How to become a Hard Money lender?

43 Replies

You need:

1. Money
2. Borrowers
3. A broker
4. An escrow company

Rates vary depending on what part of the country you're in. In Southern California hard money for SFRs is 12-14.5% with 2-4 points.

You will also need knowledge of the game and the areas you choose to lend in, not knowing your areas or having someone on your team who does could spell a loss.

Then you need your own rules/criteria. For instance, max LTV (Loan to Value), loan package requirements such as appriasal, BPO, application fees, etc., and borrower profile requirements such as experience level, credit, and other important aspects to your borrower.

Yea I would look up some hard money lenders in your area of interest and educate yourself on the competition. Will give you an idea of what the average spread/points are in the area.

Terry – of all the replies that you have received so far, in my opinion the most important is the one from Bill. Not all states are treated equal when it comes to usury laws. In my brief adventure doing transactional financing, I actually ended up with several loans that were actually usurious and would've been very difficult to enforce the collection of a delinquent note. Be real careful in this area. Rich

Thanks for the replies. What if I want to start by lending to a friend that is a start-up REI first property has contruction crew/experience in place.

Do I need a Broker still and will I be subjected to state rules and laws, regs, REC, etc, or can I just simply draw up a contract with terms, agreements, etc? If so where would I get the contracts?

No, you don't need a broker.

Yes, you still have to comply with all state and federal laws and regulations.

The best way to get the contracts are from a lawyer. You're really just talking about a deed of trust (or mortgage, not sure which is used in KS) and a promissory note. You might be able to get something from other real estate investors in your area. A title company might be able to supply something, too. Having a lawyer review the documents would be a very good idea.

These loans can default, even if the borrower is experienced and is your friend. Unless you're prepared to just call it a gift, you want to get the documentation right up front.

There is a difference between your acting as a HML and a partner, if you and he join together in an LLC you can act as the money partner making the loan internally in the company without being subject to lending regulations as an outside lender. You should alsohave a grasp on what other loan rules are, especially loan to values and disclosures this is critical to stay out of trouble. Providing funds outside of a transaction that would effect the LTV given by an insured lender could lead to mortgage fraud, money laundering and wire fraud as funds are disbursed. I'd say the best way for you to go would be inside the business entity as a partner. IMO

A bit of mis-information here in my opinion. Forst off, you DO need a broker if you are going to lend, otherwise, you are likely in violation of state usury laws and other potential Federal laws.

Bill mentioned being carfeul to stay within these laws and that is precisely the job of your broker, so YES, you need one as a lender or get your own broker's license.

Secondly, if you come in not as a lender but an equity partner, then all these topics are null and void as you are not coming in as a lender but as a partner. Keep in mind that a partner also shares in LOSS!

If you want to fund your firned's rehab deals as a lender, get a broker and stay within the legal areas you need to. If as a partner, you had better have your attonrey draft a good JV agreement OR form an entity of which you both are partners, which would also include a formal operating agreement drafted by your attorney.

If you choose to act in the lender capacity, your borker will handle all the paperwork you need other than your own internal paperwork requirements.

Originally posted by Rich Weese:
In my brief adventure doing transactional financing, I actually ended up with several loans that were actually usurious and would've been very difficult to enforce the collection of a delinquent note. Be real careful in this area. Rich
Not quite accurate or the entire story, however, as I stated, I do agree that staying within usury limits or involving a broker will keep you within the legal limitations.

Of the loans I am aware of, only 3 defaulted and all 3 were enforcable. The NJ deal had a usury cap on business loans of 50% so that was enforceable and within the legal limits, got the property back. The AZ deal had a broker involved, the deal went all the way through the foreclosure process legally and thus was actually enforced by the Trustee at Stewart Title. The MO deal would have been hard pressed by the borrower to claim usury since she was a broker herself, she committed fraud by using a phony end buyer (her maiden name) and a phony escrow company. Ended up getting the property back and sold for a wash.

Because laws and customs vary considerably by state, the first thing I would do is find a good RE attorney who is well versed in private lending IN YOUR STATE.

Knowledge of SAFE act considerations, Usury laws, etc can save you a boat load of money and headaches later.

I would probably also suggest either placing your funds with a lender who has a pool (you'll get a lower return) or working with a broker very experienced in private loans. At least to start with.

