of yield to buy homes and rent them out.  An investor can still earn a handsome 5% to 7% return on his money.

Just as fix and flip loans are all the rage right now, Wall Street is gearing up to buy billions of dollars in buy-to-rent loans.  Wall Street is becoming the secondary market for private money loans.  A secondary is where mortgage loans that have already been originated are bought and sold. Be sure to grasp the concept that the loans have already been made.  Title has closed.  The borrower and the seller already have their dough.  Only then are these loans bought and sold in the secondary market.

The secondary market for buy-to-rent loans is starting to blossom.  Wall Street is salivating, so you will now hear the term, buy-to-rent loans, everywhere.  I urge you to get ahead of this tidal wave.  Blackburne & Sons is looking to make buy-to-rent loans almost nationwide.

To succeed in commercial real estate sales and/or commercial real estate finance (CREF), you need to know the lingo.  Here's a new one for you - adaptive re-use.  Here's what Wikipedia has to say on the subject:

Adaptive reuse refers to the process of reusing an old site or building for a purpose other than which it was built or designed for.  Here's another definition that I stole from a fine article on the subject:  

Adaptive reuse, or adaptive re-use architecture, is the process of re-purposing buildings — old buildings that have outlived their original purposes — for different uses or functions while at the same time retaining their historic features... A closed school may be converted into condominiums. An old factory may become a museum...  A rundown church finds new life as a restaurant — or a restaurant may become a church.

Adaptive Reuse is a way to save a neglected building that might otherwise be demolished. The practice can also benefit the environment by conserving natural resources and minimizing the need for new materials.

A buddy of mine owns a mortgage REIT and proudly announced recently the closing of a $4.6 million bridge loan to convert a former K-Mart building to a self-storage facility in Indianapolis.  This is a good example of an adaptive re-use.  

I sent my buddy an email congratulating him on the closing and his use of the interesting term, adaptive re-use.  "Hey Bill, helluva term, adaptive re-use!"  He replied, "Yeah. Buy a vacant K-Mart for $40 per square foot. Fill it with self storage racks. Sell it for $100 per foot."

By the way, a magazine advertisement or big email blast boasting of a nice commercial loan closing is called a tombstone.  Tombstones are an unusually effective manner to advertise for new commercial loans.  Seriously guys, you should blast out a tombstone every time you close a commercial loan.  They really produce results.

You should always pay attention when other commercial lenders blast out tombstones too.  Tombstones reveal the areas of comfort and preference for the lender.  Commercial lenders tend to carve out niches.  For example, my hard money shop, Blackburne & Sons, is getting more and more comfortable making commercial loans on cannabis facilities.  We're doing four cannabis deals this month.

My wife and I just got back from a short cruise to Cuba.  What a poorly-run country!  Under the communists, the average citizen makes just $50 per month.  Fifty dollars!  Havana was filled with beautiful, French colonial homes... that haven't seen a penny of repair since 1959.  The masonry walls were literally crumbling.  The Cuban people, though, were pretty warm and friendly towards Americans, and we as tourists felt very safe.

Trump and the Republican Party want the Cuban votes in South Florida, so President Trump just reversed many of President Obama's executive orders designed to improve relations and to open trade with Cuba.  The Cubans of South Florida want their country back, so they want to keep the pressure on the communists.  Its hard to argue with the proposition that the communists have grossly mismanaged the country.

You will recall that a fix and flip loan is a loan used to acquire a run-down home and to renovate it in anticipation of a quick sale.  When a fix and flip lender orders the appraisal, he will ask the appraiser for two values - the current "as is" value of the property and the after repair value ("ARV").

The after repair value is the value of the home after the renovation has been completed.  This number is also the single most important number in the whole underwriting process.  If a fix and flip deal passes the after repair loan-to-value ratio test, a lot of flaws in the deal can be overlooked.

Okay, so what must the loan-to-value be based on the after repair value?  For most fix and flip lenders, this ratio must be 70.0% or lower.  Many fix and flip lenders will not exceed 65% of the after repair value.

