Asked to give hard money loan

8 Replies

What advice can you give to rental property owners who may give a small hard money loan ($25k?) to a fix & flipper?  It would be our first.

We met him at an REI. He's got excellent reviews online. He's done a number of fix & flips and remodeling jobs and has references. We would want to see his portfolio and follow up on recommendations, but we have no idea where to go from there. We would like to learn more about flipping and hard money lending from those who've been successful at it, but we're not sure it's for us.

Thank you.

 

 

Lend only in first position.

Limit yourselves to 70% of ARV using an appraisal done by an appraiser of your choice, paid for by the borrower.

Secure the loan with a mortgage or deed of trust, whichever is used in your state.

Have an attorney prepare the documents.  Be sure you're compliant with all laws, including usury laws.

Be sure any work done that needs permits is permitted.

Borrowers money goes into deal first.

Get monthly payments.

Get a full credit application (1003) from borrower.  Verify it.

I borrow from private investors to fund some of my flips.  On my end I like to pay anywhere from 7-15%.  15% may seem high but I want to make sure it is worth it for the investor too.  I don't pay any up front points or loan fees.  I simply pay interest only until the home is sold.  Usually on a one year note.  If it is a small amount like $25,000 I don't mind paying 15%.  If it is a larger amount, I like my interest rate to go down.  If i flip and sell within a month or two, I give the investor a "bonus" of $1000-$1500.  This may not be the ideal set up but it works for me and the few investors I work with.  I always have a security deed written up and filed as well as a note with the investor.  

Since you are wanting to learn to flip, you may suggest a deal where you front the money, he does the flip, and the two of you split.  There are several ways to work it.  I would look at it more as private money rather than hard money.  

Good luck, Mike

I briefly spoke with him yesterday, and we'll be meeting with him next week.

He owns a remodeling firm that also does flips, and as I said, has very good clients' comments posted online.  He told me that he serves only a niche market, and I know the area.  Upscale, great shopping, lots of traffic.  The price point of those homes is fairly comparable to our properties in SoCal, but not the ones we'd be interested in buying here in AZ.  However, he doesn't want to work with more than a couple of investors on a project, and the buy-in is at $60k-70k for an $80k-$110k flip.  I said that maybe it wouldn't be a good match, but then he said he tried to pay investors 30% for a 5-6 mo. loan.  Clearly, we want to check him and his work thoroughly because that seems too good to be true.  It's not that I couldn't write him a check, but I wouldn't want to lose that much.  I did tell him that we were interested in learning about flipping, however.  I think it's one thing to spend that kind of money on a house that we could buy and over which we'd have control, but another to go into somebody else's deal.  However, I'd still consider it.  We'd looked into becoming accredited investors and crowdfunding projects with a $25k buy-in, but they wanted money for 5 years, and I don't know that we'd want to tie it up in a project over which we had no control.

I am the asset manager at a hard money lender, we usually charge some points and are in the low teens for rates.  We will loan up to 60% of the after repaired value of the property, and we want to make sure that the borrower has skin in the game first.  Ideally your loan would be in first position, but if you are only lending a small amount, there might be others loaning more, who would be in the first position.  If you are not first, you should get a little higher interest.

Originally posted by @Derek Walvoord :

I am the asset manager at a hard money lender, we usually charge some points and are in the low teens for rates.  We will loan up to 60% of the after repaired value of the property, and we want to make sure that the borrower has skin in the game first.  Ideally your loan would be in first position, but if you are only lending a small amount, there might be others loaning more, who would be in the first position.  If you are not first, you should get a little higher interest.

Since you are lending a small amount and are inexperienced, if you are not in first position you should not even consider participating. Taking second position is much more risky than being in first position. You have little control over any events if the project should take a wrong turn if you are in second position.

I don't do this on a large scale but have done several with good success. The last two I did paid off within 2 months. For this reason, I always load them with points to insure a decent return. My last two were at 12% plus 4 points. I roll the points into the note so I am basically getting interest on interest. A fast payoff results in a very high annualized return. As far as safety, I run everything through a title company. I only do first lien positions, and I try to lend at 50% LTV. John Holdman covered the basics very well. If you have the extra funds to tie up it can be a decent source of additional income. I do have a 50K minimum loan amount. I just made $2600 on one loan and had the loan amount been say 25K, though great on an annual basis, the actual dollars in my pocket would have been pretty minimal. Good luck.

25k in first position in your area unless it was a complete dog seems a safe loan.

You could run this by attorney first time to create your note and Deed of trust after that you don't need attorney.  and you may not need one up front as well if you know a little about what your doing.

30% on small loans is not out of the ordinary I do those all the time. and much higher actually the smaller the loans the higher the return.. those borrowing the money know this..

what you need to do is check for usury.. my deals are equity deals so they are not loans.. so usury is not an issue for me.. that's how I can make 50 to 100% apr routinely.

but I have 40 years at it.. LOL

your OK just check a few box's its small dollars you will be fine

Everyone...please note the follow-up post.  He says you buy in at $60-$70k, substantially more than $25k.

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