Episode 18: As a Real Estate Developer, How To Do A OPM Deal?
How do you do a deal using nothing but OPM (Other Peoples' Money)? Wowza. This episode is a doozy, but it is one I get asked about quite often. What do you do if you are asset rich and/or cash poor? How exactly do you figure out how to do a deal with no money? What can you do to prepare to use other peoples' money for a good deal? How do you do a OPM deal: be prepared with templates, a good track record, and a VERY good deal that makes sense at all points. I've done them, but they are HARD. Today's episode will walk you through how to do a deal with no money!
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Full Episode Transcription
Welcome to My Life as a Landlord, where we untangle all things housing and educate the curious. If
you're looking for some entertainment with some honest, awkward conversations, you've come to the
right show. I'm your host, Dr. Jennifer Salisbury. This is my life as a landlord. Welcome to it.
Welcome to this week's episode my Life as a Landlord. I'm Dr. Jen. This week we're talking about real estate
development. How do you do real estate development deals when you're asset rich, cash poor? How do
you use other people's money to move forward when you have no cash? Now, this is a boy. This is a hard
topic. It's an awkward topic. Talking with a friend recently, and I said, I'm creating the list for my next
Podcast topics. And I've got probably 60 different topics queued up. And I said, but what is the most
applicable to you? If I was going to do a podcast just for you, what would you want me to talk about?
And this is what she said, and I went, Boy. Cut to the chase. Holy moly. Okay, so here we are. This
topic is it's a hard to do. This is a big tackle, this is a big ask, but I'm going to do it. Those of you who
know me personally know that I do not shy away from awkward conversations. Awkward conversations
do not get better with age. And doing no money deals, using other people's money, it's hard. I have done
it. I'm going to tell you how to do it. But you've got to be on your game. You've got to be ready to go.
And yeah, here you go. Here's your roadmap. Okay. For real estate developers, I'm going to give you
your three points and then a call to action. This is normal for my podcast setup. So point one, why on
earth are you asset rich and cash poor? If you're asset rich, that means you own other properties, meaning
that you've got some experience and you very likely have some net worth. And I'm going to take a stab
in the dark and say that I'm really hoping you have some good personal credit. If you're asset rich, I hope
those are the case, especially if you're trying to buy a property. No money down, so you've already got
other properties, you've got a portfolio, you've got some credibility and you've got some credit. If that's
not the case, this is going to get even harder and. But why would you also be cash poor? Do you not have
income? Do you not have a job? Do you have a job? Or are your rentals not performing? Or are you
doing improvements on other properties that is taking away your revenue and costing you money, which
is a double whammy. So, point one, why on earth are you asset rich and cash poor? Take a real hard look
at why you're in this situation. And honestly, how long are you going to be in this situation? If you're
almost through an improvement and you're about ready to, let's say, rent a unit, and your expenses are
going to go down because you're going to stop your renovations and you're about to have some revenue
from rentals, maybe this is a temporary situation and it will get easier for you to do real estate deals when
you're not so poor. All right? You make all your money when you buy your property. I'm going to
say it again. You make all your money when you buy the property, not when you sell it. When you buy
it. I know that might seem very counterintuitive and say, well, Jen, I get my money when I sell it.
That's right, you do. But how much money you get when you sell it depends on how you bought it. So
I'm a very analytical person. I do all of the real estate deal projections. I have to do them out longhand. I
actually will take a look at all of the money. All the money, all the cash flow, all the expenses, everything
that's required to buy a property through the entire transaction, the whole thing. So I'll go through that. So
first, when you purchase it, you've got cash on hand. Well, we just said that you're asset rich and cash
poor, so maybe you don't have cash on hand, but to purchase it, typically you have a down payment of
some kind, which is usually 1020, maybe 30%, depends on what kind of requirements are. And then the
rest is from a lender. 1s So that's the purchase so the down payment could be either, like I said, either
cash on hand that you have or if you don't have cash on hand, it could be someone else that provides you
that down payment. But keep in mind, the majority of the purchase is from a lender, from another lender.
