I would like to become a Hard Money Lender. Any resources?

26 Replies

I would like to become a hard money lender.

I have the customers on both sides and a specific business model. I can sell it.

I have the cash reserves myself to lend, as well as know both individuals who want to fund real estate investors, and customers.

I've talked to hard money lenders in depth before and understand the traditional model. I've actually got a specific business model in this case due to a specific set of potential clients whom I've already talked to.

What I lack is the experience and knowledge of the details involved of being the dealmaker, the hard money lender.

Can anyone suggest any resources for me on how to go about structuring this right? Books, websites, personal anecdotes, anything?

Thanks much to any responses and help!

I'm somewhat surprised at the complete lack of solid information or resources in any of these. The post with the most information I found was:

There are lots of resources for learning about becoming a private lender. George Antone at Wealth Classes has a three day private lending mastery class that is pretty comprehensive. He discusses strategies that involve lending your own money as well as other people's money and making money in the spread or through arbitrage.

I broker private money between private lenders and borrowers and I also run a private equity mortgage pool. My best advice is to work with an experienced broker or fund manager and be VERY clear on your rules for lending or " guidelines" . There are a lot of bad deals out there and you have to know how to separate the bad from the good in order to be sucessful.

Most of the posts in these threads lack substance, telling the OP to simply partner with an experienced broker.

Posts like:

Hard money lending is mainly unregulated (in almost all states) if you deal with commercial deals. With residential, you have to structure it properly.

You can either work with brokers or look for loan requests yourself (through RE investment clubs etc.) or work with an existing hard money lender that will pocket the points but you will have the interest.

I want to find out how to structure the deals properly. I already know how to evaluate, I already have the customer base. I need to know how to structure. I recognize a random person on the internet can't write me a whole guide, but surely there is some recommended reading?

Your profile is private, Chris. Do you have any real estate experience? Can you evaluate a property? Estimate rehab costs? Do you understand lending law in your state? Have you ever borrowed money or flipped a property. Are you a broker? Your question is broad. It’s easier to help if we know your background.

I actually had a fairly long and specific write-up, since I do exactly what you're attempting. Now, I don’t know what you really want. If you ask a vague question, you'll get vague answers. Plus, frankly, you don’t seem particularly appreciative.

Hi Jeff, believe me, I'd be very appreciative for any help, thank you :)

Yes, I have rehabbed several properties which I have turned in to rentals for myself, and also worked alongside some flippers. I can evaluate a property and estimate rehab costs. I love a good spreadsheet. I do not fully understand lending law in my state and am not a broker.

I am an experienced rehabber who is in a position to know people with money and people needing it. I also would like to lend some of my own money, in between my own rehabs. I am afraid, however, to do so without learning how to structure it properly, and don't know where to look to learn to do so. I suspect the local hard money lenders would not be exactly willing to take me under their wing as I would be competition.

Thanks for any suggestions or assistance!

1) You’ll need to spend some time with a good lending attorney. This is not the same as a real estate lawyer. Call some hard money lenders in your area and ask them if they sell their notes or need investors. This is one way to get into the business. Also ask which attorney they use. Lending attorneys are a rare breed and you’ll likely only hear the same few names. Pick one and spend an hour or two with him or her.

Most lending attorneys will sell their paperwork to HML's. You could wait on this until you do a few deals and instead use those from a broker at first. (I'm assuming you use brokers in Washington?)

2) Ask some of your potential borrowers for a broker recommendation. Take him to lunch and get to know him a bit. Never do business with anyone you don’t know, like, and trust. Negotiate a flat dollar amount per loan. Don’t pay a percent of the loan amount. You borrowers will pay this anyway so you’re really negotiating on their behalf.

3) Go to some real estate clubs and let people know you have money to lend. In general you can't advertise at all. Nada. Not even on a business card. Your lawyer will tell you that. Everyone will want to know your terms. Set one interest rate and point amount. Don't get into making deals up or negotiating on the fly. They'll also want to know the note duration, what happens if they need an extension, amount you'll lend, location, LTV, and I don't remember what else.

Don’t loan far from home because you’ll want to drive and see every property you loan on.

For LTV, we loan on a percent of the purchase price, not ARV. Purchase price is an easy number to establish and our percent is very high. The higher the percent, the more popular you will be.

4) Only loan to those with experience and who do this full time. No newbies, hobbyists, or anyone learning on your dime. MOST IMPORTANT OF ALL: Before you lend to anyone, spend some time driving around with them looking at their properties. Go to lunch or dinner a few times. The idea is to get to know, like, and trust them and vice versa. If you don’t, then don’t loan. See a theme here?

