Looking to Move into the Hard Money Space - Feeling Stuck
Member since 2024 · 18 posts · 8 votes
Looking to Move into the Hard Money Space - Feeling Stuck
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Lender · Houston, Tx. · Member since 2023 · 91 posts · 60 votes
2yQuote from @Sarah Reece:
After a lifetime in residential real estate I'm finally wising up and wanting to diversify a bit and start dipping my toes in the HM/PM space. I've got about $400k to loan and if I can prove my model to myself, I have access to another $1m in cash. I am getting clear on my buy box and hoping to stay local (WA state) with my lending. With all that in mind, I'm assuming that my first step is to create an LLC entity for protection and then have an attorney create a loan package with a note...right? I posted on a local group asking for attorney referrals and got some responses about my plan that made me question if this is infact what I need to do to start as a number of people said escrow will create these docs for me.
What say you oh wise ones with experience? What are my first moves to take action?
Sarah, I am a small local direct lender in the Houston area. When i started out the hardmoney mastermind with Jason Balin and Chris Haddon was extremely useful. A lot of lenders of various sizes on there that can help with some of the logistical questions, software, contracts, recommendations etc.
I also have quite a few good book titles on getting into lending.
37 Replies
- Member since 2024 · 18 posts · 8 votes2yYou bring up some great points that I have been giving a lot of thought to. Because I have been an active Realtor for so long, I do have a bit of an advantage with knowledge and relationships with flippers..but I will be spending my time finding ways to keep my money moving and that time might be able to have a higher ROI if I keep doing what I already know. The truth is though, I am ready to shift my focus and evolve a bit professionally after so long doing the same thing. I believe in the beginning I will get a lower return doing this myself, however education is always paid for somehow, right? I will see how it goes after a year and if it is far more noisy than I imagine, then I will shift plans... it's a possibility. But for now, I am ready to give this a run myself.
Quote from @Stuart Udis:
One thing many who enter the alternative lending space fail to consider is who is their target borrower? Why will they decide to borrow from you over the thousands of other banks and alternative lenders out there? The more established borrowers with a track record likely have their banking relationships in place so how to you earn their business? They are most likely going to be the better borrowers, with greater success rates on execution along with likely having access to better deal flow and thus the better collateral. Often times those who enter the alt lending space wind up with novices as their customer base with poorly located collateral and limited experience. Sure the underwriting can be done in a way to ensure the LTC is low but do you really want to own that asset in the event of a default? Sometimes it makes more sense to invest through a debt fund that has operation systems in place and most importantly relationships with more established borrowers. I am not here to endorse any particular established alt. lender, just something to be mindful of.
- Lender · Nationwide · Member since 2018 · 571 posts · 310 votes2y
Quote from @Sarah Reece:
Quote from @Shafi Noss:
Are you planning to hypothecate?
Not at this point, I am looking at short term 6 -12 month loans and if I understand hypothecation it works better with longer notes. I will admit though, I just like saying the word "hypothecation" because I feel really smart when I do 😂 and right now I am feeling a bit, um, unknowledgeable...
I'm not sure why it would be better for short term notes but happy to chat if you would like to understand that better.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @John Mason:
Types of investors who want to find hard money lenders include:
- Investors with high debt-to-income ratios
- Property investors who cannot get a loan from a traditional lender or bank
- Investment property developers who need fast access to funds
- Commercial property developers who need a bridge loan but cannot get one from a traditional bank
Sometimes, homeowners facing foreclosure may utilize hard money loans to avoid losing their homes.
https://www.biggerpockets.com/blog/how-to-become-a-hard-mone...
very rare to have a foreclosure rescue HML for an owner occupant. I would forget that play it simply is not legal in most scenarios IE you dont have the license to do it.. you need MLO and NMLS registartion to do any owner occ.. now if its non owner occ thats another story. - 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Shafi Noss:
Are you planning to hypothecate?
