Top 11 Takeaways from a Chat with a Level 4 Investor
Ever wonder what it’s like to be an investor with Level 4 Funding? Or, maybe you’re an entrepreneur who’s curious to know what the person financing your deal is really like and what he or she is looking for. John Evans, a current investor and former flipper, was kind enough to let us pick his brain, and he shared some candid details with us us, including what goes on behind the scenes and tips for success.
John’s Tapped into the Market, Even When Off the Grid
When we caught up with John, he was at a remote campsite with limited cell phone access. This is his life these days—going where he pleases when he pleases—and without worry of the daily grind. Of course, it wasn’t always this way. A series of savvy decisions brought him to where he is today.
There were the early decisions, like pursuing a bachelor’s degree in marketing and public relations as well as a master’s in business administration, and then subsequently climbing the corporate ladder to attain titles like director and VP. There was the background screening company he founded in post-9/11 culture when everybody wanted to know exactly whom they were working with. Although initially operated from a spare bedroom in his Silicon Valley home, business boomed until a global information services company caught wind of his growing company and convinced John to sell it to them in 2005.
As part of the deal, he worked for the company for a year to ensure a smooth transition, but that left John with a problem most people dream of—a stack of cash with unlimited potential, provided he invested it well.
He Got into Flipping During the Recession
We’ve done a number of interviews with flippers, lenders, and realtors who weathered the recession. In many cases, these were tough times because conditions leading up to the recession were so favorable. Property values were skyrocketing, so investors and rehabbers could grab a slice at a reasonable price, do some repairs, and then sell, profiting from a mix of increasing market values and sweat equity. Of course, when the market changed, many were left with properties of diminished value they couldn’t sell. John’s story is a little different in that, when everyone else was losing, he saw the market drops and decided it was a good time to get into it and start buying. His specialty was fourplexes in the Phoenix metro area. The prices were right, but the job was not for the faint of heart. Many of the deals were in rough neighborhoods and the properties were boarded up when he took over. He dealt with squatters too, but thankfully, they bolted when they realized someone else was on the property rather than engaging.
He says the margins were high at the time, but eventually it hit the point where it no longer made financial sense to flip. So, he became a property manager instead, only selling off his portfolio and moving into the investment side three or four years ago. “It’s the same money or better without the work,” he reveals.
Top 10 Ten Investor Takeaways
1. Study up if you want to get into flipping or investing.
John didn’t just jump into buying fourplexes and flipping. He spent about a year studying before he closed his first deal. He says Arizona Real Estate Investors Association (AZREIA) was highly instrumental for him. “Because they’re non-profit, it’s fairly inexpensive and you get a good education,” he explains. Beyond taking classes through AZREIA, John obtained a real estate license too.
2. Become familiar with the difference in fractional and whole deals.
Although he works with Level 4 Funding now, John tried partnering with other companies before. In these cases, he says he used the fractional model of investing; pooling money together with a group of investors and forming an LLC to fund the deal. The problem is, “you’ve got no controlling interest—no say in what happens with the property,” he explains. This isn’t necessarily an issue when the borrower follows through on his end, but when the borrower doesn’t, it takes considerable time to resolve the default. With Level 4, the deals are whole deals, meaning John’s no longer holding a 5% stake with no pull, but a 100% stake which allows him the ability to respond swiftly if issues arise.
3. Perform diligence checks or work with someone who does.
The importance of performing due diligence cannot be overstated. Unless you run the numbers and visit the property, it’s challenging to know what you’re getting into. For someone with John’s nomadic lifestyle, it’s not realistic to visit a property in person before investing. This is one of the reasons he likes working with Level 4 Funding. “They do the diligence,” he notes. It’s “Here’s the property, value, LTV, and address.” Even still, John looks into the data, himself, as well.
