Ne 6 Ru w le In s f ve or sto rs
The Official EZine of AAPL May/June 2016
JOHN TEDESCO + +
Private Mortgage Investing
Understanding Credit Risk
Private Lender MAY/JUNE 2016
FINANCE: PRIVATE MORTGAGE INVESTING by Curt Novy
FINANCE: HOW DOES FACTORING WORK? A Real-World Case Study by Mike Ponomarew
MANAGE AND LEAD: HOW TO EXPLAIN INBOUND MARKETING TO THE BOSS by Chrissey Breault
LENDER LIMELIGHT: JOHN TEDESCO
BUSINESS STRATEGY: THE ADVANTAGES OF INVESTING IN NON-PERFORMING NOTES WITH A SELF-DIRECTED IRA by Clay Malcolm
BUSINESS STRATEGY: NAVIGATING THE PRIVATE LENDING MARKET by Dennnis Baranowski
ALTERNATIVE ANGLE: GARAGE-STYLE INNOVATION by Adapia D'errico
LEGAL: WHAT YOU NEED TO KNOW ABOUT CONSTRUCTION LENDING IN A POST-SB978 WORLD by Melissa Martorella, Esq. and Nema Daghbandan, Esq.
REAL DEAL PERSPECTIVE: 6 RULES FOR NEW INVESTORS by Abhi Golhar
JOIN OUR SOCIAL NETWORKS /AAPLONLINE
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CORNER OFFICE “Successful people take big risks, knowing they might fall hard. But they might succeed more than they ever dreamed." To me, being a leader means having the strength and conviction to follow through on a vision. This great nation of ours – a nation that was founded on tremendous risk – is now turning into an overly cautious country as far as business ventures are concerned. Truth is, sometimes you will not know what your market is until you try. At the American Association of Private Lenders and Private Lender, we have taken many risks in hopes of reaping the rewards. Many have paid off, while many others have not. But without taking the leap, we would have never realized the potential we have today. As we continue to grow as an organization and publication, you will see us taking many more risks to achieve the success to which we all aspire. I urge you also to take that leap you have been contemplating. It just might pay off more than you ever imagined. • LINDA HYDE
Executive Director, AAPL
Private Lender R. MICHAEL WRENN
CEO, Affinity Enterprise Group
President, Affinity Enterprise Group
Executive Director, AAPL
LINDA WIENANDT Editor-in-Chief
CHRISSEY BREAULT Production Manager
EMILY BOWERS Graphic Designer
Advertising and Sales Private Lender is published bi-monthly by the American Association of Private Lenders (AAPL). AAPL is not responsible for facts or opinions as presented by authors and advertisers.
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BACK ISSUES: Visit www.issuu.com/aapl, email PrivateLender@aaplonline.com, or call 913-888-1250. For Article Reprints or Permission to use Private Lender content including text, photos, illustrations, logos, and video: E-mail PrivateLender@aaplonline.com or call 913-888-1250. Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited. Copyright © 2016 American Association of Private Lenders. All rights reserved.
CONTRIBUTORS MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE
A Pittsburgh native and hospitality major, Chrissey started a part-time photography and design business in 2009, while working full-time in local government communications. She is currently Director of Marketing and Education Services with the American Association of Private Lenders.
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Dennis Baranowski is a leading advocate in mortgage banking transactions as well as default related legal services. He has authored articles on loss mitigation after default and compliance issues under the Truth-In-Lending Act. Dennis focuses on default-related legal services including foreclosure, bankruptcy, and loss mitigation, as well as lender compliance and custom loan documentation. Dennis believes in dedicated, constant communication, and providing swift, custom, effective, and efficient solutions to client problems. He understands that his role is not to stand in the way of a transaction, but to be a trusted guide in all lending matters. Contact Dennis.
Nema Daghbandan’s practice encompasses all facets of real estate transactions representing lenders and brokers, including loan documents for commercial, residential, construction, multi-family, servicing agreements, spread agreements, assignments (of all types), leases, lien releases, procurement agreements, intercreditor agreements and subordination agreements throughout the country. He also leads the firm’s non-judicial foreclosure practice and advises clients on all default related matters. He has closed hundreds of millions of dollars in loans throughout the country. Learn More.
AdaPia d’Errico is an entrepreneur, investor, and strategic business adviser. She worked in banking and finance in her early career, transitioning into entrepreneurial ventures in brand development and strategic marketing across the new media, consumer products and entertainment industries. Over the past three years, she has done a deep dive into the high-growth alternative finance space as Chief Marketing Officer at Patch of Land, where she is responsible for driving brand awareness, marketing and communications strategy, and partnerships and business development. She has positioned the company as a recognized leader in real estate crowdfunding, P2RE®, and marketplace lending. AdaPia is a frequent contributor and presenter on these topics, as well as on topics ranging from leadership and marketing, to real estate, economics and crowdfinance.
Abhi Golhar is Managing Partner at Summit & Crowne Partners, an Atlantabased real estate investment firm. Since 2003, Abhi has utilized a “valueadded” approach to capitalize on real estate renovation, new construction, and development opportunities in the Midwest and Southeast United States. He actively educates and works with seasoned debt and equity investors to employ market-driven investment strategies that yield success. Abhi holds a BS in Electrical Engineering from the University of Michigan. You may find him tweeting @AbhiGolhar, delivering massive value to investors at #RealEstateDealTalk, sending a market trends newsletter at firstname.lastname@example.org, or connecting on LinkedIn. 5 PRIVATE LENDER
MEET A FEW OF THE TALENTED INDIVIDUALS WHO HELPED BRING THIS ISSUE TO LIFE
Clay Malcolm oversees most avenues of marketing, teaches Continuing Professional Education and informal classes and webinars, and facilitates the training of business development and client representative teams at New Direction IRA Inc. Clay has more than 20 years of management experience in various roles, including as the vice president of Jersey Films and as a director for Princeton Review. Clay draws upon his teaching background – including instructor roles with Colorado Outdoor Training Initiative and Ivy West Education – to develop the educational aspects of New Direction IRA and impart knowledge about self-directed IRAs to its clients and prospective clients. Clay received his Bachelor of Science degree in Communications from Northwestern University. MELISSA C. MARTORELLA
Melissa is a 2015 graduate of the University of California, Irvine School of Law. She joined the Transactional Team at Geraci Law Firm in August, and is looking forward to learning more about Geraci’s clients and their needs. She is excited to provide peace of mind in every client interaction, and hopes to learn from the collaborative, passionate environment at the firm. While in law school, Melissa was a Lead Article Editor and later a Senior Research Editor for the UCI Law Review. She also participated in the Community and Economic Development Clinic as a team leader on a major complex litigation case. As a second year, she was a Research Assistant to Dean Erwin Chemerinsky, and later interned at the United States Attorney’s Office for the Southern District of California. Finally, she was involved with the UCI Law Mentorship and Pre-Law Outreach Programs, where she mentored incoming law students and reviewed personal statements for potential law school applicants. Prior to law school, Melissa obtained her Bachelor of Arts in Hispanic Studies and History from Boston College in 2010. In 2011, she graduated from Tufts University with a Master of Arts in Teaching with a focus in Spanish Secondary Education. In her free time, Melissa enjoys watching college sports and attending networking events. CURT NOVY
Curt Novy is a nationwide mortgage analyst and senior bank underwriter with 25 years lending experience. He provides consulting and expert witness services to banks, financial institutions, law firms, governmental agencies, and private investors. He specializes in assessing credit risk and has analyzed over 10,000 mortgage and real estate transactions. State & federal agencies often retain Curt to analyze criminal fraud investigations and review FBI evidence and wire taps. His consulting firm, Corporate Mortgage Advisors, has been in business since 1997 and is licensed a real estate broker. Disclosure: Novy does not directly provide mortgage investments and is not licensed as a securities broker or financial adviser. 6 PRIVATE LENDER
Fast funding for purchase and rehab projects! Close as fast as 48 hours. Joint venture/equity funding. Common sense underwriting and approvals. Up to 100% financing including renovation costs. Free resources: education, training, tools, coaching and networking.
