Graduating from Flipping to Lending. What do I need to know?

Question

I seem to have an opportunity to expand into Hard Money/private lending here in Colorado Springs and I am looking for some pointers to ensure I don’t fall into avoidable traps and beginner mistakes or become victim to scammers.

I have my real estate attorney on my side and an attorney friend who both have experience writing hard money contracts. However, they are neither real estate investors nor lenders themselves.

I am looking for ways that will generate returns similar to what I am getting on my flips, also interested in keeping title in my name or third party. Some skin in the game from the borrower is a must but I am unsure what is working out there. I will also be evaluating all the properties personally.

I know this is not enough info to evaluate a deal. However, I am only looking for general terms and conditions that private lenders are using successfully. Is it even legal/ethical to maintain title? What about rehab costs? Are there other creative ways I should be considering?

Steve Babiak · Answer

Here is a link that @Ann Bellamywas mentioning; follow the links therein:

http://www.biggerpockets.com/forums/49/topics/1432...

Darren Eady · Answer

I created a six month loan and have performed over 100 of these fix and flip loans.  Your terms are way to generous and clients will walk away from 10% down whenever things get tough leaving you with a potential nightmare and often an unfinished product.  I think you are setting yourself up for a bunch of failures after observing borrower behavior for years.  If you would like to connect, we could speak over the phone.

Account Closed · Answer

Write a contract on a property and shop it around to several hml lenders in your area This way you get idea of contracts,title comps You can compare this to your business plan

Marcello Di Gerlando · Answer

Thankyou all for the great advice and info leads. love BP!

Ann Bellamy · Answer

Another thing to consider:  while I realize that laws are different in CO than in MA and NH, putting yourself on title is not really lending.  If you end up in court, the court may not view you as a lender at all.

My interpretation of "loan to own" is lenders who lend with the hope of foreclosing and taking back the property.  While I don't think that's your intent, it certainly appears that way by placing yourself on title in the first place.

I also agree with @Darren Eady that 10% is not enough to keep them from walking in the event of trouble.  I do occasionally go that low on the down payment, but only with borrowers that I know and have history with.  I have even gone to 100% financing, but the borrowers that I lend to under those terms can be counted on one hand.  Actually there are two of them.  I know them very well and have done multiple deals over years.

I think I would ask the other local HMLs like Pine Financial who their attorney is, and speak with them.  Pay for an education.  @Travis Sperr is with them and might give you that information.

Institutional lenders have teams of lawyers to keep them compliant, and who the conveyancing attorney is really doesn't matter.  But private / hard money lenders don't have that, and depending on a real estate attorney who has written some hard money contracts doesn't mean they know the nuances of keeping you out of trouble with the banking commission or any other regulatory body.

There are several older threads here on BP about becoming a private lender or a hard money lender, I'd look for them, go back a year or more, and they will give you lots of insight.

Marcello Di Gerlando · Answer

Thank you all for your feedback! I will continue to explore options in hard money lending. I like the idea and I believe I can attract a good customer base.

However, not being in the lending business and not understanding the basics is not a good start. I will be looking to partner with someone local who has a track record of writing loans and see if we can do a deal.

I will also see if I can issue a loan to folks I know well. Get my feet wet kind of deal.

I will definitely be looking for third party folks that would be able to service the loan and manage the payments etc.

Looking at this more closely it’s becoming clearer that the terms are a small slice of this pie there is much more to this business that I will need to be savvy about.

Bill S. · Answer

@Marcello D. the by word I have heard from local lenders is "loan to own". Now I realize you don't want to own but the meaning is that you don't lend on anything you don't want to own so while you numbers can probably be figured out that would be the over-riding principle.

From the nuts and bolts end. Most lenders I have talked to get their points up front.

What about cross collateralization? Would you loan 100% if it was secured by adequate 2X equity in another property?

Travis Sperr · Answer

@Marcello D. Without knowing how much you have available - you might consider working with an established lender before going out on your own - there are a lot of gotcha's in this business, not nearly as simple as most think of it to be. Just be careful out there and lots of systems/due diligence.

Douglas Dowell · Answer

Take a look at making the yield by Sal Buscemi.  Great read and I think might give you a robust overview of the lender side.

Marcello Di Gerlando · Answer

Thanks for the feed back. Below is what im considering for terms. also, how can I get the title in my name and issue the loan?

• 90% of the purchase price loaned for property purchase. Maximum Purchase price (MPP) cannot exceed 70% of the After Rehab Value (ARV)

Example:

Appraised ARV= $150,000

70% of Appraised ARV would be equal to the MPP = $105,000

90% of MPP loaned for property= $94,500

In the above example borrower would put a down payment equal to 10% MPP or $10,500.

• 15% fixed rate, interest only, payments due monthly.
• 9 month loan – no pre-payment penalty, 6 month extensions would incur 2 additional points.

• 100% Rehab loan not to exceed 12% of ARV held in escrow and released upon completed and evaluated work.

Example:  ARV=$150,000

Rehab loan equal to 12% of ARV = $18000

• 3 points ( up front or behind?)
• Processing and under writing = $1900 ( est )

Graduating from Flipping to Lending. What do I need to know?

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