5) Soon thereafter, they will call you with a property they have under contract that fits the criteria you defined for them. Tell them honestly if you don’t have the money to lend at this time or if it doesn’t meet your criteria. Never agree to fund a deal if you don’t have the cash in the bank. Never rely on one deal closing on time to fund another. Ever. The cash must be in the bank.

Meet your borrower as soon as possible at the property but no later than 24 hours from the phone call. Bring comps with you and ask them to bring theirs. As a lender you don't have to hit the ARV exactly, but you should generally agree with their estimate. Ditto rehab costs, which you can generally estimate with a walk-thru after you've done this for a while. No need for appraisals or contractor bids. That only holds things up. SECOND MOST IMPORTANT: Make sure you understand the property enough that you're confident you could sell it to another flipper if the deal goes bad.

Confirm the amount you’ll loan and shake your borrowers hand at the site. No application necessary.

6) Call your broker and put him in touch with your borrower. You don’t care about most of the paperwork except the Note, Deed of Trust, the sales contract, preliminary title insurance, and lender instructions to escrow. We go so far as to fill out our note for our broker. Read and understand everything – at least at first. Your broker (who is very experienced at this, yes?) should be able to explain everything. If not, call your lawyer but don’t obsess.

7) I don't know how it works in Washington. In CA, your broker will work with your borrower, escrow and title. There's really little for you to do except review some documents and wire money. Here, the loan is in the brokers name and the Note and DOT are assigned to us at closing.

8) You chose professionals so let them do what they do well and rehab the property without your help. Visit maybe once and take them to lunch or dinner. Attend the open house. Maybe look at more deals with them.

9) When the property sells, you will receive an email from escrow asking for a payoff amount (called a “demand”). You said you’re good with spreadsheets so calculate the amount owed and document it in a demand letter. Be clear and show all work, you’re borrower will authorize this and should understand your numbers. So should title, because they will be wiring the money into your account.

10) When the money hits your account check the amount. You can now commit it again. Not sooner.

I probably missed many steps, and others here might be horrified, but this process works for us. Always put yourself in your borrowers shoes. They appreciate extreme speed, fairness, and someone who is easy to deal with. They also work their asses off and earn a lot of my respect. Keep it mutual. Good luck.

Jeff

Jeff S gave you huge insight into the process. Mine differs somewhat, but not enough to mention for your early point in the process. He's given you great info.

Three things jump out at me:

1. I can't emphasize enough Jeff's point about an attorney familiar with private lending. Not a real estate attorney who has closed a couple of private lending deals, but one who specializes in it. The one the other hard money lenders use.

2. Don't mistake your ability to evaluate a deal from the perspective of a rehabber with your ability to evaluate lending risks. This is an important difference and you will probably learn the distinction through trial and error, emphasis on the error. For example, I do not refinance deals currently held by another hard money lender. Refinancing is common and normal in the conventional residential and conventional commercial lending world. But in hard money land, good deals are not that easy to come by, and if the borrower is paying as agreed and the project is progressing as planned, there is seldom a good reason that he/she wouldn't extend the note. If he won't extend, there is always more to the story. And you are unlikely to find out what the "more" is until you are the lender. At which point it's too late. The way I learned this is by being that new lender. Yes, I'm sure there are some circumstances that would make sense that the original lender won't refi, but I'm no longer willing to try to figure out which is which.

3. Structuring the deal - It sounds to me that you were asking the actual mechanics of structuring the terms of a loan. For example, if a borrower needs rehab money and purchase money, how much would you lend of each, would you do a construction loan, would you do two separate loans such as a first and second position, or should you fund only the purchase money? And how would each option affect your risk. Do you lend on purchase price or ARV? If there is a construction component, do you insist on funding the construction or stay away from it?

There are very few resources out there for private lenders. Books are almost non-existent, and the few George Antone students I've run into have a business model that doesn't work for me. My personal experience with Antone is detailed in a much older post which I probably can't find. You might check out the American Association of Private Lenders. aaplonline.com (moderator: I'm a member but receive no compensation from them) AAPL hosts conferences that provide information on beginner lender processes, as well as access to useful vendors and networking with other lenders. They are currently planning several regional conferences.

Hope this is helpful.

@Ann Bellamy - in the first link from my post above, you did give a pretty good book title in a post there. It's one of the few pertinent to the subject, and it is a few years old (pre-SAFE Act) - but worth a read. If the OP is as lucky as I was, it will be in his local free library :)

Yes, thanks @Steve Babiak . I never know whether to refer people to it anymore, although it is somewhat helpful, because of the pre-SAFE act issue. I suppose it's better than nothing.

