Possible to get Hard Money with no money down??

52 Replies

@Jon - I'm not doing this deal, I was just giving an example. When you use a hard money lender who's name goes on the deed? Will it be the lender or will it be my LLC? I don't see how both hard money lenders couldn't have "some skin in the game" if at the end of the day they would be getting paid.

@Chris - I understand that when your own money is on the line you tend to take things more seriously but right now just starting out, I wouldn't be able to do that.

@Keith - thanks!!

When you buy a house, your name is on the deed. Or, your LLC if you're buying in an LLC. You give a lender a "deed of trust" or "mortgage", depending on what's used in your state. This is the same as any other financed real estate transaction. On the deed, the seller is the grantor and the buyer is the grantee. On the deed of trust, the borrower is the grantor and the lender is the grantee.

A second position mortgage is MUCH weaker than a first position mortgage. If you don't make your payments and the first forecloses, then second is typically wiped out. As in the second lender loses all their money. Here in CO, the second has "redepmption rights", which means after the first forecloses, they can pay the first lienholder the amount they were owed and take the house. But they have to cough up the cash, which they may or may not want to do.

If the second forecloses, and takes they house, they still have to pay off the first to get a clear title to the property.

Even for a first lienholder, the second causes problems. A hard money lender is going to expect that if you get in trouble you will sign over the house and walk away. I have had that happen on a loan I made. If there was a second in place, I would have had to deal with the second, who probably would not just walk away. The loans we now do specifically state that placing a second mortgage on the property will result in the loan being in default.

On the house I took back, I did end up finishing the fixup and sold it. I took a $15K loss. We had an appraisal before the loan was made that considered the repairs and came up with a value of $213K. We eventually sold it for $172K. Between the loan we had made, the costs of completing the fixup, and the holding and selling costs, we took about a $20K loss on the house. Fortunately, the seller had made payments of almost that amount before they defaulted. So, we had only a small loss. Nevertheless, we had a large chunk of money tied up for 15 months with nothing to show for it. The rehabber, OTOH, took about a $30K loss. Or so we've been told.

As a lender, I want you to "take things more seriously". I want you to lay awake at night tossing and turning if you're in trouble. I want you to feel pain and do everything in your power to make the deal work. If you have nothing invested, its far too easy for you to just walk away and leave me holding the bag.

Back during the boom, things were different. Values were rising and if the lender was in at 70% of the value, they could be pretty sure of getting their money back if they took the property. Maybe more. They still didn't just hand you the cash up front. At best, maybe they paid for materials and labor directly. Its not like that now. Values are declining. In our case, there were solid comps for the higher value when we did the deal. A year later, the comps were lower. The house was on a busy street and that limited the choices of comps. HVCC is now in effect and appraisers are running scared.

If you want to be in the fix and flip business, you need some cash. End of story. You need that cash to not be tied to the property. Could be borrowed money, such as credit cards, a loan from friends or family, from a 401k (not recommended), or from a HELOC. But you really must have some of your own cash.

The other thing you must do is to be conservative. You lack experience, so I would look at your numbers and assume your estimate of ARV is too high and your estimate of rehab is too low. I would do my own math assuming a lower selling price and higher rehab and would want to see you had the ability to do the deal even with the less optimistic numbers.

One more point. You might consider this all very unfair and ask how a new investor can get a break. The reality is there are a lot of deals chasing limited money. Lenders can be choosy about which deals get funded because there's plenty to choose from. So weak borrowers (no experience, no cash) are going to have a very tough time finding any money.

First I agree with everything Jon said. I've been crafting this reply offline, and it might be somewhat redundant, but here is my 2 cents:

Lots of interesting input here. One thing for sure: Hard money lenders vary by individual, company and definitely by local competition.

Curt, if you can get that kind of deal in your local market from a hard money lender, more power to you. But I certainly laugh when borrowers tell me what I "should" do. And if I'm funding everything, including closing and insurance, where is the commitment from the borrower?

Don't get me wrong, I get where the investor is coming from, I'm an investor myself. But I can assure you that the perspective of a borrower and a lender are different. The borrower of course wants to minimize their cash out of pocket. The lender wants to minimize their risk. Two completely different motivations.

