The Best Opportunities Arise In Times of Difficulty

Warren Buffett’s prowess as a contrarian investor is well known and well admired, but for most of us it is difficult to act with the same courage of conviction as the Oracle of Omaha. His motto?

“We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
- Warren Buffett

To be sure there is no lack of fear these days. Fear is what causes the markets to plunge 800 points the day after the government announces a $700 Billion bailout. Fear is what has caused American investors to pull so much money out of the market even as prices dropped to pre-2000 levels – locking in their losses. Fear is why so many people I know have blithely announced they’re “done with the market,” even as they watch their runway to retirement extend well beyond the visible horizon. It’s understandable. The size of the financial debacle is incomprehensible for most of us (though not necessarily unexpected.)

The problem is, as Warren tells us, now is the time for greed. Ok, not the unbridled, no-ethics kind of greed that got us here in the first place. I’m talking about the opportunity to make high quality investments at a great price. The world is on sale – now is the time to buy.You still need to be thoughtful about your investment dollars but the opportunities are endless. There are, however, a few key things to keep in mind even today.

1. Investment horizon:  Make sure your investment objective fits your time horizon.  For most of us our horizon should be relatively long – at least a few years if not longer.  Let’s face it, you’re not a day trader.  Find good, solid assets that will yield for the future, not for a new car next month.  If you have an IRA or a Roth, fund it to the max and grow your wealth tax free.
2. Diversify:  You need to hold a variety of assets and asset types in your portfolio.  Stock and bond mutual funds are fine, but look beyond these categories as well.  My favorite diversification asset (of course!) is still real estate, and there are many ways for the average investor to profit from real estate, even in an IRA or other retirement account.
3. Protect your principal:  Ok, I did say it’s time to be a little greedy, but not to be foolish.  Even in today’s “everything is on sale” environment you still need to make sure your investment capital is protected and you understand the risks you’re taking.

This is a great time wade in to a variety of investment opportunities.  It’s not clear we’ve hit absolute bottom yet – there may be further to fall – but there are some great assets out there and now is the time to accumulate a little for yourself.

PS. For those of you who don’t know or remember who Gordon Gekko is, check this out.  (Then go rent the movie!)

As Wall Street Titans Fall, Hard Money Lenders Step Up To Fill The Void

Wow! I’ve been saying for a long time that this current financial crisis is worse, and will last longer, than most of the public pundits or government officials will ever admit. (Especially in an election year.) But even I’m a little in shock at just how brutal the carnage has been. First Bear, then Fannie and Freddie, now Merrill Lynch is auctioned off, AIG is holding a sign saying “will work for food,” and Lehman Brothers is in bankruptcy! Wow! Even the largess of the US government (thanks to you and I the taxpayers) has hit its limits with this one. Whatever we may think of the Wall Street culture, it is a bit sobering to see so many financial titans go down so hard and so fast! They really screwed the pooch on this one. (The pooch, by the way, is likely to be us taxpayers again.)

The press will beat this to death so I won’t ramble on about how we got here, but if you thought credit has been tight lately for any sort of residential or commercial real estate deals, watch how fast the remaining commercial banks pull their limbs into their shells. Private money lenders are nearly the last bastion of real estate credit out there. Even some of the big hard money lenders are finding themselves capital constrained as the volume of high quality deals is skyrocketing.

Now there has truly never been a better time for hard money mortgage pool investors!

Hard Money Funds Provide The Perfect Investment Vehicle For Today’s Challenging Economy

I was driving to work this morning listening to NPR where Michael Krasney was interviewing a couple of economists about the government takeover this weekend of Fannie Mae and Freddie Mac. This has been a boom time for interviewing economists of course: government bailouts, housing crisis, unemployment, demise of the dollar, skyrocketing commodities prices, the last gasp of the American auto industry, inflation, etc. Among all the gloom and doom discussion Krasney asked these economists where is the silver lining in all this? There has to be some silver lining, right? Something good that will come of this? Someone that will benefit? Surely the housing and financial markets will come out of this stronger than before, we’ll learn some lessons and the sun will shine a little brighter for the American consumer, right?

Not for these guys. They couldn’t come up with any significant upsides in the whole mess. The best one of them could to was to say that maybe, just maybe, the American tax payer will make a little money on the billions of dollars being sunk into Fannie and Freddie. (Except we all know that will just go into the government coffers and be frittered away on some pork barrel project.)

Well I’ve got an upside for some at least. Not that I would expect economists on NPR to mention this, but private money lending is a big silver lining in the credit crunch today, and investors in these funds are reaping the benefits. Hard money lenders are filling the gap (the canyon really) left by the implosion of the mortgage backed securities market as well as the disappearance of credit at commercial banks.