@Chris H. are you using your own money or do you plan to raise money from others to become a hard money lender? There is a huge difference if you use your own money. Likewise, there is a huge differrence if your lending is for an investment purpose vs. owner occupied.

Yes, I'm horified at the process Jef mentioned. It works for him, he should be the only one doing things without a request for a loan by an application and giving loan committments with a handshake, reminds me of an old Realtor type lender here who wore overalls and boots....LOL

If you use other peoples money to loan out you're getting into brokerage operations. Call your state finance department and ask them what you need to be a HMLer, explain what you want to do, types of loans, security taken and if it's only lending your money or other's money. They will tell you what you need to do.

Lending, correctly and in compliance with the applicable requirements is much harder to do than RE, you need to understand pretty much all the aspects of RE related to your collateral, including all kinds of transactions before you begin lending.

The best advice that has been given is to find a finance attorney.

While you won't be lending as a fannie mae lender, thier underwriting guidelines are a good place to start, read it all, particular attention to collateral issues. Look at the ALTA site as to RE closing functions. Understand appraisal techniques. Know your RE market. Understand business law and contracts and know business entities inside and out to ensure the right guy signs your note, it's your money so don't rely on some closing agent.

It takes a new bank employee with a college degree in finance or accounting usually, about two years before they get to lend on cars and small personal loans, another year before they get to secondary market loan and a couple more years before they get a bank portfolio. While you aren't going to be at the level of bank lending, much of being a lender applies. You are not going to find a book, like Lending For Dummies that lays out a mortgage lending business.

As a rehabber, you know what angle to drive a nail into a door jam and what size nail to use depending on the framing or screws, I doubt you read that in a book and then went out and hung a door properly. Lending is a profession. It too requires experience, knowledge, skill and technical expertise to do it well. Just because someone has money makes them a good lender just like someone who owns a truck makes them a Dakar Rally winner. :)

Jeff And Ann both gave, in my opinion, very thorough and generous replies, sharing info that cost them years and dollars to learn. I'm humbled.

Where someone might want to add their own additional steps to the process, and realizing that Jeff and Ann both know 500 or 600 times as much as they posted, I can tell that they are hard money lender/arrangers who are ACTUALLY doing this.

Chris, you're lucky.

Joffrey

Do I smell the hint of humor or is that sarcasim? LOL :)

Last month I couldn't spell lindar, now I are one.... :)

Get your feet wet by working with a broker, learn by doing with someone. :)

@Chris H. I am not a lender, but I have used HML many times over the years, going through a broker. The reason being, borrowers, as much as the people with the money want someone that understands the entire process, title, has experience doing the type of deals we do, values, funds on time and works with us on setting up a system that works for both of us in disbursing funds, because we do construction loans. There's a lot that goes into lending, it's not just transferring funds from one place to another.

I would strongly suggest that before attempting such a venture you go to work with a Mortgage Broker, and learn the ropes. As the saying goes, "you don't know what you don't know" There is no substitute for experience, and if you don't have it, find someone that does to work with, you won't regret it. Good luck!

Thank you all so much for the replies so far! They've been tremendously helpful. I asked a local HML for a finance lawyer suggestion and got one, so I'll go talk to him.

Thank you particularly to Jeff, Ann, and Bill!

Jeff, what is the reason you recommend using a broker at a flat rate- just to gain experience at expense of margins initially as the paperwork and process is complicated, or because a licensed broker is needed for this setup?

You need a lending lawyer, @Chris H. They specialize in lending and securities. I don't exactly know what a finance lawyer is, maybe a different term for the same specialty, but as long as the recommendation came from an HML, and this lawyer regularly works with private/HM lenders, I suspect you're fine. If Washington is a lawyer state (you should find out), then your lawyer will handle everything. If not, use a mortgage broker for origination, whether it's required in your state or not. This is for your protection.

Just like I’d never suggest you do your own dental work, origination is not something you want to do on your own. Lending paperwork is complicated and onerous and there’s no way you’ll know how to handle it, or how to deal with escrow and title. Here, you’ll want a licensed professional with a lot of experience originating your type of loans. If for some reason you have to foreclose, or end up in court, you’ll need flawless documentation. One false move can cost you a lot of money – especially if a borrower decides to fight.

The reason I suggested paying a flat rate is because every broker we initially spoke to asked for 1% of the deal. With due respect, all our deals are mom and pop cookie-cutter flips. The paperwork involved in a $75k deal is the same as that for $350k. So we changed the question by asking, “We are loaning money to rehabbers. Would you be interested in originating our loans for a flat fee?” It worked. The market sets the price anyway, not us, and there are plenty of extremely talented brokers willing to work for a flat fee.