Ultimately the after repair loan-to-value test is a measure of the profit in the deal and of the wisdom of even doing the deal at all.  At a recent conference, several fix and flip lenders reported that they had had investor-flippers actually thank them for turning down their deals because the projects lacked profitability.  The appraiser and the lender had caught a big mistake that the investor-flipper was about to make.  In several cases, the investor-flipper was able to go back to the seller, show him the numbers, and convince the seller to lower his asking price!

I hinted earlier that some flaws might be overlooked if there was a enough potential profit in the deal.  For example, normally a fix and flip lender will require that the investor-flipper contribute (put down) 20% of the purchase price of the run-down home.  If the after repair loan-to-value ratio was less than, say, 65% then the investor-flipper might be able to convince his fix and flip lender to allow him to put down just 15% of the purchase price of the run-down home.

If the project has lots of potential profit, in other words, the after repair loan-to-value ratio is less than 65%, the investor-flipper might get approved with a credit score of less than 600 or with better credit but with no experience.  No matter the size of the potential profit, it is unlikely that the investor-flipper would be approved if he both lacked experience and had poor credit.  Potential profit can only do so much to help.

I just finished an extended article on fix and flip loans, and I encourage you to read it.  The guys making the big money in finance these days are the ones either using fix and flip loans or originating them.  Fix and flip financing is a target of hot money on Wall Street.

One of the most important questions asked by fix and flip borrowers is, "How much cash do I have to bring to the closing table?"  The good news is that fix and flip loan borrowers ("renovators") need far less cash than home builders or commercial real estate developers.  In fact, I promise you that you will be thrilled and pleased with how little cash a renovator has to bring to the table. Hooray!  Just be patient.

Before we get into exactly how much cash a renovator needs to qualify for a fix and flip loan, let's use this opportunity to review commercial construction loans and the Loan-to-Cost Ratio.

The Total Cost of a commercial construction project is calculated as follows:

Land Cost plus
Hard Costs (brick and mortar) plus
Soft Costs (governmental fees, interest reserve, etc.) plus
Contingency Reserve (5% of hard and soft costs) equals
_______________________________________________

Total Cost

When underwriting commercial construction loans, banks usually require that the Loan-to-Cost Ratio not exceed 75%.  In other words, if the total cost of the project is $1 million, the developer must contribute at least $250,000 in cash to the project.  Ouch.

Prior to the Great Recesssion, when banks got killed on their commercial construction loan portfolios, most banks would happily lend up to 80% loan-to-cost.  In other words, the developer only had to come up with 20% of the Total Cost of the project.  Some banks were even going 90% loan-to-cost.  After commercial real estate collapsed by 45%, Dr. Phil might have asked the banks, "How did that work out for you?"  Ha-ha!  

Having learned their lesson painfully, banks now require that commercial real estate developers contribute at least 25% to 35% of the Total Cost of the project.  But you and I don't care!  Our fix and flip loans are residential loans, not commercial loans, and the secondary market is absolutely ravenous for fix and flip loans.  You or your renovator will NOT need to contribute 25% to 35% of the Total Cost of the project.  No-no-no.

So how much cash will a renovator need to contribute to qualify for a fix and flip loan?  Well, the first wonderful thing to appreciate is that fix and flip lenders do not even use the Loan-To-Cost Ratio.

To qualify for a fix and flip loan, the renovator only has to come up with
 20% of the price of the dilapidated house being purchased!

Please note that we are NOT talking about 20% of the Total Cost of the project.  We are only talking about 20% of the property purchase price.

Example:

John Renny is buying a rundown house in a nice area for $100,000.  He will need another $60,000 to renovate the property.  John only has to come to the closing with $20,000 - 20% of the purchase price of the rundown house!  His fix and flip lender will loan him 100% of the dough to effect the repairs and upgrades.  Wow.  Is this a great country or what?

Just for fun, let's compute the Loan-to-Cost Ratio of John Renny deal above - a fairly typical residential fix and flip deal.