Contact Kevin Earnest today at 407.252.6282 or email@example.com
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WHAT'S CURRENT TRENDING INDUSTRY TOPICS
REALTYSHARE ADDS CHIEF CREDIT OFFICER TO EXECUTIVE TEAM Arash Sotoodehnia has joined the executive team of online real estate marketplace RealtyShares as Chief Credit Officer, as the crowdfunding platform seeks to keep pace with increasing demand for its services. In his new role, Sotoodehnia is responsible for managing RealtyShares’ risk analytic framework, policies and guidelines. He brings nearly two decades of experience in the financial services industry to the role. “Given Arash's prior experience leading risk at firms such as Citi and Fannie Mae, I believe he will be very impactful not only to RealtyShares but also the entire industry,” said RealtyShares CEO Nav Athwal. “As we continue to build the leading online marketplace for real estate investing, our priorities include increased automation through technology and product improvements, greater liquidity through self-directed individual investors as well as institutions and more intelligent credit modeling to enhance our ability to address market- and asset-level risk. With the addition of Arash to the team, we have an amazing leader to really build the credit side of our business, which we believe will, in turn, attract additional liquidity from a diverse set of investors.” During his previous tenure with Citi Mortgage as Head of Risk Policy and Controls, he spearheaded the development and implementation of the company’s Mortgage Risk Appetite Framework. He was responsible for developing and publishing Citi’s mortgage credit policies while overseeing a team of 75 risk professionals. He also served as a member of Citi Mortgage’s Collateral Risk Committee, the Credit and Market Risk Committee 8 PRIVATE LENDER
and the Risk Committee. Prior to that, Sotoodehnia held several senior positions with Ally Financial, including Global Consumer Credit Officer and Chief Risk Officer of Ally Insurance. He also served as the Chief Risk Officer of Ally’s ResMor Trust subsidiary from 2008 to 2010. Sotoodehnia began his career with Fannie Mae, by developing the company’s multifamily guaranty fee pricing models. In his final assignment with Fannie Mae, he acted as the Director of the Risk Policy Group. Sotoodehnia joins the RealtyShares team at a time when the platform is focused on bolstering its position as a pioneer in the real estate crowdfunding industry. His hiring follows RealtyShares announcement earlier this year of a $20 million Series B funding round, led by Union Square Ventures, with support from Menlo Ventures and General Catalyst Partners. The platform also recently announced the launch of a diversified equity fund targeting institutional investors who wish to capitalize on RealtyShares' growing access to unique investment opportunities. As a key player in the company’s decisionmaking, Sotoodehnia is charged with ensuring that RealtyShares continues to be a driving force in real estate investing while adhering to the highest professional standards. “We’re disrupting an entire industry and it’s always very exciting to be the vanguard,” said Sotoodehnia. “My job is to determine how we articulate the risk and implement policies and procedures in a way that’s innovative while adding value for our investors, sponsors and RealtyShares itself.” Read more about Sotoodehnia’s thoughts around crowdfunding and why he joined the RealtyShares team. Source: RealtyShares
TRENDING INDUSTRY TOPICS
LENDINGHOME LAUNCHES CROWDFUNDING PLATFORM LendingHome, an online mortgage marketplace backed by more than $100 million in venture funding, has launched a crowdfunding platform, a move that is expected to add to already intense competition in real estate crowdfunding, where dozens of startups are jostling for control of a small but growing market. The California-based firm issues one-year, firstlien mortgages on one- to four-family homes and passes them on to institutional investors. Expanding from institutions to individual investors, who can now buy notes tied to mortgages for as little as $5,000, expands the platform’s investor base, explained CEO Matt Humphrey. LendingHome claims to have originated $550 million worth of mortgages since its 2013 launch, with $220 million returned to investors. Its average loan size is between $150,000 and $200,000, with a loan to value ratio of a little over 70 percent. The firm’s new crowdfunding offering will compete with platforms like California-based Patch of Land, which also offers notes tied to first-lien mortgages to small-time investors. While most crowdfunding platforms started out by targeting smalltime individual investors and later branched out to institutions, LendingHome took the opposite approach. Humphrey argued that focusing on deep-pocketed institutions first allowed the firm to grow more quickly than its peers. “To get scale you need hundreds of millions in capital in the first few years,” he said. “And that can be hard.” Source: The Real Deal 9 PRIVATE LENDER
PATCH OF LAND ANNOUNCES LEADERSHIP CHANGES Paul Deitch, formerly of Oaktree Capital Management, has joined online real estate lending marketplace Patch of Land as Chief Executive Officer. In the role, he is responsible for leading the firm’s next phase of growth. Co-founder Jason Fritton moves up to Executive Chairman. Deitch has more 25 years of financial services experience, most recently as Managing Director at Oaktree Capital Management where he led the development of the firm’s operating infrastructure as the organization grew from $50 billion to $100 billion in AUM, broadened investment strategies and distribution channels, built and acquired firms, and successfully executed its 2012 IPO. Prior to Oaktree, Deitch held executive roles in both management consulting firms as well as Fortune 100 banks through periods of rapid growth and transformation. “We are excited to have someone of Paul’s caliber and experience join Patch of Land as we push past $100 million in lending activity,” said Fritton. “Paul brings executive experience from multibillion-dollar companies in both banking and investment management running at scale and has deep experience across a broad range of functions including technology, operations, risk management, product development, marketing, finance and compliance—all of the ingredients we will need as we successfully grow our firm.”
WHAT'S CURRENT TRENDING INDUSTRY TOPICS
Fritton launched Patch of Land in October 2013 based on his vision to evolve real estate financing to be tech-enabled, data-decisioned, and easily accessible to a marketplace of borrowers and investors. This has resulted in Patch of Land’s leadership position in the real estate marketplace lending industry as the company achieved over 500% origination growth in 2015. “I am honored to be joining the stellar team at Patch of Land and excited to lead the company’s next phase of growth,” said Deitch. “We have a huge opportunity in front of us to continue to expand and diversify the firm’s solutionbased lending platform, which automates many underwriting processes and offers investors transparent, diversified, and understandable investment choices.” Source: Patch of Land BUSINESS DEVELOPMENT MANAGER SOUGHT FOR STARTUP Fund Management Company LLC, USA is seeking a full-time Business Development Manager as the firm continues to set up its U.S. operations. The company’s mission is to provide fund management services for U.S. and foreign investors and generate steady income at a competitive rate of return, according to spokesperson Anoop Joy. Job Duties: • To be responsible for business development to maximize the operational revenue. • Manage and build relationship with prospective clients. • Conduct seminars, presentation and demonstration of our services to the 10 PRIVATE LENDER
prospective clients in USA and Gulf countries. • Manage sales and marketing activities to meet organization budget and goals. Qualifications: • Five to seven years prior working experience in fund management companies raising funds from investors. • Certified Public Accountant designation or Master’s degree in Finance and Accounting. Other Requirements: • Networking, Communication, Public Speaking, Research, Writing, Fund raising, Closing Skills, Motivation for Sales, Prospecting Skills, Sales Planning, Identification of Customer Needs and Challenges, Territory Management, Market Knowledge, Meeting Sales Goals, Professionalism, CRM, and Microsoft Office. • Must be willing to travel to Gulf countries frequently to meet prospective clients. For information or to apply: Anoop Joy +965 66197372 firstname.lastname@example.org
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Geraci Law Firm is Proud to Announce Their Partnership with AAPL
Ger aci Law Firm is your partner through all stages
of your company, whether you are a private lender, investor, hedge fund, crowdfunder, or real estate rehabilitator. That’s the reason that American Association of Private Lenders’ (AAPL) largest members in the private lending industry are Geraci Law Firm clients, why we are general counsel to AAPL, and why we helped found AAPL in 2009. Whether you are just starting up, rapidly growing, expanding, or you are preparing to exit and sell the company, Geraci Law Firm can help you every step of the way. We have helped our clients draft up cutting edge securities private placement memorandums (both 506(b) and 506(c)) and have great relationships with both state regulators and the SEC. We have drafted custom loan documentation for AAPL members, including custom rehabilitation loan documentation, custom commercial documentation, and custom residential loan documentation in most of the United States. Finally, if it comes down to a must-win situation, our team of litigation experts assist from advising your local counsel how to win or representing you directly against borrowers, ex-business partners, shareholders, or anyone else knocking on your door. In short, we have helped your peers build stronger companies better positioned to accomplish their goals, and we can help you too.
Just a few of our AAPL Member Clients... • CCG Capital • FCI Lender Services • Rama Capital Partners • Trillion Capital • and many, many more. The AAPL members we represent have originated over $1 billion dollars of loans using our advice, consulting and documentation, and service over $3 billion dollars of loans.
Will you be our next success story? Call us at (949) 379-2600 or email our Marketing Coordinator, Ruby Keys, at email@example.com and ask us how we can help you become stronger.
“We truly believe AAPL’s partnership with Geraci Law Firm has genuinely been priceless to us. They are the go-to team in private real estate lending. We feel that the support from Geraci has contributed to the overall growth of AAPL. We consider them to be more than just partners—they’re our friends.” -Linda Hyde, Executive Director
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Geraci Law Firm
90 Discovery • Irvine, CA 92618 • Phone: 800-434-6125 • Fax: 949-379-2610 • www.geracilawfirm.com
FOCUS... ON YOUR CORE BUSINESS and let us handle your accounting.
Get virtual accounting solutions for private lenders, mortgage pools, and real estate firms tailored to your specific needs. Youâ€™ll have accurate and up-to-date financial information on demand. Your sensitive data is always confidential and secure.
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www.RollinsConsultingGroupLLC.com or 386-562-3016
THINK NETWORKING. The Think Realty calendar is filling up with great opportunities for real estate investors to network, learn, and make deals.
THINK REALTY GLOBAL CONFERENCE & SHOWCASE San Francisco - Aug 11-13
The premier international event for savvy real estate investors. Take advantage of high-level networking and education sessions. See a session lineup at ThinkRealty.com.
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THINK REALTY EXPOS Power-packed events featuring education sessions, networking and resources for new investors and seasoned pros.
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Become a Think Realty Member and receive FREE access to all Think Realty Expos, and discounted access to our Global Conference! For more info or to register, visit ThinkRealty.com!
