Investor Insights February

Investor Insights • Investor Financing Options

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Welcome to the next episode of our new monthly feature, Investor Insights!

Each month, top 1% producer Eric Workman will be providing information that real estate brokers need to know about working with investors. In this episode Eric discusses the different types of investor financing options, and the advantages and disadvantages of each with respect to how it affects deals from offer to close.

Please let us know which investment topics you would like covered in future episodes!

Eric Workman can be reached at 630-408-5582 and eric@renovofinancial.com.

Eric Workman


D.J. Paris 0:16
Hello, and welcome to another episode of Keeping it real. This is our monthly series called investor insights. We have Eric workman from Lenovo financial. McCall. Welcome, Eric.

Eric Workman 0:29
Thank you, sir. Appreciate it.

D.J. Paris 0:31
Yeah, we appreciate you being on the show and doing this every month. And Eric is a specialist where he works with investors, he is an investor, and he is going to be doing the series. This is our now second episode. So if you didn’t listen to the first one, about a month ago, we had the first investor insights, you should be able to find it in our podcast episodes, and also on our website. And, Eric, I know we wanted to really start today by talking about why well, should we should we recap, the first episode? Or should we talk about why brokers should be interested in working with investors?

Eric Workman 1:07
Well, I think let’s, let’s hit on kind of the why, behind working with investors first. And, you know, it’s, I, when I went back and listened to our first episode, I kind of kicked myself for not going through some of this data and information first, you know, we do we do a lot of training for, for brokers, we go into a lot of different real estate offices and talk about why working with investors is such a neat way to number one, you know, increase your productivity, you know, increase your volume and increase your income. But number two, just how, how much simpler of a business that it can be for a broker. So I thought I’d go through some of the data first here today, and then we can kind of recap last week, and then we’ll roll into today’s today’s lesson. Great, let’s do it. So at Renova, we we track, you know, our businesses financing, real estate investors, and primarily we finance flips, we do, I would say about 60% of what we finance are flips and the other 40% are people who buy properties, and then fix them up and keep them as rentals. But when you look at the MLS, so what we deem a flip is a property that was listed on the MLS, and it was purchased. And then it came back on the market and sold within 18 months of that original transaction at at least 20% of a higher price than the first transaction. And we so that’s kind of how we filter out all the transactions that happen and and how we figure out how many properties are flipped. And it was staggering to me, whenever we first kind of pulled together the information to see how much it was. And there are there are nearly 6000 homes a year, somewhere in the neighborhood between 407 100 homes a month, but average is at around 6000 homes a year where the properties are flipped, bought and sold off of the MLS. And when you look at the volume of that the purchase volume, and then the sale volume, it adds up to over a billion dollars. So there’s a there’s a billion dollars of just single family flips alone, where both sides of the transaction happen on the MLS. And when you you know that sounds like a huge market, right $1,000,000,000.05 1000 6000 houses. But the cool part about it is that that only takes into account, we think between maybe 20 and 30% of all the transactions that are happening by investors.

D.J. Paris 3:48
Right? Because a lot of them aren’t hitting the MLS, I imagine is part of that right?

Eric Workman 3:52
Exactly. So a lot of properties, either don’t hit the MLS, or I’m only talking about single family homes in that instance, I’m not talking about duplexes, I’m not talking about three flats or two flats. I’m not talking about properties that are you know, five to 12 unit buildings, etc, only single family homes. So, the overall market size, we think is somewhere between six and $8 billion a year of either listings or biocide transactions that brokers can and should be participating. So it’s a it’s an absolutely tremendous market. Now, why do I think and why do I? Why do I tell so many real estate brokers to figure out this business and to get into it? Well, it’s because the there aren’t a handful of brokers that are dominating that space. When when so when we pull this data and look at all the different transactions that are happening, we of course have all the different brokers who are participating as well. And when you look at the 1000s and 1000s of transactions, just the ones that we have the data on There are less than 100 brokers who do more than four of these transactions a year.

