1/23/11: Finding Financing When Funders Are Fickle

I love you.  I love you not.  I love you. I love you not.

Financing is the life blood of real estate – especially for real estate investors, developers and re-habbers.  When times are good, lenders are BEGGING for your business.  Do you remember when there was so much money chasing deals, if you had a pulse you qualified?  Ahhh….the good ‘ole days.  But we digress.

Today, it’s a different story.  Lender’s lust for lending has grown cold unless you’re stacked with cash and have a nice asset base.  And even then it’s hard to get a date to the funding dance.  Lenders can be so fickle!

Of course the drive to reproduce profits is hard to suppress.  To find out what’s happening on the funding scene from a developer’s perspective, we decided to call someone who’s been on the prowl for funding for most of this real estate recession.

In the radio love shack for this episode:

  • Your host with the most, Robert Helms
  • Your co-host with the almost, Russell Gray
  • Special Guest, International Real Estate Developer and Summit at Sea Faculty Member, Beth Clifford

What are you going to do when the well runs dry?  Are you going to run away and hide?  (Hint: Fats Domino – late 50’s when the Godfather first started investing.)

When the flow of capital to the market place abruptly stopped, many real estate investors’ and developers’ financial hearts stopped beating.  Despite various attempts by the Federal Reserve and Washington DC to get money flowing again, it still hasn’t happened.  So vulture firms sprang up and have been carrying off the carcasses of the permanently broken-hearted, while there are many walking wounded who may never love real estate again.

But there are also a number of stalwart real estate lovers who refuse to be put off by a little (okay, a LOT) of adversity.  How may times are you willing to take “No” to get to a “Yes”.  A yes is SO worth it!

And even though many of the old haunts like commercial banks aren’t too flush with good prospects, new establishments are opening all the time – where private capital and creativity are coming together to hook up investors with capital.

To cut to the chase, and avoid an NR rating, in this episode we get our special guest to reveal some of the lengths she’s willing to go to find money for her projects.  And though you may never be an international real estate developer managing multi-million dollar projects, you can take the same business principles and apply them to your project – no matter how small.   Yes, it’s true.  When you’re in love, size doesn’t matter.

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10/24/10: Big Profits without Wall Street or Tenants – How Private Investors are Making Money from the Financial Crisis

When an economy burns down, the landscape is charred and the financial food chain is disrupted.  Viable businesses starve for funding, while investors hunger for return.  The normal eco-system has broken down and sources of capital and investment opportunities aren’t where they’re supposed to be.  Everything is in disarray and the ensuing uncertainty breeds fear.

But it also brings opportunity.

Sadly, after an economic forest fire, most people focus on what’s burned.  They hang around the old Wall Street and banking feeding grounds, waiting for things to grow back and settling for low returns or grubbing for hard to find funding.

But others are able to find new pastures simply by looking past the beaten path and seeing where the new opportunities are growing green in more fertile soil.

We found a guy who’s doing something so brilliant that we decided to dedicate this episode to cultivating our understanding of his model.

Plowing through the conversation in the studio for this adventure in broadcast excellence:

  • Your show host and real estate Yogi, Robert Helms
  • Co-host and Boo-Boo bear, Russell Gray
  • The man with the Smokey voice, the Godfather of Real Estate, Bob Helms
  • Special guest, investor and real estate entrepreneur, Ron Black

A few episodes back, Ron Black called in and seeded our minds with the awareness that in today’s charred economy, conventional banking is failing to feed the needs of both savers and borrowers.  Interest rates paid to savers are too low.  Access to loans for consumers and business is too tight.  Even well qualified borrowers are having a hard time finding the funding needed to grow the economy.

For investors in the past, long term appreciation has proven to provide plenty of financial timber for building a strong retirement.  Just buy stocks and real estate, water them faithfully, and in time they grow into mighty oaks of equity.  But today, the economic forest has burned down – and while those who plant now will likely have some big trees in 20 or 30 years, what if you don’t have that much time?

For baby boomers, the last 10 years of buy and hold stock investing has been disappointing at best. The Dow hasn’t grown.  It’s even worse for retired folks trying to live on interest income when yields are low single digits.  When you’re living on interest, if rates go from 4% to 2%, you just suffered a 50% pruning.  Ouch.

When it comes to personal finance, conventional financial planning models are struggling to adapt. The whole system is designed to sell stocks and bonds through the Wall Street machinery and to park money in the banking system.  Then these “experts” take your money and (as we’ve all now sadly discovered) they do all kinds of risky things, most of which the average person doesn’t understand, can’t control and probably wouldn’t approve of.

Conservative individual investors have been gravitating more towards dividend paying stocks. These stocks are typically issued by big companies with solid profits (or at least as solid as they can be in a fragile economy).  With yields of 6-8% and the opportunity for long term capital gains, we understand that this looks “good” compared to whatever green shoots are peeking out of the charred landscape of traditional Wall Street offerings.

Of course, if times get tough for the dividend paying company, they may choose to reduce or eliminate the dividends.  Or, perhaps they’ll incur debt or distribute vital reserves to continue to pay dividends when they really can’t afford it.  If this happens, you can bet the stock price will drop, which makes an exit in favor of a better offering potentially expensive.  Buy high and sell low is not a winning formula.