Private mortgage investing: Understanding credit risk by Curt Novy
WHAT IS PRIVATE LENDING? Simply put, private lending is filling the needs of real estate investors who require or prefer short-term loans funded by private lenders who essentially act as the bank. Often, conventional lenders cannot close a loan transaction quickly enough or the borrower may not meet stringent lender qualifications. Private lenders provide a vital source of alternative financing for builders and real estate investors, and borrowers are often willing to pay a premium (higher interest rate) for a private loan. If structured correctly, private lenders can earn a good rate of return on their investment and real estate investors have a steady source of funding to purchase or refinance debt. SEEKING HIGH-YIELD INVESTMENTS It’s no secret financial advisers, hedge funds and individual investors are awash in cash and chasing high-yield investments. Today’s low savings rates offered by financial institutions have given way to riskier and higher-yielding real estate-related investments. Unfortunately, financial advisers who pitch these real estate secured investments often focus more on yield 14 PRIVATE LENDER
and less on risk. In private lending, earning high rates of return are indicative of a higher level of risk that simply should not be ignored. The objective, from the private lender’s point of view, should be to earn a high yield but carefully manage the underlying risk to avoid loss of principal investment. UNDERSTANDING RISK AND REWARD Carefully balancing risk and reward is key to
FINANCE protecting your investment from loss. Financial institutions that lend money on a daily basis adhere to proven risk management principles and factors to manage credit risk. It’s important to understand big banks and other financial institutions expect a certain number of loans to go into default. Losses are part of the business of lending. Private lenders, on the other hand, may be severally affected by a borrower default. Therefore, a high level of due diligence and professional guidance is necessary. Private lenders should always focus on understanding the risk of lending money and identify steps necessary to reduce risk. Earning a high rate of return only works if the borrower performs and repays the loan! Mitigating credit risk is an effective way of reducing the likelihood of borrower default, or at least minimizing the effects of an unforeseen default. Properly managing risk is therefore extremely important to private lenders, and substantial due diligence and professional guidance is recommended. Understanding risk factors and ways to reduce credit risk can go a long way toward avoiding borrower default. A mortgage risk analyst or underwriter is a specially trained credit expert who reviews the key credit factors and forms an opinion as to whether the borrower will likely repay the loan or is more likely to default. No lender can guarantee a loan will not go into default, but following established risk factors or retaining an underwriter to assess risk will reduce the chances of default. Private investors should apply the same basic principles to assessing credit risk and should always conduct their own due diligence. Some private lenders retain a professional skilled in mortgage analysis to formally assess 15 PRIVATE LENDER
••• credit risk and prepare a written risk assessment report. Typically, a mortgage analyst will prepare a formal written report that identifies credit risk factors and provides an opinion as to overall credit risk. A factual, independent underwriting analysis is often well worth the cost of the report, which generally ranges from $500 to $750. WHAT FACTORS AFFECT CREDIT RISK? Many factors go into assessing credit risk. In private lending, one of the primary factors is equity in project or down payment. In other words, a person investing 30 percent to 40 percent of his or her own money in project is a good indicator the loan will be repaid. This is called “skin in the game.” The more equity contributed, the more vested that person is in repaying the loan to avoid loss of his/her cash investment. The analyst looks closely to determine who’s putting up the down payment and whether third parties, such as real estate agents, have an interest in the project. Analysts look for factors that may corrupt the transaction, such as financial kickbacks or other individuals who are actually fronting the down payment money. Other important credit risk factors analyzed by the mortgage analyst include appraisal reports and sales comps, project viability and inspections, environmental concerns, permits and zoning, borrower reserves, title records, escrow documents, purchase contracts, real estate MLS records and sources of repayment. In summary, a wide variety of factors should be considered before committing to fund a private mortgage investment. An informed lender is one who does all of his/her homework, knows everything about the transaction, has conducted significant due diligence and understands the risk factors. •
HOW DOES FACTORING WORK? A REAL-WORLD CASE STUDY by Mike Ponomarew
o recap: Factoring is the purchase of Business to Business (B2B) or Business to Government (B2G) accounts receivable for goods or services that have been rendered in the past for a discount fee. There are two key disbursements associated with a Factoring facility: 1
DVANCE: Vendor (Factoring client) reA ceives up to 95 percent advance of the total invoice, when the invoice is purchased by the Factor.
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ESERVE: Vendor (Factoring client) receives R the balance once the customer has paid for the invoice, less Factor’s discount fee.
Here is a real-life case study that will serve to better illustrate how factoring works. Synchromesh is a small industrial detergent manufacturing company, with monthly sales totalling $86,000. Synchromesh is awarded a large contract from a new industrial customer to supply a truckload (88 drums of bulk industrial laundry detergent)
FINANCE each month for the next 12 months. Total value of the purchase order – $816,000 or $68,000 per month - almost double the sales compared to Synchromesh’s current sales. Synchromesh negotiates early payment supplier discounts (in order to outbid the competition) with its suppliers and receives special pricing on the raw materials, under the stipulation that Synchromesh pay the suppliers within seven days of receiving the raw materials. The new industrial customer ends paying for the first order in 60 days. When Synchromesh approaches its customer and asks whether it could pay faster on all future orders, the customer insists on paying in 60 days. The Issue: Synchromesh must now be in a position to pay its suppliers in seven days on all future orders (and generate a profit), even though its new customer pays in 60 days. Synchromesh doesn’t have this kind of money because it always has been tied up in the company’s receivables. If Synchromesh can’t find another way to raise the cash to pay its suppliers, it will have to relinquish the contract to the competition. Synchromesh approaches the bank to request a loan of $50,000. The bank declines the loan, citing these reasons: 1 The company is growing too quickly. 2 The company has been in business less than two years and does not have enough financial history (bank-required minimum three years in business and proof of profitable financial statements). Factoring provides a positive solution. The transaction we structure goes on to look something like this: Purchase Order Value each month new custom17 PRIVATE LENDER
er – $68,000. Synchromesh fulfills the purchase order and sends out an invoice to the customer. The Factor ends up advancing 85 percent of the total invoice, or $57,800 ($68,000 x 85 percent), more than enough money to pay the suppliers. The Factor in this case generates revenue (discount fee) of just 2.0 percent for every 30 days the invoice is outstanding. The customer pays the invoice in 60 days. Factor’s discount fee equals 4 percent (2 percent for the first 30 days plus 2 percent for the next 30 days). Invoice Amount: Amount Advance to Vendor (85%): Amount Held in Reserve (15%):
$68,000 $57,800 $10,200
60 Days Later Amount Paid by Vendor’s Customer: $68,000 Advance Amount Back to Factor: $57,800 Factor’s Discount Fee (4% of invoice): $2,720 Amount Held in Reserve (15%): Minus Discount Fee: Amount Rebated Back to Vendor:
$10,200 $2,720 $7,480
As you can see, in total Synchromesh receives an advance of $57,800 and a reserve rebate of $7,480 for a total of $65,280. The Factor receives a discount fee of just $2,720. Without Factoring, the next call from Synchromesh to its customer would have been informing the customer that Synchromesh cannot fulfill the terms of contract and is losing revenue. With Factoring, Synchromesh is now in a position to pay suppliers and take on new business, knowing that each time the company fulfills a purchase order and creates an invoice it will receive 85 percent of that invoice. Factoring is a positive solution because it creates continuous and predictable cash flow. For questions or more information email Mike at: Mikep@thetfi.com •
MANAGE AND LEAD
HOW TO EXPLAIN INBOUND MARKETING TO THE BOSS by: Chrissey Breault
arketing and communication professionals have a very different understanding of inbound marketing than the boss in many cases. They already know what it is, and understand the results it can bring for business in terms of organic, user-oriented growth. When it comes to explaining inbound marketing efforts, you have to be able to explain the ways in which it contributes to the bottom line and expands business more
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effectively than other, dated marketing ploys. Web users want exactly what they’re looking for, and they want it now. That is what drives inbound marketing (and in-turn, its ROI), and a sentiment you cannot leave out when pitching inbound strategies internally. IT SHOULD BE A NO-BRAINER There are certain preparations to be made that you might not realize or think about at
MANAGE AND LEAD first – beyond jotting down your impressive statistics on how inbound marketing, social media and content can help business grow. Do some research on a variety of CRM platforms as well as what kind of results your boss hopes to see – not just for your marketing efforts but for the business as a whole. Is your company currently more focused on overall sales growth, launching new services or growing brand recognition? These can complement an inbound marketing strategy in different ways, and learning how can be just the motivation your boss needs to invest in such a strategy. Once you’ve identified what your boss is looking to achieve, take the time to explain how various elements of inbound marketing can make those goals a reality. Delve a little deeper into what makes inbound “tick” but refrain from getting overly technical. Your boss cares more about conversion rates than the differences between an eBook and a white paper. MENTION PERTINENT KEY PERFORMANCE INDICATORS (KPIS) Don’t be afraid to back yourself with KPIs and other figures related to benchmarks your boss wants to reach. Discuss how inbound marketing, and everything it consists of, affects revenue and the bottom line for your business. Here are a few KPIs you can focus on to sway things in favor of inbound marketing: Cost per lead: For every new lead you generate, how much of an investment does your company have to make? Inbound marketing leads can cost as much as 61 percent less than outbound leads. Site traffic to lead ratio (and other audience metrics): How much traffic coming to your current website is marketing-qualified? How many conversions are you generating per visit? This indicator can shed light on your 19 PRIVATE LENDER
••• ongoing efforts and highlight how inbound strategies have helped others in your industry find success online. Organic search traffic: This includes percentages of leads and customers generated from organic search and what keywords bring the most highly qualified traffic to your site. Search engine optimization (SEO) is one of the core pillars of inbound, and explaining its power in generating qualified leads for your business could end up tipping the scales in its favor when your boss weighs his or her decision. Customer acquisition cost (as well as the time it takes to pay back the investment): This is the total sales and marketing cost for your company (everything from project costs and advertising to salaries.) Determine what percentage of this is related to marketing, and how long it takes to pay back. If it’s taking your company over one year to pay back the investment with your current model, you should probably consider how relevant inbound marketing strategies can help boost sales. Ultimately, a single marketing action is difficult to peg directly to revenue. You can get buy-in from the boss and other leaders when creating a marketing KPI dashboard that will serve as both a method of increasing transparency and showcasing marketing’s worth to your organization. Don’t be so desperate to report results that you start reporting irrelevant metrics or metrics that aren’t even aligned with your department (such as sales figures.) Convincing the boss that inbound marketing is what drives online business may take a bit of legwork on your part, but as your boss will soon learn: the benefits are not only real, they’re entirely within reach. Remember to focus on how inbound marketing can bring your company revenue streams, expand on old ones and contribute to bottom line growth. •
COVER YOUR ASSETS! at the American Association of Private Lenders 7th Annual Conference
AAPLANNUAL CONFERENCE 20 PRIVATE LENDER
11 aaplonline.com NOVEMBER 13-15 | CAESARS PALACE | AAPLCONFERENCE.COM
LENDER LIMELIGHT JOHN TEDESCO
TRENDING INDUSTRY TOPICS
LENDER LIMELIGHT J
ohn Tedesco is Senior Vice President, Business Development for Appraisal Nation, an award winning nationwide mortgage services company providing valuation, servicing support and title solutions.
