All Forum Posts by: Jeff S.

Hard Money Lender = Private Money Lender = Bridge Lender = Residential Transitional Lender (RTL, the latest fad term).

Unlike government-sponsored loans, such as those through Freddie Mac and Fannie Mae, there are no consistent criteria among these loans. Traditionally, they are for properties that need renovation, with 6 to 24-month terms, primarily based on the property and the ARV, with a secondary focus on borrower qualifications.

Some argue that hard money lenders are licensed professionals, while private money lenders are like your mom or dentist who lend their own money. This view overlooks bridge and RTL loans — terms used less often.

In reality, there's so much overlap that it’s silly to differentiate. For example, we are licensed, market ourselves, and lend our own money, including from our retirement account. How would you define us? What box do we fit in?

Strangely, some get emotional and feel strongly about this, but most lenders don’t care what you call them. Feel free to use these terms interchangeably. Everyone will know what you mean.

As I look at this, @Beth D., you're paying $475k for the property, plus $100k for the rehab, plus all the holding costs as you perform the rehab. That is, you're paying $575k plus holding costs and potential overages. This is at least 90% of the $625k ARV you stated, or almost full price – for what appears to be a busted project.

The seller must be beside themselves.

If this were a flip, you would obviously be overpaying. I assume rental properties are selling in the area for you to have established your $625k ARV. Not to be facetious, but if the rental income only supports a $625k value, why not just pay the extra 10% and buy one of these properties to cut out the rehab risks and time to complete?

Plus, 60-day balloon financing is a non-starter in my view. I don’t know you (and your profile is blank). Nor have I seen the property. But we have loaned on many busted projects to some very skilled rehabbers. There is virtually no chance you will be able to rehab a gutted property and refinance in 60 days. Six months to a year would be a safer loan.

The good news is you’re putting down $100k on a $475k purchase, or about 20%, and presumably have enough for the rehab. This could be enticing enough for a hard or private money lender.  A good way to find these is to obtain recommendations from the organizers of some local real estate clubs found through Meetup.  They will know the reliable lenders, with the best reputations, who attend their club.

The next day.

It’s a call we get now and again from existing borrowers, which typically starts in a panicked voice, “Jeff, do you have any money?” (I can tell from the tone where this one is going.)

“Yes, what’s going on?” (I already know)

“We just had a lender flake out on us.”

“When do you have to close?”

“Tomorrow.” (Naturally)

“Do you have the purchase contract, escrow instructions, and (most importantly) the preliminary title report?”

“Yes.”

“Great, please email them to me along with the property address. We’ll meet you there in two hours to do a walk-through and confirm your construction estimate.” (We once had a seller’s agent literally laugh in our faces on-site, claiming there is no way we’d be able to fund so quickly, and why are we wasting his time?)

Once back home, I pull comps and confirm the estimated ARV.

I used to have a loan doc template I would fill out, but now we use Lightning Docs. This takes two hours max and the resulting loan docs are sent to escrow.

Our borrower notifies escrow & title and updates the property insurance, noting us as the Mortgagee.

The next morning, our borrower signs everything at the escrow office. Escrow emails everything back to us. We review.

It’s been 24 hours. We wire money to the title.

Deal closes.

(In that one case, I get a contrite and very apologetic call from the agent who laughed at us.)

This process only works when you work with direct lenders (i.e., those who lend from their own balance sheet). Banks and brokers can’t generally work this fast.

Borrower is now a lifelong client.

There is little difference between most first and second position loan origination processes other than the order of recording the mortgage or deed of trust.

In both cases, the lenders will create the loan documents and send them to escrow. This documentation will include lender instructions that specify the loan seniority. For example, we include a statement in our instructions that says, “This loan shall be recorded in first position.” If neither lender specifies this, shame on them, but escrow and title will ask.

You will sign and appropriately notarize all the documents. This might occur at the escrow office or in front of a remote notary, who will send them to escrow, who will send to title. (Obviously, I’m referring to states that use escrow, not closing attorneys.)

Each lender will review the documents for completeness and only then wire their money to title. Once the funds are received, title will record the mortgages or deeds of trust in the agreed upon order to ensure proper loan seniority.

In no order, title will disburse funds to everyone and their brother, including paying off all liens, taxes, escrow, title, notary fees, and so on. The property seller will be paid.

If it’s a refinance, you will receive the remaining funds.

