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In part two, Equity Trust Educational Speaker, John Bowens, discusses with Ryan Wright of Do Hard Money how private lending works and what a successful deal may look like, the ins and outs of wholesaling, and tips on how to find investments.
John: Okay, and so I asked you, Ryan, about one of the transactions that didn’t go so well for you. Tell me a little bit about a typical deal, a typical private loan, that you would see.
Ryan: Yeah, it’s a great question. We typically spend about $150,000 is a typical loan, the purchase price for acquisitions, probably around $120,000, there’s probably $30,000 worth of rehab give or take, although we’ve seen rehabs have been going up over the years.
And then that property’s going to sell for, you know, let’s call it $200,000, or $215,000 is what that property is going to sell for. As a lender, we’re looking for points in our origination fees is anywhere from two to six in origination fees, depending upon the deal and complexity, and interest rates ranging anywhere from 12 to even 18 percent, depending on the deal itself.
As an investor, if I’m investing in that type of a deal, we’re typically want to see double-digit returns all the time. Lots of times, we’ll see deals we make 20 percent, sometimes we’ll see deals that we’re going to make 10 or 12 percent. But that’s typically what we’re looking for.
I think most investors if we’re looking at it, probably somewhere around that 15 percent, if you average out the losses, and some of those things are probably where you end up. As long as you can spread yourself out, you’ve got to have enough deals going that if you have one deal that goes bad if you get a Bad Deal of the Year Award, you don’t want that to sink you, you’ve got to make sure you’re diversified.
And you know something like us, we don’t diversify for you. That’s something you do on your own. By having multiple deals, we don’t we don’t pull money and bring everybody’s money together. And so is something you’ve got to think about for diversification.
John: Okay, and so I asked you about the worst, you know, meet me in the middle of the road. What about the best deal that you’ve done, whether it’s in a private lending type, private debt type instrument, or even physical property or real estate partnership? What’s the best deal you’ve done?
Ryan: It’s got to be a little office building I bought. So this little office building, I kept my eye on that for two years, the property was in foreclosure, I made offers, then the property got foreclosed I made offers, then the property, the note got sold from that one lien holder to another I made offers then, and finally, they ended up accepting one of my offers.
The property had been sitting for four years. It was a commercial office space, it was a standalone building, I bought the property for, I want to say was $200,000, it might have been $175,000, it bought over 10 years ago.
This is my best, one of my best. I should say we dumped another hundred thousand dollars into it. So, I’m into it about 350, let’s call it. And it provides cash flow. I’ve got two tenants. I’ve got a pulmonary rehab and then I’ve got a nurse practitioner. Between the two of them, we get about $6,000 a month in rent off of $300,000, $350,000 investment.
And we’ve owned it for over a decade now. That’s a cash cow. The ROI on that. It’s amazing. Actually, there’s a developer that asked to come by it, because they wanted to do a development around there and everything else and I started running a pencil to it, I’m like, dude, you’re going have to pay me like $1.7 million to sell this thing to replace the cash flow. And they’re like, it’s not worth it. I said, then it’s not worth it for me to sell.
They’re trying to do this development all around my property because it just doesn’t make sense. And they’re even talking about buying it and moving me on the other side of the project and give me a brand new building for this old building that I have because it’ll fit within their plans better because it just doesn’t make sense for them to pay what I would have to get out for the cash flow. So I would say that’s one of them. I’ve had some other fix and flip deals that have been some home runs. And I’ve also had some wholesale deals that have been great wholesale deals as well. I hope that helps.
John: Yeah, that helps a lot. Could you describe what a wholesale deal is? And maybe if you can give an example of a deal that you’ve done in the past?
Ryan: Yeah, absolutely. So wholesaling, basically, is that you secure a property, and you sell your interest in that. Basically, I go and find a deal. I put that deal under contract. I did one I don’t know a few months ago, I can’t remember specific numbers I think we were buying for let’s just call it $200,000. So I went and found a property talk to the seller. They want to sell the cash right away. I say this is what I can pay, we negotiate.
I get it under contract for $200,000. Then I go and find some buyers, typically some cash buyers. I know some rehabbers in the area, and I say “Hey guys, how much would you be willing to pay for this property?”
