Private Lending Success with Mitch Stephen

Happy Monday everyone! We’re busy over here working on a few leads and negotiating with sellers to come up with some mutually beneficial solutions! More on that later on this week!

For today I really wanted to share a guest post with you from Mitch Stephen, author of My Life & 1000 Houses and a very successful real estate entrepreneur in San Antonio, Texas. If you missed my book review and interview with him a couple weeks ago, check it out here.

As you know, my hubby & I have been securing private money lenders for our own investments and right now we’re working to secure additional lenders to purchase 3-4 investment properties (to hold) before the end of this year. Mitch has made extensive use of private money lenders for his business so I thought you might enjoy learning from him and his experiences. I certainly have!

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When I started my career I tried just about everything to find the money I needed to buy investment properties. It was not unusual for me to have $150,000 to $200,000 thousand in credit card debt on any given day…because I was buying houses on my credit cards. At the time, rates were not very good. I was paying anywhere from 18 to 25% annual interest. The rate wasn’t as important since I’d flip those properties in 60 days or less (sometimes before I bought them I had them sold!). So let’s just say that in some cases the rate isn’t as important as the margin between the acquisition price and the sales price.

Today, I’ve cultivated a pool of private lenders and they keep me rolling in and out of inventory. I pay them a reasonable interest rate in exchange for a 1st Lien on the property I buy with their money. IMPORTANT: I never let my investor loan more than 65% of the value of the property at the time of the loan. In this current “Buyer’s Market” I’m averaging about 52% Loan to Value (LTV), one person per deal/property, close at a title company, provide mortgagees insurance, 3rd party appraisal, and proof of hazard insurance…all at $0 cost to the private lender.

When you offer your prospective private lenders a 1st lien position with these types of LTVs and safeguards, it makes it a lot easier to persuade individuals to give you a try. What’s the worst thing that can happen? I get hit by a train and they get to foreclose on a $100,000 property that they have $65,000 in? Well, that’s a pretty good worst case scenario - don’t you think?

I actually give my private lenders a “What if Mitch Dies?” white paper. This piece describes exactly what to do if I don’t perform…for whatever reason. I suggest which lawyers to use and explain exactly how the gain possession of the property and profit from my misfortune. Now, at this point I feel compelled to express that I’ve never given a property back to anyone for any reason and I’ve never been foreclosed on in my entire career. As the title of my book suggests, I’ve bought and sold well over 1,000 properties in my career so I’m starting to think that my successful tactics are not an accident. But seriously, we have to talk worst case scenarios if we’re being honest with our private lenders in discussing the “what if’s of lending money on Real Estate.

What is the secret to my success? Why have I been able to purchase well over 1,000 houses and not ever lose a house or have to give a house back? It’s not all that complicated. Here’s the big secret: I never borrow up on a property. I never borrow the equity. If I buy a house at 20% on the dollar then I stay in that position on the property until 1 of 2 things happens:

I find a buyer to get a new loan and cash me and my private lender out.
I sell the property with owner financing and then sell the note (the income stream) on that house to a 3rd party for cash and pay off the private lender (keeping the equity as my profit). Meanwhile, I collect the difference between what I owe my private lender and what my owner occupant owes me every month.

I don’t get my big payday until the house is gone, down the road, closed out, and not my responsibility anymore.

The gurus that teach you (or used to teach you) how to borrow up on the property to get that TAX FREE money (tax free because the money is borrowed money…not profit from a sale) are the ones filing bankruptcy every time the economy rolls like its been doing the last few years.

If anyone’s interested, I’ll talk more about how to find those private lenders. I want to be clear; I’m sure there are plenty of other angles on this topic and am by no means the last word on anything. I can, however, feel comfortable about sharing with you what has worked for me. And I’ll tell you about the bad things that have happened to me as well as the good. Yes, I’ve never lost a house to foreclosure or given a house back to a lender – ever…but I have lost money on some houses. I’ve lost money on my deals from time to time (not often thank goodness) but my lenders NEVER lose money my deals! It was not my lenders problem and they never knew anything about my problems for good reason…it is NOT their problem! So don’t think that I’ve never failed because I have…but I’ve never failed my private lenders.

It would be financial suicide to fail your lenders. It only takes one mad investor to ruin a life time of good deals. So here’s another little secret to my success; I keep an emergency fund especially for those deals that I need to write a check for to get out of. “Your first lost is your best loss!” Get out of bad deals quick. Pay the price…and move on!

In closing I’ll to leave you with two questions;

How many houses can you buy with your money?

How many houses can you buy with ‘other people’s money?” (opm)

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Feel free to ask Mitch any questions you may have in the comments below. Thanks so much Mitch for sharing some of the secrets of your success in this area!

P.S. If you haven’t already, be sure to connect with Mitch Stephen on Facebook and Twitter.