Innovation in the Hard Money Lending Space

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

Love the 24-hour decision framework. Thanks for the reply! If I ever choose to invest in Kansas City I know who to call.

[email protected]Podcast Guest on Show #204

Noah Thacher

Real Estate Agent · Dallas, TX · Member since 2021 · 27 posts · 19 votes

4y

@Eric Boshart, I feel like relationships are the key to any great business. I recently had a lender experience where a certain lender had the best rate but were not able to deliver on their promises and burned everyone in the process. I would much rather work with someone that I know I can trust and is going to deliver consistent results than just finding the best rate. Hope this helps!

2 Reply

Alicia MarksPro Member

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

As someone in DFW who uses hard money, I would say that any innovation that keeps the initial out of pocket amount low for the borrower makes a huge difference. Structuring a loan that is the entire amount with a rehab in escrow is incredibly frustrating and causes people not to purchase. If they had the money to set the majority in escrow they wouldn't be seeking a rehab loan in the first place! Creating loans that split out rehab and purchase into two separate loans means more deals for the investor and in turn more deals for you! I think you could also consider a rehab that has you paying up to a certain amount of the rehab yourself and taking half the equity at sale would be appealing to flippers as well. Of course you would need to cap your percentage to ARV, but structuring more as a partnership side deal with experienced investors would be potentially very profitable for you.

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

Thanks very much for the insight. I agree JV partnerships (taking equity upside on the backend) would certainly be appealing, and I could adjust the return to meet the higher risk profile.

Strictly rehab loans usually require you to sit behind a first lien holder correct, because typically they would finance the purchase with a bank/different lender. Again, I think that would be fine as long as you're adjusting the return.

Very interesting!

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

@Noah Thacher great point. I've worked with "best rate" lenders instead of "best service" lenders, and the difference is palpable.

[email protected]Podcast Guest on Show #204

Alicia MarksPro Member

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

Quote from @Eric Boshart:

Thanks very much for the insight. I agree JV partnerships (taking equity upside on the backend) would certainly be appealing, and I could adjust the return to meet the higher risk profile.

Strictly rehab loans usually require you to sit behind a first lien holder correct, because typically they would finance the purchase with a bank/different lender. Again, I think that would be fine as long as you're adjusting the return.

Very interesting!

I did a loan with a private lender that still had 70%ARV where they held both loans. The difference being that the two amounts were separated into a purchase price loan and a rehab loan that was held in escrow. I didn't end up with $20k in closing costs like I found in the combined loan because they weren't just placing my rehab funds in escrow. It became an actual secondary loan. Same as many lenders would do as a single loan at 70% ARV, just separated with the rehab loan as an escrow account with draws so my closing costs made it doable for me.

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

Quote from @Alicia Marks:

Quote from @Eric Boshart:

Thanks very much for the insight. I agree JV partnerships (taking equity upside on the backend) would certainly be appealing, and I could adjust the return to meet the higher risk profile.

Strictly rehab loans usually require you to sit behind a first lien holder correct, because typically they would finance the purchase with a bank/different lender. Again, I think that would be fine as long as you're adjusting the return.

Very interesting!

I did a loan with a private lender that still had 70%ARV where they held both loans. The difference being that the two amounts were separated into a purchase price loan and a rehab loan that was held in escrow. I didn't end up with $20k in closing costs like I found in the combined loan because they weren't just placing my rehab funds in escrow. It became an actual secondary loan. Same as many lenders would do as a single loan at 70% ARV, just separated with the rehab loan as an escrow account with draws so my closing costs made it doable for me.

Gotcha, makes sense. What would you think if a lender, instead of placing the rehab loan in escrow, attempted to earn a yield on it until you requested it for reimbursement? It could be an attractive proposition for a limited partner/passive investor into the business if the return is spiked a bit.

[email protected]Podcast Guest on Show #204

Alicia MarksPro Member

Fort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes

4y

I would be hesitant because of the possible loan fraud implications of leveraging money placed in escrow. I'm not an attorney, but I would think that those funds would need to be very sound. It also would likely not be worth pursuing if they re projects like mine that are limited to 2-3 months maximum. I do like how you're thinking outside of the box though!

Podcast Guest on Show #222

Jeff S.

Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes

4y

@Eric Boshart wrote:

“… and they're all racing to the bottom in the terms of pricing, which leaves little profitability on a per-loan basis …

The material I'm digesting that covers this topic isn't really providing me any creative new ways to add margin ...”