D.J. Paris 5:06
And just just to give you an interesting point about how big this pool of brokers is, it’s well over 30,000 in the Chicagoland area. So that is an oak staggering number, a small number rather, of people doing investment working with investors.

Eric Workman 5:23
Yeah, so there are there are, you know, so when you look at, when you look at like our sample that dataset, which is again, it’s about 6000 transactions, you have well over 90% of those transactions where that is the either the brokers only investor transaction or or one of two. And it’s a so I look at that, and I say, this is such a fragmented market. From from the brokerage standpoint, you have all these real estate investors who are incredibly active, who, you know, are doing somewhere between six and $8 billion of transactions a year. And there’s a very, very, very small number of brokers, who are actually capturing a significant piece of that business.

D.J. Paris 6:08
Yeah, that’s very interesting. How, so aside from there being less, I guess, you could say, less competition or less people in that space? What are some of the other benefits that you find when brokers start to consider in adding more investors to their, you know, regular business?

Eric Workman 6:27
So we talked about this a little bit before but you know, a real estate investor is a is a traditionally a pretty emotionless client, right? There’s the numbers work or they don’t you know, the the rents, the rents are there, or they’re not there’s comps to support the after repair value, or there’s not, it’s a did transactions become quite a bit easier, especially whenever you learn the business and you’re able to discern, you know, whether or not a property will work?

D.J. Paris 6:59
That’s a very good point. It’s for brokers out there who are tired of working with hesitant buyers or emotional buyer’s or seller’s. This is one of the quickest ways to circumvent emotions, these are investors who care about the deal, right? And so you know, you’ve talked about that in the previous episode. Yeah. And

Eric Workman 7:19
when you find an investor who, who, you know, kind of going back into last week’s episode, doing a quick recap here, the first thing that I tell brokers, it’s kind of like the first thing that we that we do, whenever we interview a potential investor, if we’re going to get into financing their deals, is to look at their business plan. And, you know, one, determine if they have one, because if they don’t, let’s not waste our time, but to if they have a business plan, and that that’s a viable business plan. Well, now you have a client who’s always looking, right, you have a client who is always looking to buy, or hopefully a multitude of clients are always looking to buy. And then whenever they’re done with that project, you have clients who, who need to sell. And I can’t think of an investor worth their salt, who doesn’t reward the broker who found them to deal with the opportunity to list it also. It’s a

D.J. Paris 8:14
very, very good point. So you end up getting, you know, for every one transaction, you’re probably getting a minimum of one additional transaction.

Eric Workman 8:22
That’s right. Yeah. And it’s, and it’s, you know, you can kind of almost set up a pipeline, so to speak of, you know, client a, I helped them on the buy side, four months from now, I’m going to be listing this property, so and then whenever that property goes on the market for sale, you know, that same client typically needs to go find another property. So you’re able to, you’re able to generate a tremendous amount of volume and a ton of business out of a significantly smaller pool of clients, who, you know, once you understand their business, and you want, once you understand their focus, it’s, it’s a significantly easier way to build a book of repeatable business.

D.J. Paris 9:04
Yeah, it makes sense. It also cuts down on it for the buyer on the buy side, probably taking clients around and showing them 2030 properties. I suspect, in most cases, investors are less interested in tagging along going to see I imagine in some cases they do, but I know the brokers that are firm often talk about how great it is they just have to find the the deals and make the numbers work. And that saves a lot of a lot of car travel time. And, you know, walking somebody through properties, oftentimes it doesn’t happen, which is a nice, you know, shortcut as well.

Eric Workman 9:37
I absolutely. I mean, like you, like you mentioned, I’m an investor myself. And, you know, I don’t just drive around to look at properties without knowing before I’m going there. That one it’s an area I want to be into. It’s a style of property. I like three I’ve looked at the comps, and four I’ve looked at the photos or the information on that property and I’ve said If I walk in there, and it all checks out, I’m going to buy this house, you know, normally I’m going there to make sure that it’s not like the back house or the back half of the house has been burned off, or the foundation is crumbling. Or there’s some sort of just, you know, functional obsolescence with the property that you can’t see online. Sure, 90% of the time, I’m not going to see a property without the intention of buying it.

