Hard Money Lending - Becoming an Investor
San Jose, CA · Member since 2012 · 14 posts · 0 votes
Hello,
I am new to investing and have the opportunity to start investing on a hard money lending transaction for a short sale purchase and flip transaction.
According to the company servicing the loan:
The loan is a 1 year interest only. The note rate will be 11% with an investor a rate of 10%. The buyer is a seasoned property flipper (they have done 5 loans for him over the past 2 years).
The LTV is 65%.
How would you decide if this is a good investment?
What advice do you have for hard money investors?
Thanks!
The broker is brokering you the loan. You still need to do a bit of due diligence on your own. That is how investors decide when and in what to invest. Assuming even the broker has the best intentions in the world you still have a duty to yourself to learn how to do some due diligence.
You sound like a very green investor and I would suggest likely too green. (well that and you said you were new) Perhaps spend some time with the broker on a deal or two and learn a bit more about the industry and read through BP to get a better understanding of your role and your rights and responsibilities when you invest in a loan.
I would tell you pass on the deal. To be honest, the fact that you came here to ask if you should make the loan means you should not. You need to learn a bit more, IMO, no offense. Spend some time with the broker to understand how he underwrites the deal (if at all). Speak with other investors and use BP to come back and ask questions when as needed.
There is one thing I can tell you, this is not the only deal out there now or into the future you have time to approach this with a better set of tools and knowledge than you have today.
Capital is hard to come by most of the time, you hold all the cards, the broker right now and the buyer need you more than you need them.
What are they charging the borrower to put together the loan?
They are paying you 10%.
They are charging the borrower 11% and that's it? No points?
65% LTV is fine, but is that of the ARV? How happy are you with their due diligence in knowing that property will be worth X (and therefore your loan will be nice and safe at 65%)?
Will there be any other liens against the property? Is the borrower/rehabber coming in with their own money for rehab?
1 year is a bit long, IMO, for a flip loan. I would cap it at 6 months with the option for an extension.
Take a close look at the property because you could become the owner.
The broker is working for the borrower and will not protect you. That is entirely your responsibility so "buyer beware".
Obviously, the broker is supposed to disclose what they know but it is up to you to figure out worst case scenario. Good luck.
Only saying this as this is the second time this notion has surfaced recently;
That a broker has no duty to an investor lending his/her money out....hogwash!
A broker has a duty to his client, an applicant, to assist him in placing and obtaing a loan.
That changes at the closing table when that duty has been fulfilled. When that note is signed the broker has a fudicary responsibility to the investor, to do those things to safeguard that investment. I don't know of any broker that would tell an investor, lend me or invest with me and I'll lose your money for you.
The moment you accept money from an investor you have a duty to perform and to opearte prudently.
That's like saying a bank has no duty to depositors and has a duty to the guy who doesn't pay his car payment on time because he is their client.
It's broker beware! They are exposed to liability from both sides.
Thank you for the replies.
Loc R., The 65% is LTV at the purchase price. The flipper is buying the property with a 35% cash down payment + closing costs.
I believe the broker only does 12 month interest only loans, but the buyer can pay it off faster.
I agree with Bill. The broker's responsibility is to get the money to fund the loan, but then, his responsibility becomes collecting the money to pay off the investors.
Does the broker hold onto the rehab funds and disburse them in stages?
Here in So Cal most HMLs won't go past 6 months...the flipper should be in and out in 6 months. Otherwise, it's more likely going to be a problem property than a quick profit.
In addition, considering most HMLs make their money on points when originating a loan, why make 2 points once in 12 months when they can make 2 points twice or even 3 times in that same time period with your money?
Loc R. According to the broker, the house does not require many updates. It was built in 2004; and it is being sold as a shortsale straight from the bank. The bank does not allow the new owner to sell the property for 90 days.
Broker said that it is possible that the flipper will only keep the property for 90 days and then sell it and close off the loan.
Is that usual here in California? The flipper would use his own money for updates.
The broker is brokering you the loan. You still need to do a bit of due diligence on your own. That is how investors decide when and in what to invest. Assuming even the broker has the best intentions in the world you still have a duty to yourself to learn how to do some due diligence.
You sound like a very green investor and I would suggest likely too green. (well that and you said you were new) Perhaps spend some time with the broker on a deal or two and learn a bit more about the industry and read through BP to get a better understanding of your role and your rights and responsibilities when you invest in a loan.
I would tell you pass on the deal. To be honest, the fact that you came here to ask if you should make the loan means you should not. You need to learn a bit more, IMO, no offense. Spend some time with the broker to understand how he underwrites the deal (if at all). Speak with other investors and use BP to come back and ask questions when as needed.
There is one thing I can tell you, this is not the only deal out there now or into the future you have time to approach this with a better set of tools and knowledge than you have today.
Capital is hard to come by most of the time, you hold all the cards, the broker right now and the buyer need you more than you need them.
Hello, On the surface this sounds like a good deal. LTV @ 65-70% IS AVERAGE for a seasoned investor. (depending on how much rehab has to be done)
One thing no one has mentioned is are you the ONLY investor for this product? What does the rehab list of repairs look like? Who did the inspection on the property for this list? Do you have written bids and cost projections?
These questions are only part of a list I would want to know the answers to---- prior to putting my money out.
YOU could end up owning the house, so you need to protect yourself on all levels.
ALL rehab projects are different, some very complicated and some easy. If you have not done this type of investing before, I would pass until I knew more....
Good luck with whatever you decide.