Hard money lending has been around for a long, long time and has always been a good business. When our current financial and economic challenges subside, hard money will continue to fill an important role in our real estate markets. But today, in many cases, private investors in hard money funds are often the only source of credit for a lot of high quality real estate deals that are still abundant in this country.

Last week I attended a conference for commercial mortgage brokers. Obviously being a mortgage broker in this environment is tough, but there is still a lot of business for those that know how to stay focused. Probably the biggest question being asked among the mortgage broker community is: who has money to lend? To be sure there are still banks out there lending money, but their underwriting guidelines are so stringent you really have to present a flawless (aka riskless) deal or they can’t do it. But when that question is asked the private money lenders were there to say, “we do, and lots of it!”

Hard money is by no means stupid money, but it is flexible money. Every deal, and every borrower, is different. Private money lenders have the flexibility to structure a deal to address the unique needs of each borrower’s situation. They don’t suffer huge bureaucracies so they can underwrite and fund very quickly, and their primary focus is on the value of the property backing the loan and a very clear story on how the loan will be repaid. Other issues are secondary. After years of credit available for virtually nothing hard money can seem quite expensive to some borrowers, but it’s way cheaper than equity and provides the high-octane fuel to those really valuable deals.

Investors in private money funds get a diversified portfolio of assets, an extremely high risk-adjusted yield, and their money is working for them 24/7. Many funds provide the added benefit of compounding by allowing dividends to be reinvested. Finally, and this is big for all of us looking to retire in the next ten to twenty years, many hard money funds are ERISA compliant, meaning you can invest your IRA or 401k and earn great compounded yields tax free.

Our world is changing fast and the economic free-for-all we’ve had in the United States for the past decade has come to a screeching halt. But in any economy, good or bad, there are always great opportunities to provide an important service and make a good profit. Today, hard money fund investing is just one of those great opportunities.

Financing Religious Institutions is Big Business

This article was origianally published in Scotsman Guide’s Commercial Edition, July 2008.

Mortgage financing for churches and other religious institutions is big business. According to a 2006 Lambert Edwards Analytics report, refinances, purchases and construction financing in the church-lending market will reach $40 billion annually by 2010.

Despite this, the church-lending business is extremely fragmented. Because national lenders’ underwriting criteria are rigid, local or regional banks often handle church loans. But banks are reluctant lenders at best. They generally don’t have staff trained to underwrite church loans, and they are understandably concerned with headline risk — it’s bad press to foreclose upon a local religious organization.

Thus, nontraditional, private-money lenders are a rapidly growing force in church financing. Understanding who they are and what they are looking for is the key to establishing yourself as a successful broker in this niche.

Finding the loans

Networking is the key to finding church-lending opportunities. Whether or not you are affiliated with religious institutions, you may have more access to them than you realize. In addition to the clergy, most churches have volunteer board members who also are professional service-providers. Here are some of the primary referral sources for church-loan requests.

• Contractors
• Architects
• Attorneys
• Certified public accountants
• Insurance agents
• Local banks

Get the word out that you arrange financing for religious institutions. You’ll be surprised how many of your neighbors, friends and others know a church needing to upgrade its facility or refinance a loan. Most churches are at a loss as to where to turn for financial help, so make sure your market knows about you — and how you can help.

Working with the ministry

Real estate is a relationship business. This is especially true when working with religious institutions.

Most often, church leaders focus on serving their congregation and their community — not on operating a business. Your primary client may be the lead clergy, professional staff member or volunteer board member. Regardless of your primary point of contact, you must view your role as an important adviser to the ministry and not just as a mortgage broker.

Be prepared to explain complex loan terms and their implications to people who have no financial or real estate backgrounds. Decisionmaking often is much slower than with individual property-owners, and final decisions may be made by a governing board that meets infrequently.

Classifying the loan

Not all loans meet national church lenders’ requirements. To qualify for their programs, your borrower generally must meet the following criteria:

• Loan amounts of $1 million or more
• Well-established history, usually at least five years of existence
• Proper corporate organization with professional administrative staff, accounting systems and credentialed or experienced leadership
• At least 150 members, ideally showing membership growth
• Mainstream denomination
• Situated in growing metropolitan area
• Well-located, high-quality real estate

Don’t be put off if your borrowers don’t meet these criteria — many won’t.

The fastest-growing segments of the church business are smaller churches, often not part of mainstream denominations. These churches also tend to purchase or develop facilities that are more multi-use in design and function. This is important because finding a new buyer for a “steepled” property — a single-use asset — can be difficult down the road. Private-money lenders are less concerned with this risk and can customize loan structures to meet borrowers’ needs.

Considering your client

There are various other issues of which to be aware in procuring church financing.

Many religious institutions own multiple properties, including houses for clergy and land for future use. Private-money lenders have the flexibility to consider these additional properties to cross-collateralize the loan, if necessary.

