Top 10 Takeaways - Podcast 9 Hard Money Lenders with Ann Bellamy

BP Podcast 009: Using Hard Money Lenders to Grow Your Business with Ann Bellamy

Edited by Brandon Accomando

Top 10 Takeaways - BiggerPockets Podcast 009: Using Hard Money Lenders to Grow Your Business with Ann Bellamy

1. What hard money is, when to use it, and when NOT to use it.

People think that hard money has to do with being hard to get or hard arsed as they say. But it actually relates to the asset which is a hard asset. So it’s a lending decision that’s based on the hard asset as opposed to your credit score or your income or something like that. Well it used to be that homeowners would use them when they couldn’t get conventional financing. That has largely gone away. Most of the time now it’s real estate investors whether they’re buying a single family to rehab a distressed property and resell it or someone that is buying say a distressed multifamily that needs to be rehabbed and stabilized with new tenants. Small commercial bridge loans, large commercial bridge loans, that sort of thing also to real estate investors. I see real estate investors using it and maybe not on their first deal because maybe they go to their Aunt Edna or their buddy that is also interested in investing. I see it when people realize they can only do one deal at a time with their own money and they want to ramp up their investing. I see a lot of people use it because they only buy distressed properties and those maybe won’t qualify for conventional financing. And I see people use it even if they do qualify for conventional financing, but they need to close in say 15 days or 12 days or whatever. And a conventional lender is never going to close that quickly. I do have a few fairly strong feelings about when not to use it and one of those is as a foreclosure bailout. I strongly feel that if you are in a foreclosure situation whether you’re a home owner or a real estate investor, that using hard money to bail you out is just going to get you in a little bit deeper. So I strongly feel that you should not use hard money as a bailout and I also feel you should not try to use it on a property you’re going to live in. Current hard money lenders really don’t want to do those kinds of loans anymore. They’re not legal in many areas and you really shouldn’t be trying to get that sort of loan for a primary residence.

1. Why Rehab properties in rural areas is a bad idea…

I try to stay away from rehab properties in rural areas because there are not a lot of end buyers. Or if it’s a multifamily, there are fewer tenants, so the exit strategy is more difficult to implement. So even though I’m in New Hampshire and 98% of New Hampshire is rural, we do have two or three tiny cites and I stay away from the rural areas.

1. Exit strategies and the new Real Estate Mini Bubble.

Well the first most important exit strategy is having one. And that sounds kind of strange but it’s amazing how many people don’t think ahead to how they’re going to get out of the loan or get rid of the property. Especially when it’s a six-month loan if you don’t have at least two exit strategies lined up, you could find yourself in trouble. So the first most important thing is planning ahead and having an exit strategy. I like to work with rehabbers that are buying low enough so that they can underprice their property to the market that is our best and well-liked exit strategy because those properties sell quickly. Most of my best borrowers are embarrassed if they hold onto the property beyond two weeks. So if they’re getting multiple offers the first weekend because their property just pops and it’s underpriced to the rest of the properties that’s my favorite exit strategy. And most of them have backup exit strategies such as taking it off the market, putting new photographs up and changing the price slightly. Or even in a couple of incidences I’ve had a couple of investors that have decided to rent their properties out long term and they get conventional financing. And we’re seeing the same thing in the Boston area because even though I work in New Hampshire also it’s the suburb of Boston. And all of the REOs that are on the market have multiple offers. If you don’t get your offer in within the first day or so you don’t have a chance. They’re much preferring cash offers and banks nowadays do not look at hard money the same as cash. So, some of the investors that don’t have big fat bank accounts, are having trouble getting their offers accepted. It’s kind of pretty much everywhere. And it worries us a little bit too, it’s sort of another little mini-bubble.

