Note-on-Note Financing: How are HMLs Hypothecating Paper with Bank Lines?

Question

I know a local hard money lender who is using a pretty awesome strategy, and I’m trying to figure out how he actually pulls it off.

Basically, he lends his money out to flippers at 11% and 2 points. Once the deal is done, he takes that loan to his bank, and they hypothecate the loan / they lend him money against the note at 7%.

So he gets his cash right back to go fund the next deal, keeps the 2 upfront points, and pockets the 4% spread every month on the bank's money. It’s a genius way to scale without running out of cash.

I get the basic idea, but I have no clue how to actually set this up in the real world. Has anyone here done this?

* What kind of banks actually do this? Local community banks? Credit unions?

* Who do you even talk to at the bank to pitch this?

* What do they need to see from you? Do you need a massive net worth or years of lending experience before they'll even talk to you?

* How much of the loan do they actually cover? I'm assuming they don't fund 100% of the note, so how much of your own cash gets left in the deal?

If anyone has moved from just lending their own cash to leveraging bank money like this, I’d love to hear how you got started.

Rick Pozos · Answer

I have NOT done this, but this is exactly how banks work. They leverage the leverage that they leveraged. Yes, when car notes or house notes go bad with the bank, they are in trouble. Thats why they have to have a 10,000 loans so when 50 or 100 go bad, it's not that big of a deal.

For hml you would have to have that relationship with the lender, great credit and plenty of assets at the bank and lots of net worth.

I know another investor who would purchase a property cash, rehab it, sell on owner financing and use the loan as collateral for more loans. Same type of situation.

Jay Hinrichs · Answer

these are just guidance lines and how many HML work..  although its not dollar for dollar the bank is only going to lend a certain % of the new mortgage generally no more than 60 to 65%  so the lender still have to have their own cash into the deal but they do get a substantial amount back. I had 5 of these kind of lines pre GFC they were very common.. U had to be in the business though not just walk off the street with an idea.  And you needed the cash so for us for each 1 mil in cash we had we got a 4 mil dollar line we could use for this lending activity.  Each bank was different one bank wanted to actually record an assignment the others just took the note and the alonge and the assignment and put it in their vault so public did not know there was secondary financing.

On one offs you can hypothicate notes I did that a lot in my timber days  Log the land sell said land on contract then hypothicate the note so I could go buy more Timber land and repeat the process.. Did this from basically the CA OR border to about Castle Rock in WA .. but my main counties were Yamhill Clackamas Washington .  Jackson and Josephine and a few in the Eugene area..  Fun business that logging business.

Mitch Messer · Answer

What happens in the event the flipper stops paying on the note, because the bank that made that 7% loan is still going to want their monthly payment?

This is the kind of "genius" we saw back in 2007, when so many couldn't imagine a world where housing prices ever go down.

Like any high-leverage scenario, this sounds like a sweet deal ... until it's not.

Mike Grudzien · Answer

Have you ever seen 3 card Monte?

Note-on-Note Financing: How are HMLs Hypothecating Paper with Bank Lines?

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