I've been doing flips for the past three years and have gained a lot of experience from it, especially when we started expanding into different states. I've also gained valuable relationships, particularly on financing as I've borrowed from at least 15 different hard money lenders, both local and national. I started diving more into the financing side at the end of last year and became a commercial and hard money broker.
I've seen a lot of loans (on good deals) rejected due to these reasons:
- Not enough down payment / liquidity
- Lack of experience
- Bad credit
I feel bad when there's a good deal (70% rule, sometimes 60% rule) and the borrower loses it because they can't get financing for it. I've always wondered if they can somehow just "borrow" my own fundability in order to get the deal (and at good rates). We've worked hard to build up our reputation, borrower profile, and lender relationships in order to get the best loan terms. I typically borrow hard money at 8-10% interest, 2pts, 1-yr term, and 90-95% LTC.
However, the only way I can think of making this work is if I take title in an entity with the borrower, essentially a partnership. Lenders won't consider my experience otherwise. They often require me to be a guarantor as well, but not necessarily always.
Hoping to get your advice on the following:
- Do you guys think something like this adds value? I know Brandon Turner has mentioned the idea of a credit partner on deals to lock up bank financing, but this is more for fix and flips and hard money.
- What are some risks I should be considering, and how can I protect myself from it?
- How would you structure the "partnership" with other investors?
Why ? Partnering with those who have little experience or liquidity seems a lot riskier to me. I only partner, but would never guarantee (Ouch it hurts me to even say it) , with those who bring something to the table. To me, bringing the deal or the skill is not enough
In these situations, offer them a couple of thousand dollars and the opportunity to observe and gain experience
I have dealt with various lenders. Credit was never an issue. They didnt really care because the house was the collateral. they never asked for a down payment unless a so do deal. The smoking deals I just had to cover the carrying costs. To combat that somewhat I partnered with the homeowner on 7 deals dnt work that often but enough. Majority of my deals are smoking. I was trained where to look, hidden markets. I am a hard money broker too people with so so deals had to deal with down payment. My friends I helped get the money had horrible credit and no issues getting money. What I saw is when reserves were checked hard to get a loan. Most people dnt make much hard to cover their bills etc yet the carrying costs..
I am with @Greg H. ulta high risk.. if you want to do this to increase your deal volume just do it yourself and pay the bird dogs a fee to bring it and manage it if that's what they are doing..
If deals are hottt credit and experience dnt matter. I had more lenders than i could count when i started my deals were so good lenders would call me for next deal and still do. Was trained very well. What would have gotten me was reserves. Why I did small loan deal but huge profit then was up hill after that. had enough for a small/medium deal. Knowing where to get deals biggest problem people have. Lenders go wow john send me request asap. I talk before I send in deal. I feel like VIP lol
I agree with greg h.
You can bring the financing and take down the property in your name and have a JV agreement on the side. Profit split on the back end if you have the time to oversee the project.
@Nghi Le , instead of (only) being a "commercial and hard money broker", how close are you to being able to be a "commercial and hard money Lender" as well?
That way, you get to choose what makes or breaks a deal!
Other than that, do you have enough commercial Lenders on your books?
(ie. Several learned folk here have indicated those 4 excuses shouldn't be the problem!)...
I'm actually not looking to be more "active" in the flipping business. Since last year when we had our baby, we've transitioned to being more passive in our flipping business and have accomplished this through systems and partnerships. My motto is, "It doesn't matter if it's two doors down or 2,000 miles away; I don't want to see it or hear about it." I still do my due diligence up front and am involved in the big decisions, but I'm not a part of the day-to-day operations. This is what has allowed me to scale and do rehabs in different states.
However, these types of partnerships are different than the ones I was mentioning in my post. Partnerships formed with aligned goals before a deal is very much different than "partners" that come with a deal. The former is more long-term focused whereas the latter is more transactional.
If a borrower has no experience, lenders typically will ask for more down payment. However, if they are able to leverage as much as a higher tiered borrower can, they may be able to get the deal done. I'd never work with a borrower seeking 100% financing though.
Or another situation I've seen is that the borrower has enough cash to close and has a private lender to cover rehab, but the HML needs to see extra liquidity in the bank and doesn't accept secondary financing. This is a case where they can borrow my liquidity to get into the deal, and then bring in their private money on a 2nd lien.
Does your opinion change if I'm not putting any money into the deal AND not signing as a personal guarantor? I'd simply be on the entity just to help them get better terms. I might even roll out of the entity (through an amendment/addendum) after the loan closes to reduce my liability.
What you're saying isn't always true. I don't know what your credit is, but some lenders have 660 credit minimums, some are 600, some are 550, and I do know of a couple that have no credit requirement, but they don't operate in every state. So what works for you in your state isn't always universal. Sometimes I wish the lenders in my state were available in other states where I do rehabs because they can do things like close in 2 days, fund same-day at auctions, cross-collateralize other properties that I own for down payment, 100% financing, etc.
A lot of people think that lenders shouldn't care about a borrower's financials if the property has good equity in it. But a true hard money lender isn't interested in owning properties and takes every precaution necessary to make sure they're not stuck with one. And credit score is simply one of the best ways for a lender to determine someone's ability to repay based on their history of borrowing.
My end goal in real estate used to be to get into private lending myself with my own funds. But I usually seek higher returns than what private lending offers, and I can only go so far with my own funds. As a broker, I'm using OPM and in essence have unlimited funds. I think understanding and adhering to each lender's underwriting requirements is a worthy trade-off for that.
I actually often agree with most of their requirements. When I purchase new deals, I rely on their criteria and due diligence to help me confirm that what I have is a deal. Some investors might not like things like BPOs/appraisals and draw inspections, but I feel like those things protect the investor as well. HMLs are my 2nd set of eyes on a deal, and I don't think it's ever bad to have more people watching your back.
Vestus and those type in Seattle are pioneers in what they do.. keep that in mind. And much more sophisticated than most HML in the country.. when it comes to courthouse bidding .. their back end foreclosure tracking systems.. etc.. A guy named Dave Miles put that all together for of them.
also there are 12 states were you MUST be licensed.. WA is not one of them But like Oregon is.
Credit partner works but almost any lender if you have more than 20% of the LLC will require PG.
so if your less than 20% you can still have uneven distributions that could be a work around for the PG.
i didn't say always I have done biz in over 20/states and the lenders work in all states they are nationwide. I even helped many friends with horrible credit they didn't turn them away. Deal was good. I haven't dealt with local lenders. Every time I go to a state to visit networkinggroup they have the same lenders. Why they say nationwide. Wa, cali, Nevada and NC for example all same thing. My first two deals came from your state ngh. Also my friend did 5 deals in your state the following few months They fund nationwide. He had great reserves but nt so good credit. they check but worry about other stuff as well. Just got several in Texas closed. My third deal came from wa also they took longer to fund like cali for transactional. Why lender allowed extended transactional funding. Took longer than a few days. My first two was fix n flip.
@Nghi Le Hey Nghi, great comments thus far.
1.) I think you can add value by partnering with someone who you think has the drive to learn as you help them with a deal
2.) Risks of unforeseen issues with a flip leading to a hike in the budget and the investor do not meet your expectations during the project, leaving you to do most of the work
3.) Some sort of profit sharing arrangement with the investor so that your interests are aligned
All in all, I'd say it is a risky play, but in risk lies great returns. The established lenders are not seeing the opportunities as you are.
Hope this helps Nghi. Goodluck. Thanks! - Ola
Consider Joint Ventures, You lend your credit profile and operations experience if needed, in exchange you get a fee + % of profit over a certain amount.
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