This is not to say you want to squeeze every dime out of your broker. You must pay fairly and you want him or her looking forward to your calls. We actually pay a higher than normal amount to keep ours happy and we’re fiercely loyal to him alone. In return, I could call him on a Saturday and have paperwork in escrow on Monday. This has happened.

Jeff

Sorry Jeff - I used the correct verbage with the lender but incorrect with you. I did ask for a lending lawyer and my HML sent me a lending lawyer recommendation.

I get what you mean about phrasing the conversation as a flat fee from the start. What do you usually look at for that price?

The mortgage broker seems useful even just to reduce time spent.

@Chris H. , let's not get tied up on what title we give an attorney, as they are really in corporate law, then you need to inquire and you can say a lending, a finance, or probably in your case ask about banking experience. These guy/gals are real hard to find, at least good ones as usually you'll find the better ones are not in the public but are employees in a large institution. Generally at the wholesale mortgage level as they assist and advise in establishing new origination offices and take care of compliance.

I'd suggest, initially, that you ask your bank who they use for thier corporate matters. You may get a local attorney but at least they have been diving into such areas such as the SAFE Act and issues with the CFPB, HUD and Treasury matters, they will probably be fine in areas of securities as well. Probably the least expensive you'll find.

However, unless you find an attorney in the lending business, like an owner of a brokerage or an HML, the better attorneys still won't be able to address the process so much or underwriting or probably not even appraisal methods. So, that is why I suggested getting with a broker, there is where you will see things like dual control of the verification process and the due diligence required.

Another thing we missed here, in saying what you might do to get started is you telling us what level of education you might have as that has alot to do with where you need to start. Your past experiences also play on this, I believe Jeff was a stock broker, I believe Ann comes from RE and went into a HML office. I believe Joffery was a RE broker, so there a structured business background, meaning they didn't strike out on thier own learning business as they went along. This aspect is important starting out, if you think RE is regulated, finance is 10 times as regulated, it's not near as easy to get into. There is a high barier to entry, not just the money but just getting compliant to run an ad in the newspaper.

Just trying to get you into it the easiest way, getting with an established mortgage broker. Good luck... :)

Mark, for later reading.

This all sounds very complicated. I took a page full of notes and ended up feeling fairly deflated.

I have a deal I did and I'm not sure if it was fine or flawed. Basically, a local, reputable (as in, references checked out) "we buy houses" kind of person approached me offering 8% a year, paid monthly, on a $100,000 loan. He used that money to I would imagine, buy other houses from distressed sellers. As collateral, I put a lien in the first and only position on a local house I was able to drive by and see was adequately maintained from the exterior, the neighborhood was decent. It had a lease optioner occupying it. The place was worth probably 50% more than the $100,000 loan in the 2013 market. The contract was between my LLC and the land trust that owned the house, and I got a personal guarantee as well. There is a valid homeowner's insurance policy in place, and my LLC is an additional insured. An attorney processed the loan, and though he said that there were indeed "a lot of moving parts," he signed off on it. There was a buyer's title policy in place, and the house was owned for a couple of years, and the attorney and abstractor felt it was a clean title, so I assumed that there were no clouds and didn't want to pay the $300 for a lender's title policy. As well, the person in question has multiple income streams, is local, has a wife and kids, was an Air Force pilot, and from what I was told, pays back his loans on his flip projects (for which he pays 10%). Indeed, I've gotten about ten $667 deposits into my account and all seems well. I drove by the subject property and all seems copacetic there. The person probably wants to do this again and wants to keep his reputation intact, which is a minor incentive to keep paying as contractually required (a Note and a mortgage). I didn't advertise or use anyone else's money.

Is this kind of deal the level of complexity that you all were discussing, and I'm totally wet behind the ears, or is it quite likely to go off without a hitch? Admittedly, I began to wonder if his personal guarantee is worth much, in that I would have to find assets to attach. I was also a bit leery of the land trust (with the member being a second individual, who actually signed the paperwork). I realize that 8% is going to become watered down if inflation increases. I get that foreclosure is complex if I have to foreclose on the property while there is a good lease optioner in place, but I imagine that he could stay put and would just end up paying me the whopping $2,000 a month payments in case of my taking title. Those are my concerns. But as far as the house being a junker, no I don't think so, and as far as the guy actually being a sociopath who is running a big game, I don't think so either. The market probably isn't going to turn soon, and if it did, the lease optioner may still have their job, and the individual may still have adequate income streams to avoid losing it to foreclosure and being sued personally by my LLC. I put the odds of continuing to get payments successfully for the remaining 38 months to be 97%, and if I went to foreclosure, I put the odds of 90% of succeeding there and owning a $160,000 house in this market.