House Purchase Price (in a dilapidated condition) plus
Hard Costs (of renovation) plus
Soft Costs (closing costs, report fees, 4 mo's interest reserve) plus
Contingency Reserve (5% of hard and soft costs) equals
______________________________________________________

Total Cost

Now let's plug in the numbers.  C'mon, guys, don't zone out on me here.  This is fourth grade math.  Maybe third grade math.

House Purchase Price = $100,000
Hard Costs = $60,000
Soft Costs = $16,000
Contingency Reserve = $3,800
__________________________

Total Cost = $179,800

In our example, John Renny is bringing only $20,000 in cash to the closing table, which is the magical 20% of the cost of the dilapidated house.  Therefore his fix and flip lender will make him a loan for the difference - $179,800 minus the $20,000 downpayment equals $159,800.

Okay, so what is the Loan-to-Cost Ratio of John Renny's imaginary fix and flip loan?

$159,800 / $179,800 x 100% = 88.9% Loan-to-Cost!!!

Wow.  Nowhere else in the civilized world can a real estate developer get this kind of leverage.  This is why successful fix and flippers are making incredible retuns on their money.

I met a nice lady from Alaska a few years ago who lives in Anchorage.  Every year several people in Alaska are stomped to death by a moose, so finding one in your swimming pool is not really a laughing matter.  A college classmate (interestingly she is white) of my daughter is from Swaziland, and she is crashing with us over the Thanksgiving holiday because its too far to travel back to Africa.  When I asked her about wild lions and tigers and bears, she said that the hippo's are the big killers in Africa.  Huh.  Who would have thunk it.  Such friendly looking animals.  And don't even get me started on the dangers of Porky Pig...  :-)

My son, Tom, and I just returned for the 5th Annual American Association of Private Lenders Conference in Las Vegas.  At the conference, fix and flip loans were all the rage.  Everyone was talking about them.  Several of the break-out sessions were about fix and flip financing.  There were even hedge fund managers and Wall Street investment bankers prowling the conference floor in search of hard money shops (private money mortgage brokers) to sell them more fix and flip loans.

There is a lesson to be learned here:  Give the investment community what it is seeking.  If you are not already active in fix and flip financing, you need to start focusing your efforts there.

There are a number of reasons why the investment community is so hot-to-trot to make fix and flip loans:

1. Debt buyers are desperate for yield.  Treasuries, corporate bonds, and even junk bonds offer only very low yields.
   
   
2.  Fix and flip loans are secured by real estate.  In start contrast, corporate and junk bonds do not offer this kind of collateral.
   
   
3. Wall Street has learned that a portfolio of rental homes provides an excellent source of cash flow and potential appreciation.  Its is far from the end of the world if an investor has to foreclose on  a home.
   
   
4. Homeownership rates have plummeted to levels not seen since the 1960's, thereby creating a huge demand for rental homes.  Once again, if a fix and flip lender forecloses on a newly-renovated rental home, it is far from the end of the world.
   
   
5. New home construction is far below the levels of the early 2000's, so home buyers are attracted to newly-renovated properties.

The typical fix and flip loan is a first mortgage loan to a renovator to buy and renovate a one-to-four residence and then to quickly sell it for a profit.  The typical fix and flip loan is a 12-month, interest-only loan, and it has no prepayment penalty.

Virtually all hard money lenders making fix and flip loans will require that the renovator cover at least 15% of the acquisition price of the unrenovated house.  Then most hard money lenders will lend to the renovator 100% of the funds needed to renovate the property.

Example:

John Renny plans to buy a $100,000 house and then to spend another $60,000 in renovations.  The hard money lender will require that he put down at least $15,000 on the home purchase.  The hard money lender will then lend him $85,000 of the acquisition price plus the $60,000 cost of renovation plus the loan points and sometimes even plus a four-month interest reserve.