Ok, so I both lend my own money, and other peoples' (private investors) money. I am flexible enough to take into consideration borrower's history with me, the location of the property, the amount of equity if the borrower got a killer deal. The only time I lend with the borrower having no skin in the game is if I have a long history with that borrower. Which contradicts the concept of hard money being based solely on the property, but there you have it. The ability to deliver matters. Inexperience always has a harder time getting funded.

In general, the following holds true:
1. The concept of skin in the game is critical. Having "nuttin' ta lose" makes a borrower behave differently from one who is fighting to keeps what is his.
2. Hard money customs and competition (which affects the hard money market) are very local. So what is true in one area is not so in another.
3. Having history with a HML can get you much better deals than if you are a first time borrower with that lender.
4. Larger hard money companies have a more cookie cutter approach because they lend across multiple states, and they usually have higher fees and lower LTV's
5. Local HML's can be lending their own money, lending other investors' money, or pooling money in a fund. These funds have higher expenses if they are formed correctly. Ask the lender about their business model for procuring money, so you will have an idea of their flexibility. They may not tell you, but they may.
6. Some lenders are in fact hoping to foreclose. This is called "loan to own". But no matter what, they are looking at what would happen in a worst case scenario if they had to take the property back. There are very significant expenses involved in foreclosures, and typically there are back taxes, insurance and utilities if there is a foreclosure. So I would suggest you not tell a lender what he or she "should" be willing to do.
7. Second position mortgages are all but gone. I don't know anyone in my market who would even consider one anymore. Declining property values wiped out so many, that even those lenders taking on the riskiest scenarios, won’t do a 2nd. Realize that by the time a first position mortgage lender gets to forclosure, there are so many expenses added to the total, that the 2nd lien holder has no equity to work with.

Having said all of this, I do have a program that provides 100% financing in specific instances. It is not my program, I am brokering the program for another company. As a matter of fact, I wouldn't use my own money to do anything similar, it is too risky for the lender. It is a profit split with high fees, and as such, I have yet to see one close. But it’s a real program, that can work in the right circumstances. For a beginner, it might be something that would work. It's available, however, in a very limited geography in Massachusetts.

The investors I know that use hard money pay for the repairs themselves.

This keeps the rehab moving along faster because you don't have the HM lender hit you up continously for "inspection fees" and approvals at each stage and releasing the repair funds in draws.

When you call a HM lender and you are NEW with no money that will not instill confidence to do a no money down deal with you.

They can tell you are a newbie when you call just by the questions you ask and depth of knowledge you display.

It sounds like you to need to find a deal,control it,and partner with someone with more experience who has cash or just assign the deal to them for a fee.

With all the great advice given, it should be undertsood that in cases/situations like this thread example, an investor needs to find some money either via credit cards, HELOC, retirement account, etc. so they have money to bring to the table along with the HML funds OR get a money partner and give up 50% of the profits (or more if need be). a % of something is much better than 100% of nothing.

Curt,

I am throwing some support your way - your market is totally different than anything I have ever encountered. I know people in your market that if you have decent credit and $500 they will find a property, buy it in your name, re-hab it, re-finance it again with a perm loan, and then give you back a cash flow positive rental. I have a friend that has several of these in your market. $500 and the right connections in your market and you are golden.

But I have never seen that in any other market.

Originally posted by Jon Holdman:
One more point. You might consider this all very unfair and ask how a new investor can get a break. The reality is there are a lot of deals chasing limited money. Lenders can be choosy about which deals get funded because there's plenty to choose from. So weak borrowers (no experience, no cash) are going to have a very tough time finding any money.

That is the in-all end-all short 'n' sweet too it.

Too Curt and others on HML's happy to take properties back, the are H-M-L's, NOT investors. There is no scenario where they would like to take a property back. When they do so, they incure costs of doing so, added hassles, time lost, and money tied up.

As I remind new investors over and over and over again, if you can sell something for 200K, and buy it for 175K, you just lost about 15K probably. Transactions are not free, fillings and closings, agents, taxes, untilaties, insurance, all NOT free.

Hard Money Lenders are in the business of lending money, not lending money and taking properties back. If you want to get in the game, to get good HML's backing you, know there position and make yourself a good investment to them, and that requires a track record or cash. The more record, the less cash needed.