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LENDER LIMELIGHT Welcome to Lender Limelight, John. Let’s start by having you talk about Appraisal Nation. The core of our business began as an AMC (appraisal management company); here we have a panel of 25,300 appraisers serving all 3,100+ counties in America. Today, Appraisal Nation serves over 400 national lenders and more than 6,000 brokers as we complete 70,000 appraisals a year. These lenders turned to us as a trusted partner to provide them more. Now we offer an array of services, including; BPOs, AVMs, flood certs., disaster reports, evaluation inspections and title and settlement services. Tell us about the team that you’re a part of at Appraisal Nation. I am very proud of the fact that we have a great team and good story. We started over 10 years ago with three guys in my brother’s attic. Now we have a national reputation that is second to none, with over 120 employees in our corporate office in Raleigh. Because of our team, model and unique approach, we can customize solutions for small to midsize lenders anywhere in America and treat them as if they were Chase or Wells. It is this approach, built for speed and customization, that has made us the leading AMC in the private lending space with over 100 of the nation’s top private lenders turning to Appraisal Nation. The story behind how the company was born is fascinating… Our founding partners came in very hands-on with diverse backgrounds, and that has helped us build something special. My brother, Mike Tedesco, is our CEO. He was a lender and a banker, so he brings direct experience and helped customize our model around the needs of our clients. Partners and longtime friends Brian McSheehy, our CFO, and Anthony Mattia, our COO, added 25 years of experience. Brian was with one of the largest servicers in the nation, and Anthony has experience as a field appraiser. As our SVP of 22 PRIVATE LENDER
••• Business Development, I focus on leading our sales and marketing efforts and building key strategic partnerships. My focus is to keep our team looking for ways to make our partners more successful; everything we do is with a win-win philosophy. How did you get your start in the industry? I really came into this industry from both a rather non-conventional and personal pathway. And that has made all the difference. Most of my early career was in public sector development, where I raised hundreds of millions of dollars from public and private sources for various projects and infrastructure, mostly around the greater New York City metro area. As a city manager in a New Jersey community, I was leading our government relations and overall operations such as budgets, utilities and public safety. I also was charged with guiding the development of all of our capital projects such as schools, roads, bridges, fire houses, public housing and more. I served as a director with Pace University and NYU in Manhattan to develop significant capital campaigns, including NYU’s first billion-dollar campaign. Additionally, I served as a chief development officer for children’s charities such as Big Brothers Big Sisters and Harbor House, where we built community partnerships, programs and homeless shelters for thousands of kids. At the end of the day, I was always putting together large-scale deals to bring millions of dollars to the table through a strategic vision with collaborative partnerships. Family is important to you. Tell us more about that. I am the oldest of six kids, and yes, family really is everything to me. We grew up in the Pittsburgh area, where my dad worked in a steel mill to make ends meet for all of us. After college I left for New York City for the career I just mentioned. My brother Mike, on the other hand, headed out to the Air Force and back to Pittsburgh for a successful career in banking and lending.
In the early 2000s our mom passed young. At that time, Mike had a new opportunity in Raleigh, so we decided as a family it would be good for my dad, now retired, and younger siblings who were still in schools, to follow for a new start. Shortly after I wrapped up a campaign for a new homeless youth shelter, I followed. Shortly after that, Mike reached out and asked me to tap some of my business development expertise to help him with his vision to create Appraisal Nation. As the company got up and going and grunted out the early years, I stayed on to provide ancillary consultation when needed, but mostly I continued my career as a community leader. After finishing an elected term as a leader with one of the largest education systems in America, managing a $1.4 billion operation with 172 facilities and 18,000 employees, I accepted Mike’s offer to come on full-time and help him take the company to new heights. There was a caveat, though, wasn’t there? I agreed, but under one condition. I said, “We never had a chance to do too much as kids. So for all of these conferences across America that we do, I want you to add some time to do something cool together as brothers.” Since then we have been to most of the nation’s baseball stadiums, the top of the Seattle Space Needle, chasing gators on fan boats in the Everglades—and more. What types of things do you do to keep current in your business? 23 PRIVATE LENDER
Being current is critical in our ever-regulated industry. We do more than 30-plus industry conferences annually, and I routinely sit in on sessions. I regularly read a cross sector of industry publications specific to unique markets such as traditional banking, private lending, commercial real estate and more. The private lending space alone holds so many unique vertical markets. Our clients expect us to stay on top of it all. This creates an opportunity for us to bridge together our thousands of brokers with the right partners and their products.
LENDER LIMELIGHT What kinds of mistakes have you seen professionals make when it comes to their investments? We routinely see individuals who are overaggressive in chasing the deal, and lose sight of the big picture of building a quality business or investment portfolio. So much so, that they do not always take the time to properly evaluate the asset, the market conditions and the future landscape. We offer a wide variety of tools for this, from AVMs, inspection reports, evaluations, BPOs and full appraisals. Often smaller lenders want to say they trust their instincts or local market knowledge, and they then choose not to use these tools. Unfortunately, that leaves many with deals that fall short, deals that they can’t sell, or properties that are underperforming. Larger lenders already institutionalize these tools to guard against their own risk or meet requirements of securitized lines. Doing things the right way is one of the critical steps to playing with the big boys. Personally, I have my own rental portfolio, and would never risk
••• assets that are a couple of hundred thousand dollars or more to save a couple hundred bucks. What do you think are some of the biggest mistakes you’ve made, and how did you overcome them? Digging in deeper when you should walk. Not every deal is the right deal, and not every possibility is the right situation. There is a sweet spot where you have to balance trying a little harder with moving on and calling it a learning experience. It is true in business and life. I tend to think if I just work it a little harder, a little more, a little further, then I can push it over the top of that hill. But that is not always the case and sometimes not worth what it takes from you. You have to surround yourself with some true friends who can give you honest feedback. You need someone you respect and will listen to, even when they tell you what you do not want to hear. I have worked diligently to gather trusted colleagues, friends and mentors in this industry, and I do not hesitate to call on them as a sounding board. I calculate the grief factor into every deal and relationship; and at this stage in my life I really only want to work with people I can respect, value and enjoy as friends. How would you describe your management style? Some people are really good at seeing the big picture. Some people are good at the small details and technical knowledge to complete each part.