I took pictures of it. I send them the pictures, everything. I’ve got it under contract. And I said, “Hey, I think this is probably worth 240 in its condition.”
And they got back to me and said, “We think it’s worth 230.” I said, “Okay, well, I’m buying it for 200 and sell it for 230.” So, then I wholesale it to them.
Basically, what I did is, I can either assign the contract to them, where they give me $30,000. And then they go and close on the transaction and do an assignment over to them, or I hit and there are some state laws, depending upon a few things, or what I can do is I can close on the transaction simultaneously, where they bring their funds, I take their funds, and I close, and I get $30,000 to walk away.
In some cases, and this can be great for your private lenders, in some states, you actually have to do, I call it flash cash, where the transaction actually has to close with separate funds.
This can be a great investment for somebody with a self-directed. There are different strategies on how to do it.
The idea of wholesaling is finding a good deal. And rather than you fixing it up, whether you taking on the risk, you can sell that property to somebody else before you own it in lots of cases. And sometimes you actually just close it simultaneously, which works out really well. The thing I like about it for people getting started is that it’s pretty low risk.
You only buy the property if you have someone that’s willing to buy it from you. So you’re taking on very little risk, and it’s a great way to get started. Also, you don’t need a lot of money.
John: It makes a lot of sense of buying or getting a property under contract like that.
When I first got into the business, and I first learned about wholesaling properties, my thought was you find deals and you approach realtors or sellers and you know if it is a for sale by owner type situation, and you make an offer. But unfortunately, what I learned very quickly is that, that you there’s really no money to be made there, right? Most people aren’t going to be willing to accept the offer that you’re going to make, you really have to find the deals, the off-market deals where there’s an inefficiency there, right?
The seller could be a probate property, could be a homeowner, the absentee homeowner could be somebody that’s in a stage of foreclosure. You have to find someone that is motivated and willing to sell that property for under market value so that there’s an opportunity, or it needs to be fixed up substantially so there’s an opportunity for a rehabber.
There’s good money for them, there’s good money for me, on the wholesale side.
How do you find deals or the individuals that you might network with? How do you find those off-market deals that are good wholesale opportunities for you?
Ryan: It’s a great question. Like, I want to wear a shirt that says anti-MLS with a line through it because they just killed so many dreams of real estate investors.
People delegate their success to an agent say, “Hey, how are you going to find properties?”
I am an agent, my wife’s a broker like I’m not an anti-agent guy. But if your hopes and dreams are to make money in real estate, calling a real estate agent only happens after you found the property, not before you found the property because that agent is not going to find those great deals.
Now there are some one-offs and I know people are going to email me and say, “I found this great deal through an agent.” Yes, it happens.
It’s equity. And it’s motivation, you’ve got to combine the two.
So what we do, and we build the software around it called Investors Edge, we look for equity, and we look for motivation. Equity is the difference between what they owe, and the difference between what the property’s worth.
We run AVMs, it’s an automated value management system. A bunch of people may be getting refinancing right now. And if they’re doing that, if they have enough equity, the bank just does an AVM, which is a computer-generated, says your home for $300,000. And they’ll lend based upon that as long as there’s some equity in your home, we have access to that as well. And then we go back to the year when the loan was created because we don’t know how much exactly is owed.
But what we do know is how much they got a loan for. And if they got a loan for $200,000 10 years ago, what we say is what were the average interest rates 10 years ago in 2010. What were those average interest rates, and once we know those average interest rates, and we do a reverse amortization and assuming they made their payments, we say okay, they currently owe $175,000. So $175,000 versus $300,000. And the AVM tells me that there’s $125,000 worth of equity that checks that box.
Now I’m mashing the data together on both of those then I have to check the other box, which is motivation. Then I look for public information. I look for people that are going through a divorce, I look for vacant dwellings. I look for out of state owners, I look for a non-owner occupied property.
I’m looking for all these different things, bankruptcies. You name it. Anything that’s public information I have access to. And then I mash those two together and say, I’ve got equity, and I’ve got the motivation. So those are the people that I need to call and email, I need to knock on their door, I need to do a skip trace whatever the case is, so I can actually get their phone numbers.