I think you’re having digestive issues, Eric. 🤣 Why do you believe you have to compete on price?

Do Nordstrom’s or Whole Foods compete on price? How did it work out for K-Mart?

Everyone will always say they want the cheapest money they can find. In our experience, their actions speak louder than their words. I can tell you with certainty that experienced flippers, our market focus, are much less sensitive to a few points or percent than they are to speed to fund, maximizing LTV, minimizing payments, and above all a great trusting personal relationship. It boils down to having as many competitive advantages as you can. Here are a few I know are actionable:

Even in our current overheated crazy market, most successful active flippers often have more deals than money and need as much as they can put their hands on. What LTV are you willing to loan at? 70%? 80%? 90%? How about 100%? The greater the percentage, the more popular you will be.
Ditto, monthly payment deferral. This helps your borrowers preserve cash flow.
Experienced flippers always make aggressive offers with a short closing period; say a week to 10 days. Often less. What if you could fund a loan in 2 to 3 days? Or, 24 hours in an emergency, such as when a lender flakes out at the last minute? Note that I wrote “fund” not “make a decision.”
Similarly, are you 110% reliable? If you can’t be trusted to fund when required, not only are your competitive advantages irrelevant but so is your entire business model. It takes time to develop this reputation and one bad deal to lose it.
Lend to newbies. Perhaps specialize in this. Many lenders won’t loan to the inexperienced and this leaves a gigantic gap in the market you could fill (if you’re willing to hold some hands.)
Obtain the proper licensing to make consumer-purpose loans to the self-employed, commissioned salespeople, or other well-qualified but hard-to-fund individuals. I’m not suggesting becoming a conventional lender. The few HMLs I know who do this are as rare as hen’s teeth and doing quite well.
Lend to retirement plans. Many lenders always require a personal guarantee. You can’t require a PG when lending to a retirement plan. This is a crazy easy problem to solve.
Most important, do you have a process to develop a strong trusting relationship with your borrowers?

What other competitive advantages can you offer which have nothing to do with the price of your money? What asset class are you lending to? Are you trying to be all things to all people like the giant mega-HMLs? The narrower your focus, the better.

If you lend to out-of-state strangers, require two appraisals (I really know HMLs who do), credit reports, bank statements, W-2s, income taxes, 2 weeks to fund if you're lucky, and then hope to obtain 8% on a 75% LTV, then you are almost indistinguishable from most conventional lending criteria. This is the model used by many of the billion-dollar mortgage pools.

The billion-dollar mortgage pools can get by on a 3% spread. You can’t.

3 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Quote from @Eric Boshart:

Thanks very much for the insight. I agree JV partnerships (taking equity upside on the backend) would certainly be appealing, and I could adjust the return to meet the higher risk profile.

Strictly rehab loans usually require you to sit behind a first lien holder correct, because typically they would finance the purchase with a bank/different lender. Again, I think that would be fine as long as you're adjusting the return.

Very interesting!

I have done a fair amount of equity participations over the years I find there is not a lot of demand for that.. Read Jeff above he lines it out quite well what borrowers are really looking for.

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3 Reply

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

Quote from @Jeff S.:

@Eric Boshart wrote:

“… and they're all racing to the bottom in the terms of pricing, which leaves little profitability on a per-loan basis …

The material I'm digesting that covers this topic isn't really providing me any creative new ways to add margin ...”

I think you’re having digestive issues, Eric. 🤣 Why do you believe you have to compete on price?

Do Nordstrom’s or Whole Foods compete on price? How did it work out for K-Mart?

Everyone will always say they want the cheapest money they can find. In our experience, their actions speak louder than their words. I can tell you with certainty that experienced flippers, our market focus, are much less sensitive to a few points or percent than they are to speed to fund, maximizing LTV, minimizing payments, and above all a great trusting personal relationship. It boils down to having as many competitive advantages as you can. Here are a few I know are actionable:

Even in our current overheated crazy market, most successful active flippers often have more deals than money and need as much as they can put their hands on. What LTV are you willing to loan at? 70%? 80%? 90%? How about 100%? The greater the percentage, the more popular you will be.
Ditto, monthly payment deferral. This helps your borrowers preserve cash flow.
Experienced flippers always make aggressive offers with a short closing period; say a week to 10 days. Often less. What if you could fund a loan in 2 to 3 days? Or, 24 hours in an emergency, such as when a lender flakes out at the last minute? Note that I wrote “fund” not “make a decision.”
Similarly, are you 110% reliable? If you can’t be trusted to fund when required, not only are your competitive advantages irrelevant but so is your entire business model. It takes time to develop this reputation and one bad deal to lose it.
Lend to newbies. Perhaps specialize in this. Many lenders won’t loan to the inexperienced and this leaves a gigantic gap in the market you could fill (if you’re willing to hold some hands.)
Obtain the proper licensing to make consumer-purpose loans to the self-employed, commissioned salespeople, or other well-qualified but hard-to-fund individuals. I’m not suggesting becoming a conventional lender. The few HMLs I know who do this are as rare as hen’s teeth and doing quite well.
Lend to retirement plans. Many lenders always require a personal guarantee. You can’t require a PG when lending to a retirement plan. This is a crazy easy problem to solve.
Most important, do you have a process to develop a strong trusting relationship with your borrowers?

What other competitive advantages can you offer which have nothing to do with the price of your money? What asset class are you lending to? Are you trying to be all things to all people like the giant mega-HMLs? The narrower your focus, the better.

If you lend to out-of-state strangers, require two appraisals (I really know HMLs who do), credit reports, bank statements, W-2s, income taxes, 2 weeks to fund if you're lucky, and then hope to obtain 8% on a 75% LTV, then you are almost indistinguishable from most conventional lending criteria. This is the model used by many of the billion-dollar mortgage pools.

The billion-dollar mortgage pools can get by on a 3% spread. You can’t.

Thanks very much for the insight. I agree on the Kiavi, national fix and flip lenders that have to do a ton of volume in order to scale. Not really looking to lend to everyone everywhere.

Seems like speed and limiting cash-to-close requirements are super important, as well as having really solid personal relationships.

All very actionable advice.

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

Quote from @Jay Hinrichs:

Quote from @Eric Boshart:

Thanks very much for the insight. I agree JV partnerships (taking equity upside on the backend) would certainly be appealing, and I could adjust the return to meet the higher risk profile.

Strictly rehab loans usually require you to sit behind a first lien holder correct, because typically they would finance the purchase with a bank/different lender. Again, I think that would be fine as long as you're adjusting the return.

Very interesting!

I have done a fair amount of equity participations over the years I find there is not a lot of demand for that.. Read Jeff above he lines it out quite well what borrowers are really looking for.

Helpful! How did those deals turn out from a return perspective, if you don't mind me asking?

Troy Jones

Lender · Tempe, AZ · Member since 2016 · 46 posts · 8 votes

4y

@Eric Boshart

Even with the amount of lenders out in the market given how a lot of lenders are doing i'd say there is plenty of customers out there. Not all investors are rate, point, or leverage sensitive if anything they just want speed and transparency. Also keep in mind certain lenders have minimum, maximum capabilities on certain propertis. Some only do smaller loans under 500k, some only offer 70% LTV, some only lend to seasoned investors, some only do bridge loans. We are a newer fund but have been doing this for 10+ years and we had no issues funding over $200M loans in our first year. Look at larger shops like Lending Home, Anchor loans these shops do 1 billion in loans a year, but a lot of other shops are doing 100M -500M in volume and thriving. One thing I found is when a lender becomes too big they end up lacking in other areas such as customer experience and seasoned investors just want the ease of mind to know their deal is going to get funded in a timely fashion without issues or headache.

2 Reply

OP

Lender · Fort Worth, TX · Member since 2016 · 77 posts · 20 votes

4y

Quote from @Troy Jones:

@Eric Boshart

Even with the amount of lenders out in the market given how a lot of lenders are doing i'd say there is plenty of customers out there. Not all investors are rate, point, or leverage sensitive if anything they just want speed and transparency. Also keep in mind certain lenders have minimum, maximum capabilities on certain propertis. Some only do smaller loans under 500k, some only offer 70% LTV, some only lend to seasoned investors, some only do bridge loans. We are a newer fund but have been doing this for 10+ years and we had no issues funding over $200M loans in our first year. Look at larger shops like Lending Home, Anchor loans these shops do 1 billion in loans a year, but a lot of other shops are doing 100M -500M in volume and thriving. One thing I found is when a lender becomes too big they end up lacking in other areas such as customer experience and seasoned investors just want the ease of mind to know their deal is going to get funded in a timely fashion without issues or headache.

Much appreciated, Troy! Definitely not even looking for that type of volume. Sounds like having a dialogue with your prospective clients is most important.