D.J. Paris 10:24
Right, because you’ve, you’ve done you’ve run the numbers. So, so I know today you we wanted to get into Okay, so we’ve solved this this one question or answered it of why should I work with investors? Last episode, we talked about if someone approaches you who’s interested in investing, here’s a way to vet them to make sure that it’s worth your time and theirs. And now, we wanted to talk about sort of next steps, right? So once you’ve decided this is somebody I believe, I’d like to work with, then what?

Eric Workman 10:54
Right, so now, now that you’ve decided you want to be in it, that you’ve decided that this is a particular investor that you want to work with. Now, the now the ball kind of swings back into your core, and it’s time for you to figure out the properties that are going to work for that particular investor. And beyond? Where do you like to invest? Or what style of properties do you like to invest in? I believe the first and most important question is, how do you finance these deals? Because there are, there are a multitude of ways to finance real estate, especially from an investment perspective. And if you as a broker don’t have a pretty intimate knowledge as to how this particular client buys their properties, and then finances or gets the properties fixed up, then you’re not going to have all the information you need, when you’re presenting a deal that you think that they should buy. So what I did, is I’ve gone through and I’ve written down, there are really kind of seven different buckets that investors use on a pretty regular basis to buy into finance. Investment Properties. Sure, let’s hear about them. So the first is our is our favorite, which is cash. Right? Who doesn’t love a cash buyer? Or a cash offer? From a brokerage standpoint, right? I mean, anytime, anytime that you have somebody who you know, can pay cash, or you think a couple different things, right? One, they’re serious. And two, it’s probably going to happen quickly. But from an investment perspective, if you have an investor, who is a cash buyer, well, now now, you know, a couple of things. The first is that, if there are deals out there, or opportunities that come along quickly, where where you have to be able to close quickly, you have a buyer who can do it. And you know, too, if someone’s devoting cash to a property into a project, we’re typically talking in the neighborhood of hundreds of 1000s of dollars. So you’ve got a serious client here, who’s making a serious investment. And they’re going to be and they shouldn’t be as serious about the property and the project, as you would be, you know, as a real estate professional. So that first bucket, there is cash, the the second bucket, and a lot of times people will, people will present themselves as as cash buyers, but really, their money is coming from partners. And so you have a lot of investors out there in the market. And by investors, I’m talking about just straight up money investors, who they’ll find either a broker or a contract or what have you. And they will, they will give that person the money to do the deal. And they stay. They they don’t do any part of the execution. But that doesn’t mean that they’re not a decision maker. So if you’re working with an investor, and they say, oh, yeah, we pay cash, oh, is this your cash? No, actually, I’ve got some partners. Well, now what you as a broker need to decide is okay, well, who makes the decisions? Am I going to be going out and looking at properties with you? Am I going to be sending you potential properties? Am I going to? Am I going to be dealing with you? Or do I really need to deal with your partners? You know, who’s making the decisions on who can actually say yes to a project, sign it sign the deal, etc?

D.J. Paris 14:14
And have you found there to be any red flags to look out for when dealing with somebody who has partners or not even so much red flags, but important questions to raise, aside from Hey, who makes the decisions? Have you through experience noticed any best practices around sort of vetting the partners?