"I applied for an SBA loan but they turned me down."  Okaaaay, but what did the second SBA lender say?  How about the third?  Today's article is pretty long, so if you don't get to the end, please remember this important lesson:

Every SBA lender is different, and just because one SBA lender turns you down, this doesn't mean that another might not still approve your deal.  By using C-Loans.com to  apply for your SBA loan (the orange button below), you can quickly shift your SBA loan application to six more of our 218 different SBA lenders. 

A lot of commercial mortgage borrowers think that the SBA is the lender, and therefore if the SBA turns them down that they are toast.  The SBA does not make commercial loans.  It only insures a part of the loan.  The actual lender is the bank making the loan.

Example:

Bank of Wyoming makes a $900,000 new SBA loan to renovate a successful but aging truck stop on I-25.  Because the business was an existing one, rather than a start-up, the borrower was able to qualify for an SBA loan of 90% loan-to-value.  Had the business been a start-up, the maximum loan-to-value ratio would have been limited to just 70%.

Now the Small Business Administration is not going to guarantee the entire $900,000 loan.  The SBA wisely demands that the bank have some skin in the game.  The general rule is that the SBA will only guarantee between 50% and 85% of the loan made by Bank of Wyoming, depending on the SBA program (7a versus 504) used and other factors. 

For the sake of this example, let's assume that the SBA agrees to guarantee 70% of the $900,000 truck stop loan made by Bank of Wyoming.  This means that Bank of Wyoming has 30% of $900,000 at risk in this loan or $270,000.  Requiring the bank to have some skin in the game helps to makes sure that banks don't make SBA loans willy-nilly.

In real life, Bank of Wyoming has less than $270,000 at risk.  The bank can sell off the insured portion for a substantial premium.  The insured portion is 70% of $900,000 or $630,000.  Now a premium is the amount that a loan buyer or a bond buyer will pay in excess of the face value of the note.

In this case, lets suppose that Bank of Wyoming can sell off in the secondary market the insured portion of this truck stop loan at a premium of 10%.  Why would bond buyer pay a 10% premium?  An SBA loan yields 2.75% over Prime.  Since Prime is 4.25% today, that's a whopping government-guaranteed yield of 7%.  Thirty-year Treasuries today are only yielding about 2.8%.

Now a 10% premium on $630,000 (the insured portion of our $900,000 loan) is a whopping $63,000!  Therefore Bank of Wyoming doesn't really have $270,000 at risk in the deal but it quickly sells off the insured portion for a $63,000 premium.  Now the bank has only $207,000 at risk in our $900,000 truck stop loan.

In doing my research for this article, I discovered that SBA lenders earn a handsome loan servicing fee of 1% per year.  Therefore the bond buyers are actually only netting 6% after loan servicing fees, but they are still quite happy to pay a 10% premium.  Heavens, I sure love-love-love loan servicing fees.  Every month my own hard money shop enjoys $90,000 in loan servicing fees, whether we close a new loan that month or not.

Okay, we are closing in on the point of today's article.  It is quite possible that the Bank of Wyoming was the third Wyoming SBA lender to look at this deal.  The first two lenders might have turned down the deal because of the fuel tanks or because the deal depended on fuel sales increasing after the renoavtion.  The deal was too speculative in the eyes of the first two banks to look at the deal.

In stark contrast, the President of Bank of Wyoming loved the deal because his dad had owned a trucking company, and his dad had complained for years that this section of I-25 desperately needed a truck stop.  

Remember, despite the large premium paid for SBA loans in the secondary market, Bank of Wyoming still had some serious skin in the game - $207,000.  Therefore the approval of any SBA loan is NOT guaranteed.  It depends on whether or not the bank reviewing the deal is willing to put a ton of their own dough at risk.

If you are trying to get your SBA loan approved, be sure to submit it through C-Loans.com to our 218 SBA lenders.  If one our SBA lenders turns you down, you'll be invited to submit the same application to six more SBA lenders, with no additional paperwork on your part!  One, short SBA loan app works for all 218 of our SBA lenders.  Start by using the orange button below.