I would also be sure to stay only within one state to start with, as market conditions and lending laws vary enough to get you into big trouble if you don't stay within the laws.

If you use a broker, you won't have to market for borrowers, and can make these deals more hands off like they are supposed to be. You can spend your time on leisure activities instead of business.

One caveat about the broker however. Typically brokers represent the borrower, so this is something you want to find out ahead of time. Their goal will be to get the loan closed, not to protect your money. You need to have criteria designed to protect your money, and a reliable method of determining value.

In my opinion, appraisals are not necessarily a reliable method of determining value, so staying within your own market area to start with can also protect your capital because it's easier to know value next door than across the country.

What happen to the good ol days when a guy could lend a friend some money w/o the red tape and everyone wanting a piece of the pie? Lol!

Thanks for all the great info, you all are awesome!

Originally posted by Terry P.:
What happen to the good ol days when a guy could lend a friend some money w/o the red tape and everyone wanting a piece of the pie?


Oh, you can loan money to a friend with a handshake, no problem, it's taking a security interest in RE that's the problem. We assume you want to secure the debt. And being a HML is a business venture!

Yes waaay to complicated now, there were just some who are now making all of us pay for their sins.

Yes waaay to complicated now, there were just some who are now making all of us pay for their sins.
Go ahead Bill, you can say it. THE BANKS.
Remember, many of the new rules, particularly Dodd Frank Act, is the banks influencing politicians to pass such stupid laws with the claim that it is consumer protection when in reality, it is the banks protecting their own interests. They are simply attempting to hinder and get rid of private lenders who take some of their business away. What better and easier way to do that then get these stupid laws passed.
OK, rant done.

I agree with Ann on some of the issues she raised, keeping in mind that some of those laws/rules only apply to owner occupant loans, not investor loans, however, lending in your own area where you know your market will help keep you safer, no question about it.

As for not having to market for borrowers if using a broker, I would have to toss this out - you will be doing a lot less business if you rely on brokers to find your borrowers. Find your own, the borker is there to do the paperwork and keep you within the laws of your state.

Not to get off topic, so I'll say it this way, a HML needs to realize that there are two issues behind the regs, your competetion and consumer protection issues. Reading the SAFE Act carefully you'll see that there are two issues afloat, reserve requirements, bonds, accounting, examinations are all things banks screamed about when the first broker opened his door, banks were required to do all these things and brokers were not, so yes I'm sure they felt the playing field wasn't all that level. OTH, I think most of the seller financing issues are consumer driven, the banks never did have a slice of that market nor would or could they, and still can't.

An HML type needs to be aware of such issues as they will be working closely with banks and will want a good reputation and working with the public, they had better keep fairness in mind as well. IMO

HML also better be careful about calling a residential loan a commercial loan as well. Loans are classified by the collateral taken, not by who the borrower is, that can be a very thin line....

Whether it goes to court, usury is usury. You can google state usury laws for all states including NJ, AZ and MO. Be very careful and have a principal that knows what he is doing. A very treacherous area, imo. Rich

Originally posted by Amir Levi:
To open a shop is easy, to keep it open is an art.


So true! I'm really amazed that there are people who have money and think that's all they need to be a lender. Anyone with money has to be smart right? So, what's the problem???? Just a few rules to follow and have your attorney do some documents! :)

I don't want to hijack this thread, but in keeping with the spirit of the original question ... I'm looking to dive into this lending space as well with a Self Directed IRA. I see everybody mention the term "broker" and "you have to get a broker" etc. the one thing that I'm wondering is, what kind of broker ... real estate broker? mortgage broker? or a broker that specializes in private loans if such a line of work exists? From the description of the duties that a broker will help you out with, it sounds like this is the type of person that I really need from the get go to help me get started out right.

I'm thinking one of the first calls I make is to call one of these brokers, and develop a good relationship with a good broker. I'm totally looking for somebody that will help out with the paper work and keeping within the law; and also (And just as importantly) help finding the deals based upon my criteria. And it sounds like the second call I need to make is to a RE attorney. Does that sound about right?

If anyone want info on this feel free to contact me. I have done about 600 loans over the last 5 years with 2 foreclosures and no losses. I'm happy to help you stay out of trouble and getting things started. Shoot me an email.

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