We have a software that we put a lot into that does those types of things. But there’s, there’s money created in two ways. I just want to highlight this real quick.
You make money by negotiating and finding a good deal. And this isn’t taking advantage of somebody, this is actually helping them solve a problem.
Ryan Wright, DoHardMoney
I helped a family that grandpa had to go into an assisted living home, they put him in there because of health reasons. He had equity in his home, but the home was really beat up. Nobody had money. And those homes, they’re expensive. They’re $2,000 or $3,000 a month, family could cover the first month, but not the second month, they needed money.
They needed it in a couple of weeks, they knew they were selling for a discount, and I was getting a discount, but they were getting the money, they needed the payments on a house.
And after, everybody was happy. They write me thank you cards every Christmas and say how great I am because I helped them.
There’s not a lot of buyers that can go out there and say I’ll buy it the way it is, don’t worry about it. And I even said leave all his personal belongings you don’t have to take what you don’t want; I’ll take care of everything else. And because it’s emotional to go through everything, like take the stuff you want, I’ll take care of everything else.
The other way you make money is also value-adding so I can make money by finding a good deal. And I can make money by adding value to the property by doing rehab. I should be making money on both of those levels.
John: That makes a lot of sense. And I appreciate it, Ryan. Yeah when I got involved in real estate investing, I worked for a real estate company, and never really had any exposure to this whole world of being able to find off-market real estate transactions for me.
My background was you know, MLS, maybe an occasional referral from a broker or agent. But by and large, it wasn’t this world of using technology to find deals. And so I think it’s really important for the entire audience here to take note that you could go and in a neighborhood, and you could look up every single property.
By the way, I’ve done this before driving the streets, right? Look at houses and then try to go on the public forums, right, you go to the county website, and you can look up taxes, and you can look and see the last mortgage that was filed and try to use a reverse amortization to determine what do they probably still owe. I’m assuming that they consistently made their mortgage payments. And there’s a lot of work right.
I’m sure you’ve done direct mail before I have as well, obviously, that it’s a lot of work. And sometimes it becomes very much and I’ll call it sort of shotgun approach to real estate investing. And not that that’s a bad thing, right?
I mean, sometimes it’s just where you have to start. But with this technology in the software and the systems that people can gain access to nowadays, you can take very much a more targeted much more of a sniper type approach to investing in real estate. And it sounds like Ryan, to me, that’s exactly what you’re doing. Is that correct?
Ryan: Absolutely. Yeah. Ours is called Investors Edge. And we really believe that gives the edge because it makes it easier. Now you still have to do a lot of work. So even with that it’s not, you know, I found this great list. Why doesn’t everybody want to sell then it comes to timing. If I’m mailing to out of state owners or non-owner occupied, it’s probably a rental property or a property at non-owner-occupied is probably a rental property, right?
If it’s not a vacation home, it’s a rental property and none are occupied means the tax bill doesn’t go to the house, it goes to a different property, which tells us is probably a landlord situation. But I can mail to those guys or I can call those guys. But I have to keep working them because they’re not going to sell until they have a need, which is usually they have a tenant that destroys the house and they’re like “I’m done. I don’t want to be a landlord anymore.”
One of the postcards I like to send out is a picture of a criminal that says I’m your tenant, you know, and so just stuff to play on where people are like, Hey, you know, when you’re sick of this, that’s when you call me. I’m still waiting for the right opportunity. And I’ve got to be there. But if I’m there when the rock right opportunity happens, that’s when a deal happens. That’s when the deal gets made, is being available when the opportunity presents itself.
John: So you’re using this technology system, you’re rendering addresses, you’re sending postcards, you’re sending letters, potentially even finding phone numbers and making phone calls or maybe door knocking so on and so forth.
You’re approaching that the seller in a solution based or solution-oriented fashion, understanding their specific needs and desires, right doing it in the appropriate way as a real estate investor, and making an offer and like you said in the commercial real estate opportunity, it took you four years after multiple offers.
Lots of offers, but you find deals and then close on those deals, whether it’s a wholesale type arrangement or possibly, it sounds like you also have bought some of those properties and rehab them yourself.
So you got both the equity side and the value add rehab side.
Ryan: Absolutely, yeah, absolutely.
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