Life Happens, How You Deal With It Is What Counts
By M. Jane Garvey
Jane Garvey says investors that have been through a crisis can tell you how important it is to have backup plans. Notice, I said backup plans, not just a backup plan. Flexibility is needed to not only survive, but to thrive. These plans relate to all matter of things in your business. Of course, the time to be thinking about them is before they are needed. If you wait until they are needed, you may be the guy trying to buy a generator in a power outage, sandbags in a flood, or find funding as banks are failing. If you wait for the crisis to hit you personally, your stress levels may quelch your creativity so you can’t even think of ways to deal with the problems you face.
“Expect the best. Prepare for the worst. Capitalize on what comes.” Zig Ziglar
Zig Ziglar hit the nail on the head with this statement. If you are paying attention and preparing, you will be better prepared to thrive rather than just survive. Be the one who has umbrellas to sell in the downpour, shovels and snowblowers to sell as the snowstorm approaches, and excess toilet paper to ingratiate yourself to your friends when they run out. Finding a need and filling it is a winning formula for success. Even better, anticipate the need and be prepared.
What got me thinking about this topic today was some news I heard about credit being pulled by a bank due to a person being outspoken against the current administration. While that is another topic that we need to deal with, it is not the point of today’s article. Being prepared is.
Funding! If you rely on bank financing to do deals, you should make sure that you have alternate plans in place. The fine print in many agreements for Home Equity Lines of Credit, Business Lines of Credit, Credit Cards, and other funding allows the lender to pull the funding at any time. Sometimes it is just the additional available funds that are pulled. This can be horrible if you are counting on those funds to finish out a rehab. Funds that you have already borrowed can sometimes be called due as well. Read the fine print so that you know what you have signed up for. Some of the most brilliant people I know have been caught unprepared when funding disappeared overnight.
It may seem unbelievable that lenders would pull financing when borrowers are current on their payments. Trust me, it has happened, it does happen, it is happening, and it will happen! Your ability to survive an economic shift may be dependent on your preparedness and willingness to have backup plans in place.
Lenders will also pull funding commitments when the borrower’s circumstances change. Try losing a job, losing a spouse or a business partner mid deal. You will quickly find that the lenders look at you differently. If you have deals under contract, what are your plans if you can’t close them because your funding disappears?
For funding safety, I would suggest that you always have accounts at more than one bank, and if feasible a credit union as well. Build a relationship with each of them. Have some private lenders at the ready too. You should develop relationships with friends who could bring strong credit, money, or other assets to a transaction for a piece of the deal if needed. Having these relationships in place may necessitate giving up some of your profits when you don’t need to, so that they will be available when you need them. You may be able to use these same relationships and connections to solve other people’s funding problems.
Right now, there is tremendous inflationary pressure on our economy. The relentless spending by government is only adding to the likelihood that we are in for an economic day of reckoning. While it is tough to predict what exactly this will look like, I would suggest that you learn everything you can about seller financing. Practice using it as well.
When I started investing in real estate, interest rates were in the high teens. People were getting double digit interest on their savings accounts. Lenders wanted 18%+ for mortgage rates if they were willing to lend. Strangely, people still were doing deals. Why? Because life happens. People get transferred, people get old and need to move out of their homes, people die and their heirs need to sell their property, people get divorced, people lose their homes to foreclosure, etc. On the other side of the coin, people get transferred or promoted and want to buy a home, people inherit money and want to buy real estate, people get married and start a family and want to buy, people retire and move, life goes on.
Life continues to happen, even in an economy with huge inflation. There is a need that needs filling. We managed to successfully do deals by giving the seller more on their money than the bank would, while we paid less than the bank would have charged. Sellers were willing to listen since buyers were somewhat scarce. The main hurdle that needed to be cleared was the middlemen that didn’t want the buyer and seller to have a conversation. Some of the smarter ones were more open to the conversation happening during this time since they were not getting paid if the deals didn’t happen.
Bank funding was available for rehabs, and the high interest rates were more tolerable for short term. That worked while real estate was a part time gig. After we quit our jobs and found that banks were reluctant to lend, we used partners who could enhance our credit so the banks would lend us money. The key to success in all of this was creating deals that worked for everyone and building relationships that allowed for the partnerships.
Take the time to look for vulnerabilities in your current strategies and situation. The time for developing your back up plan is now, before you need to implement it. Prepare so that you can not only survive, but thrive, in the changing market.
Jane Garvey is President of the Chicago Creative Investors Association.
