All Forum Posts by: Jeff S.

True, but my favorite novice quote is, “I don’t care if I make money, because I’m doing this to learn.”

It’s not a hard rule, @Joshua Ruse — it's a rule of thumb. A guideline. Something you can use to quickly screen deals. If you insist on using 70% in Southern California, your offers will be so low that you'll never buy a property. Fortunately, for homes with an ARV above about $250K, which is now basically all homes in Los Angeles, you can use 75% instead.

This rule of thumb says: the purchase price plus rehab costs should not exceed 75% of the ARV. In other words, pay no more than 75% of the ARV minus rehab costs. If you follow this, you'll typically earn a profit of around 12% to 15% of the ARV. That's a fair return in our view, and it's how we structure our loans. For both our protection and that of our borrowers, we won't fund a deal unless it meets this standard.

This rule of thumb assumes you're using private/hard money financing and paying a real estate agent to sell the house. If you're self-funding or selling FSBO, you can afford to pay a bit more. Use the rule of thumb but always run the numbers in detail. If you don't know how, call a local friendly HML for their spreadsheet.

For some odd reason, there are those on this board hate this method. Some advocate deciding their desired profit, estimating all expenses, and backing into an offer price from there. That’s fine — but it doesn’t change the math.

We always run both approaches — using our spreadsheet to estimate every cost — and they lead to the same place: if you want to earn 12% to 15% of the ARV, you'll end up paying about 75% of the ARV minus rehab.

Fair warning: once you exceed 86% of the ARV minus rehab, you'll likely break even — if you're lucky. Run the detailed numbers and you'll see. At 80%, your profit drops to around 6% of ARV. Only the desperate or inexperienced are paying that much. Don't be one of them and don't let yourself get desperate.

Prices right now in Southern California are flat to declining. Rehab costs are increasing. There’s no rush. Don’t push the numbers, Joshua.  You’re not immune to losing money or working your butt off for six months to earn minimum wage.

It’s much like Assets Under Management (AUM)—the overused finance term beloved by the fake-it-till-you-make-it crowd. Many here could overleverage themselves and buy a 200-unit apartment building tomorrow. This doesn’t demonstrate sound judgment or the ability to run a business profitably or efficiently.

More impressive would be citing your Equity Under Management—a term you don’t hear as much because it actually reflects success. Or better yet, your ROE, which shows you’re operating efficiently and generating real returns.

Owning 200 doors just shows you know how to spend money, not earn it.

“… I can understand charging a fee upfront as a small commitment to not shop the deal.”

I can’t. Unless you’re doing large commercial loans that require you to invest large sums for your due diligence, most sophisticated borrowers are wise to upfront fees, which are often associated with pump-and-dump scammers.

If you find your borrowers continue shopping for better deals after they’ve given you the go-ahead, I suggest you work on your marketing and qualification processes. What’s making them walk? Repeat borrowers, respect, and mutual loyalty build businesses. Churning through upfront fees to keep a borrower from walking is folly.

I’m not sure what a basic contract is, @Steve Balinski. Our loan package contains approximately 20 documents. The issue here is that your loan amount is so small that you won’t be able to cover your expenses, even though some will be paid by your borrower.

Lightning Docs charges $500 for a set of loan documents, plus a $500 annual fee. These documents will be no-nonsense, without explanations, and could be missing broker- or state-specific disclosures. If you want to understand them, you’ll need to pay a lawyer, and it’s not unreasonable to expect costs around $2,000. This is not the right way to get into lending.

$30,000 is a small sum and might lead you into second-position or unsecured lending to undercapitalized borrowers. This includes loans for earnest money, down payments, or closing costs. These types of loans are extremely risky and can easily wipe you out. You do have another option.

Fortunately, you live in Illinois, which is one of the few states that allows fractionalized or multi-beneficiary lending. These loans enable multiple individuals or lenders to be listed on a single loan as beneficiaries, sharing the same debt position and owning it pro rata.

In this case, your name and the names of the other investors would appear on the note and deed of trust (or mortgage), along with your percentage ownership—totaling 100%. Your $30,000 would be combined with contributions from others into a larger loan that could fund an entire property, including rehab if needed. A knowledgeable broker could arrange this professionally, at a safe loan-to-value (LTV), ensuring the quality of the borrower and the property, with vetted paperwork, and recorded in 1st position. This would allow you to participate in a relatively safe loan with no additional expenses on your part. You’ll also see how the process works.

Call some local brokers or your lawyer for references. Additionally, real estate clubs are a good way to connect with people who offer these kinds of opportunities.

You’re being blinded by the promised interest rate, @Joshua S., and your list of protections requires further investigation and significantly more paperwork. Sorry, but paperwork is what protects you. Welcome to lending.

A personal guarantee is not worth the paper it’s printed on without substantial assets backing it up (and your willingness and wherewithal to obtain a judgment, as mentioned). You need a loan application from your borrower. Here, they declare their assets and liabilities, banking info, and SSN.

A bank statement will confirm where they bank. The value of this account is irrelevant. You want the bank name on a bank document.