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2. M aintain your passion while not getting I have always been blessed to be able to do both. It emotionally attached. is just the skills and talents that I have. I can’t slam a basketball, but I can see the vision 3. D on’t insist on going at it alone when you and each of the steps needed to bring it to reality. can become so much more with the right I apply that in an open and inclusive approach partners in place. that works to bring out the best of all those around me while plugging them in to roles to ensure their Leverage partnerships whenever possible. It is success. I also seek out those who think differently than me. I already know what I think—I do not need great partnerships with organizations like AAPL, and our numerous clients that have helped us rise mirrors and “yes men.” to the national service provider we are today. We are constantly talking to our clients, partners and What was the last project you headed up, and providers to ask how we can work together better to what was its outcome? create more mutual opportunities for growth. I spent the better part of the past year building a collaborative partnership with EDR, the nation’s What advice would you give to investors to help leading organization for environmental data for them establish their credibility with lenders? over 25 years. After building key relationships, Do your homework. Evaluate your deals well. setting terms, completing technical integrations Cross your Ts and dot your Is. Don’t just chase with our system and their premier Collateral 360 the next deal, but be committed to building your platform, providing trainings for their nationwide reputation and your bigger vision of your business. sales team and webinars for their client base, this Keep that in mind in all you do, as your name is spring we fully rolled out and have already been on the line. Don’t take shortcuts on your projects, adding clients. Today, EDR serves over 1,400 because it will show. If you are short on your banks and lending institutions in America, and now they can offer our Appraisal Nation services to personal credit and capital, start being diligent all of those clients. It is a partnership between two about improving your position, even if it is slowly. nationally respected industry leaders that we are Don’t try to be everything to everybody—find your very proud to be a part of. niche and become great at it. Bring something to the table for your partners; always seek win-win. What's the most difficult decision you've made Most of all, be true and keep your word. in the last two years, and how did you come to that decision? What are three things you tell yourself when Turning down some highly lucrative ventures and your chips are down? opportunities with some folks I respect to stay with I remind myself of the long view in life. I our great team at Appraisal Nation and continue highlight that this is merely a moment in that building on our great success story. point in time and that each moment will be a step to a new position or a chisel to sculpt me Given your experience in the field, what are into a better position. three hard-to-spot pitfalls for entrepreneurs I remind myself that Edison never failed at that are critical to avoid? making the light bulb, but merely found 10,000 ways how not to do it. There are always alternative 1. D on’t let emotional attachment cloud your paths to a goal; keep pressing onward. ability to do the math. Then the Italian in me turns on some “Rocky” movies. 25 PRIVATE LENDER
LENDER LIMELIGHT Can you share a life memory or two that you recall most frequently? My role as town manager of a New Jersey community was in a town that was a ferry hub to lower Manhattan during 9/11. With the roads and bridges all closed that day, we became an evacuation point for tens of thousands of people and then a relief-and-recovery center for the months to follow. The whole community really rallied to help in every way. In my role I had to take a lead in organizing these efforts with our executive and emergency command team. Standing on the docks watching just across the water as the towers were hit and ultimately fell, it was easy to feel helpless. The ferries started racing back, boat after boat all morning into the late evening, with overflowing loads of people confused and just trying to escape. As we helped off the thousands of people covered in blood and dust, we would usher them to hazmat and first-aid stations. These were the thousands of unknown victims with physical and emotional injuries for life. We would get them medical help, water, food, phone calls to loved ones and more—whatever we could do. There were so many vivid memories from that day, the months that followed, and onto the first anniversary vigils that will always be etched in my mind. As ugly as much of it was, it always reminds me more of the kindness and heroics of so many, and of the incredible humanity and power of all of us in any situation. Who would win the fight, Superman and Batman? Superman!! Batman is nothing more than a disgruntled billionaire vigilante with cool toys, but no real powers. Superman, on the other hand, is all-powerful and on the side of truth, justice and the American way. Some say that is too idealistic. I prefer to admire those who bring out the best in others and dream better than we are. Can you tell us about the weirdest deal you 26 PRIVATE LENDER
have ever been approached with? My friend, Kellen Jones at Cache Private Capital brought us some cemeteries in Alabama to appraise—that was a first. Now we’re experts at it! What do you think is the biggest misconception about you—and why? Some may perceive a sense of rigidness to my political passions. I have always been very politically engaged, served in party leadership roles, did political consulting and have been an elected official. I am strong in my convictions. Talk show host Stephen Colbert once noted me on his show as “Tea-Party Tedesco.” While I am pretty focused on strong business practices and common sense, the reality is that I have always worked toward broad consensus opportunities. I surround myself mostly with people who think differently from me and seek broad input. In my statewide campaign, many were surprised to find my leadership team was a good mix of Republicans and Democrats. What’s the best advice you’ve ever received? From whom? A friend once told me, “Trust God and marry a Southern girl. They will both keep you grounded.” So far that has proven correct. Tell us about something that you did in the past. What did you learn from it, and what would you have done differently? I have had numerous and diverse small businesses and business projects. I also do small business development consulting for many. I will say, and from some early experiences, when you are working with partners or in service to others, make sure the terms are clear. And when you are ready to walk, walk—don’t dabble around the edges. What was the first experience in your life when you realized you had the power to do something meaningful?
LENDER LIMELIGHT The pastor I had, beginning as a young boy, was more like a grandfather to me for over 20 years. Anthony helped teach me how to read, sing, fish, drive and more. He even used to give me advice with the ladies, like tell me to “play it cool”—easier said than done for a young teenage boy. There was time in my life, back when I was 14, when I had just lost my uncle to cancer, my first girlfriend dumped me, and my family had to leave our home all the same weekend. I was upset, crying to him, and mumbled I didn’t think that I wanted to live anymore. Normally, Anthony would have hugged and comforted me—who wouldn’t for crying child? But not this time. He straightened up my shoulders and tipped up my sobbing face and firmly said, “Tough. You have work to do. Every day your eyes open is a gift from God and a note that you have more work still to do.” I pretty much have seen each day since as an opportunity to do something meaningful in some way or another, big or small. Was there a person in your career who really made a difference? Jack the janitor. When I was a town manager in New Jersey, I was essentially CEO of all municipal operations with the Mayor and Council serving as Chairman and Board, respectively. In this role, all directors and chiefs of each department reported to me. Out of every single town employee, Jack was essentially the lowest guy on the totem pole. He was rough, skinny, older gent long past retirement with a slight stutter and a limp. On his hip for 30 years was a key ring with so many keys for every lock in the town that he appeared to lean to that side. I quickly learned to keep Jack close to me as his eyes and ears had seen and heard it all. I would routinely ask him for his input. Often business leaders, budget directors and local political leaders were quick to get my ear, but it wasn’t often I would 27 PRIVATE LENDER
get the honest insight from the ground so plainly put. He always had that sage advice that comes with age. When I would ask, “Jack, how did you know I was going to do it that way?” He would refer to our age gap by saying, “As you are, I was. And as I am, you will be.” Since, I have always treated everyone I meet or work with the same—with dignity and respect. Whether they be the janitor or the CEO, I believe there is value, knowledge and opportunity in all. I seek it out, and that has contributed greatly to my success in all that I have done. There's no right or wrong answer, but if you could be anywhere in the world right now, where would you be? Home. As I answer these questions with you I am sitting here at the IMN conference for multifamily rentals in Miami. I will be speaking at the upcoming Pitbull conference in Vegas for private lending, then on to MasterMind with 3,000 brokers, and then a Think Realty event. With more than 30 conferences a year, I really welcome every chance to sit on my back deck with my family, get the grill going, light the fire pit, kiss my wife, Jenni, and play with my little baby girl, Miss Maddie Grace. •
The Advantages of Investing in Non-Performing Notes with a Self-Directed IRA by Clay Malcolm
rivate lenders are no strangers to the tax advantages that accompany lending with a self-directed IRA or HSA account. IRA account holders can combine their retirement account tax advantages with their loan returns. Account holders also possess strategic control over the person or entity in which they lend money, as long as the person or entity is non-disqualified. This control means that the IRA holder can choose the borrower, principal amount, interest rate, length of the term, payment frequency and amount, and whether or not the note is secured by collateral. Retirement investors can choose between performing and non-performing notes for their IRA. Both types of notes have their own sets
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of advantages. In addition, it may be worth investigating the benefits of combining the unique tax advantages of the two. Non-performing notes can be secured or unsecured. A secured note is any debt that is secured by real property, or a first deed of trust, a vehicle title or a certificate of deposit. An unsecured note is any note that is uncollateralized. It’s important for IRA holders to do their due diligence on the borrower to decide whether they want to extend a secured or nonsecured non-performing note. ADVANTAGE OF PURCHASING NON-PERFORMING NOTES WITH A SELF-DIRECTED IRA IRA holders can potentially benefit from
purchasing non-performing notes after origination because the note may be available at a discount, or the purchaser may be in position to take possession of the asset if the borrower defaults, providing the note is secured. Buying a non-performing secured note enables repossession of the property, but the rules and timelines for this repossession vary from state to state. On top of the purchase price discount, when the note is purchased with a self-directed IRA or HSA, the lender can also enjoy amassing earnings at a tax-free rate if it’s a Roth IRA, or a tax-deferred rate if it’s a Traditional IRA. If an investor chooses to buy a non-performing note at a discounted rate with real estate as the collateral, one option to pursue is to foreclose on the property and sell it for a much higher value than the amount invested. Assuming the investor did foreclose, he or she can then choose to keep the property within the retirement account and use it as a rental property until reaching the age of distribution. All rent and returns from the property will go back into the IRA at a tax-free or tax-deferred rate. Another option for investors who purchase a non-performing note with real estate as collateral is to modify the terms of the loan to begin receiving payments from the initial borrower. This route requires that the borrower agree to the terms and be able to fulfill them. The goal of modifying a non-performing note is to find a way to make the note perform again. This can be accomplished by lowering the interest rate, reducing the principal balance, extending the term of the loan or adding unpaid interest to the principal balance. The following fictional narrative will give you a better idea of what purchasing and modifying a non-performing note with a self-directed IRA could look like: Roughly 18 months ago, Patricia made a first position loan of $100,000 to Michael for the 29 PRIVATE LENDER
purchase of his $150,000 primary residence. Unfortunately, Michael has had a difficult time keeping up with these payments, and is now more than 90 days behind. Michael’s outstanding loan balance is still $95,000. Patricia has made several attempts to collect loan payments from Michael, but his ability to pay is looking bleak. Liam, a self-directed IRA real estate investor, is actively looking to invest in property-backed loans, and he meets Patricia at a local real estate investing club. Liam learns about Patricia’s poor loan experience and offers her $75,000 for the loan in hopes that Patricia would rather cut her losses and move on to a new investment. She agrees, and Liam purchases the non-performing note with his self-directed IRA. After the transaction is finalized, Liam visits Michael and explains that he doesn’t wish to foreclose on Michael’s home, but would prefer to come up with a solution that can help them both. Liam suggests new loan terms to make monthly payments more affordable for Michael. Michael gladly accepts, and 12 months later, he hasn’t missed a single payment. Liam successfully purchased a non-performing note at a discount, modified the note and turned it into a performing note once again. All returns from the note will go into his self-directed IRA at a tax-deferred or tax-free rate, depending on his IRA account type. At this point, Liam more than likely can resell the note at closer to face value. Alternatively, had Michael not agreed to the modification of terms, Liam could have filed foreclosure proceedings to repossess the property and either sell the property or turn it into a rental property for his self-directed IRA. Understanding the full benefits of self-directed IRA investing is the key for private lenders to choose a strategy that maximizes their account returns. Be sure to work with your self-directed IRA provider to get the education you need to set yourself up for success. •
NAVIGATING THE PRIVATE LENDING MARKET by Dennis Baranowski
rivate lending can yield better returns than stock and bond markets. If you understand the fundamentals and know how to conduct proper due diligence for each transaction, you can earn solid returns while minimizing your risk. A little more knowledge and effort can give you better returns in private money loans. Electronic transactions that require pushing a button to buy or sell stock are fast. But if you focus your time and attention on learning the ins and outs of private money lending, you can win lucrative deals. Read these tips and learn the lending game.