@Jason Merchey

It's likely to go without a hitch. Next time I'd get title insurance and have the borrower pay for it. Keep a close eye on the hazard insurance, make sure it's always current. Since your LLC is an additional insured you will get notice before it expires.

The thing about the land trust is that you don't know who really owns the beneficial interest in the trust. The true "owner" of the property can move around 20 different times and you would never know. Not that that is necessarily bad, it's just that one owner might be a better landlord than another, you don't know. I may be a little off on this but maybe the guy living there has (or will acquire) beneficial interest in the LT thus making your loan a consumer loan subject to a myriad of regulations at origination.

Hopefully you have a due-on-sale clause in your note so you can call the loan at your option if ownership does change. That way if the tenant exercises his option and takes title you have a choice if you want to continue the loan or not.

I think you are saying the numbers are value=150k and loan=100k, thus ltv is 67%. That's on the high end imo, but not bad.

As a lender myself I've had borrowers move title around without saying anything and I've overlooked it for the most part since payments were continuing, but it doesn't set real well with me ... unlikely I'd ever do a loan with them again.

I think you need to begin by being clear about how you want to make your money: as a lender (investor) or from origination fees (as would a broker).

It used to be that the hard money business was all about the basics - title and the collateral (equity). Now it also encompasses lots of onerous issues regarding underwriting and servicing, at least in my state CA. I would discourage you from servicing your own notes unless you're willing to take on unknown risk of legal compliance exposure.

My advise reflects a CA bias.

What starts as a little question can grow legs around here pretty easily. The best resource that used to be available was a little book by George Coates, "Smart Trust Deed Investing in California" now out of print (eBay?).

FirstTuesday.US is a site for real estate continuing ed and has some very good, affordable material on the topic.

For those considering starting, there's a lot to learn. Since your going to get an education one way or another, I think you are unrealistic if you side with the BPers here who will tell you that you can learn enough just by reading these forum.

I am, however, willing to considering buying your CA loans that go bad, (for a substantial discount, of course).

OK, I hear you. In a second, unrelated case, I am the capital partner on a fix and flip. In that situation (which is currently underway), I searched for the property with my project manager/architect, bought the property in my name, and am writing checks for the rehab as the work is completed by our GC. Is that a horse of a completely different color because the house is in my name, and there is no note or mortgage? I guess if you have the kind of relationship with the active partner such that they are okay with a) not having title and b) not getting paid until the end, when the sale occurs, then that is black and white different from PML. My bottom line is that I want to do something investing-wise that is different than buying/holding/landlording, making about 12% a year, with good security. Am I hearing that it would be far-and-away better to do the latter rather than the former?

Originally posted by @Chris H. :

I would like to become a hard money lender.

I have the customers on both sides and a specific business model. I can sell it.

I have the cash reserves myself to lend, as well as know both individuals who want to fund real estate investors, and customers.

I've talked to hard money lenders in depth before and understand the traditional model. I've actually got a specific business model in this case due to a specific set of potential clients whom I've already talked to.

What I lack is the experience and knowledge of the details involved of being the dealmaker, the hard money lender.

Can anyone suggest any resources for me on how to go about structuring this right? Books, websites, personal anecdotes, anything?

Thanks much to any responses and help!

Here are some book titles of you haven't read already.

Making the Yield. Buscemi.

Lee Carney.

George Antone. Mpactwealth.com. Banker's Code and Wealth Code.

What type of terms are you looking to loan at here in Seattle? What type of returns are you looking for?

The market here in Seattle is pretty competitive. I've had HML offer as low as 9% and 1 pt, other HML like Eastside Funding at as high as 90% Loan-to-Cost (for both acquisition and rehab), and other HML that will go 100% Loan-to-Cost with seller subordination.

We're in a similar boat to you. We have some access a wealthy private individual at 9%. However, I found it was too high an interest to pay and be competitive in this market where experienced proven rehabbers can access 10% and 2 pts. HML is a lot of work and in addition to my business partner who is an experienced loan office we also needed two processors to be able to properly service the clients need for 72-hour underwriting.

We're about to go through all the securities and DFI paperwork to raise money from private investors we already work with at 5.5%. That will make the HML competitive.

To make money on hard money, you need a steady flow of good deals to underwrite as you make money on the velocity of money. You also need the staff to underwrite and process the documents. 

We're in the process of doing all of this ourself. Message me if you'd like to brainstorm and mastermind.

@Ryland Taniguchi : Have you gone to any of the MPactWealth classes or just read the books? What are your thoughts on the classes and/or books? I'm trying to learn more about private lending.

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