4. Know there’s risk involved.
“Loan to Own,” is the slogan John lives by. This doesn’t mean that you need to want to own the property, but rather, “Don’t loan money on a property you’re not willing to own. Assume it’s going to go into default,” he cautions. With this mindset, it’s easier to make wise investment decisions and pivot as conditions change.
5. Relax, a default doesn’t mean you’re losing.
When a borrower defaults, it can be difficult for an investor, especially for those in fractional deals where the foreclosure process may drag out for an extended period of time. “Sometimes people get into it and, for whatever reasons, are not able to hold up their end,” John explains. He’s done about 15 deals in the past couple years and, yes, a couple have defaulted. However, he says his contact at Level 4 guided him through the process and put him in touch with a local family-owned foreclosure services company which took care of everything within about 90 days. Although John was initially apprehensive due to his prior experiences with defaults on fractional deals, he no longer has these concerns. “The way the contract is structured, the interest rate goes up and the borrower has to pay more,” he clarifies. “I have always come out on top.”
6. Investors really do care about the success of entrepreneurs.
Poor lending practices contributed to the 2008 recession and, unfortunately, many people lost their personal homes. The stigma associated with this persists today and tends to be the elephant in the room when people are new to hard money lending. In this respect, knowing the mindset of the investor funding your deal can make all the difference in the world. “I don’t get involved with people buying for their family,” he explains, but even then, the decision to move forward with the foreclosure process is never simple. As someone who has been on both sides of the table, it’s easy for John to identify with the struggles rehabbers face. Though funding deals may be a “matter of business,” he says, “I feel bad for people that default because they put their time, money, and effort into it.” A successful outcome for everyone involved is always the priority.
7. Rehabbers need connections to flip today.
Historically, auctions were the way to go, but John says this strategy doesn’t work anymore. “There’s too many trusts buying today. They pay over retail and don’t care when they do.” The average flipper can’t compete with this and there’s not a lot of inventory, which means word-of-mouth is the best way to find good deals.
8. Know your numbers.
We asked John for some tips for new investors. “Anybody can get into it, BUT, you’ve gotta understand the numbers,” he imparts. When John started flipping, the margins were high, but he says 10% is a good profit now. This is a major component of the “thrill of the deal,” he adds. “Doing the analysis and thinking, ‘hey, this is going to work,’” is exciting.
9. If you’re flipping, pad everything.
“Be conservative with estimating value of a property; overestimate your costs, overestimate how long it will take to sell,” he cautions. “It always costs you more than you think to do these things,” his wife and business partner Sandy offers.
10. Lending is based on the property, not the person or credit score.
“You’ve got bad credit, but a good property? I’ll lend to you,” he declares with absolute confidence. Although John doesn’t search for his own deals, he brings this attitude to lending via Level 4 Funding. “It’s a great way to lend money. They do all the homework; they’re shadowing them, checking the numbers.” Because he’s a licensed realtor, John can also do his own valuations and make sure the numbers make sense, and notes, “What doesn’t work for banks works for private lending.” A bank won’t lend to someone with a credit score in the 500s, but John says that’s not a problem with the types of loans he funds. “You don’t have to have good credit. Find a good deal,” he advises.
11. Cycles aren’t important, but being able to pivot is.
There’s a lot of talk lately about how the market cycles, and with home values skyrocketing, those who weathered the 2008 recession are often especially wary that another massive drop is due. Perhaps John sees this differently, as he got into real estate during the recession and wasn’t holding properties when it started, but at the same time, he also adapted his fix-and-flip strategy to fix-and-hold due to market conditions back then too. “I don’t see the cycles as a problem,” he explains. “Even if the market sees a dump, you’ll break even on a 70 LTV.” If need be, “you can rent until you can sell,” he adds.
Contact Level 4 Funding if You Want to Grow Your Wealth Too
Whether you’re an investor like John or in the fix-and-flip biz and need someone to finance your deals, Level 4 Funding can help. Visit the site to get a free investment guide and see current deals or contact us to find out what terms you’ll qualify for as a borrower.