All Forum Posts by: Jeff S.

I usually stop reading a post when I see the word, “Facebook” because I know nothing good will follow. I’m glad you recognize you have much to learn, @Trevor DeSimone, and you seem to have the right attitude.

You need to spend an hour with a good lending and securities attorney. This is not the same as a real estate attorney. Your discussion should include the general lending process in NH and perhaps northern MA, usury, licensing, paperwork, business purpose vs consumer purpose loans (which few here really seem to understand), and anything else the attorney recommends. This is where you will get your loan documents; NEVER from a title company. There will be many of them and they will be state specific. @Ann Bellamy, who lends in your neck of the woods, used to be prolific here and will hopefully chime in.

I strongly suggest you only loan locally and I disagree with your disagreement (Ha!) that internet strangers are the same as local strangers. There is no way you will get to know, like, and trust someone over a phone conversation as you will going to lunch once or twice and looking at a few of their properties with them. We put our hard-earned money where our mouths are on this and it’s the basis for our entire loan process. Of course, we still pull comps, do our own evaluations, and physically walk through every house to confirm the rehab estimate, but the borrower is key in our view.

Over the years, I’ve published our process a few times on BP which you can read in this thread. My post is still about 95% accurate.

“How at risk is my position not being on the fire and hazard insurance?”

If there were a fire, the insurance company would make payment to both the borrower and mortgage holder. If you are not a mortgage holder, payment will go directly to the borrower who can do whatever he or she wishes with the money. I’ve always liked Thailand, but France and Spain are also very nice.

“Can an entity give a personal guarantee …”

Whether an entity or a natural person, whoever is on the note is a guarantor. A personal guarantee is used when you additionally want other people/entities to guarantee the loan. If you made the loan to an LLC you would always want all members to sign the PG in their names plus anyone else you can agree to. The more the merrier.

I hope you have not already wired your money, @Trevor DeSimone. You did not make a real estate loan. You made a completely unsecured business loan to a Facebook “investment group” of some sort. Without a mortgage, you do not have a lien on the property and you cannot foreclose. Without a personal guarantee, you cannot go after anyone’s assets. You are not in second position, which would be unwise in any case, you have no position. At best, if you could afford it, you could sue the company to which you loaned your money for a judgment and then try to collect -- on an out-of-state debt.

A note alone is simply an IOU. It has no teeth unless secured by a recorded mortgage. If you are lucky, you will get paid back. As an out-of-state lender, did you consider the usury and licensing restrictions in Ohio? Did you get a lender’s title insurance policy? Heaven knows how many others like you loaned them money and also think they are in second position. How are you covered on their fire and hazard insurance?

These guys might not have acquiesced to a higher interest rate because you, “Have solid negotiating and people skills.” That's hubris.  I’m sorry, but it's very possible/likely they did it because they hooked a live one. For your sake, I really hope I’m wrong, but this is not how you loan money, Trevor.

“I preferred the relatively guaranteed return within a short time frame.”

What makes you think this loan is “… relatively guaranteed?” And why are you liquidating an entire brokerage portfolio for strangers you met on the Internet? Are there no real estate clubs in NH where you can meet and vet real estate professionals face-to-face as well as physically vet and evaluate the property you might actually own? Have you spoken to a lending attorney to learn how real estate loans are made in general and more specifically in New Hampshire and Ohio?

“Have to put yourself out there!”

No. You don’t. Sorry, but this is just a nonsensical aphorism and not the basis for a business. First, you educate yourself.

I know I’m being harsh and I’m sorry for the cynicism, Trevor. I really hope this works out for you.

Not a day goes by here, @Jim Langdon that someone claims private/hard money lenders can’t lend on owner-occupied properties. Rubbish. Some myths here never die.

The primary use of the money must be for a business purpose. In fact, lending against a rental is not necessarily a business-purpose loan. It’s the use of the money that’s important. I hope in your case that your borrowers are not using the money for personal, family, or household uses.

The Official Staff Interpretations for Reg Z (Dodd-Frank) specify your exact scenario in at least two ways:

- Exempt Transactions

ii. Business-purpose examples. Examples of business-purpose credit include:

1. A loan to expand a business, even if it is secured by the borrower's residence or personal property.

…

8. Agricultural purpose. An agricultural purpose includes … (Too long to quote. Read the statute.)

You should read the entire Section 226.3 but this is pretty clear. Assuming the vineyard is a business and not a hobby, you could make this loan. In fact, we’ve been asked to make loans like this, except for business inventory, and we got the green light from our attorney.