1. Typical hard money rates and fees – and how you can lower them.

Well I don’t think there is such a thing as typical rates and fees because it varies so much from geography to geography. California I understand is very competitive and they’re seeing hard money rates down as low as I guess 9% sometimes 8.5%, very few points. And we have a different situation here in the North East. Rates in the North East are in the 12-13% range as a rule, occasionally 14 for some of the tougher areas and points range anywhere from two to four as rural, it is a little bit deal dependent and deal dependent means the geography of the property and the experience level of the borrower and the amount of skin in the game. So rates and points vary by geography and by particular deal. I do indulge in a little bit of relationship lending so the borrowers that have come to me that have shown that they know what they’re doing, their rates get progressively better the more they show me, the more they are willing to put their money where their mouth is and the more I know they will deliver and they have the cash reserves to get themselves out of a jam if it happens.

1. Brandon’s first mistakes with Hard Money.

Brandon: When I first started on my very first flip and I can illustrate that point perfectly, I didn’t know what I was doing that much. It was in 2007 I think and we all know what happened then. So I bought this house it was like best deal in the market about $52,000, I put about 40 into it and I had a hard money lender fund the entire thing. I mean the repairs, the purchase price everything because I think hard moneylenders were a little bit more loose back then. So I had roughly 90 close to 100 into it by the time I was finished and I put on the market at 140 to sell. And that was my only exit strategy I mean it never occurred to me that I might not be able to sell it. And the market started to drop and drop and drop and we lowered our price and lowered it. And we were down to I think 110 or 115 and still wasn’t selling it. And we tried for six months and I mean like I had no idea what to do because I had no exit strategy. I thought the guy was going to have to take it back or he was threatening. I mean it was a bad situation because I didn’t have that exit strategy. But that’s when I discovered Creative Finance.

1. The best place to find Hard Money Lenders (hint: try here).

Well I think a lot of people go to the internet and they Google hard money and they see a quadrillion listings and they end up at one of the either national companies or the websites that have sprung up lately about they sound like they’re hard moneylenders but they’re in fact just an aggregate site or something like that. The best way to find hard money in your local area is locally. And so what I feel that you should use directories, BiggerPockets is good example where you break it down by location. And then talk to people in your local area about those hard moneylenders. So go to the rears, ask for references of lenders that maybe other investors have used. Talk to other investors maybe, think courthouse steps where a lot of guys are bidding on properties. But I think it’s important to use for the most part lenders that are mostly sited to your projects because they’re going to be an additional resource for you number one, because they know the market a little bit. And number two, they’re not having to hire appraisers from out of the area, they’re not having to raise their rates compensate for lack of market knowledge. And they can sometimes stop you from making a mistake if they know something that you don’t. So asking around at rears is probably the first place I would start.

1. How to get your hard money loan proposals accepted every time.

Okay well if you’re coming to me personally, I do have an application on my website that I ask that you fill out. It’s basically a spreadsheet and it aggregates all the information into one place. And that includes all of your contact information. So if you’re going to someone else; I’m going to talk to everybody that isn’t going to me maybe. If you’re going to somebody else, you want to provide that lender with all of your contact information; how to reach you, where you live, the name of your company, your email, your cell phone et cetera. If you have an attorney, you should provide that information also that’s important. Then you want to provide all the property information. So any deed references, any tax map references, provide maybe the tax card from the website, the deed if you get a pdf of it or something like that. But the most important thing is comps to support the after-pay value of your project. And the rehab budget of what you’re going to do to the project, it does not have to be down to the bucket of joint compounds. You don’t have to have to have it that detailed. But you should have an idea if you’re going to put in a new kitchen how much that kitchen is going to cost you. And you should be able to document those expenses such as kitchen, roof, landscaping, a budget by line item sort of like that. And be able to put that in a coherent version that makes sense to a lender. And a summary, what’s called an Executive Summary in the world of commercial lending that outlines what you’re going to do to the property and how you’re going to sell it. So first of all you’re acquiring it via short sale, via REO, via probate sale whatever way you’re acquiring the property. What you’re going to do to it and how you plan to either sell the property or refinance out of the hard money. And you summarize not only what you’re going to do to the property as far as change just like adding a master bedroom or something like that, but you should also talk about your marketing for how you’re going to sell it and the process if you’re going to refinance. Say you’ve already gotten a pre-approval for a finance. So basically the rehab budget, the property information, the executive summary, the purchase agreement, in whatever format it takes in your particular state. And frequently photographs of the property inside and out, so the lender can get an idea of what sort of condition it’s in before he or she goes out to the property.

