Where is the bottom? What's the worst that could happen?

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Where is the bottom? What's the worst that could happen?

Kevin Armagno
Huntingdon Valley, PA · Member since 2016 · 6 posts · 0 votes
I am new to real estate, and though there is loads of amazing information here on how to succeed, I am looking for more information on how to fail (Not that I intend to!). So, given that there was a crash 10 years ago (and some people forecast another big one soon) and there are plenty of investors that do ultimately fail in healthy economic times, what does that look like, and how do you recover? A coworker of mine recently told me to only use conventional loans and not do "anything weird" (he owns a duplex) . I would like to feel like I knew what I was getting into if I did use private or hard money. Does failure count as experience? Does failure destroy your reputation and your credit? What happens/what does it look like if you can't pay a private or hard money lender? For that matter, what are the lasting personal effects of foreclosure? I apologize; I know it is an incredibly vague question. I just want to understand my risk and better understand the whole process.
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Michael Randle
Aurora, CO · Member since 2016 · 158 posts · 118 votes
8y

Lots of questions so lets just dive into them.

"I would like to feel like I knew what I was getting into if I did use private or hard money" - Very High interest rates, usually not as much concern for personal credit score etc (this will vary between lenders) and more looking into property and experience.

"Does failure count as experience" -Absolutely, as long as you learn from the failure and apply that knowledge to future endeavors. If you fail and say 'The gods are so cruel to curse me as such!' then it doesn't count as failure. (Sorry, just read Richest Man in Babylon and that writing style is stuck in my head).

"Does failure destroy your reputation and your credit" - Depends on the level of failure, if you get foreclosed on or have to declare bankruptcy then it is going to ruin your credit. If your failure is selling a house for a slight loss then no. All matters on the magnitude.

"What happens/what does it look like if you can't pay a private or hard money lender" - Well it isn't like the loan sharks of the mafia era so you can expect your kneecaps to remain in tact. But you can expect to lose any collateral and have your personal credit ruined.

"For that matter, what are the lasting personal effects of foreclosure" - Do not quote me on this but I believe it is on your credit report for 7 years and you cannot get a mortgage for at least 2 years.

Hope that helps you a little more. Good Luck!

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  • Michael Randle
    Aurora, CO · Member since 2016 · 158 posts · 118 votes
    8y

    Lots of questions so lets just dive into them.

    "I would like to feel like I knew what I was getting into if I did use private or hard money" - Very High interest rates, usually not as much concern for personal credit score etc (this will vary between lenders) and more looking into property and experience.

    "Does failure count as experience" -Absolutely, as long as you learn from the failure and apply that knowledge to future endeavors. If you fail and say 'The gods are so cruel to curse me as such!' then it doesn't count as failure. (Sorry, just read Richest Man in Babylon and that writing style is stuck in my head).

    "Does failure destroy your reputation and your credit" - Depends on the level of failure, if you get foreclosed on or have to declare bankruptcy then it is going to ruin your credit. If your failure is selling a house for a slight loss then no. All matters on the magnitude.

    "What happens/what does it look like if you can't pay a private or hard money lender" - Well it isn't like the loan sharks of the mafia era so you can expect your kneecaps to remain in tact. But you can expect to lose any collateral and have your personal credit ruined.

    "For that matter, what are the lasting personal effects of foreclosure" - Do not quote me on this but I believe it is on your credit report for 7 years and you cannot get a mortgage for at least 2 years.

    Hope that helps you a little more. Good Luck!

    1Reply
  • Tara Daniels
    Private Money Lender · Tampa, FL · Member since 2018 · 54 posts · 16 votes
    8y

    @Kevin Armagno

    Hey Kevin, 

    If you use private or hard money, the first thing to understand is that every lender is different. Typically though, you will be loan term of 6-36 months with an interest rate anywhere between 7%-18% and anywhere between 1-6 points at closing, though most commonly 2-4 points.  

    The more experience you have, the better terms you will get.  Any experience within the past few years will also help in terms of you getting better terms, so will having a good credit score.  

    Please feel free to reach out with any questions. 

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  • Kevin Armagno
    OP
    Huntingdon Valley, PA · Member since 2016 · 6 posts · 0 votes
    8y
    @Michael Randle Thank you for the reply! Richest Man in Babylon is great. I just read it earlier in the year and lent it to my father a few weeks ago :) Your answers were very insightful. I guess a large hesitation of mine is it seems like a "failure" usually means losing money, which seems like a bigger problem for new people who have limited resources (and just starting out trying to diversify their income). In my context, I am saving money for my first real estate deal and it is hard to know if I can absorb the negative impact of a failure without the long-lasting effects. If I had a few successful cash-flowing deals, it seems more realistic that I might be able to weather a bad deal easier. It stands to reason that anytime someone takes a big step forward financially (e.g. a first purchase, a multi-family unit, a first apartment complex), the risk may overcome them. I am kind of thinking out loud here; it seems like for some of these transitionary deals that would be why it makes sense to work with someone experienced to start, or theoretically house hack to save money, but otherwise only uphold an expense that can be managed.
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  • Kevin Armagno
    OP
    Huntingdon Valley, PA · Member since 2016 · 6 posts · 0 votes
    8y
    @Tara Daniels Thank you for the response Tara! Those numbers will help in factoring that cost of money into my deals to hopefully avoid failure altogether! I'm still very premature in my knowledge in how (or when) to secure funding. Though it is not really related to my first questions, I'd like to ask this while you are here: Do people have funding secured when they make offers? Or do they have to be under contract (contracts are another topic im hazy on), then find a way to pay for the property? To me, I have a better understanding of the conventional loan route, there being prequalifications before shopping for properties.
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  • Tara Daniels
    Private Money Lender · Tampa, FL · Member since 2018 · 54 posts · 16 votes
    8y

    @Kevin Armagno

    No problem Kevin, happy to help.  What I like to do with my borrowers is to have them pre-approved and have financing already in place for them so that when they do find their property and are going under contract, everything is able to move very quickly.  I always recommend that investors have their financing in place already so that there is nothing slowing them down or stopping them from closing on their next deal!

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