JOBS Act…Plan for it

For those of you who haven’t been following the JOBS Act, it is a bill that will make it easier for startups and small businesses to raise funds, especially through online crowdfunding, is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.

 

The JOBS act was designed to help small businesses by:

 

1. Removing general solicitation and advertising restrictions for certain private offerings

 

  • Rule 506 – If all purchasers are accredited investors
  • Rule 144A – If issuer reasonably believed all purchasers are qualified institutional buyers

2. Creating a new $1M crowdfunding exemption, allowing non-accredited investors to participate in the funding rounds

  • Up to $1M of securities in a 12-month period
  • Investor’s net worth <$100k they can purchase greater of $2k or 5% of annual income or net worth
  • Investor’s net worth $100k+ they can purchase 10% of annual income or net worth up to $100k

Complete article

The SEC will have a 270 days to implement additional regulations from signing of the bill.

If you are a real estate investor who may be looking to raise private capital through this vehicle you may want to start planning in the meantime.

Planning is the foundation to your success, Execution is the material that creates the business. Execution without planning is like wanting to drive to Fargo without a map. You may end up getting there but a little planning could have saved you a lot of time.

  • Check out my previous blog post where I lay out business planning and goal setting:

http://gabhartinvestments.com/article/in-the-office-today-working-on-my-2010-real-estate-business-plan/

  • Get all the documents in place. Including your business plan, incorporation documents , financial analysis & forecasts and a full executive team bio.
  • Do market research. Get all the facts in place in order to have a strong argument as to why people should fund your project.
  • Start putting together a list of contacts and potential investors.
  • The concept of crowd funding involves work from the user seeking funds as they need to leverage their networks and ask their networks to lend a hand. We found that the initial 30-40% of activity actually comes from the users’ network.
  • Make a video
  • Start to craft your pitch in the best possible way. If someone asks what you do can you explain it in 30 seconds or less? Do you know what your most common questions are and the answers to those questions?
  • Start building your social network presence. Remember crowd sourcing is based on smaller amounts of money from multiple people. Start building your network and credibility

Time will tell exactly how much impact the JOBS Act will have on the job market and raising money for Real Estate

Some reasons it may not make sense:

IF the SEC:

  • Makes it to costly to set up
  • Makes it to complicated to create
  • Has to be sold through securities brokers

OR

  • It may be to cumbersome to have a lot of little investors on deals.
  • More red tape and reporting requirements

I am not sure yet whether this is a good thing or not. It really depends on the SEC final terms which I will report on when the grace period is over.

 

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HARP2 saving small % of underwater mortgages

The HARP2 program, combined with the $25B bank settlement (providing $20B in loan modifications), will save some underwater mortgages from foreclosure and help long-term market stabilization. However, part of the bank settlement requires banks to adopt standardized (and hopefully more efficient) servicing and foreclosure processing measures. I think better processing, combined with the sheer volume of underwater mortgages is going to keep the short sale floodgates open for quite some time.

According to researchers at CoreLogic, a leading analytics firm, 11.1 million or 22.8 percent of all residential properties in the United States were worth less than the amount their homeowners owed on the mortgages used to purchase them.

The federal government originally rolled out the HARP program in 2009 to help homeowners who were underwater or near underwater. However, the program was recently broadened to reach even more borrowers. Originally, HARP applied to 895,000 underwater borrowers; and now HARP II is expected to help up to double that amount. According to HUD, about 400,000 homeowners have taken advantage of the program since it launched in April 2012…that’s less than 4% of underwater mortgages.

HARP II allows underwater homeowners who are continuing to make payments to refinance their loan. The new program offers a number of advantages over the original HARP loans. First off, there is no loan-to-value or combined loan-to-value restriction on fixed-rate loans with terms of 30 years and under. In other words, it doesn’t matter how upside-down borrowers are on their mortgages. Previously, there was a cap that restricted borrowers who owed more than 125 percent of their home’s current worth from accessing the program. In addition, an appraisal may be waived if a value for the home can be automatically generated, and the borrower only needs to have a 620 FICO score.

There are three main components to qualifying for a HARP II refinance loan. The first requirement is that the loan must be owned by either Fannie Mae or Freddie Mac. Second, the loan must have been sold to Fannie or Freddie before June 1, 2009. Third, a HARP II refinance must benefit borrowers in at least one of four ways:

  • Reduce the loan’s monthly principal and interest payment.
  • Reduce the loan’s interest rate.
  • Reduce the loan’s amortization term.
  • Transition the loan to a more stable type of loan. (i.e. interest-only to fully-amortizing, adjustable-rate to fixed-rate, 30-year to 15-year).