Eric Workman 14:35
Well, I’m not a I’m not a huge fan of partners, to just, if I’m talking about from a personal investment perspective, right now. Partnerships, especially having multiple partnerships can get really messy really fast. But so if you’re a broker and you have an investor or client that you want to work with and each and that person’s talking about partners, I would I would as a course of business Just try to meet with the partner as well. And you need to just get a clearer understanding of how much money is actually available and how invested this partner is in this real estate business. Because clearly, you’ve got someone now who’s got a business plan and who has, who has convinced you that they’re worth your time. And if their money source is someone else, it would, it would be of your best interest to ensure that that money source is as committed to seeing their business grow as you are. Sure. The third, the third bucket that that is, I would say, pretty commonly used is private money, right? Like, kind of a private lender or private financing. And by private, I’m talking about like friends and families and, and other investors who instead of going in in a partnership, that investor client of yours owns the property, but they actually take a loan out from friends, family members, what have you. Again, it’s it’s another component to the deal now that that deals with timing, you know, so how quickly can you close on a property? Are we able to go in as cash? Or do we actually need to say that we’re financing this deal? How much money is there? And is available? Like, how many of these projects can we do and look at at a time? And three? What kind of interest rate? Are you paying? You know, are Is this a? Is this an arrangement where they get a percentage of the profits? Or is this an arrangement where you have to, you know, you have to make monthly payments? And whenever I’m putting the numbers together on whether or not this is a good deal? Do we look at it really kind of a back end of again splitting that money up? Or do we look at it as the whole duration of, you know, we’re going to be paying paying juice on this thing going forward. So there’s a few different few different angles to look at there Whenever someone’s using private loans. So the fourth, and I would say this is kind of the most, the most common that you’ll hear from from investors is what’s commonly referred to as hard money, or basically short term financing. And a lot of times that’s, that’s the bucket that we get placed in are kind of brushes that we get painted with, I, I hate the moniker of hard money, because it gives the it kind of gives the connotation that someone is either in in dire straits, or that there’s, you know, a Louisville Slugger, that’s part of the that’s part of the deal. In actuality, what it is, is it’s just it’s short term financing, where the investor builds it in typically as part of their business plan. And the lender is comfortable with the risk that comes along with, you know, lending money on a property that is typically in rough shape, and then financing the cost of bringing it back to life. So, again, who the when, when someone’s getting into hard, like hard money, or you know, call it short term financing. Most of the time, that client now is going to be working with an actual lending institution, right? Somebody’s like a renewable or a comparable lender that’s out there. And your your questions from that perspective, as a broker really should center one around timing. So again, how quickly can you actually close on a deal with this particular lender? I would say that most, most lenders like to promise the world and they deliver very little of it. The second would, again, kind of be the same thing as the as the prior bucket is what does the money cost? And then the third is, you know, what’s the duration of of your loan here? You know, do you are you typically able to get six month loans, nine months, nine month loans are the year loans. What’s What’s the duration here so that when we look at a deal, we’re able to factor in how long it’s going to take to get the property to where the comps are at from a style and from a quality perspective, and then how long our property is sitting on the market in this particular area. Timing, cost and timing, really, that bucket, the next the next bucket and I think this is where people typically think that you would go for one of these loans and that’s banks.

The unfortunate part is that you think that you go to a bank, and then you have a an investor who takes a deal to a bank, and they realized pretty quickly that most banks just aren’t interested in lending, lending on single family flips or even, you know, small multifamily renovations. But if you have a client who’s got a good banking relationship, you’re what you now need to understand is that you’re probably 45 to 60 days out from being able to close on anything. And that’s really the most important factor to you as a broker of Hey, we’re not going to be able to win deals that need to close fast. It’s the it’s the ninth of February, if a deal pops up, and that broker on the other end of the line says, Listen, man, if you can close this by February 28, the deal is yours. If your client gets everything financed through a bank, and that’s their only option, that deals not happening. And so it’s it’s imperative that you as a broker, understand that because I go all the way back to, to that episode that you that you take with Lumi, when she said, I get so many clients who come to me because the broker that they’re working with just, you just don’t understand their business. Because I can tell you, as an investor, it’s really tough to be presented a good deal that you know, you can’t do. And it would be really, it’d be really tough. If your broker, you know, who’s out there supposed to be looking on your behalf starts putting deals in front of you that are that would be really good, like, a nice property in an area that you know, you can do in a in a price range that fits your business plan, but you can’t close on it, because the bank you’re working with, it’s going to take at least 45 to 60 days to do. And then the last bucket is kind of the traditional financing. And that’s using, you know, Fannie Mae, Freddie Mac, secondary market lenders, and using 203 K loans, which, candidly, if an investor comes to you and says, that’s our financing option, I think it’s time to turn around and go find a different investor, or steer them into a different direction, the qualifying time, the hoops that you have to jump through when using secondary market financing. And then the manner in which you have to finance the renovations on a property under that kind of financing is so arduous, that it’s a, it typically takes projects quite a bit longer than necessary in order to complete them whenever we’re using financing like that. And really, that financing is much more geared towards homebuyers than investors, like people are going to actually live in the property afterwards. So if you’ve got if you got a person with who says that that’s the type of financing that they’re going to use, it’s, I would say it’s best to point them in a different direction.