Shafi why do you mention Hypothicate ? those are pretty rare and not really available to most investors.. Just curious in what setting would you do this and have you actually done one before ? - Lender · Nationwide · Member since 2018 · 571 posts · 310 votes2yIt allows you to leverage your notes if you have the balance sheet to make the bank comfortable. I had a stake in a startup HML in Texas and helped set up a facility for it and a private lender who is open to it but never closed anything with him.
Quote from @Jay Hinrichs:
Quote from @Shafi Noss:
Are you planning to hypothecate?
Shafi why do you mention Hypothicate ? those are pretty rare and not really available to most investors.. Just curious in what setting would you do this and have you actually done one before ? - 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Shafi Noss:
It allows you to leverage your notes if you have the balance sheet to make the bank comfortable. I had a stake in a startup HML in Texas and helped set up a facility for it and a private lender who is open to it but never closed anything with him.Quote from @Jay Hinrichs:
Quote from @Shafi Noss:
Are you planning to hypothecate?
Shafi why do you mention Hypothicate ? those are pretty rare and not really available to most investors.. Just curious in what setting would you do this and have you actually done one before ?
Gotcha for sure a strategy for experienced lenders.. Or as you said companies that have a long track record and their banks like them..
I Used to Hypothicate my seller carry backs when I was buying land and Timber..
I would buy a Timber track log it.. then sell the land to someone who wanted to build but needed a few years to get the building permit etc. So we would carry a contract for them.. Then i would hypothicate that contract with my commercial bank and use the proceeds to go buy another timber track and rinse and repeat. The land was enough collateral but we did have to PG .. What I see now is HML just selling off their loans or having a substantial warehouse line with a bank etc. - 2yKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
Quote from @Sarah Reece:
That makes total sense! How did you develop your methodologies of analyzing? Was it basically trial and error or did you go in with a documented plan?Quote from @Kenneth Garrett:
To be a private lender you need to be able to analyze deals. Is the borrower a flipper, BRRRR investor or rental investor? The type matters and their plan on acquisition and exit strategy. Typical documents are a mortgage or deed of trust (depends on your state, I believe Washington is a deed of trust state), and a promissory note. You are now the bank with all the protections of foreclosure procedures.
I always have my attorney prepare the documents. Analyzing the project is critical. Success of the borrower. How many homes have they flipped? Tell me a project that went off the rails and how did you get it back on. It all about what if something goes wrong.
Best of Luck.
in a previous life I was a mortgage underwriter, so I have*some*knowledge, however I was borrower focused and need to change to be asset focused.I had completed many BRRRR projects and flips myself before I started private money lending. My method of funding my own projects was using private lenders, so I knew the process fairly well. You have to treat it like you either you borrowed money from your grandmother or lent money to her. Protecting your interest as well as the borrower is critical. If the deal is not a good one where the borrower will not be successful don't lend to them. Find someone with a good track record. I did almost everything at my local REIA club.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Kenneth Garrett:
Quote from @Sarah Reece:
That makes total sense! How did you develop your methodologies of analyzing? Was it basically trial and error or did you go in with a documented plan?Quote from @Kenneth Garrett:
To be a private lender you need to be able to analyze deals. Is the borrower a flipper, BRRRR investor or rental investor? The type matters and their plan on acquisition and exit strategy. Typical documents are a mortgage or deed of trust (depends on your state, I believe Washington is a deed of trust state), and a promissory note. You are now the bank with all the protections of foreclosure procedures.
I always have my attorney prepare the documents. Analyzing the project is critical. Success of the borrower. How many homes have they flipped? Tell me a project that went off the rails and how did you get it back on. It all about what if something goes wrong.
Best of Luck.
in a previous life I was a mortgage underwriter, so I have*some*knowledge, however I was borrower focused and need to change to be asset focused.I had completed many BRRRR projects and flips myself before I started private money lending. My method of funding my own projects was using private lenders, so I knew the process fairly well. You have to treat it like you either you borrowed money from your grandmother or lent money to her. Protecting your interest as well as the borrower is critical. If the deal is not a good one where the borrower will not be successful don't lend to them. Find someone with a good track record. I did almost everything at my local REIA club.