What about high yield bonds? Money for top quality corporate borrowers is pretty cheap right now.  The best companies are sitting on piles of cash waiting for the economy to stabilize.  They hardly need to borrow and wouldn’t pay much to do so.  So high yield bonds are likely to carry substantial risk.  Plus, are you ready to trust the Wall Street credit rating agencies again?  You know, the ones that gave sub-prime mortgage backed securities a trip A rating?  We’d rather go for things that we can see and understand.

Then there’s high interest savings accounts and high yield CD’s.  But remember, today’s definition of “high interest” is maybe 3-4%. Whoopee.  Plus, the better rates mean locking the money up for years.

So the conventional investing trees are pretty bare right now.

The problem with the Wall Street model is that investors are too far removed from the actual investment and have so little security if something goes bad (does that really happen?), that even in the good times, it’s still risky.  The only reason it doesn’t feel risky is because Wall Street insulates you.  Plus, all the slick marketing is intended to make you feel like giving your money Wall Street and the banks is not only normal, but your only choice.

With so much retirement planning marketing built on the Wall Street model, most people don’t have any idea where to find another option – or even what it would look like.  And when they do, those Wall Street paradigms pop up and prevent people from seeing that low risk, high yield, short term, cash flow investments are possible in today’s market – specifically because the Wall Street systems have broken down.

In this episode of The Real Estate Guys™ Radio Show, our special guest Ron Black describes how he identified a void left by the breakdown of the traditional mechanisms for matching investors with yields.  Best of all, his model cuts out Wall Street and the banks (after all, they’re really just high priced middlemen) and gets the investor very close to their actual investment.

The bottom line is that double-digit high yields are currently available on short term, secured investments which are easy to access and understand. It’s something anyone can do in today’s market to supercharge their portfolios, whether seeking current income or long term growth of principal.  Think of it as Miracle Gro for your portfolio.

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Reality or Mirage?

Today’s Wall Street Journal reports that MGM Mirage is cutting the price of  the condominiums in its spectacular City Center project in Las Vegas, Nevada.  How big a cut?  Thirty percent!  We’re not sure what their margin is, but that’s probably all of it and then some. Ouch.

Worse, it’s probably still not enough. But only time will tell.  The cuts are a little surprising to us, but clearly they’re the result of a major reality check for MGM Mirage.  And this post isn’t really about Las Vegas, MGM or City Center.  It’s about the LESSONS available in this situation for all of us.

Lesson #1 – The market sets the price. Whatever MGM needs to cover its cost is interesting, but only to MGM.  The market decides what its willing to pay.  In this case, MGM is hoping it’s just 30% off.  Before it’s all done the market may want more.

Lesson #2 – The market is fickle. Three years ago people were willing to pay more. That’s why MGM sold so many.  People had equity, unemployment was half what it is today, financing was readily available for almost anything related to real estate  – even condo-hotels.  But a funny thing happened on the way to the closing table.  Okay, not so funny.  But the stream of foreign money through Wall Street into mortgage backed securities got shut off almost over night, taking with it equity and working capital.  A market heavily driven by momentum did an abrupt 180.  Whether you’re rehabbing a fixer upper or building a skyscraper, if your success requires you to find a ready,willing and able buyer (or in MGM’s case, thousands of them), you better get to market fast – because things can change.

Lesson #3 – Have a Plan B. Donald Trump’s Plan A was to sell the condos in his Las Vegas project, just like MGM and every other developer participating in the Las Vegas rush for real estate gold.  When Plan A bit the dust, he converted the project into a hotel.  Still a tough gig, but the goal is to get some cash flow to hold the property until things improve.  Rich Dad Advisor and Robert & Kim Kiyosaki’s investment partner Ken McElroy says they only do deals they can afford to stay in for 10 years.  Plan A may be to build or fix up for quick sale, but Plan B is to structure the deal so it still makes sense if they have to hold.  Plan A is a win and so is Plan B.

Lesson #4 – Understand the other party’s needs, wants and desires. When you’re in a deal that’s going sideways, whether for reasons under your control or those not (certainly MGM could not predict, much less control the mortgage meltdown), it’s easy to fixate on your own pain.  If buyers aren’t willing to close on City Center, should it be assumed they are unwilling because of the price?  Could they be unable because of lack of financing?  Could they be afraid of reduced rents on their units due to the soft economy?  Until you know what the issue are for the other party (again, in MGM’s case, thousands of them), you might give up or give away profit unnecessarily.

Lesson #5 – Use Creativity to Protect Profits (or minimize losses). Certainly we don’t know all the considerations for MGM, and presumably these are extremely smart people, but we know many investors who are in contract for units in City Center and we haven’t heard any discussion of owner financing.  We know that condo-hotel pricing has all but disappeared. For many buyers getting a conventional third party loan is an impossibility.  But what if City Center carried back the financing?  It doesn’t get cash, but it gets an asset (a mortgage). For those buyers who need income to service the mortgage, couldn’t MGM as the hotel operator, steer more guests into the unit? After all, they still get their operator’s share of revenue, plus they get the mortgage payment.  The owner may need to kick in a little cash flow to feed the mortgage, but better than losing one’s deposit. After all, it’s still one of the premier properties in the country.  Where do you think values will be in 20 years?

You may not be a Big Time Operator like MGM.  But real estate is real estate and when you watch what’s happening for the BTO’s, many of the lessons will apply to you.