So, I just finished up my first short-sale deal successfully. Yay for me! There was this one investor that has done many short-sales and is quite successful at them. Well, during title, the title officer asked me about splits with him. Splits… splits? Huh. Granted, I did consult with this other investor a good hour or so. And he did front the money for me for 24 hours to complete the deal and I did pay him 2 points “fee” for doing that. In essence, he made $2000+ for 1 hour of consultation work. However, all the sh!t work - I did it all. Contact homeowners, contact bank, compile paperwork, submit to bank, do negotiations, jump through hoops, track down lost loans, payoff judgements from my own pocket, schedule, coordinate, market, do showings, deal with owners, deal with buyers, resell, submit all paperwork to title, etc. etc. etc. And I did it all, from start to finish, with a 2 week deadline!
Digging a little bit, it would appear that this investor has partnered with many other first-time short-sale investors in my area and they’ve always split 50-50. So, this veteran investor just assumed that I would split 50-50 with him, too. However, I never spoke the word splits with him in any conversations, nor did I put anything in writing. Even in phone text messages. Since this guy assumes that I would be splitting 50-50, his is mostly unhappy (to put things lightly without actually being able to actually read his mind) about the whole thing. From what I can tell, he would rather not ever hear from me again. Now, I didn’t need this guy to front the money. I had 4 other investors with the cash just itching to fund for me. I wanted to build a positive business relationship with this guy, so I chose him.
This is just lovely. Is this what real-estate investing is like when working with a “dream team”? :rolleyes All this crock-a-crap about No real-estate investor succeeds on an island, blah, blah. Geez, including other investors in a deal is more of a pain in the ass than dealing with destructive, non-paying tenants.
Dean
P.S. Sorry about the venting; you can’t possibly imagine how difficult it is for me to refrain from profanity in this post … :evil
A money partner “usually” gets 50% of the profits. That’s pretty common. Without knowing all the details, I’d assume that all the other money partners would be expecting that split or MORE.
You mentioned that you had to do the grunt work. Well, the deal AND the work to close the deal was what you were supplying to the deal.
The money partner has ALL the real risk in the deal, not you. A 50% split is pretty generous for that, in truth.
You really expect someone to loan you $100K and only make $2K for doing it? Heck, even that was cheap!
If you don’t want him anymore, pm me his info. I’ll make him rich!
Actually, the 4 other people that were interested in funding were only going to charge points. None of them mentioned any splits. The highest offer was 5 points. Thus, I could have gone with any of those others without any 50-50 splits included. They were hard-money lenders and initially were making offers for 30-90 days. When I told them I had the new buyer, under contract, with verification of cash funds, for same day closing, then they gave me offers that only included points as the fees. When I started mentioning to them that I had other lenders available, then they started giving me bids to undercut the other guys. One even hum-and-ha’d about maybe undercutting by a whole point. That would have cost me about $1500 tops. Like I said, I didn’t need to go with this guy, but wanted to to build a potential future business relationship.
At the very most, I would have paid $5250 (barely, but still, within budget) to a hard-money lender for 24 hour funds. Even if things would have went late - highly doubtful with the buyer under contract with verification of funds - that hard-money lender didn’t even charge interest for the first 90 days. I also had multiple other buyers that were itching to put it under contract for more than who I did sell it to. (See my other post here titled: “How much more can I offer for you to break the contract?”) Believe me, I was covered.
Now, why would I split 50% of my profits (obviously more than $5250) when I could have just went with that hard-money lender and saved multiple thousands by myself? Isn’t one of the critical aspects of real-estate investing to keep costs low? From the way I see it, there is no reason to pay 50-50 when I have multiple lenders trying to outbid each other auction style to fund my deals. Even more so when they’re anxious to hear about my future deals so that they can fund those instead.
It’s your fault for not being clear up front how much he was going to get paid.
It was his fault for not being clear up front how much he expected.
But yeah, if all he did was front the money for 24 hours when you had tons of people lined up and expected 50% of the profits, he can shove that up his ***. Greedy sons of ******.
This is just lovely. Is this what real-estate investing is like when working with a "dream team"? All this crock-a-crap about No real-estate investor succeeds on an island, blah, blah. Geez, including other investors in a deal is more of a pain in the ass than dealing with destructive, non-paying tenants.
Congratulations - you broke the code! All this “dream team” talk is a bunch of guru nonsense intended to convince newbies that real estate is easy. So, the lesson you learned is next time do the deal yourself and keep all the profit for yourself (including the points). If you’re going to do more of these quick flips, go to the bank and get a line of credit. You can use that over and over.
This is a business where it is not a good idea to burn bridges.You never know if you will need someone again, and networking is very important.
I would have called him up and said, Hey, we’ve had a misunderstanding, let’s get together over a cup of coffee and work it out.
With him neglecting to say anything about a split, but you benefitting greatly from his advice, you could probably work something out where he got more than his points and less than his split and he’d be happy as could be and willing to work with you again.
It’s not a good idea to sh*t on the people who help you up the ladder.
In the future, all details of any partnership or money borrowing should be in writing. That would have prevented this misunderstanding.
I agree with both Tien and Tator above. This is not a one-sided event at all. Both were at fault at best, and there was probably a better way to solve the problem.