I say this from an experienced stand point. I started from scratch myself, I know it's tough in the begining but thats what it takes. I built a record doing JV's to get funding, then with that record got funding myself. I know have a record where I get funded sight unseen.
This is work, it takes hard work to get the great returns.

Originally posted by Will Barnard:
With all the great advice given, it should be undertsood that in cases/situations like this thread example, an investor needs to find some money either via credit cards, HELOC, retirement account, etc. so they have money to bring to the table along with the HML funds OR get a money partner and give up 50% of the profits (or more if need be). a % of something is much better than 100% of nothing.

I can not emphasise that point enough, JV to start with an established investor. It is the fastest, best way to get in. You will gain the capabilaties to actually do something, plus will learn far far more then the 50% cut you give them worth. Not to mention the networking.

The ? is, if you don't believe in your project enough to put your money into it, why should an investor put theirs?
With no proven track record, no money into the deal, what are you bringing to the table?

Originally posted by Mike Nelson:
No when I saw "no money down" what I really mean is that I'm not trying to put more than let's say 2k down.

Unless you are buying properties for less than 10K, 2K is the same as no money.

Many have and will also ask what a fair percentage split is on such a JV. The answer is that it varies a lot. Each party will consider what they are bringing to the table. As the no money, inexperienced, no track record partner, you bring very little to the table. The most you can bring is the deal itself, so depending on the deal will largly affect your partnership %.

Obviously, since no one throughout this thread mentioned exit strategies, those likely have no value to HML. Still, I cannot resist asking this:

If Mike had an end buyer with a pre-approval in hand (from a major bank) and a written intention to buy the property from Mike after the rehab is done, would such end buyer (holder) absolutely make no difference? Such end buyer could in fact be a family member of Mike's.... Would Mike still need to resort to a JV of some sort?

And, an experienced GC involved in the project aside from the exit buyer, still would not do?

I know, there are a few lenders, needles in a hay stock (one of those on this very thread) who lend based only on the value of property but to hope for one of those would be like hoping for a lottery win? Exit strategy and or experienced GC would not make a difference? Is that what most of you are saying?

Originally posted by Joanne Basecki:

If Mike had an end buyer with a pre-approval in hand (from a major bank) and a written intention to buy the property from Mike after the rehab is done, would such end buyer (holder) absolutely make no difference?

If I were the lender, it would make no difference to me, unless the buyer were putting up enough earnest money that I'd be recouping my investment even if he backed out of the deal.

A buyer with no skin in the game is no difference than the rehabber with no skin in the game -- they can both walk away at a moment's notice and the lender is the only one who is now in a bad spot.

As for having a good GC in the mix, that might be a pre-requisite, but it's not going to make a difference with respect to the terms I would offer/require. A good GC just means that the rehab will get done in a quality fashion *IF* the rehabber manages it well, makes good decisions, stays on top of things, etc.

So, once again, it boils down to the skill of the rehabber, not the GC.

The goal of having the rehabber have skin in the game is to ensure that there is someone who has at least as much to lose as the lender...this helps to protect the lender's interests.

If you live in California, as private trust deed investors we are funding rehab loans up for the purchase and rehab costs, often with no money in from the rehabber if you have a proven track record.

And we DON'T want the house, by the way! We like repeat business and want to set people up for success.

If you can buy and rehab the property (single family only) for up to 65% of what it conservatively will be worth retail after it is repaired, then the property qualifies--again, as long as the rehabber has a proven track record.

The reason we are willing to take on the added risk is because we are joint venturing with the rehabber and sharing some of the profit. Not for everyone, but it gets someone going and if they can do more than one rehab at at time, the numbers work out in their favor by far because they have none of their own money tied up.

In the days before the Real estate market crash.HM was easier to get. Ive done over 100 transactions never used any money. On the contrary I would always recieve a check for the first draw towards repairs.But now in California, all HMLs ask for at least 10%,in California that translates into an average of 30k.

Most HMLs advertise 65% ARV, How ever they use thier own appraiser and thier own fussy math.So it really drops from 65% ARV to about 50% ARV.

When the market was on its way up I dint care what I paid for HM cause, I was in the deal with none of my own money so it was 100% profit.

but now in California, you have to consider, among other things , room for the down market. After holding a property for 6 months,if your lucky to sell to an end buyer that quick,you will lose at least up to 5 percent in the property value.