Ren Ver has two great points. The details were not provided in the thread. If you have $100k to invest, then the property value would be assumed to be $153k. It looks like you live in California and for that state that is a low value so perhaps a not so nice property....
OR
You are not the only investor the broker is putting into the loan and the property value is higher.
The other point here, for being a short sale with minimal repairs 12 months is a long time. There is an undertone of lack of confidence in ability to exit this property which is an issue. Loc said the prevailing term in California is 6 months and the broker wants to issue 12. Remember just because you can't convey title to the property for 90 days does not mean you can not market the property. A buyer should be lined up in 90 days if the borrower knows what he is doing. That is plenty of time to gain sufficient market exposure to garner decently high percentage of value.
I hope this thread gives you some tough questions to run yourself and the deal through to make a good decision.
Thank you so much for your replies. A bit more
Information. The broker chargers the borrower 3 points for the loan. The borrower has done many flips; but 5 of those flips have been funded by that broker. The loan would be the only lien; however the loan would be made by 3 investors; including myself. According to the broker :" i choose to write the loan for 12 months. If I write the loan for 6 months, and if it takes alittle longer than 6 months to close a resale, then I might have an expired loan on my books."
Because there is not any rehab necessary I don't believe the loan should be for 12 months.
Check this other recent and relevant thread; Ann Bellamy has some good advice in there:
http://www.biggerpockets.com/forums/50/topics/74335-how-to-become-a-hard-money-lender
Marimar, IMVIO (In my very infomred opinion, LOL)
You need to stay away from this being in with two other investors. How is your security structured, if there is a loss who gets paid first, what guarantees does the broker provide, is this broker in compliance with SEC regulations with 4 persons involved in the loan, do you have a qualified opinion of the LTV, property values, quality of rehabs and how are you ensured there is no cash out received by the borrower???????
Before you lend money you really need to understand the entire process and rules related to the deal, otherwise you're laying everything at the broker's feet who has a vested interest in getting his hands on your money and doing so at an advantage with limited risk. You need to know how to hold the broker's feet to the fire if he messes up or a deal goes sour. He certainly has a liability to you but that does not mean he is performing his internal issues properly, in fact from what I have seen is that most don't as they have not had significant problems in the past (to learn) or have received advice from an attorney with financing experience. While well meaning, there are many brokers that are just unaware. You really need to be familiar with such issues to identify a solid broker.
But in this case, your first time, you have enough to be the one and only investor involved and I suggest you not partner with other investors on a participation basis. Good luck....
Marimar,
You have some solid advice from from solid people. If we are inexperienced then we are only as smart as the people we take advice from.
When looking at any kind of deal, the legal possibilities is something every smart business person is now forced to do.
When you involve multiple partners that you don't know the complication of possible problems is enormous. If you end up in a lawsuit with multiple lawyers your nest-egg will be eaten alive.
There are other deals. Don't allow anyone to sway you into a deal that has such a small gain but such a large downside risk.
Marimar Hernandez You have been given some great advice on here. You definitely need to know what ALL the costs involved in rehabbing the property will be, what your position will be, etc. If you don't know anything about construction costs, you need to rely on someone that does in order to know if the estimates for repairs make sense. Also, do some comps of your own on the neighborhood, taking into account if the house was sold as a rehab or it's already been repaired and flipped. Have you asked what properties the borrower has completed before, and verified the numbers they purchased for and sold for (or has the broker?)
Regarding the broker, how well do you know him? How long have they been brokering loans? Have you checked their license, etc.? References?
FYI talking with a local HML yesterday and he is writing his loans for 12 mo with 4 mo guaranteed interest. He said some like to keep and rent for a while, guess in hopes of improvement in the market, and/or maybe refi during the 12 mo and keep as rental.
He loans 85-90% of purchase price and will sometimes, under certain circumstances, finance some repairs too.
He gets and gives 12% and keeps 4 pts.
Loaning at 65% of the purchase price is meaningless Marimar Hernandez, if the buyer paid twice what the property's worth, has inaccurate rehab costs, or a poor ARV estimate. That is, LTV is not a comprehensive metric and is irrelevant in the context of flips, especially if you're looking at it as a measure of safety.
Other than a profit, the key for you as the lender is to understand how you can get out of the property if the deal goes south. If you had to take the property back, could you rehab and sell it at a profit or, more realistically, could you immediately sell it to another flipper and come out whole? Don't do the deal unless you understand the true value of the as-is property to another investor. Understand too that while there is generally only one value of a rehabbed house; the ARV or market value, there are at least three values to a flip.
The first value is of the current as-is condition. This is the number a flipper will add to his anticipated rehab and holding costs to determine if he can make a fair profit, using a variety formulas. The second, and often overlooked, is the value of the project as work on it progresses. This changes over time and is important to you as a lender. An over-demo'd, over-ambitious project, or simply lousy work could reduce the as-is value at any point in time if you had to sell to another flipper. Here you have to know your borrower is skilled at what he or she is doing. Third, would be the ARV of the completed home.
No matter how strongly your broker believes he has a fiduciary responsibility to you (a laughably naïve concept in my view) it’s up to you to know your exit strategies once you own the note. For this particular deal, the killer would be the other partners, who I presume you don’t know.
To summarize, you should learn how to confirm the property values, the rehab costs, and the skill of the rehabber. Don’t rely on the broker to understand any of this.
Move onto another one, Marimar. You’re on the right track but I suggest you learn a bit more first and perhaps initially get into something with fewer moving parts. Good luck.
Jeff