Hardmoney Lending Questions that I couldn't find on older posts
Real Estate Broker · Andover, CT · Member since 2017 · 32 posts · 9 votes
Hardmoney Lending Questions that I couldn't find on older posts
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Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
9yThere are many options available to you, @Daniel Saunders :
- Sell your notes to other investors, not banks. Buying performing notes from other HML's is one way others get into this business. Here, you would typically keep the points and sell the undiscounted notes.
- Fractionalize your loans. That is, organize several investors to invest in one loan, putting all their names on the note with their percent interest. In this case, they would all share the same position. This is legal in many states but may not be legal in yours.
- Hypothecate your loans. Here, you would make a loan with your own money and use the note as collateral to borrow additional money. You would keep the points and could even take a cut of the interest. This would be repeated for each new loan you make.
- Form a mortgage pool. This typically involves a syndication and the associated SEC registration.
A good lending and securities attorney (which is not a real estate attorney) should be able to explain these to you, set everything up, and help you stay compliant with all state and federal laws. I would also talk to your existing lender. This should not threaten him. Perhaps he needs a partner? Good luck, Daniel.
8 Replies
- 9yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Daniel Saunders some important concepts in what you are asking is that hard money loans are NOT sold back to the bank because a hard money lender (HML) grants notes that are outside of normal banking parameters. Banks either have portfolio loans or government sponsored loans. If you were acting as a residential mortgage broker who had a correspondent agreement with a bank and had warehouse lines of credit from a banking institution then you would need to make sure your conventional/fha/va/etc loans conformed to that lender's warehouse line with you so you could sell the loan back to the bank. Once you "sell" that loan back then your warehouse line goes back to the original amount and you can lend more money.
A hard money loan does not fall into this parameter. A hard money loan is essentially private money...your private money or your company's private money. The money you lend runs out when you lend the last of it. And this is why a HML is a short term loan with a balloon payment...so you get the money back and lend it again. HML setup their own payment structures, will be responsible for writing/filing the notes, and also be the party that would foreclose on the property if that becomes necessary. I hope this helps.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Hi @Daniel Saunders,
What you describe (doing saleable bank-conforming loans) is just being a traditional mortgage broker or loan officer. You don't need your partner for that, Fannie Mae (the biggest mortgage bank of them all) has billions of dollars at your disposal to lend out if you take a little 20 hour online course, pass a test, pass a background check, learn what actually matters, and find an employer.
If it's not saleable and bank conforming, then almost by definition no bank will buy it.
Hard money charges higher rates, in part, specifically because they can't sell the loan immediately to recoup what was invested.
There is a secondary market for performing HML and private notes; they generally pay less than the outstanding principal balance. So you'd be losing money for each loan you do.
- Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes9y
There are many options available to you, @Daniel Saunders :
- Sell your notes to other investors, not banks. Buying performing notes from other HML's is one way others get into this business. Here, you would typically keep the points and sell the undiscounted notes.
- Fractionalize your loans. That is, organize several investors to invest in one loan, putting all their names on the note with their percent interest. In this case, they would all share the same position. This is legal in many states but may not be legal in yours.
- Hypothecate your loans. Here, you would make a loan with your own money and use the note as collateral to borrow additional money. You would keep the points and could even take a cut of the interest. This would be repeated for each new loan you make.
- Form a mortgage pool. This typically involves a syndication and the associated SEC registration.
A good lending and securities attorney (which is not a real estate attorney) should be able to explain these to you, set everything up, and help you stay compliant with all state and federal laws. I would also talk to your existing lender. This should not threaten him. Perhaps he needs a partner? Good luck, Daniel.
- Real Estate Broker · Andover, CT · Member since 2017 · 32 posts · 9 votes9y
@Jeff S. and @Chris Mason I'm not sure how he is doing it then. He is some how making the spread between the interest he charges us 12% and whatever the rate is that he selling the loan back to the bank (or whatever it is). I would assume he keeps the points as well. When the payment is pulled it says his company's name as well.....
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
what he probably has is what I had when I ran my HML shop... he has a line of credit with a local bank I had 5 of them from 1 million to 6 million each.
I made the HML then either did an alonge and put the note and mortgage in the banks vault and they advanced off of my credit line so I could do it again.
or other banks would take an assignment and record it.. but the funds came off of my credit line. I had to have 20% of my own money into each loan.. so with out 30 million of loans we had roughly 6 million in cash to marry to it.. has to be equity not loans... from investors.. at least that was our arrangement and many HML has the same thing.. although in 08 I think 90% of those facilities got called I know all but one of mine did.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes9y
Originally posted by @Daniel Saunders:
@Jeff S. and @Chris Mason I'm not sure how he is doing it then. He is some how making the spread between the interest he charges us 12% and whatever the rate is that he selling the loan back to the bank (or whatever it is). I would assume he keeps the points as well. When the payment is pulled it says his company's name as well.....
Oh, that old trick. Here are the steps:
- Have a lot of equity in your primary residence.
- Open HELOC for as much as they will give you, say at 4%.
- When someone walks up to you and says "can I plz borrow $100k now plz I'll pay 3 points up front and allow you to secure it by real estate?" you say "yes, I will gladly help you kind soul."
- You should know where this is going by now. :P
- Make sure their 'skin in the game' (eg, down payment) is enough that you're in a "can't lose" position even if you have to foreclose.
- Click 3 times with your mouse, dump $100k into your checking account from the HELOC.
- Walk down to the title company, and record/notarize the private hard money mortgage @ 12%.
- Put the 3 points in your pocket, that's just what you get today for being awesome. The spread between 4% and 12% is 8%, except that 8% isn't ROI because you're not into it for a dime, your bank is. That spread between 4% and 12% is simply net profit. $8k/yr in this case + the 3 points.
- ROI is incalculable for this specific transaction, because it cost you nothing but the time to click 3 times, conduct due dilligence, wire the money over to title, and ensure the paperwork was in order.
- Believe it or not, I do not currently offer stand-alone HELOCs even though they basically sell themselves. :P
- If you want to play this game as frequently as possible, only lend to folks with a clearly defined exit strategy that gets you paid back your $100k in full, such as a refinance (BRRRR) or selling the property (flip).
- Talk to a lawyer and tax person about the legal and tax implications of all this. HELOC interest is not always deductible the way other mortgage interest is, and the $8k/yr is likely going to be taxable income, but I am not a tax professional so you should not trust me on that.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Daniel... my facilities I were one year facilities IE renewed annually.
1 point and a float above prime so my rate I was paying was 5 to 6.5% in the day.
I loaned the money at 3 to 5 points and 12 to 15% interest
so yes I kept the points AND I made the delta.. its a great model if you can scale.
you need to get to 5 to 10 million to make any real money at it !! plus your making the full interest on the 20% of your own dough in the deal.. We did quite well until the world went on its A&&& and came crashing down in 08 ERGO I still work and am on BP prior to that we were printing money and my staff ran the buseinss for me LOL
- Real Estate Broker · Andover, CT · Member since 2017 · 32 posts · 9 votes9y
Thanks guys! This is some good info. I now have a good starting point
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