I have a friend in upstate New York who is interested in funding an experienced investor's house flips for a 12 - 15% ROI. Passive investing, as some call it.
My recommendations to him in order to find these individuals or groups to partner with in these type of ventures was to attend local REIAs, join BP and read and post in the forums and to contact real estate attorneys in the area for recommendations.
My question: How would you recommend "vetting" house flippers before funding their projects? I told him to look for someone who provides an itemized, detailed breakdown of their project with documentation to back up the numbers; ask for a portfolio of their previous flips with itemized breakdowns of the financials; to contact other people who have funded said investor's projects. And to make sure he uses a good RE attorney before entering in to any agreement.
What would you add to that?
Maybe you should have your friend be prepared to define what he brings to the table for his 12-15%. Any flipper who's head over heels to borrow money at 15% may not be the sharpest tack in the box, unless your friend can offer some other expertise to to along with it.
I meant to say 10-12% with no points. My apologies. Wouldn't that be better than going through a hard money lender?
My thoughts are someone like that would be an asset to a house flipper who found a great deal but is currently tapped out on funds while in the midst of other flips.
make sure who ever your friend works with, he has to have all the scope of work, everything from A total list price as is, sqft, lot size, locaction,ARV, contact the owner to make sure and if he can get it under contract , you should have home take some professional pictures, outlining the work that will add value, so You can NoÃ© compare it to the locals properties in the area, of yaws numbers are profitable for both parties.
Shrink time conserve it and use every minute
Your work tells a story about you, make sure he is time and structured
It's his money so you ought to send your friend here to have his questions answered, @Daniel Harnsberger . Have him do a search on becoming a hard money lender and he'll get many hits.
Does your friend have any real estate experience? I suggest he first attend several local real estate clubs to meet some local flippers, hard money lenders, and perhaps get a feel for the prevailing rates. One option would be to do his first few loans through a local hard money lender to learn the basic processes.
Local hard money lenders will also know local lending attorneys. These are not the same as real estate lawyers and can be as rare as hen's teeth. Lending attorneys have the background in lending and securities law that most run-of-the-mill real estate attorneys don't. Your friend doesn't want someone who does evictions today, leases tomorrow, and closings the next. He wants someone who's immersed in lending day in and out, can explain the law, the processes, and can also provide paperwork.
Your friend should meet his potential borrowers in person and real estate clubs offer the best concentration. We focus on experienced, full-time professionals who earn their livelihood flipping homes. A new lender to an inexperienced borrower is nothing more than the blind leading the blind and could be a formula for disaster. It would be helpful to have a broker originate and then assign the loan to your friend, if it's done that way in your state.
I suggest he meet with each potential borrower and drive around with them, looking at their finished homes or projects that are in work. Then go to lunch. The sole idea here is to spend time with them and get a sense of their integrity. Anyone can fix a house. Trust and respect are the basis of all rehab loans. Your friend will want to deal with professionals he believes in.
He'll also want to learn to quickly estimate rehab costs and ARV. With some experience, this doesn't take long to learn. As a lender, these can be estimates.
You might also refer your friend to this thread, which provides more detail and perspectives and many related links: I Would Like to Become a Hard Money Lender. Any resources?
Screen any potential lending partner just like a tenant at first.. this will weed out many believe me.. Run full criminal background and full credit. You would be surprised at what you may find out.
in lending on the private side you want to follow bank protocol as well,,, the three C's Character, Collateral and Capacity...
The Caveat being this is I assume going to be a long term multi deal arrangement.
HML by and large don't do background.. Although when I was HML I had a Accurant product that looked for obvious issues.. you popped in the SS and you got a report back it was like a speedometer in the green you were good yellow you needed to check individual out better and Red was major red flags.
I do all my deals as JV's these days I don't lend anymore so this is my normal procedure to set up a JV partner that I will be creating long term facilities for.
And honestly sometimes I just go with my gut.. But I have been doing this 35 years .. someone starting out if you do the above you should be in good shape.
Thank you for the feedback @Jay Hinrichs Jeff S Na
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