It can be a bank or an institution. It can be another company that all they do is lend money on real estate
deals. It's known as a hard money lender, but there are pros and cons to using both. And I'll go through
that here real quick. If you're going to use a bank or an institution as your primary lender, meaning the 70
or 80% on your real estate deal, it can take a long time to qualify the interest rate or payment with a
mortgage, maybe. Okay. But you've got to be careful because if it takes so long to qualify, you may
not meet all the deadlines in your contract that you're using to purchase the property. The other thing is
that some lenders don't allow a second mortgage, a second note. If you don't have any money and you
need help with that down payment or even the earnest money to get the property under contract, you
might need a second lender to be able to put a second note on the property, meaning a second mortgage,
a second promissory note. It can occur depending on your personal relationships that maybe someone
would let you unsecure. Meaning they're not going to put a lien on the property with a second note, but
they were going to want a promissory note for sure. They're going to want some kind of calculation of
interest whether you're paying them every month or a balloon payment when you have some kind of exit
strategy that's a banker in instance institution and then your down payment with that. Now if you're using
a hard money lender to be the primary lender for the purchase of this can be very quick to qualify. But
you're very likely going to pay a higher interest rate and additional fees when you close. These are known
as points and those are usually to the brokers that find the deal. They're very likely also going to want not
only a mortgage but a promissory note. And then they may or may not allow a second note. Again, they
may not allow somebody to have a second mortgage to help you with the down payment. So if that's the
case then you either have to have that cash on hand or you have to have an unsecured person with a
promissory note to give you that down payment. This can be a difficult thing for the purchase. Now what
I'm going to explain I'm going to move on to the second part. Let's say you make it through the purchase
part. But before you purchase anything you've got to make sure that every single thing, every single stage
of this deal makes sense at all times. If it doesn't make sense, the deal is very likely not going to work
and it's going to stop right away. And you want to find this out as quickly as possible because you don't
want to start losing money. You don't want to start really panicking over cash flow. Okay? So let's say
you go through and you do purchase the property whether you're using a bank or an institution or a hard
money lender as your primary lender and then you have either a personal or maybe a second note as the
down payment, you've purchased the property. Okay? 1s You've got to improve that property. Very
likely, even if you've got to put new flooring paint on the walls, there's always going to be something that
you have to improve. Guess what? You need to have a sound budget on those improvements. There's
going to have to be some kind of budget. That makes sense. Very likely. You need at least one contractor
estimate and a contingency in this day and age, with COVID and the labor shortages is you must have a
contingency, which means your hold time, when you think it's going to take, how long you think it's
going to take, 1s is going to be longer than you want to admit. If you think it's going to take three months,
you probably should budget for six. That is the reality of where we are. 1s So that's your improvements.
So let's say you're purchasing something and then you're going to improve it. And then you've got to have
some kind of post improvement value. Meaning after you've bought it, after you've improved it, what are
you going to do with it? There's got to be some kind of comparable value. You got to run the comps. And
in this example, I'm just speaking merely of a single family home, I'm not going too specific into this
example, but I'm trying to speak in general of how you would go about a no money down deal using
other people's money. So post improvement, using comps, you've either had the asset value itself, either
through an appraisal, yes, you can use a Zestimate on Zillow, but my goodness, don't rely on that. There's
other ways that you can get comps for the asset itself. Also comps for rent, all of these are leading into
what is your exit strategy? Your exit strategy means how are you going to get out of the deal? Are you
going to sell the property? Are you going to ref, finance the property and pay out your investors? If so,
how much do you think you're going to refinance for? And then you're going to rent it, meaning you're
going to hold the property for a long time. Your exit strategy is your way out. Now, when we're talking
about no money down deals, purchase improvement, post improvement, and then your exit, every single
step has to make sense. If it doesn't make sense in there somewhere, meaning you've paid too much
for the property, it won't appraise, your budget is too high, you can't find a contractor, your whole time is
too high. I mean, there's any number of things, if it doesn't work in every single stage, the deal very likely
will not go through. Let's talk a little bit about investors and, and when my friend approached me to do
this podcast topic, this is exactly what she was talking about was how do I use other people's money to
help me do real estate deals and meaning other investors, right? And real estate investing is next week's
topic actually. And so you want to make sure that as you are approaching other investors, whether it's a
private party, hard money lender, could be a family member, you want to make sure that you've got your
numbers as sound as you possibly can make them. You're not making wild assumptions. And so the
question is how do you actually do this? Now remember, an investor is somebody who is expecting some
kind of a return with a secured note, whether it's a registered mortgage on title or it's unsecured with a
promissory note of some kind. Now, let me just do an aside here. I am simply just talking about an
interest return for your investors. If you're going to start talking about equity splits, meaning the investor
is actually going to be on title and there's a portion of ownership, it changes the deal. I want to make sure
you understand that if you're going to offer your investor shares in the company that's buying the
property changes the deal a lot and it also may impact requirements for licensing under the SEC because
then it becomes something more like a mortgage backed security, meaning it's an investment where
they're expecting a return. So you've got to be really careful on what you're offering your investors. The
simplest way to do an other people money, no money deal is a straight interest with a secured note or an
unsecured note with a promissory note. 1s I hope that made sense. Okay, so what do you do to justify all
of this? 2s A lot of this is 1s preparing for the deal. What do you do when you find a deal? You find a
house that is under market. It's a distressed property. It needs to be improved. What you typically will do
is you'll an offer. You put the deal under contract, which includes earnest money in either trust or escrow,
whichever applies in your local area. But then you need to start looking for your investors, and
investors are going to start wanting to know who you are, what is your company, what's your experience.
