[New Training] Protecting Your Principal Part I

As some of you know, I have been getting a lot of questions from students lately about advice regarding becoming a private investor. I am starting to get a sense that we need to create and offer a training specifically for private investors, private lenders and self-directed IRA investors.

I am working on creating a new training series called “How to be a Successful and Confident Private Lender” and what I want to talk to you about it today is a part of this, called “How to Protect Your Principal as a Private Lender.”

If you think you are ready to find your own private investments and deals, then we will walk you through our exact underwriting process. If you think that you don’t have time to search out the perfect investment opportunities, we can discuss our done-for you opportunity and how you can invest with Freeland where we can responsibly deploy your money into deals.

Deal or No Deal

We have a team of professional underwriters at Freeland that will go through a detailed step-by-step process of how we determine if the properties that our students bring to us to get funded are a deal or not.

To protect our investors, we have a very specific process we use when determining if we will move forward with funding a house. Most of the deals we look at are in markets where the properties are similar and are selling on a routine basis for roughly the same price in a reasonably active market.

The first thing our underwriters do is review the loan application from the student and take a look at the appraisal.

What’s an Appraisal?

An appraisal is an opinion of value written by a professional who is licensed and education, but keep in mind, it always just an opinion. It will include all the information and variables that the appraiser sees in the marketplace and in your property to determine what price it should sell for.

Basic steps in the appraisal:

Research the market to obtain information pertaining to sales, and pending sales that are similar to the subject property
Investigate the market data to determine whether they are factually correct and accurate
Determine relevant units of comparison (e.g., sales price per square foot), and develop a comparative analysis for each
Compare the subject and comparable sales according to the elements of comparison and adjust as appropriate
Reconcile the multiple value indications that result from the adjustment (upward or downward) of the comparable sales into a single value indication

There are many other outside variables that also depend on the selling price. For example, in my market of Cleveland, Ohio, the best house selling time is the spring. You may not get as high of a selling price as you would in the spring if you wait to put your property on the market until the winter.

Case Study

14006 Baden Westwood Rd.
Brandywine, MD
Purchase Price: $125,000
Rehab Amount: $94,260
ARV: $350,000 (Borrower’s Estimate)
LTV: 62%

Actual Appraisal: $337,000
LTV: 65%

In this case, the borrower said they think the property will be worth $350,000 after repairs. Our formula says that purchase price + rehab should not exceed 65% of the realistic saleable after-repair value. It’s a very simple formula that only requires three numbers.

The rehab work must be done to the standard of the neighborhood. If it’s a higher-end neighborhood that your property is located in, you may need to spend more on granite counters for the kitchen and nicer tile in the bathrooms.

We have a formula that we specifically use to make sure all the numbers jive together and to ensure that it’s a good deal for the borrower, us at Freeland and the investor.

In the above case study, if the rehab price were to actually end up being $150,000 instead of $94,260, would we have had to say NO DEAL because appraisal sale price is only $337,000 and our loan amount would have been around $275,000. BUT, with the current numbers of the loan being $94,260 and the appraisal after-repair value of $337,000, the borrower should make around $51,000 in profit off this particular deal.

If the deal doesn’t make sense, as a private lender or investor, you should be honest with the borrower and try to steer them away from the deal. Compensation drives behavior, there’s a larger change the borrower can walk away from the deal and the return they offer you is going to mean nothing when you lose some of your principal.

When people lose money, it always seems to be somebody else’s fault. Don’t lend on a bad deal and make sure to try and steer the borrower away from it.

Still Want More?

If you are thirsty for more training similar to this one, or you want a chance to network with the real estate investing industries biggest and brightest, I would like to invite you to our Flip & Fund Summit.

The Flip & Fund Summit 6 is taking place in Dallas, Texas on October 14-16. The agenda is chock-full of USEFUL, RELEVANT and REAL information that myself and my faculty use DAILY in our businesses. We have TWO incredible guest speakers lined up - Kevin O'Leary aka: Mr. Wonderful from ABC's hit show, Shark Tank AND Daren Blomquist, VP of RealtyTrak and real estate data extraordinare.

This is definitely going to be one for the books and I don't want you to miss out...