Obviously, you don’t take legal advice from a message board -- and lastly from me. You must confirm with your lending attorney. As importantly, make sure you adequately document the purpose of the loan. Our lending attorney recommends having the borrower handwrite their intended use on a clean sheet of paper upon application. This makes it difficult for them to claim they got confused when they signed all the loan docs at escrow. Also, a UCC filing in case you must foreclose on business inventory.

There’s much more I know your attorney will recommend. You asked a good and well-needed question.

They could hand you a bag of cash, @Nicholas Acosta. Seriously.

These are not conventional loans, which require you to justify your funding sources. There are no rules here except those made up by some lenders, and they are all different. Understand that when you take advice from private/hard money lenders on this board, they are giving you their rules alone. That is, they speak for no one else. Certainly not for us. We don’t care where you get your money and don't check. Thus, be careful of the DM’s. If their message can’t withstand public scrutiny, you’d be wise to be cautious.

The better answer depends upon how secure you want your family to be. If this is just a personal handshake loan, then yes, a bag of cash is truly legal -- though the bank might question the deposit. Ha. Better they do a wire transfer or write you a check. You'd book the deposit as either a capital contribution or a loan to your LLC from your family members and perhaps offer them an informal note explaining the loan terms.

If you want to properly secure the loan, like we do and which I strongly recommend, this will involve a note and recorded mortgage or deed of trust (state specific) and a number of other documents and disclosures, including even a personal guarantee. You don’t get these online or from a title company. They should be obtained from a lending attorney. Your family members should understand what they are getting into and spend an hour with one, so they understand their risks, which are significant, and their options if you default. It sounds like it wouldn’t kill you to sit in on this conversation, as well.

Nothing will forever change a relationship faster than when money is involved – and usually for the worst, so I really recommend against borrowing from friends and family. Lecture over, and I know it won’t stop you, but it’s at least important to make this a formal loan. This forces all of you to act professionally and to also get some education.

Good luck to you, Nicholas.

You presented no numbers, @Anthony Freeman, so it’s hard to be specific.

In general, if you refinance your house at the current 7% ballpark, and then lend the money at 10% plus a few points per year, that’s a 5% annualized spread. If you are in the 40% tax bracket, it will leave around a 3% return. This assumes you are loaned out 100% of the time, which is impossible.

Then consider what would happen if a borrower runs into trouble. Depending upon your state, it could take months to years to foreclose and recover your money. Could you afford to make your loan payments to the bank over this period?

The giant hard money lenders can spread hundreds of millions of dollars or more out over many loans and do well with a 2 or 3 % spread. Of course, most sell their loans. The days of taking out a 3% HELOC and lending the money out at 12 – 15%, which we did for years, are probably gone forever.

Lending is still a great business, but unless you have cash in the bank such as savings or retirement money, or you want to accept investors and run a fund, borrowing money against your home to lend is not only unviable, but it’s dangerous .

Really, you should run the numbers and you’ll get your answer.

Transferring funds from a 401k plan to an ordinary LLC would typically be considered a distribution, @Luke McMullen. There would be no penalties if your family member is over 59 ½ years old, but there could be income taxes due unless the funds came from a Roth 401k plan. I hope your family member is getting good tax and financial planning advice.

When your current company allows it, such as when you quit or retire, or if they allow an in-service distribution, you can transfer your company-held 401k funds into your self-directed 401k plan if you qualify. If you don't qualify for an SD 401k plan, you can generally transfer your company-held funds into a self-directed IRA.

If you choose, your SD IRA can hold its assets in a special purpose IRA LLC that is controlled by an IRA custodian but managed by you. Perhaps that's what you are referring to, Luke? The LLC operating agreement must include references to the retirement plan rules such as restrictions on doing business with prohibited parties, prohibited investments, and much more.

You typically obtain this operating agreement from a company or attorney that specializes in forming special-purpose, retirement plan LLCs. That is, a special purpose IRA LLC operating agreement is not a run-of-the-mill Legal Zoom LLC operating agreement. Don't let your family members make this mistake.

“so if an unlicensed lender wants to trick a borrower into seeing the loan as legit by using Fannie, Freddie or FHA approved mortgage notes and filling in blanks, is that legit use of those documents?”

The highlights are mine.

Lending is not for you, @Martin A Phillips. You don’t “trick a borrower into seeing the loan as legit...” In fact, you don’t “trick” them into anything. Not only is this NOT how you do business, but you will discredit yourself as you’ve done here, in my view.

Though an astute borrower will always ask their lender where they get their money, and especially if they sell their loans, most really don’t care (though they should). You don’t seem to realize that you actually have a competitive advantage in that you will be the lender for the life of the loan and can provide accommodations larger lenders, who either sell their loans or accept investors, can’t. Borrowers appreciate this if you market yourself appropriately.