And this is what we call credibility. In fact, in the real estate development world, real estate investment
world, it's called credibility package. And it's basically a resume on yourself in the real estate world. 1s
And it includes many things including your personal credit. It can include it very likely will include
your personal net worth, your experience over time, especially doing real estate deals similar to the one
you want to do, and then your business experience specifically as a licensed either realtor broker and or
contractor or all of the above dollars, all of this lends credibility to an investor. Remember, this investor
is trying to figure out how secure is my money with you in this deal? That's what they are asking, right?
And so if you have zero money to put in this deal, what are you bringing to the table? Well, if you're
qualifying for the loan, guess what? Your personal credit is on the line. Your personal net worth is on the
line. Your experience, which is probably extensive, is on the line. And then you've got all licensing,
which means you are currently educated and very likely insured in this industry. So even though you
don't necessarily have cash, you have a lot of other aspects, you have a lot of other credibility. I've had
several people approach me and they go, I'm a brand new investor at this point. I'm talking about an
investor. Even though this is a real estate development topic. How do you actually do this? When I
don't have any personal net worth, I don't have any experience. What does it feel like? I'm going to tell
you straight up, this is hard to do. This is hard to do. Even with me and Mike's experience with our credit,
our personal net worth and our experience, it is very hard to do. But if you want to know what it feels
like to put yourself and do a deal like this and call these investors and ask them for money, ask them for
hundred thousand dollars. It is incredibly awkward. If you want to know what it feels like, sing karaoke.
That's right, sing karaoke. Get up in front of a crowd and sing the worst song you've ever had in public.
That's what it feels like. You are completely vulnerable, completely exposed. And you need to
understand that even if you completely fail, just the fact that you've done it, you've asked the question
that you have made an attempt to win. I know that sounds very strange, but that's very true. You sing
karaoke, it feels awkward. So how is it that you can actually do these deals? Here's your call to action. I
have templates ready on the fly. I have contract to purchase templates, budget templates. My credibility
packages for all of my companies, both US and Canada are ready. My personal net worth statement is
always current. Meaning if I have a lease amount change or I have an insurance premium change,
everything is updated at least once a quarter, if not more. The way that you do these deals, asset rich and
cash poor is with time, with speed. If you find a deal, you need to already have investors who have said I
am ready to invest with you and I have X amount of dollars. You just need to tell me what you bring me
the deal and I'll take a look at it. When you find that deal, the faster that you can react, the easier you will
be able to qualify and you will be able to get the purchase, get your budget, get your post improvement
and figure out your exit strategy. It is all about time. It's no longer about the cash. It's about time. Time
becomes the major factor. So my call to action to you do you have templates ready? I do. And that's how
we've been able to do these quick asset rich, cash poor, other people money deal s is I have them ready
and I keep them ready. So my question to you how many templates do you have ready? Do you have a
contract to purchase ready? Do you have credibility packages ready? 1s There's all kinds. Do you have
budgets ready? You can Google any number one of these things. I may throw a couple of these on the
website, but there's lots of places you can get them. So that's my call to action for you is if you're really
serious as a real estate developer and becoming a real estate investor, if you are asset rich and cash poor,
you've got to have your templates ready. So there it is. Thank you, friend, for asking me to do this
podcast. Holy moly. You made me think this is really hard. Next episode is as a Real Estate investor.
Nothing happens until it's in writing, so let's talk about everything in writing as an investor. It's a perfect
segue for next week's episode. I'll see you there.
Thank you for joining us this week. To view the
complete show notes and all the links mentioned in today's episode, visit our websitewww.mylifeasalandlord.com
If you're looking for educational resources for getting into real estate investing,
becoming a landlord, or even a better tenant, then I have a page on my website to get you started looking
for a solution to the pickle that you're in. I've suggestions for that, too. You can throw your situation on
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this episode of My Life as a Landlord. I'll see you next time.