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PRIVATE LENDING 101 Investing in private money loans is similar to investing in a bond. They both have a fixed yield and pay off at maturity. Example: If you make a loan to a borrower for $100,000 at 8 percent interest and require interest-only payments, you will earn an income of $8,000 annually. If the loan is paid, it will pay off at or before the maturity date. You will also get the original vested principal. Tip: Look for a real estate investor who flips property. Offer to lend the total project cost that includes the acquisition of property
BUSINESS STRATEGY plus renovation cost. He should make a down payment of 20 percent. The down payment will demonstrate his “vested” interest and proves the appropriate due diligence. These factors will contribute to a higher chance of success. Research how to lend capital to others for an annual return. Discover the pivotal factors that make the private loan investment considerably more involved than a bond investment. Study these rules so you can master the process and invest with confidence.
OAN ADVANCES L Some transactions require advances because of delinquent property taxes, attorney fees or foreclosures. Lesson No. 1: Leave yourself a cash cushion. Provide for enough liquidity
IQUIDITY L Do not become a private lender if you think you will need the money that you want to invest before the maturity date of the loan. Most loans pay off, but some do not. If you do need cash before the maturity date, it may be possible to sell your loan. You can utilize an online loan exchange like Loan MLS. Consider offering it to another private investor for sale through a hard money loan broker. If you do need to sell a note that is not paying, keep in mind that non-performing private money loans are typically sold at a discount.
in your finances so you can fund for any unexpected expenses.
the philosophy for lenders. Get in your car and drive to the house that you will be appraising. Take photos. Use an Automated Valuation Model or Broker Price Opinion to determine market value. 3
2 C OLLATERAL ASSESSMENT
Reduce your risk. Collateral for a hard money loan is important. “Drive the comps yourself” is 31 PRIVATE LENDER
4 F RAUD PROTECTION
Make sure your title company insures your lien position as a lender. Get fraud protection
BUSINESS STRATEGY to address possible forgery. Title insurance is indemnity insurance. To be reimbursed, you must be able to prove a loss. 5 C REDIT HISTORY
Analyze the borrower’s credit report carefully. Private money loans are based on hard assets and collateral. Make your assessment of a borrower's creditworthiness on the person’s ability to repay the loan when a balloon payment occurs, or when the loan reaches maturity. IQUIDITY FIRE & LIABILITY INSURANCE L Make sure the property owner has the correct type and adequate amount of fire and liability insurance. The insurance company must notify you (the private lender) as an additional insured on the policy. In a case of loss, have the reimbursement check sent to you first. 6
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WRITTEN AGREEMENTS You must document the loan. Create security documents and disclosures for the borrower. There are numerous state and federal regulations that must be followed and should not be ignored. A violation could render the loan invalid. 7
LOAN SERVICING Conduct a quick Google search to get the proper tax and regulatory statements. Many private lenders hire a servicing company to manage this part of the process for them. If a borrower defaults, investors must go through the foreclosure process to claim the collateral. The complex foreclosure process varies from state to state and requires expertise and understanding of the law, so get the proper guidance. Seek advice from other seasoned professionals or attorneys who specialize in real estate law. 8
BUSINESS STRATEGY The role of a private money lender is a specially trained person who originates private or “hard” money loans. If you are new to the private money lending arena, it’s best to let experienced professionals help guide you through the pros and cons associated with each transaction. Here is a list of the types of private money opportunities and the positives and negatives to consider for each. NEW LOANS The purchase or construction of a new property requires renovation or refinance of existing debt on a property. pro Because you are lending to one party, you have control regarding origination, documents, terms, etc. You will not have potential liability for a previous originator’s errors. If this involves a former client, you have access to his performance history. con New borrowers do not have a prior payment history that you can evaluate for a lending decision. Use reports from previous lenders. no. 1
no. 2 N OTE PURCHASES
As a private money lender, you can purchase loans that have already been originated. When you buy performing or non-performing loans, they can be purchased at face value, at a lower rate. pro There is a performance history that can be analyzed. For non-performing loans, a combination of solid valuations for collateral and deep discounts can give excellent yields if an investor is willing to risk foreclosure. Some nonperforming notes may pay off to avoid foreclosure or be restructured in the future. 33 PRIVATE LENDER
If the note wasn't originated properly, you could be purchasing a liability. Non-performing loans may result in foreclosure. Your due diligence is limited to records from the current lender. con
OAN POOL L The process of buying several loans in one transaction. pro Bulk loan purchases typically come with a discount. Performing loans have histories available for evaluation. con Files may not be accessible. Buyers are often rushed to make a bid, resulting in potentially costly mistakes. You’ll get a mix of good and bad loans. no. 3
no. 3 M ORTGAGE FUNDS
There are companies that collect funds from multiple investors and create a single entity to
BUSINESS STRATEGY no. 5 FRACTIONALIZED LOANS
In the case of a fractionalized loan, private investor funds are collected. Each investor is vested on the security instrument. For example, if a borrower required a $1 million loan for a shopping center, the note may be fractionalized across 10 different investors, each investing $100,000. All 10 investors would be vested as beneficiaries on the recorded security document. Investing in a fractionalized note is different from investing in a mortgage pool. In the fractionalized note, all investors have an interest in one particular note. When the note liquidates, the investment liquidates. In a pool, members have an interest in the entire investment. pro Multiple fractional transactions allow investors to diversify their investment portfolio. con Everyone in the fractionalized group must agree on foreclosure and advances. J UNIOR (SECOND POSITION) LIENS Buying a second or junior lien brings higher returns. However, risks associated with the junior position and complications with servicing escalate substantially. pro Less initial cash up front and a higher rate of return. con Significantly higher risk. If a borrower defaults on the first mortgage, you may have no choice but to bring the first mortgage current or pay it off to protect your investment. Junior lien investments are not for the faint of heart. If the market drops or bankruptcy is filed, you could lose everything. Nurture your relationships with other private money lenders. Practice due diligence and weigh your options carefully. Comparably, private lending can be lucrative. It can offer greater returns than stocks, bonds and mutual funds. Strive to understand all aspects of the industry, especially your personal investing. • no. 6
loan money. A Limited Liability Company (LLC) is the structure for most mortgage funds. The investors would hold a membership interest in the LLC. The fund manager makes decisions regarding the note. This arrangement typically avoids conflict with respect to the disposition of loans by the fund. pro Pool managers handle the transaction, and your investment is diversified across a wide variety of loans. con Since you are an owner of the LLC, foreclosure is not an option to recover your investment. You may be subject to the entire pool closing before you can get your funds returned to liquidity. Your success is dependent on the success of the pool. If the pool manager makes poor decisions, the entire fund is affected. It can be difficult to sell your position, as there are often restrictions regarding to whom you can transfer your interest. 34 PRIVATE LENDER
Private Money Lending Software Powerful, Flexible, and Easy to Use Used by most AAPL members Dodd-Frank and RESPA compliant Service multi-lender loans or pools with ease Automate budget and draw process for rehab loans Handle ARM, Construction, and Commercial loans Built in Trust Accounting Enhanced reporting and forecasting Online investor access 24/7 Increase productivity and accuracy
800 . 833 . 3343 | the mortgageoffice.com 35 PRIVATE LENDER
SOMETIMES IT HELPS TO TAKE A STEP BACK and look at things from a different perspective. AdaPia d'Errico, CMO at Patch of Land, explores some of the most interesting topics affecting real estate, like technology, online finance and crowdfunding.
e v i t a n r e t l A an
E L G N A d'Errico ia P a d A h wit
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The Role of Technology in Buying, Selling and Leasing Real Estate
e all know the model of the heroic “garagescale” startup. The iPhone you may be holding in your hand famously had its beginnings in a garage, and that also was the early working home for the Wright brothers back in Kitty Hawk when the level of “tech” was more about fixed wings than circuit boards. There was even a garage setting used in the financial meltdown film “The Big Short” to establish the outsider bona fides of two of the characters, as well as the notion that they could see what those who were more established could not. There is no denying that innovation is the new normal and even a mandate for companies that want to evolve, grow and thrive in an increasingly fragmented, complicated and tech-enabled world. But how does an already established company replicate that kind of “garage-scale” fearlessness, especially if it’s looking to innovate in a business like real estate that finds, buys, sells, leases, manages and finances those “garages” as well as other kinds of property? While many industries strive for innovation, they may not all be well suited for it. Some sectors like mortgage finance encounter regulatory or structural impediments, which make the very act of innovating more challenging. But even in markets like commercial real estate, often regarded as mature to the point of ossification, innovation is still possible.