I don't know about the rest of the country but right now its not a good time for novices to get in the game in California.

Joe, you are certainly entitled to your opinion, some of which I agree with, however, to make a bold "cross the board" statement that it is not a good time for a novice to enter the CA rehab flip market is just not true. Opportunity is out there for both the seasoned pros and for the beginners, they key for the beginner or novice is to make sure they have a good team and that they have received enough education and guidance to prevent any disaster investments.

I agree with Will, even though the odds are against the beginner, it is possible.

With the proper motivation, it can be done!

Everyone has to get started regardless of market conditions. It's about having advise that helps, not the opposite.

I hate to say it, but why is everyone trying to discourage this young man? How about some positive feedback!

Are you trying to tell him it is impossible? It is not!

We all have to agree that we got started when everyone said "no way".

All I'm trying to say is that this thread is all about what can't be done.

How about what can be done.

Chris, a few days ago you said:

"Skin in the game is based on the deal. The closer you are to ARV the more risk for the lender.

Find a good deal to lower the risk."

This in itself is a positive statement, giving hope.

Now, would Mike purchased his property for "next to nothing" ending up with no holding costs, could THAT be considered a skin in the game as well, from a point of view of a lender? Would the rehab money come in even easier for a good ARV deal?

Originally posted by Chris Clothier:
Mike -

This may seem unreasonable, and I know it does not fit every investors' situation, but if I had to do everything over again, I would use some of my own money on every project. I have found myself in trouble on deals where I have no vested interest and yet, when my own money is on the line, I have never had a problem. There is definitely something to be said for having some accountability to yourself on a deal and that tends to help us think very clearly.

Money itself may indeed be a big part of accountability but so is a percent of life savings. What one dollar means to one person may be same as one thousand to another.

But even aside from money, how about the situations where the entire future and life itself or someone else's life seems or IS at stake? Many people likely deal FUTURE and LIFE aside from MONEY, particularly now days.

I know I may be wrong but I thought on that so often, the subject became very dear. This is why I follow threads like this one so closely. Wonder why I at least was not able to find the argument for this other type of "skin". Could it be that it is actually not valet?

Originally posted by Joanne Basecki:
Chris, a few days ago you said:

"Skin in the game is based on the deal. The closer you are to ARV the more risk for the lender.

Find a good deal to lower the risk."

This in itself is a positive statement, giving hope.

Now, would Mike purchased his property for "next to nothing" ending up with no holding costs, could THAT be considered a skin in the game as well, from a point of view of a lender? Would the rehab money come in even easier for a good ARV deal?

If Mike has already purchased the property and does not need the HML to acquire it - then Mike does have skin in the game.

If Mike is relying on his "skin" to be the equity at acquisition, based on an under market purchase, Mike may be able to find money as long as he does not get anywhere near the final 65% LTV against ARV - 50% would be more like it. Even then, HML's like to see everyone putting cash on the table but it is doable at lower LTV's.

Originally posted by Joanne Basecki:

Money itself may indeed be a big part of accountability but so is a percent of life savings. What one dollar means to one person may be same as one thousand to another.

But even aside from money, how about the situations where the entire future and life itself or someone else's life seems or IS at stake? Many people likely deal FUTURE and LIFE aside from MONEY, particularly now days.

I know I may be wrong but I thought on that so often, the subject became very dear. This is why I follow threads like this one so closely. Wonder why I at least was not able to find the argument for this other type of "skin". Could it be that it is actually not valet?

Unfortunately the percentage of life savings that you have in the game only matters to God with the Widow's mite.

The unfortunate fact is that if the person has 1,000 and he puts in that $1,000 as 100% of his net worth he can still make back that $1,000 easily with a second job, a sold car, or even doing any number of things that can easily net you $1,000. The fact is that it is probably easier for the guy to make back the meager $1,000 than it is to for him to salvage a Real Estate deal that is going sideways.
Will the borrower get up every morning and work 10 hour days on the job just to save a no profit deal? Or will he eventually have to re-direct his efforts to simply making back the $1,000? Especially if he is "on the edge" in the first place. In the end, the guy will have to walk away from the RE project and do other things to make money, rather than work a no profit deal. Especially if he has a family to feed etc. It's just the way life works.

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