D.J. Paris 22:19
Yeah, that makes sense. And, you know, I know a lot of brokers who are listening, and we, we probably would save this for a future episode, but a lot of brokers who haven’t yet started working with investors who have now sort of been interred now been introduced to the idea and you’ve given a lot of great, great steps are probably wondering, Well, gosh, how do I, how do I find these investors? And I’d like, you know, definitely will devote a whole episode to maybe some strategies around looking for some of these, these types of people who are who are looking for deals?

Eric Workman 22:54
Well, for sure. The I would say the first, the first step that I would tell somebody to take in that is to educate yourself as much as possible on what the investor’s needs are and what their business is. You know, you’ve you’ve had a couple of recent episodes, Bree Schmidt, Andrew Holmes, etc. Like, those people are the pros pro at educating real estate investors, and they put on some fantastic events, really, almost on a weekly basis. Surround yourself with people like that. And you will you will trip into dozens of real estate investors as potential clients.

D.J. Paris 23:36
Yeah, I’ve always heard that. I don’t know if we mentioned this on the last episode. But I know it’s been said on on other episodes I where I’ve interviewed people like Bri and Andrew and yourself. And it’s that oftentimes brokers say, Well, gosh, how do I find the investors? And maybe that isn’t really the right question is find the deal. And the money part of it actually is not super difficult, or the investor side, every investor is looking for a good deal. So we can probably devote a future episode to that as well as how to actually find deals and run numbers and, you know, be able to have those to present to get the investors attracted to you.

Eric Workman 24:15
Absolutely. Look, there are. There are a ton of investors in the market right now. And it’s a, I don’t wanna say it’s a feeding frenzy. But good deals are harder to find than any other time in the last six or seven years. And I would say that we’re going to we’re in more of a normalized market, right? It shouldn’t be hard to find good deals, because that means market means the markets healthy. But yeah, if you can find them, then there is there is no shortage of people who are willing to buy that deal and to work with you and then let you list it on the back side and allow you to help them find more.

D.J. Paris 24:57
Awesome well, it’s probably a good place to pause we can I’ve heard I think a lot of ground this this episode. So what I would like to remind our listeners is that Eric is generous enough to host these episodes once a month, here with with keeping it real. So please send us your questions. So as you’re starting to listen, and you have questions for Eric, I send those to us. You can do that via our website, which is keeping it real pod.com. Find us on Facebook, which is also keeping it real pod and send us your questions, let us know where you would like this conversation to go in future episodes. Also, Eric is available to meet into to educate brokers himself educate offices, he’s been to our office for our most recent investor meeting for brokers who are investor focused, and he was just in and everyone said he did a fantastic job like he does here on the show. So Eric, what’s the best way that or if somebody may be an investor who’s looking to work with you specifically to what’s the best way someone can reach out to you?

Eric Workman 25:58
Sure. So email addresses, Eric errc, at renouveau financial.com. And then my cell phone 630-408-5582.

D.J. Paris 26:09
And Eric is also often at some of these events he mentioned as a as a as one of the featured speakers. So definitely keep keep your eye out for him. He is He is around. And always, always available and very easy to to get a hold of. So Eric, thank you so much. We will see you again in the preview in the next month and also want to remind all our listeners to please tell a friend we do this because we have listeners and those that has been growing. And please let any other brokers or anyone else you feel could benefit from listening to this kind of conversation, please let them know. Well, thank you, Eric. We appreciate your time once again, and we’ll see see it in a month.

Eric Workman 26:49
Absolutely. Thank you

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