Very good points Kenneth. I was giving a presentation in LA about maybe 80 folks at the REIA meeting and my opening question is who in the room is a private lender.. about 60 hands shot up in the air.. this is ground zero for finding your borrowers.. you get to meet them forge relationships with them go check out the deal etc etc. Thats how I would start.. - Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes2y
Quote from @Sarah Reece:
Quote from @Shafi Noss:
Are you planning to hypothecate?
Not at this point, I am looking at short term 6 -12 month loans and if I understand hypothecation it works better with longer notes. I will admit though, I just like saying the word "hypothecation" because I feel really smart when I do 😂 and right now I am feeling a bit, um, unknowledgeable...
Hey @Sarah Reece. I agree with the others, have your legal documents in place before lending. I also try to keep every loan under 6 months to flip that money faster. Some are even 2 months only. You'll need a promissory note, mortgage lien and maybe even a JV agreement on the deal. You may also want to ask them to cross-collateralize another property or give you a personal guarantee to further protect you. My advice, if your goal is to keep all your loans in WA state, then find a title company with a lawyer who is familiar with this.
I have been private lending since last years on deals mainly in Orlando, FL area. I couldn't tell you anything about WA state in terms of legalities within RE. It is quite good here in Florida however to be a lender. I understand Texas is another great state to be a private lender though I haven't lent on any projects there.
- 2yDoug SmithPro MemberLender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
I've been a lender for 33 years, but most of the hard money lenders that I've seen springing up don't have a lending background. I also periodically serve as an expert witness for some area attorneys in lending and foreclosure matters. Attorney's can help with some things, but I don't know a single attorney that has a formal credit background that understands the ins and outs of underwriting a deal. They can prepare docs, research title, and other things that attorneys do, but they typically don't know credit underwriting. That's one spot that an overreliance on using only an attorney on your team can get you in trouble. There is a lot...and I mean a lot...that can go awry that most private money lenders are not aware of. Before you make your first loan, think about partnering up with someone with a true formal credit background for the first several deals. Don't just lend on the value of the property, but think about your primary, secondary, and even tertiary exit strategies on the deal. Think about your yields and how points will help you hit your yields. I could go on and on, but before you start making loans, I would implore you to seek more than just an attorney. Welcome to the wonderful world of lending. PM me if you have questions that I can help answer.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Ray Hage:
Quote from @Sarah Reece:
Quote from @Shafi Noss:
Are you planning to hypothecate?
Not at this point, I am looking at short term 6 -12 month loans and if I understand hypothecation it works better with longer notes. I will admit though, I just like saying the word "hypothecation" because I feel really smart when I do 😂 and right now I am feeling a bit, um, unknowledgeable...
Hey @Sarah Reece. I agree with the others, have your legal documents in place before lending. I also try to keep every loan under 6 months to flip that money faster. Some are even 2 months only. You'll need a promissory note, mortgage lien and maybe even a JV agreement on the deal. You may also want to ask them to cross-collateralize another property or give you a personal guarantee to further protect you. My advice, if your goal is to keep all your loans in WA state, then find a title company with a lawyer who is familiar with this.
I have been private lending since last years on deals mainly in Orlando, FL area. I couldn't tell you anything about WA state in terms of legalities within RE. It is quite good here in Florida however to be a lender. I understand Texas is another great state to be a private lender though I haven't lent on any projects there.
WA state = no license required for non owner occ. or commercial
WA State = Trust Deed state fast foreclosures that are not judicial.
WA State = Title and Escrow company closing state attorneys do not do closings.
WA State = you can have an attorney produce your Prom Note title company will have the trust deed that will suffice.. Attorney can prep the PG title company can handle the cross collateral . etc etc. - Investor · Salt Lake City, UT · Member since 2019 · 339 posts · 126 votes2y
It depends on the structure you want on your business. There are different ways to do hard money.
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