Second,
I’d wager that you also weren’t hearing the whole truth behind those competing loans either. Things would have been VERY different with them had you chosen one of them over this guy. In particular, the no interest for 90 days. No offense, but I have NEVER seen a true hard-money lender not charge interest. What is MORE common is upfront points AND a minimum of 3-6 months of interest.
Actually, I did offer to take the guy out to lunch. Along with several other people that helped me out during the whole thing. Note: while each of the other guys gave me at least an hours worth of consulting about making this deal work, not a single one of them are interested in me paying them anything. At the very least, I was planning on giving all of these guys $100 gift cards to any store in the city. In essence, they would have all made $100+ / hour just for giving me a few suggestions and enjoying a free lunch.
The guy that funded for me gave me a definate No, with “fine print” that hinted at ‘Don’t call me because I’ll won’t be calling you.’
Another tidbit is that I actually called the teacher that taught this funder how to do short-sales. The teacher gave me advice - no mention of splits or consulting fees; the teacher actually congratulated me on getting everything done and hoped that I would send him a success story - the teacher gave me advice that this funder told me the direct opposite of. So, I ignored 95% of what this funder told me and did things my own way. From what I can figure, if I would have taken the suggestions that this funder gave me, I’d be sitting here twiddling my thumbs watching a whole bunch of other people making money off a deal that I would have missed out on.
Now, the other lenders that I didn’t go with, they actually called me up and apologized for not making it more clear to me that they could easily match the 2 points, if not beat it. And fund just as fast. They told me to definately keep in touch with them as they are all very anxious for my next deal so that they can get 2-3 points on money that they just have sitting around doing nothing. Not a single one of them has made any mention of splits in any way, shape or form.
Sorry, again, for not being entirely clear. The highest cost hard money lender was deferred payments. As in, interest accumulates, but you don’t have to pay it for up to 90 days, or when the deal closes. That hard money lender is www.dohardmoney.com. (No, I don’t get any referral bonuses for mentioning their website, although, I’m sure that they will now love the new traffic I just inadvertantly sent their way :cool ) Anyways, you can see the entire rundown of their fees/costs on their website. There isn’t mention of any splits anywhere on their website, although, over the longer term, their costs/fees equate as though there were splits.
None of us here will ever know exactly what happened with this situation, so the best that we can do is guess and give advice/suggestions on that guess. So you’ll just have to take it for what it’s worth.
It seems that you may be confusing (or pooling together) private lenders and hard money lenders. They are two completely different things.
A private lender is an individual that lends his money/credit to the deal. They may want points/interest or a split of profits. Private lenders and the investor make the deal work between them to whatever terms that they agree.
A hardmoney lender is much more like a bank. They will have points and interest and terms. And it’s basically handled their way.
I hear what you’re saying Roger (and others), and I thank you all very much for your analysis and “consulting”. Don’t assume 50-50 splits, though. Haha! :biggrin Really, it is good to have all your input and experience. Being this one of my first completed deals, its good to hear from others about what I might be expecting down the road. I have gained much insight from all over the place. Really, I should give something to REIClub for what I’ve gained from here. Its been a good 45% - 55% of everything I’ve learned. Now to just figure out how to make it a tax deduction… thinking
I have to agree with Roger, I changed what I was going to write after reading your last post, “don’t assume 50/50 splits” I will agree with you as well, If you were to come to me and ask me to put up all the risk I would be saying the same thing :argue
As a follow-up, nope, not gonna happen. I went to several local credit unions in my county and not a single one of them would give my business a line of credit because my business was “speculative in nature”. Since their loan programs are funded from SBA, SBA won’t allow it. Its not just real-estate, its other investment type businesses, too. The lady even said it extended to apartment buildings. She worked with one client, and she eventually did get them a line of credit for their apartment buildings for repairs, but it took several months and a few forests of trees in paperwork. I thought that maybe I could get a line of credit for my LLC’s rentals, but if the SBA even had a hint that the money was being used for something other than repairs or payroll, I would have a fun business review meeting to look forward to.
Bank of America gave me equity credit lines on two of my rental properties. Credit limit was established by a simple formula
Limit = Appraised Value x 80% - Current Loan Balance
or $100K whichever is less.
The key point to that is EQUITY credit lines. Yes, they will give loans for equity credit lines. I thought about that as one of my rentals have a few 10’s of thousands equity. However, its a new build and I really couldn’t think how I would use it for that rental. The mortgage officer told me that if I tried to use an equity credit line for something other than the rental itself, get prepared for a fun business review/evaluation meeting with the bank, SBA and possibly even the IRS.
Anyways, I hit up just credit unions initially. Maybe I’ll try some large banks and see if they have something other than SBA lines to offer.
My equity lines don’t have those restrictions. I can use the funds any way I wish. It is true that if I use the funds for personal expenses rather than for an investment purpose, I would lose the mortgage interest deduction on my tax return.
However, there is no IRS requirement to invest the money back into the financed property itself to preserve the mortgage interest deduction.
I will grant that my equity lines were obtained through the consumer lending department at the bank. If I were trying to obtain a commercial equity credit line, maybe I would have also run into the constraints you encountered.