COMMERCIAL SECTOR IS RIPE FOR INNOVATION
U.S. commercial real estate is a $12 trillion industry with a significant percentage of revenue concentrated in a handful of REITs and brokers controlling extremely high-value assets. Until very recently, these firms were reliant on outdated legacy software and, in some cases, even pen and paper to manage their vacancies and schedule tours for prospective tenants. However, technology verticals have emerged in finance-- now commonly known as “fintech”, which represents innovation in areas including payment processing, bitcoin, blockchain, asset 37 PRIVATE LENDER
management, investment and lending. There has also been a smaller, less talked about, but equally important surge in real estate tech startups, a sector known as RETech. Real estate professionals are becoming the focus for dozens of technology companies using data, analytics, modeling, apps and online distribution channels from other fields to create more efficient processes., Prime among these are speed to market and accessibility for those professionals and their clients. Among them are companies like VTS and Hightower that are revolutionizing the commercial real estate industry by centralizing a firm’s data in a single cloud-hosted database and making it the system of record for agents to manage their workflows and customer relationships. Their services are used to manage billions of square feet of real estate, and provide landlords data such as trends across buildings and marketing performance, while brokers can use the tools to manage leasing pipelines.
ACCESSIBILITY IS KEY
The other ongoing hallmark of such innovation is making the macro immediate, localized, and accessible. On that theme of accessibility, it seems natural that real estate professionals, due to the on-the-go nature of their jobs, would need mobile apps to stay in touch with both lessors and lessees, clients, and their service companies, while still in the field. to get “real time” changes in terms of space or unit availability, prospective tenant interest, financing terms, etc. Data analytics platforms like San Franciscobased Rentlytics give owners and managers greater transparency into the performance of their portfolios, both on an overall basis and at the level of an individual asset. They do this by identifying which buildings in a portfolio are having difficulty maintaining target occupancy rates and drilling down to address root causes, through which landlords and portfolio managers can improve profitability.
shakeout. Buyers of RE tech-- as opposed to Meanwhile, companies like Nestio and Onthose buying and investing in the real estate Line Residential bolster the marketing and lease itself are advised to management functions evaluate the longof multifamily term viability of any owners by allowing As property information becomes startup. Operating them to syndicate ubiquitous, customer service at the leading edge listings to multiple of tech adoption is a internet services. In and branding will become real delicate balance in a vast, fractured and differentiators, especially for the midst of everunreliable landscape shifting economic of listings data, millennial buyers who tend to be conditions, though these companies tech-savvier and more decisive as a the benefits created by are replacing the jump in real estate current “tools” result of native information access. tech startups will far like spreadsheets outweigh the costs. and emails, which We expect that the future will see continued cause delays that lead to outdated and incorrect efficiency gains in information speed, information reaching consumers. accessibility, and accuracy. And of course, this increased "garage tinkering" on behalf of RE isn't just confined to the commercial side: companies like HouseCanary use their own analytics to fine-tune predictions and trend lines for IT’S ALL ABOUT EQUIPPING HUMANS SFRs for both mortgage lenders and the families or WITH THE RIGHT TOOLS investors who are buying. For those not ready or not But if Real Estate Tech 1.0 was about bringing real needing to buy at the moment there's RentRange, estate data online, those working in the “garages” which analyzes the occupancy side of the equation for Real Estate Tech 2.0 will find that it’s about for landlords and tenants. And finally, when any of equipping humans-- the agents and brokers, with those "garages" need to be maintained, upgraded, increasingly improved platforms to harness that or remodeled, there's BuildZoom, where a database data and run their businesses even more effectively. combing over 100 million building permits, along Brokerages with the best data ultimately make the with a massive and growing set of customer reviews most money. This applies equally to agents who can allow people to select their preferred contractors, now access real-time information and collaborate based on locality, reputation, price, etc. with colleagues based on a standard system of record. Ultimately, these tools save agents time, and their parent firms money, leading to leaner and INNOVATION HAS SAVED COUNTLESS more profitable businesses. Some savvy business people already anticipated HOURS these changes on the consumer side of the equation, All of these niches and needs, from commercial and launched startups in the early 2000s to to SFR, from NY to SF, and from agent to tenant provide online access to home and apartment to owner to lender, are areas where innovation information: Zillow, Trulia, HomeAway, and Rent. was called for-- and innovators responded. Such com are just a few. Joining them are legacy software responses now save teams hours each day that companies such as CoStar, Yardi, and RealPage, would otherwise be spent doing manual updates who have updated their platforms to be more useracross sites and ensures their listings are always friendly. Other startups like LoopNet (now part of accurate and up-to-date. Brokers also benefit by CoStar) have democratized commercial real estate getting faster, more reliable data on new listings information by providing online access to buyers coming onto the market. and sellers of commercial properties nationwide. But this explosion in real estate tech startup This new "connected" generation of brokers activity comes with risk. There will be an inevitable 38 PRIVATE LENDER
ALTERNATIVE ANGLE and agents are attuned to the fact that mobile technology is essential to run their business. As expediency and safety are addressed on both sides of the transaction, brokers, buyers, and renters are all influencing the way people search for properties. With 92% of consumers using the internet as part of their property search, the pervasiveness of mobile technology is a given. And those “givens” have led to a new kind of real estate investment. Venture capital is pouring into real estate tech startups, and those particular “garages” raised $1.5 billion in 2015. Established tech providers are shortening the go-to-market time with startups for fear of being left behind. Trinity Ventures developed a unique perspective on RETech trends since an early investment in LoopNet in 2006. More recently, they have made investments in commercial, multifamily and residential housing with bets in VTS, Rentlytics, and DotLoop (acquired by Zillow), as well as an investment in IoT (Internet of things) company, Nest. All three sectors of RE are undergoing the
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same fundamental transition to improved data management software, depending on where technology can add the most value, improve information flows and automate tasks.
HOW CAN YOU BEST STAND OUT FROM THE CROWD? As property information becomes ubiquitous, customer service and branding will become real differentiators, especially for millennial buyers who tend to be tech-savvier and more decisive as a result of native information access. Real estate professionals will, in turn, leverage social engagement and data in how they manage their relationships, provide insights and guide people through the process with a particular emphasis on transparency. We can expect technology adoption across the industry to continue to be rapid and expansive. Meanwhile, experts expect to see an increasing number of homes listed for sale at a modest growth rate for the remainder of 2016, both in the United
States and globally. A connected RE marketplace can help speed up the process by allowing stakeholders on both sides of the deal to connect and transact with greater ease and fluidity. More than any other sector dependent on technology, real estate demands innovation that can address the two-sided marketplace. Given the size and complexity of transactions, the best real estate technology, rather than eliminating the intermediary, will strengthen the role of professionals working in the industry. One of the most profound innovations in RE comes not from the ease with which housing and commercial stock can be monitored, tracked, or leased, but the expanded degree to which people can now participate in real estate investments via a marketplace. This investment model is successfully led by real estate crowdfunding platforms like Patch of Land, PeerStreet, and RealtyShares, which allow investment in real estate loans on a fractional basis. By bringing together thousands of unrelated parties online, loans are fully funded in minutes, creating a perpetual source of growing, redundant capital as new investors are added daily through innovative marketing, PR and branding efforts. 40 PRIVATE LENDER
Similarly, LendingHome is tackling the inefficiencies and investment opportunities in the consumer mortgage space alongside fintech disruptor SoFi, both of which target consumers who have little desire to transact with a traditional financial institution for their mortgage financing needs. Finally, the newest breed of real estate investment marketplaces are creating seamless access to the single family rental asset class. Roofstock, led by SFR veterans, has developed institutional quality data and analysis tools to allow any real estate investor to select, research, analyze and purchase a cash-flowing, leased-up property with just a few clicks. Perhaps PeerStreet's co-founder and COO Brett Crosby said it best, and spoke for most of REtech when he said they were, "applying lessons learned at Google to a space that's been almost untouched by technology." Which makes complete sense. After all, when Google's founders returned from Burning Man in 1998 to launch their company, they set up workspace in current YouTube CEO Susan Wojcicki's Menlo Park garage. •
WHAT YOU NEED TO KNOW ABOUT Construction Lending IN A POST-SB978 WORLD By: Melissa Martorella, Esq. and Nema Daghbandan, Esq.