Because of the service and personal nature of religious institutions, their success or failure often hinges on one or two key people — typically, the head clergy. Many lenders will require key-person insurance, naming the lender as beneficiary in the unlikely event of the death of that person during the life of the loan.

You also will need a different perspective to understand nonprofit organizations’ financial statements. Churches are budget-based organizations and typically spend what they bring in. It’s important to understand the institution’s sources of income. A lender will want to know the trends in contributions to the church, including the concentration among members. If the top 10 contributors account for more than 10 percent of giving, there may be concern about the stability of those revenues.

In addition, be aware of any large one-time gifts that may make a church’s revenues look stronger than they really are. A lender is likely to discount these gifts in its underwriting because they do not represent recurring sources of income.

Depending on the administrative depth or budgeting strength of the church, a lender may require a few months of loan-payment reserves to be deposited in an interest-bearing escrow account.

Packaging the loan submission

Preparing a church-loan package for submission is not much different from preparing any other commercial loan submission. With private-money lenders, your chances of funding the loan will improve if your package is thorough and well-organized. At a minimum, your initial submission should include:

• At least two full years of income statements, plus year-to-date statements within 90 days, which should include all church-owned enterprises such as day cares, schools or any for-profit activities
• Balance sheets for at least the two most-recent fiscal years and a snapshot within 90 days of submission
• An overview of the church’s history
• Biographies and résumés of all current church leaders and ministry
• A schedule of real property with descriptions, including all church-owned property
• Pictures of the inside and outside of the property
• A recent appraisal, if available; and
• A completed loan-request form showing “sources and uses.

Most private-money lenders will have a submission form to fill out. If not, make sure you include a statement detailing the loan request, its purpose and the exit strategy.

Private-money lenders will focus on the exit strategy. They generally provide loan terms of no more than a few years and will want a clear, plausible plan for repayment.

Hard Money Loans Are Not Just for People with Bad Credit.

I’ll bet you ‘d be surprised to know that the American national anthem, the Star Spangled Banner, is actually set to the tune of an English drinking song (“To Anacreon in Heaven“). Most people are also surprised to learn that hard money loans are not just for people with bad credit. Why would some with a good FICO score need to use an expensive hard money loan?

Surprisingly, the majority of hard money loans are not made to people with serious credit problems (although we do lend money to the credit challenged as well.) Savvy real estate investors and developers, for example, frequently use hard money and and make a ton of money despite the generally higher cost of these loans. Here are just a few reasons why.

When Cash Flow Isn’t Your Friend: Experienced real estate investors know that you make your money on the buy, meaning you need to buy a property for less than it is potentially worth, then raise it’s value to its potential. Often this means buying a property that has a low DSCR (debt service coverage ratio) or even negative cash flow. Conventional lenders have strict underwriting guidelines, so even if you’re buying the property for half its potential value the bank won’t lend you the money because the cash flow isn’t there now! We will lend you the money because we recognize the loan is backed by a property worth significantly more than you are buying it for. This fact, along with the equity the borrower is putting into the deal, makes it a safe loan in the private lender’s eyes. When the investor improves the property and it’s cash flowing nicely he can refinance with traditional lenders at a lower cost. As a California hard money lender this is a situation we see often.

Owner Occupied Properties: Many banks and mortgage lenders don’t like owner occupied commercial properties because they feel they’re taking a risk on the borrowers business as well as the real estate itself. This is faulty logic at best and the hard money lender corrects the error. If it’s a good property we can value it based on what it would rent for on the open market and lend up to 65% of that value. There is business risk associated with any commercial property and if the owner-occupier’s business doesn’t hold up the property can be rented to another business and do just fine.

The Need for Speed: Smart real estate investors also know that moving quickly is sometimes the biggest advantage in acquiring quality properties at below market prices. Traditional lenders can take 45to 90 days or more to close a loan; hardly a competitive advantage for the investor. As a hard money lender we can close loans in just a few weeks, sometimes in as little as a few days. The property can then be refinanced with a conventional lender over the next couple of months, but without the hard money lender the investor wouldn’t get the property at all.

Development Difficulties: Most banks assume that a builder who runs out of money is simply bad at managing a budget. Hard money lenders view it differently. In this era of rising material and labor costs and plunging housing prices many good builders find themselves in a financial bind. A hard money lender will look at the value of the project when it’s finished and provide the builder additional funds as needed to get there. Funds will be dispersed through inspection based draws. (The hard money lender will evaluate the builders however, to make sure they do know what they’re doing.)

These are just a few of the many reasons for using hard money. The bottom line is a good hard money lender can and will evaluate ever deal individually. If you’re looking for a special situation lender, hard money is the place to look.