Real Estate Agent · Lansing, MI · Member since 2020 · 169 posts · 91 votes
For our FLIP projects, we are usually using a Hard Money Lender for 80% of the purchase price and 100% of the rehab cost (on a draw schedule). In an effort to use NONE of our own money, we raise the other 20% (roughly) from a Private Money Lender. Just like with an institutional lender, we secure this PML's loan / Note with a mortgage on the property we're purchasing.
With that though, pretty much every HML that we've come across does NOT want to see a secondary lender (20% PML) on the closing docs (2nd mortgage being recorded at closing), even if they know this PML will be in SECOND position. This leaves us with only one option... Close with the HML, using our own funds for the 20% (roughly) and then doing a second closing shortly after with the same title company for our secondary lender (PML), in a sense "paying ourselves back".
Now, my question to everyone is, how do you go about this so that we don't have to use our own funds at all on the initial closing, but instead can use our PML's fund right from the start and offer them security (currently a recorded mortgage at closing) all while appeasing the main lender (HML) and not holding up closing?
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
9mo
Hi Troy, Several of the lenders/Banks I worked for earlier in my career did studies on loans and why they default. For instance, Norwest Banks did a study in the late 1980s on the job profiles that paid their loans the best and worst. The best...a Registered Nurse statistically. The worst...by far and it wasn't even close...clergy believe it or not. Like insurance companies, lenders use the law of large numbers to come up with underwriting guidelines. Now, to your question, default rates are exponentially higher the less someone injects of their own money into a deal. It's not that many of us won't allow a 2nd, but we don't want to see a 2nd to a super high CLTV. We also "source" the down payment funds, partially to ensure that they haven't been borrowed. That's one reason lenders ask for 2 to 3 months of bank statements. We want to see that you've been holding the money for a bit (seasoning). It's not the answer you want to hear, but it's the truth. The risk to us lenders is just too great to lend on extraodinarily high LTVs. I wish you well in your investing journey.
Lender · Pennysylvania · Member since 2018 · 139 posts · 68 votes
9mo
@Troy DeLong So I assume this is a thought exercise you are going through although your first paragraph made me think you had done this.
I also assume given the responses you've received about this, you know why Lenders don't want a borrower to have NONE of your own money in the deal. If not, let me explain it to you. If a project goes sideways with the borrower, with no money on the line, it's pretty easy to walk away and move on. This leaves all those who provided funding to try to get their money back. This takes time and this takes more money but for you, it's neither. To a Lender, skin in the game helps eliminate or reduce a borrower walking away without a care in the world. Put yourself in the Lender's shoes, why would they want to be in a deal where they are the only one taking on risk of loss.
Regarding your idea of getting a lender to step in after closing to fund the money you put out so you can 'pay yourself back', I would guess that would put you in default with your primary lender. Most lenders have language in their documents that prevent that, again, to avoid having their borrower with no skin in the game.
Knowledgeable Lenders won't allow borrowers have zero out of pocket to purchase and knowledgeable Lenders won't do a 2nd so the borrower will have zero skin in the game.
While you may find a lender who will do 100% of the deal, they are few and far between and likely smaller Lenders who you've built a relationship based on successful exits... maybe. Be cautious about putting yourself in default at the start by going around terms of your legal documents.
Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
9mo
Only an idiot would lend in 2nd position to 100% CLTV on a flip in a for-profit scenario. If anything goes wrong, they will be wiped out.
Also, a large fraction of HML loans will have a clause that further encumbering the property with addtional loans is a technical default. This is why your HML is telling you they wont allow a 2nd lien to fund at closing - they specifically want you to have skin in the game by putting your own capital into the deal. When investors have no skin in the game, the risk to the lender goes through the roof.
Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes
9mo
Hi Troy, Several of the lenders/Banks I worked for earlier in my career did studies on loans and why they default. For instance, Norwest Banks did a study in the late 1980s on the job profiles that paid their loans the best and worst. The best...a Registered Nurse statistically. The worst...by far and it wasn't even close...clergy believe it or not. Like insurance companies, lenders use the law of large numbers to come up with underwriting guidelines. Now, to your question, default rates are exponentially higher the less someone injects of their own money into a deal. It's not that many of us won't allow a 2nd, but we don't want to see a 2nd to a super high CLTV. We also "source" the down payment funds, partially to ensure that they haven't been borrowed. That's one reason lenders ask for 2 to 3 months of bank statements. We want to see that you've been holding the money for a bit (seasoning). It's not the answer you want to hear, but it's the truth. The risk to us lenders is just too great to lend on extraodinarily high LTVs. I wish you well in your investing journey.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
9mo
TL;DR
1) There is no basis for the claim that no skin in the game means a flipper in trouble will walk.
2) For 1-4 unit properties, a lender can’t call a loan if the borrower takes on a 2nd.
I have a different perspective and would like to see some data behind the claim that no skin in the game increases the likelihood that a flipper will walk away if they face a problem. The Norwest Bank study, above, did not address this and was irrelevant. If you make 100% loans, what is your experience here? If not, what is the basis for your claim? I contend this is a concern based on intuition, and not real data. Our real-world experience doesn’t support the claim.
We’ve been making 100% purchase money loans to local house flippers almost since we started lending our own money 16 years ago, and we’ve had exactly one rehabber give up on a property. Actually, he got in over his head with too many flips and declared BK on all his projects, not just ours, so does that count?
We only make 1st position purchase money loans. The rehab money is on the borrower. In our model, they can use their own funds, get a 2nd, 3rd, 4th, or 5th, or rob a bank for all we care. We like the idea of someone behind our loan, who could get wiped out, “encouraging” our borrower to complete the project, or who might pay us off. This has never happened but, of course, we are super careful about who we do business with.