Have you guys ever heard of a smartphone app called TuneIn.com?  I stumbled across the app recently, and I am enjoying it so much that I thought I'd share it with you.  I am not getting paid for this article, ha-ha.  I am simply sharing my wonderful experience with TuneIn.com because you guys are my buddies.  I teach my loan officers to write to their contacts, not as some stuffy, boring "professional", but rather as if they were buddies sharing a beer at the end of the day - so pop open a brew and prepare to be wowed.

I am a huge Notre Dame football fan, but my daughter plays soccer for Earlham College, and the Saturday games always start about the same time.  Therefore I obviously can't watch the Notre Dame game on T.V.  But what about radio?  Couldn't I listen to the game?  Well, if my daughter was playing her soccer games in Northern Indiana, and if I could find an old fashioned transistor radio, I might be able to pick the game broadcasting out of a local radio station in South Bend.  Unfortunately Jordi plays her games in Ohio and Eastern Indiana.  Hmmm.  Stay with me, folks.  This gets good.

So I googled "Notre Dame football radio and discovered that I could stream an audio version of the games using a smartphone app called TuneIn.com.  The premium service is only $99 per year, so I bit the bullet, paid the $99 annual fee, and thoroughly enjoyed my Notre Dame games.  You can listen to 50 or 60 different college football games using TuneIn.com, including the Alabama Crimson Tide games, the Georgia Bulldogs games, the Ohio State Buckeyes games, the Clemson Tigers games, etc.

But wait, there's more!  You can also listen to every NFL football game, every NBA basketball game, and every Major League Baseball game.  Wow.  All for just $99 per year.

Now I am a huge audiobook fan, and rather than listen to my music tunes or to music on a local radio station, I am constantly listening to historical fiction audiobooks.  I am a big fan of Napoleonic War naval yarns, like the Horatio Hornblower series.  The problem is that my monthly bill at Audible.com is on the order of $60.  Ouch!

So I was playing around with TuneIn.com and discovered that they also offer free audiobooks!  Right now I am listening to Bill O'Reilly's (the former anchorman on Fox News) smash hit, Killing England, about the Revolutionary War.  It's a fascinating yarn, with exciting, vivid battle scenes, including Indians scalping British redcoats while they were still alive.  Yikes.  After that I am going to listen to Origin by Dan Brown (DaVinci Codes) and then The Cuban Affair by Nelson DeMille (The General's Daughter).

But wait, if you order now... haha, remember I'm not getting paid for this.  I am just a thrilled user of TuneIn.  The app also offers all of the major news shows on radio, like CNN, CBS News, NBC News, Fox News, etc.

Lastly TuneIn offers free podcasts.  Podcasts are pre-recorded audio shows of 30 minutes to 10 hours in length.  I was personally thrilled to note that TuneIn.com offers scores of history podcasts; but if you are a politics junkie or an economics junkie, you will swim in a warm pool of scores and scores of such podcasts.

When you write to your buddies and contacts, you do NOT always have to talk about business.  The idea is to get in front of them and reward them with fun or interesting stuff if they read your marketing piece.

I have been marketing for commercial loans for 37 years, and the most successful marketing piece that I ever wrote was entitled, The Ebola Virus Is Going to Kill Us All.  That piece tells the true story of The Hot Zone, where the Ebola virus mutated in a lab in Restin, Virginia in 1989 to become transmissible by air!  Hellooo?  You no longer have to touch the blood.  You just had to breath the same air as the sick person to become infected with Ebola.  The infected person didn't even need to cough on you.  Apes in totally separate rooms became sick and died.

That marketing piece generated more commercial loan leads for Blackburne & Sons than any other piece in 37 years, and nowhere in the marketing piece did I even mention commercial loans.  As for that mutated strain of Ebola, it turned out that the same genetic mutation that had made it transmissble by air also made it harmless to humans - even though it had spread all throughout the lab, and it had killed 30 different apes and monkeys.

That's it for today.  Did any of you note that Notre Dame, despite losing the first game of the season, has climbed to #3 in the college football playoff rankings?  Go Irish!