1. Which comes first: finding the hard money lender or the deal?

You should be scouting around for hard moneylenders, you should be talking to people, you should be getting references. You should be having conversations if the lenders will talk to you, a lot of lenders won’t talk to people that don’t have a deal. I spend a lot of time at local networking meetings talking to people that don’t have deals and making myself accessible so that they can have time to talk to me even when they don’t have deals. At the same time, a hard money lender is not going to commit to something that doesn’t exist yet because it’s deal based it’s not person based. So you need to have your property lined up and at least getting ready to come to an agreement as terms. At the same time that you’re deciding who you’re going to submit an application to in terms of who your hard money lender is going to be. And that doesn’t have to only be one person because you may not be sure that your lender of choice is going to do the deal you want. So it’s not uncommon to be shopping around.

1. Starting a local ethical real estate club to build your brand.

Okay well what I did was I partnered with a couple, three actually, rehabbers in my area that are very experienced, very knowledgeable and had a high level of integrity. And we formed this group and it is based largely on the BiggerPockets model actually because we do not allow advertising, we do not have selling speakers. We don’t have membership fees, we’re talking about sponsorships but we don’t have them yet. And basically we are a free networking group simply for the purpose of having us all do more deals. And one of the things that I found when I was involved with some other local real estate investor groups whether it was a nonprofit or another one that I founded, is the person standing in front of the room that is the leader of the group becomes the go to person for many different types of deals. And that can be very profitable. So I liked that. So that’s part of why we founded this group, it’s for us to do more deals but we found that dealing from a mentality of abundance instead of trying to keep everything to ourselves just exponentially increases the network and we’ve had huge response and huge attendance to this perspective. And everybody in our area is very excited about The Black Diamond.

1. How to become a Hard Money Lender.

Okay the laws are an important part of it and I do want to say that I made a lot of mistakes when I first did my first few deals. And sometimes I just got lucky as many real estate investors do. They jump in, they do a deal, they make some money they get lucky and find out afterwards all the things that could have bit them right in the butt and they didn’t even realize it. The first thing is if you’re going to do some private lending and I’m calling it private lending as opposed to institutional whether it’s low rates because it’s to your cousin and your nephew or whether you decide that you want to lend with a hard money company. You need to talk to a good real estate attorney who is knowledgeable in the private lending space. And I don’t mean just a real estate attorney that does closings I mean someone that specifically does private lending closings and works with a lot of private lenders because the laws relating to private lending have changed significantly in the last few years. There are mine fields out there and you need to know what to do and what not to do. And stay away so that you don’t end up on the front page of your local newspaper as the attorney general’s proof that they’re doing their job. So you want to stay away and I’m not saying talk to your attorney so that you can side step those issues and find a way to do them legally I’m saying stay away from those issues. Sometimes you just don’t even know what those issues are when you first start out private lending. The second thing is that you need to, I recommend that if someone is going to start as a rule the first loans that they should do should probably be to someone that they know, whether it’s a real estate investor that they know in their network or maybe a family member or that sort of thing. But if you’re part of a real estate network and you know other real estate investors and you want to lend, it should be somebody that you maybe think is already successful and you know that they have successfully completed a deal. So at least if you know the person and the deal goes south, you’ve got some common ground there to work it out and make sure that it comes together for both of you and that you don’t both get hurt. Lending to people that you have no background on, no knowledge of, I’m all about relationship lending. I lend to people all the time that we don’t know but we form a large network and get to know people and check people out through that network. So I think that’s the safest way to start, it doesn’t mean that you don’t progress to doing loans with people that you don’t know but certainly to start with it’s a good place to start. And work with someone either a broker or hard money company that can bring you deals that they’re going to work in your behalf and not present the deal as a typical mortgage broker might that well excuse me for saying this. But in the olden day a mortgage broker would present a deal in the best possible light to make the borrower look as clean as possible even if he knew they weren’t. And that’s not who you want to work with.