The notary who stamps the deed of trust should also send you a copy of your borrower’s driver’s license. Do not accept this from your borrower.

In addition, since your borrower claims substantial deals around the country, he or she should easily be able to provide both purchase and sale closing statements to prove this. All of the above can form the basis for your interview with this investor. We prefer going to lunch. Make sure you prepare a list of questions.

Not mentioned in your list is being named on the borrower’s property insurance as a mortgagee and having them obtain a lender’s title policy for you. Title will (better) record your deed of trust and should provide you with a preliminary report, which you will have to read. These can be daunting, especially the exceptions. I’ve read many and still occasionally need the help of a lawyer. In addition, do you know what title endorsements you want? No? Lawyer time.

Title will also need lender’s instructions, which will define your insurance requirements and lots more, but most importantly, it will specify your loan position. In this case, you claim you will be in second position. Some nefarious borrowers stack many small liens up at once, and you could unknowingly be recorded in fifth position. Protect yourself. (I’m a fan of fractionalized loans, but that’s another topic.)

Last—and these should be first—a 25% annualized loan is almost certainly usurious. Unless you have an exclusion of some sort in your state, your loan could be illegal and easily contested. Similarly, make sure you obtain hand-written documentation from your borrower explaining the use of the money and confirm that this use is for a business purpose. Claiming a legitimate business-purpose loan was really for a consumer-purpose is currently the most popular lawsuit in private lending.

None of this is worth the whopping $1,250 you will make on a $10k loan at 25% over 6 months—and that’s before taxes—but this is up to you, Joshua.

You can—and should—be able to answer this question on your own, @Sarah Steinhaus, because it’s location-specific. The answer lies in the comps. Assuming the renovation is “thorough and well done,” as you’ve said, there should be comparable properties in the area that indicate what buyers are willing to pay.

If 125-year-old, well-executed homes are selling nearby, then that’s your answer. If there are none—or if such homes are typically torn down and rebuilt—then that tells a different story.

Some cities have entire neighborhoods of restored or historic homes. Bungalow Heaven in Pasadena and Hadley-Greenleaf in Whittier are examples of highly coveted districts where many buyers are willing to pay a premium. Even outside these specialty neighborhoods, one-off, well-restored, turn-of-the-century homes can attract strong interest.

Of course, what works in one market may not work in another. The only way to know is to study the comps and speak with local agents. Call a few who have sold homes similar to yours and ask what buyers are prioritizing.

My only caution—and only slightly off-topic: Be careful with homes designated as historic properties. In our experience, local historic committees or societies—who care only about preserving the property—can be difficult, with strict rules and often unreasonable demands. After learning this lesson too many times, we no longer offer loans on such homes. Speak with your local building department to find out if your home carries this designation.

I know it’s hyperbole, but perhaps lines like “Banks could take weeks” and “Hard money lenders can mean forms and waiting” exist because they actually care whether you're qualified—before they indicate they’ll lend you money or let you mislead sellers into thinking you're legitimate, under their name.

If someone is truly qualified with the lenders behind your Chrome extension, why wouldn't they just pick up the phone, request a POF letter and a real bank statement, and skip the $250 junk fee? If your extension hands out POF letters to just anyone—qualified or not—then let's call it what it is: a scam.

Websites offering these kinds of “proof” letters are a dime a dozen online, usually with no verifiable bank statement and zero credibility. It’s the kind of thing no serious professional should be associated with.

I disagree with @Jay Hinrichs. The chance that they are scammers is not 97%, it’s 100%. (Just kidding, Jay. 🤣)

Real lenders get their fees when they perform, at closing. Though this firm says their up-front fee is refundable, what do you think the chances are that they will actually honor this promise? I’ll say 0%.

Real lenders use professionals, including legitimate title and escrow or closing attorneys, as well as vetted documentation. This is in your interest as well.

Real lenders secure their loans with a lien against the property so that they are assured they will be paid back if for some reason, you can’t perform.

You found nothing more than a pretender lender, @Robert McClung III. If you ask for references, who do you think you’ll be speaking to?

The last thing you want, @Shane Bishop, is to make an aggressive offer on a property—perhaps a 10-day non-contingent close—and then scramble to find the money, all while worrying about your EMD.

Similarly, spending a lot of time preparing various financial statements, business plans, applications, and lists of every property ever owned could turn into a waste of time. After you’ve spoken to a handful of private/hard money lenders, you’ll find that, unlike conventional lenders with standardized minimum requirements, they will be as varied as fingerprints. Don’t invest time in this yet.

Call a handful of P/HML's and ask them about their loan criteria. Will they lend on STRs and under what terms? What are their physical and financial expectations of the property? What do they expect of you in terms of your background and experience? What documents do they want to see from you? Appraisals? Credit? POF requirements? How long do they typically take to fund? This list goes on, but you'll see that everyone's process will be different.

Lastly, since this is a business based on relationships, getting to know your lender will go a long way toward the potential accommodations you might need to obtain a loan. We meet and get to know every borrower. You might consider inviting potential lenders to lunch.