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B of A resuming foreclosures in 23 states

As you probably know, on October 2, 2010 Bank of America announced that they were halting all foreclosures in the US due to allegations that the bank was using faulty paperwork to foreclose on homeowners. Lawmakers urged other banks to do the same but the Obama Administration wasn’t having any of it, claiming a national moratorium on foreclosures would be harmful to the fragile real estate market (fragile, chaotic, whatever you want to call it). Starting Oct. 18th, Bank of America resumed foreclosures in the 23 states that require a court order to foreclose, an estimated 102,000 cases. They expect a plan of action in DC and the other 27 states in a couple of weeks.  This news, combined with high unemployment and steady property values, means we will continue to have a steady supply of distressed inventory that needs to be purged by the banks. Gotta go, my phone is ringing off the hook with hungry agents. 

Click here to watch a short clip: B of A Foreclosures Resume

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Not that hard a decision! A Hard Money Lender, a Partner or Both?

Not that hard a decision! A Hard Money Lender, a Partner or Both?

It’s the age old question in real estate, Do I get a hard money loan or should I get partners? Some people choose to get partners because they feel that hard money loans are too expensive and other people choose to get hard money loans because they think partners are too expensive. While at the outset one may think that hard money lenders are too expensive, it may be surprising to note that they can actually turn out to be cheaper than a partner or when used with partners allow you to increase your buying activity. This is because you will be able to leverage other people’s money and will not be required to invest as much yourself. Therefore, you can complete more deals if you chose to and even further improve the overall return on investment. However remember, leverage is not a good thing unconditionally, so use it carefully.

Here is a simple comparison.

Lets say a rehab deal takes 6 months with the following details:-

Purchase Price: $200,000
Rehab & Selling Costs: $50,000
Sale Value: $300,000
Partner share: 50/50
Total Profit: $50,000
Your Profit: $25,000
Your Investment: $125,000
Return On Investment: 20%
Annualized ROI 40%

Here is the same deal if you went with a hard money lender:-

Purchase Price: $200,000
Rehab & Selling Costs: $50,000
Sale Value: $300,000
Loan Amount (65% of sale value) $195,000
Loan Costs (4 points): $7,800
Carrying Costs (13 PITI for 6 months) $12,675
Profit: $29,525
Investment: $75,475
ROI: 39%
Annualized ROI: 78%

As can be seen from the example above, the investment required has decreased by 40% (thus freeing up capital for other deals) while there is also a corresponding increase of almost 100% in the ROI. So if you used the balance of your funds to complete another similar deal, your ROI would turn out to be 4 times that as if you had partnered with a financier for 50% share.
Apart from the above financials which speak for themselves let’s look at some other aspects of hard money lender funding vs. partnership funding below:-

Advantages of working with Partners:-

If they are real partners (and not just investors) they will split the work load. There could be synergy if your partner has experience and contacts in the business.
Can close very quickly if you are paying cash
Can do more deals than you could do by yourself.
Usually a safer and more conservative route
However, here are the disadvantages of working with partners/investors:-
You do most of the work, you may invest as much as they do, however you need to split the profits equally.
There can be disagreements resulting in the opposite of synergy
Consensus may take a longer time to reach and may cost you money
You will be limited in the freedom of your decisions
Legal issues & securities laws

While on the other hand here are the advantages of working with a hard money lender:-

It usually works out cheaper than a partner on a return on your money basis

Because of leverage you can buy more property (this is a double edged sword and can be good when making money or can be devastating in a declining market if you do not buy right).
Potentially will need very little or no money down. It usually is based on the value of the asset.
However, one needs to be wary of the following when working with a hard money lender:-

Leverage, as mentioned above, can become a double edged sword.

This is short term financing, usually between 6-24 months, and therefore may become a problem if your exit strategy is not working out and you can not find take out financing.

If you do not have a good relationship with someone you trust and they do not fund the loan you can lose out on the deal and more importantly your credibility

You need to be careful on who you chose to work with as Hard money lenders are notorious for being sharks, therefore it is important to get a referral.

I only choose to involve partners when I can see a clear synergy between our efforts or work with some investors that with whom I have built a good level of mutual understanding.

Many times what we do is use our funds combined with investors and hard money/private money loans to purchase properties. This allows our investors to get a better return than going out and paying cash for the property themselves and we use our expertise and time to complete the project and they collect a check.
Good luck in your search and if you need a list of money lenders feel free to drop me an email as I have an excellent list of hard money lenders which I would be open to sharing with you.

Here is a real life example of a recent transaction we used a hard money loan to purchase. For comparison purposes I put a scenario of using cash.

Cash Flow

Here are the before and after pictures:-

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