alifornia Senate Bill 978 (the “Bill”) became law on Sept. 27, 2012. Despite more than three years since its enactment, many people with whom we speak fail to understand its far-reaching implications, especially as it pertains to changes in construction lending. The Bill created numerous new sections to California Business & Professions Code, including Section 10232.3 (“B&P 10232.3”). What used to be limitations that only applied to multibeneficiary loans became a blanket rule for all loans arranged by licensed California brokers (“Brokers”). B&P 10232.3 first lays out the maximum Loanto-Value (LTV) limitations that must be adhered to for all loans arranged by Brokers, categorized by the type of collateral and type of occupancy as shown in the accompanying table. The LTV determination is based on the current market value of the real property collateral, often called the “as-is value.” However, as most construction lenders know, the as-is value often far exceeds the LTV limitations proscribed here because the Borrower’s intended improvements
should dramatically improve the LTV post improvements, often referred to as the “After Repaired Value” (ARV). To strike this balance, SB 978 sought to provide a framework permitting Brokers to arrange loan transactions in which the LTV limitations meant ARV versus the as-is value. B&P 10232.2 specifically applies to loans in which the lender is not disbursing all loan funds directly to Borrower at loan closing and the Broker must rely on the ARV of the loan in order to fall below the maximum LTV limitations. The restrictions are broken down between loans in which there is a holdback in excess of $100,000 and loans that contain a holdback of $100,000 or less. The rules are described here: Loans that include a construction holdback of $100,000 or less relying on ARV. 1 T he loan must be fully funded, with the entire
loan amount deposited into an escrow account before recording the deed of trust. This means that any fees associated with the loan, including
TYPE OF COLLATERAL
Single-family residence, owner-occupied
Single-family residence, not owner-occupied
Commercial properties and income-producing properties not described above
Single-family residentially zoned lot or parcel that has installed offsite improvements including drainage, curbs, gutters, sidewalks, paved roads and utilities as mandated by the political subdivision having jurisdiction over the lot or parcel
Land that produces income from crops, timber or minerals
Land that is not income-producing but has been zoned for (and if required, approved for subdivision as) commercial or residential development
Other real property
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LEGAL the construction holdback, cannot be net funded, and the lender must provide the full loan amount to escrow, and then any points or holdback amounts may be sent back to the lender after recording. 2 A
comprehensive, detailed draw schedule must be included to ensure timely and proper disbursements to complete the project. This is important because the draw schedule will outline for both lender and borrower how the disbursements will be made from the holdback amount. By providing a detailed draw schedule at closing, any disputes over the manner of disbursements will be addressed before the loan is funded and will provide both parties the security of knowing that there will be sufficient funds to complete the project, and that there is a detailed plan in place to be successful.
licensed appraiser must complete an appraisal. Often considered one of the more cumbersome requirements, the Broker cannot rely on a BPO or other valuation and the investor must receive the valuation from a licensed appraiser in accordance with Uniform Standards of Professional Appraisal Practice (USPAP). Many clients find this requirement particularly onerous in transactions that must close quickly, but unlike other sections of the code there is no exception made available here.
4 T he loan documents must outline the actions
that can be taken if the project is not completed, whether due to insufficiency of loan proceeds, default or other causes. Typically, the construction holdback language in the loan documents will describe what will happen if there is an event of default or other occurrence that requires the lender to take action to protect the investment.
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5 T he loan amount may not exceed $2.5 million.
Clients are often surprised to hear that there is any limitation on the aggregate loan amount. A Broker may create a first and second loan bifurcating the acquisition funds and constructions funds so long as the ARV LTV does not exceed maximum limitations provided above on the construction loan.
Loans that include a construction holdback of $100,000 and Broker is relying on ARV. In addition to the five requirements enumerated above, if the construction project includes a holdback amount of more than $100,000, the Broker may rely on ARV to determine the maximum LTV if two additional (and onerous) safeguards are met: 1 A n independent, neutral third-party
escrow holder is used for all deposits and disbursements relating to the construction or rehabilitation of the secured property. Often a highly contentious issue for investors who either want to retain control of the construction funds for obvious reason or alternatively would like to earn the added interest return on non-disbursed funds, B&P 10232.3 requires the funds to be disbursed by a neutral third-party escrow holder as a funds control agent.
2 T he disbursement draws from the escrow
account are based on verification from an independent, qualified person who certifies that the work completed to date meets the related codes and standards and that the draws were made in accordance with the construction contract and draw schedule. An Independent Qualified Person is defined as “a person who is not an employee, agent or affiliate of the Broker and who is a licensed architect, general contractor, structural engineer or active local government building inspector acting in his or her official capacity.”
LEGAL Many of our clients retain the services of a construction management company that can satisfy both of those requirements because it is licensed as a general contractor and as an escrow company. Finally, B&P 10232.3 uniformly applies maximum investment limitations for investors, limiting investment in any one loan to no more than 10 percent of an investor’s net worth (exclusive of home, furnishings and automobiles) or an investor’s adjusted gross income. This rule, similar to the maximum LTV limitations, was strictly
limited to multi-beneficiary loans prior to the enactment of SB 978. Not sure if your construction loan documents are SB 978 compliant? Contact associate attorney Melissa Martorella at melissa. firstname.lastname@example.org or Nema Daghbandan at nemad@ geracilawfirm.com. Geraci Law Firm is dedicated to the representation of lenders, brokers and other real estate professionals. The firm has 14 attorneys, with experts in securities, lending compliance, document preparation, litigation and secured creditors rights. •
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PERSPECTIVE by Abhi Golhar
6 RULES FOR NEW INVESTORS
RULE #1 - UNDERSTAND THAT YOU WILL LOSE MONEY
Even the world's very best investors lose money from time to time. And as a new investor, your chances of losing money are very high. The best way to handle losing money is to evaluate why and then minimize any future losses by applying what you’ve learned. Why did you lose money? What could you have done to protect yourself from significant losses? What information do you need in the future to keep your losses at a minimum and eventually turn those losses into gains? Answer these questions each time you lose money, and you will start finding it a little easier to make sensible and winning investments.
RULE #2 - NEVER BET THE FARM
The colloquialism "betting the farm" applies to investors who put money that they cannot spare into their investing activities. When you are just getting started in investing, you should 45 PRIVATE LENDER
set aside a fund that you can use that will not affect the way you pay your bills or provide for your family. In other words, never start off your investing career by using your mortgage payment or your child's college fund as a financial foundation.
RULE #3 - PRACTICE MAKES PERFECT
When you are new to investing, you are usually eager to set up your online brokerage account and get right to it. But that is one of the biggest mistakes you could make. When you set up your brokerage
strong market fundamentals, “theWithtimesuchis right to expand portfolios and
nvesting online can look simple to a would-be or beginning investor, with so many websites offering a way to invest, whether it’s stocks or real estate. But you need a plan if you are going to develop your new investing career properly, and a good plan always follows experienced and practical rules. The idea of putting money into something and then realizing a profit without having to do any work is appealing to a lot of people, but it also is unrealistic. Investing requires a great deal of hard work. Here are six rules that can help new investors increase their chances of making money with their investment plans.
benefit from strong occupancy and rents with room to grow.
account, you should utilize an online brokerage that has tools you can use to learn how to invest. For example, many online brokerages have investing games that allow you to use fake money to make transactions using real stock information. These types of games give you a chance to see how stock investing works, without the side effect of losing your real money. You should also choose an online brokerage house that has a comprehensive library of investing information and tutorials to teach you how it all works. The more prepared you are when it comes time to invest your real money, the better your chances of success.
New investors often look for that big stock tip or real estate inside information that will give them a chance to make a big score on something new. But if you want to find success as a new investor, your best move is to go with what you know. For example, if you have been drinking the same brand of cola your entire life, then the chances are very good that the manufacturer is a stable company that knows how to remain profitable. Instead of venturing out into the world of unknown securities, do some research on that cola manufacturer and find out if that could be your first, sensible investment. The same can be said for new investors in the real estate market. Instead of speculating on which properties will gain in value due to commercial expansion, you should consider purchasing existing properties that are already in excellent locations and generating a profit. Until you have the experience to speculate on any kind of investment, it is always better to stay with what you know.
RULE #5 - FIND A MENTOR
A personal finance mentor can be a stockbroker, a financial planner you trust or even your uncle who made his fortune investing in gold futures. A mentor is someone who has experienced success in investing and is willing to share his or her experiences with you to help you become successful in investing. Without a good mentor, you will find it 46 PRIVATE LENDER
“If you want to find success as
a new investor, your best move is to go with what you know.
RULE #4 - GO WITH WHAT YOU KNOW
very difficult to establish a stable investing career.
RULE #6 - BUY LOW, SELL HIGH
This is the oldest investing cliché in the book, but it is a rule that every new investor must follow. When you are first starting out, it can be difficult to project a selling price that will make you a huge profit. Instead of waiting for that big break, you should just sell when your investment is worth more than what you paid for it and be happy to walk away with a profit. As long as you are making a profit, you can never go wrong. As you gain more experience, you will learn how to identify trends and patterns that can be used to maximize your return on each investment. But as a new investor, you can minimize risk by always selling for a profit. Investing is a difficult game to play, especially when you are brand new to it. But when you take the right steps to develop your investing career and follow these six basic rules for new investors, you will significantly increase your chances of establishing a long and successful investing career. •
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