We only lend to those who are local, do this full-time professionally, and have a killer deal that meets our lending criteria. No first timers, hobbyists, or anyone we haven’t gotten to know and developed a relationship with. If they don’t flip, they don’t eat, so they have a strong motivation to get the job done. Plus, we always require a personal guarantee and are clear that we will enforce it. I didn’t see that required above.
Lastly, despite what most private loan docs say and conventional wisdom suggests, a senior lender cannot call a default just because their residential (1-4 unit) borrower takes out a 2nd or any other junior/subordinate loan. The lender doesn’t have to make the loan if they know the borrower’s intent, but once the loan is made, these terms are unenforceable unless it’s a commercial property. It doesn’t matter if it’s a business-purpose loan, so flips count.
This is from my lending attorney. It has been federal law since Garn-St Germain was signed by Ronald Reagan in 1983. It’s easy enough to look up, but please confirm with your lending attorney, rather than relying on advice here. Lastly, from me. Ha.
If you don’t mind pissing off your lender, @Troy DeLong, there is nothing they can do except never loan to you again if you take out a 2nd. Otherwise, you’ll just have to play their game. How many lenders will actually check if you initially use your own money and then get paid back with a 2nd? If they do, how many would call a default on a performing loan?
For our FLIP projects, we are usually using a Hard Money Lender for 80% of the purchase price and 100% of the rehab cost (on a draw schedule). In an effort to use NONE of our own money, we raise the other 20% (roughly) from a Private Money Lender. Just like with an institutional lender, we secure this PML's loan / Note with a mortgage on the property we're purchasing.
With that though, pretty much every HML that we've come across does NOT want to see a secondary lender (20% PML) on the closing docs (2nd mortgage being recorded at closing), even if they know this PML will be in SECOND position. This leaves us with only one option... Close with the HML, using our own funds for the 20% (roughly) and then doing a second closing shortly after with the same title company for our secondary lender (PML), in a sense "paying ourselves back".
Now, my question to everyone is, how do you go about this so that we don't have to use our own funds at all on the initial closing, but instead can use our PML's fund right from the start and offer them security (currently a recorded mortgage at closing) all while appeasing the main lender (HML) and not holding up closing?
Is this doable? I'm all ears. Thanks in advance.
- Troy
How many flips have you done? If you are making money on the flips where is that money going? If you want the best rate, like 8.5-9% interest rates you can get away with 10% down and get 100% financing from some instituational lenders but you need to have experience. Once you get 5+ deals under your belt you can then get better rates and terms whcih allow you to grow quicker.
For our FLIP projects, we are usually using a Hard Money Lender for 80% of the purchase price and 100% of the rehab cost (on a draw schedule). In an effort to use NONE of our own money, we raise the other 20% (roughly) from a Private Money Lender. Just like with an institutional lender, we secure this PML's loan / Note with a mortgage on the property we're purchasing.
With that though, pretty much every HML that we've come across does NOT want to see a secondary lender (20% PML) on the closing docs (2nd mortgage being recorded at closing), even if they know this PML will be in SECOND position. This leaves us with only one option... Close with the HML, using our own funds for the 20% (roughly) and then doing a second closing shortly after with the same title company for our secondary lender (PML), in a sense "paying ourselves back".
Now, my question to everyone is, how do you go about this so that we don't have to use our own funds at all on the initial closing, but instead can use our PML's fund right from the start and offer them security (currently a recorded mortgage at closing) all while appeasing the main lender (HML) and not holding up closing?
Is this doable? I'm all ears. Thanks in advance.
- Troy
You have to read your loan documents when you sign them.. Most Hard Money lenders will have specific verbiage that will prevent this. If you breach this, they can call your note due.
Instead of using a "Private HML in a secured 2nd position" see if you can have a JV partnership agreement with said hard money lender, if they are OK not having a lien on the property... You might need to forfeit some profit in the deal, but if you are adamant of not using your own money, it's the cost of doing business...
Realistically, 100% financing is more costly, and will eat your equity. Especially in a market like this. There are HMLs that offer 100% financing if you have 5+ exits in the last 3 years, however what I have seen is borrower's barely breaking even on a flip or coming in with money to closing on a refinance.
The 2nd position will be at a higher rate (18% I've seen) and the 1st will roughly be at 11.5-13%). PLUS you have to pay 3-4 points on average since it is a riskier deal. The real winner on 100% financing is the Hard Money lender...
You are much better off saving your own money, securing better rates/fees to minimize the cost..
What is your expected net profit? The only way you're making 100% LTV work is if you're net profit spread is insane to begin with, in which case how are you finding these deals and care to share some insight x)?
To the point of everyone here, the risk is enormous from the perspective of the lender. If you don't have enough net profit wiggle room and your project takes longer than expected, you go bust entirely on your project:
Lender · Boston, MA · Member since 2021 · 125 posts · 64 votes
8mo
This is more than doable.
#1 is you could find a lender that allows 2nd lien on HUD (I work with several).
2# the workaround is typically asking title for the favor of filing the lien for you post close. Some just will not do this but a lot will especially if you have a good relationship. So you can wet sign the note secured by deed/mortgage so your 2nd position lender sees it and trusts you and instruct title to file this post close so it does not end up on the HUD. You can also wet sign and deliver these docs to your 2nd lender and tell them they can file any time after close.
A good 3rd alternative is offer them a lien on an existing property.
Hinton, WV · Member since 2025 · 11 posts · 2 votes
8mo
@Troy DeLong this is a common HML policy issue. Most hard money lenders want a clean capital stack at acquisition, which is why they don't allow secondary financing to appear at closing, even if subordinated. In some cases, private capital can come in as equity at closing, with the lien recorded post close once the HML's first position is set. It's lender specific and requires upfront coordination, but I've seen it work. Happy to compare notes if helpful.