In a prior post of yours, that I participated in, I believe you indicated you were from Nevada. Here, you absolutely must be a licensed broker and also work from a brick-and-mortar office. In your case, that means using a broker to originate your loans. The last thing you need is to play the games you seem interested in and have a borrower contest your loan. I guarantee a judge won’t look at you as some, “... guy with a trust fund lending money for private mortgages.” Not when you’re trying to trick people.

Instead, try lending with some integrity. Why don’t you find a broker willing to originate your loans for you for a modest fee using their legally vetted loan docs?  (Of course, you realize that the loan docs downloaded from Fannie or Freddie are not a complete loan package. Yes?)  While you’re at it, you might speak to a lending attorney to learn the process in your state. This would include a discussion on licensing, usury, paperwork, and representations.

Sorry to be harsh, but lending is way too easy to play these games, Martin A Philips. I don’t know where you’re getting your advice, but you’re on the wrong track.

It’s called an in-service distribution and it’s completely legal, @Linda Doane. The problem is when your company wrote its 401k plan it did not allow this option. Many companies don’t want you taking money out of your plan because 1) they don’t want the administrative headaches and 2) they don’t want you to make foolish investment decisions (i.e. They are smarter than you. Didn’t you know that?). Thus, other than borrowing $50k max, unless you leave this company, you are likely stuck. Here’s a reference in case you are having a hard time sleeping: In-service Withdrawals

If you have self-employment income and no full-time employees, you can generally open a self-directed 401k plan and contribute up to $66k tax-free or tax-deferred in 2023 for you and your spouse, each!!! Taxes reliably take the greatest percent from any investment and should be deferred or avoided as long as possible.

Years ago, I flipped houses through a self-directed IRA and we currently own rentals and lend money through our SD 401k plan. We are fully aware of where the funds must come from if an A/C unit goes out and we don't do any cleaning ourselves. Like all real estate investments, owning property through a retirement plan doesn't mean you don't plan for contingencies. Now that would be horrible. This It one of the last legal tax loopholes the government allows and something everyone should take advantage of if they qualify. Unfortunately, there is a contingent of investors on this board that flat-out don’t like retirement plans and have all the convoluted justifications.

I would have also eliminated the last clause in their definition of a Private Lender, striking the words, ”… all loans are made to a formal corporate entity (e.g., corporation, LLC, etc.) on nonowner-occupied real estate.”

In spite of the conventional wisdom on BP, and surprisingly at the NPLA, Private Lenders can absolutely make loans to individuals and to owner-occupants. With all the lending attorneys in this organization, including John Hornik, it makes me wonder who vetted these definitions.

It’s interesting, as well, that there is no definition of a hard money lender in their glossary. I guess the Ministry of Truth is trying to kill the term. I would have titled the definition: Private Lender AKA Hard Money Lender, since there is no legal difference. They know this.

@Sebastian Marroquin

Here’s some advice from an experienced investor who has been going to real estate meetings regularly since the mid-2000s.

• Free is not the goal. We want content and the opportunity to network. With exception of the sales-pitch-heavy, for-profit real estate clubs, everyone understands that there are expenses associated with a meeting. Charge a nominal fee. Perhaps $10 or $20. Few except those you probably don’t want, will have a problem with this. It will also separate the wheat from the chaff.
• Advertise on Meetup. There’s nothing wrong with advertising on BP, but if you only do it here, you’ll only attract those who frequent this site. There are a few other BP-related clubs in LA that I have attended. Almost all attract newbies with no experience. What’s the point of going to a real estate club to meet others who are brand new and have little to offer? I quit wasting my time at those.
• Meetup will also provide a meeting notice attendees can add to their calendars. BP doesn’t do this. I suspect many here who said they would attend, forgot because they had no calendar reminder.
• Arrange a speaker. You shouldn’t have any problem finding other investors willing to educate others. Once you start attracting members, the topic won’t matter so long as it’s varied and of high quality. Make sure to leave plenty of time for networking before and after the speaker’s presentation.
• NO SALES AT THE FRONT OF THE ROOM. Leave this to the for-profit clubs that attract those on the real estate speaker circuit. They will contact you. Tell them to take a hike.
• Don’t expect to make money running a real estate club. Ask anyone who does this. You will gain instant credibility standing at the front of the room and many will bring deals to you. That’s your main benefit.
• Attend Christina Suter’s FIBI real estate club, also in Pasadena, to see how it’s done correctly. Talk to Christina.
• Be patient. It takes time to grow a real estate club.