Re: investor wants short notes - Posted by Tony-VA/NC
Posted by Tony-VA/NC on June 17, 2003 at 10:05:57:
You need not make the terms of the note sound that much different than you Lonnie notes, but you need to emphasize the advantages.
Let’s say your investor is only willing to lend money for 4 years (as in a Lonnie deal perhaps).
Explain to them that you are giving them an opportunity to invest in a real estate mortgage, which is far more secure than just a mobile home (use a common prejudice to your favor).
Ask them, “Would you be interested in loaning money on real estate if you had all your money back in 4 years?” (Just like they do with your Lonnie notes). You are seeking to make it impossible for them to say “no”. They are already used to loaning you money for that long.
Then you work the terms of the deal privately and come back to them.
You need to know what the land/home will rent for (or sell for) realistically. You need to crunch you numbers so that the payments are reasonable and that you make a nice spread. You will later explain to your lender that this is how you make some money as well as provide for their safety by building in a reserve fund in the event of vacancies etc.
Approaches change with time but for now I prefer to talk real world concerns with my private lenders on their first deal or two with me. After that, you usually need only tell them the amount you need and when the closing is.
Answer their concerns upfront and show them that you are making a profit that you are comfortable with. I do this not to expose my hand but to ensure them that the deal is not “skinny” and they are not at risk. On the first deal, they need something to base their trust upon. After I have proven myself, it is no longer necessary.
Then I work in the terms of the loan. Payments of $xxx, amortized over 20 or 30 years with a balloon payment in 4 years. This way you are able to do the deal and make a spread that is comfortable for both of you. They get all their money back in 4 years. (Be sure to prepare for this and have back up plans).
You should consider including a clause that allows you to pay a one time fee to extend that balloon. They may or may not go for this on the first deal but once you have proven yourself on similar deals, it will not likely be an issue.
Just be sure to prepare for the balloon. I cannot stress that enough.
Balloons are not the only way to do this and all methods should be considered.
This is one method used to get the best price, a fast closing and it allows you to take title in your company name (although you may still have to sign as the guarantor on the first few deals at least).
Tony