If there is a construction holdback, funds might be sent to a neutral party such as a construction management company that will handle progress payments. Or the lender might hold them back and disburse the construction funds themselves. This is also common. An unsophisticated lender might send all the construction funds to you.

Other than for a refinance, or from an unsophisticated lender, you, or more typically your contractor, will receive funds in draws as you complete your project.

Most, but not all, first-position lenders will only lend a percentage of your purchase price and expect you to wire in some amount of cash as your “skin in the game.” This doesn’t mean you can’t make up the difference with a lender in second position. Some lenders won’t care, we don’t, but it’s the most important thing in the world to others. You’ll have to ask around.

FWIW, on 1-4 unit properties (only), a lender can’t prevent you from taking out a second position loan after the loan is made. They don’t have to make the loan if they know you intend to take out a second, but they can’t prevent you from doing so.

Assuming this is in Colorado, at the absolute minimum, your friend should have a Note and a recorded Deed of Trust. The note is the promise to repay, and the recorded Deed of Trust (DOT) provides the lien against the property. Additionally, we use a Security Agreement, which further ties the collateral to the loan, especially if there is personal property involved, and defines many other loan requirements. I add this because when you refer to "agreements," do you mean specific Security Agreements, or are you speaking generically?

Who determined that "… everything looked solid upfront"? Did your friend obtain loan docs from a lawyer and use a title company to close?

The recorded DOT, and only the recorded DOT, gives your lender friend the right to foreclose. Without it, the note is unsecured and not worth more than an unsecured IOU. DOTs are recorded immediately after the loan is funded, typically through title, not upon default.

Borrowers in trouble are similar to homeowners facing foreclosure and are often in denial. Going dark is not unusual if that's the case. Or they know what they're doing and are taking advantage of your friend's bad(?) process.

Either way, the first thing is to send a demand letter detailing the reason for the default (not answering the phone is not a reason) and the amount owed, with perhaps a 10-day period to bring the loan current. This should be sent certified to all known addresses. After that, it becomes very state-specific. (E.G., In CA, this would be followed by a Notice of Intent to Foreclose.)

Your friend should also speak to a foreclosure trustee. A trustee will be able to explain the foreclosure process in your state at no cost. Foreclosing on a deed of trust is relatively quick and easy.

If she used proper paperwork, which included a note and a recorded DOT, she should be fine whether the borrowers ever respond or not. If there is no DOT, as you seem to imply, she really should speak to an attorney. The same applies if the loans are in a mortgage state.

I hope for your friend’s sake that we are all just misreading what you wrote, Deborah.  Good luck to your friend.

Add the purchase price to the rehab estimate, and together they should not exceed 70% of the ARV. This is the 70% rule of thumb, though you can stretch it to 75% for properties with ARVs above roughly $300,000. Use it only for quick screening only, and always run your numbers in detail. Done correctly, you will predict a profit of about 12%–15% of ARV. As former flippers in the mid-2000s and now private lenders, we consider that a fair profit for you and a safe loan for us.

This rule worked 20 years ago and still holds true today, but don't expect to find properties at 55%–60% of ARV. Lightning strikes occasionally if you're active, but that isn't a business plan. Good deals have always been difficult to find, and "right now" (your words, Kelly) is no exception.

From 2010 until a year or two ago, you could usually count on selling at or above ARV, so we sometimes pushed the rule by 2 to 3 points. Not anymore. Prices today are flat to dropping in most markets, so your ARV estimates should be conservative. You should also expect longer days on market and not stretch the rule of thumb.

We have heard the same complaints for years about how hard it is to find flips, yet good deals still come across our desk. Do not give up hope, Kelly.

The Mortgage Professor is a reliable website for all mortgage-related questions. The articles are well-written, and he provides a wide selection of calculators, including several that address refinancing. Here’s the link: Find a Refinance Calculator.

Good question, @Gia Hermosillo. This was a common concern as the real estate crisis was ending around 2010. The problem was that everyone and their brother was a wholesaler participating in long wholesaler chains, each claiming to be "direct to the seller." We’d go to a real estate club, and three people would stand up offering the same property!!! It was nonsense and a running joke, but common practice then.

As lenders, potential borrowers were afraid to give us the address of a property for which they wanted a loan, fearing we might steal it somehow and give it to another borrower. This was also silly for a few reasons. First, we are looking to fill a pipeline with potential borrowers, all of whom can bring us deals. We don't work for even a few to feed them properties. Their job is to find the deals. Our job is to fund them. Second, the first time we offer someone else's property to one of our existing borrowers, you just know they would wonder what keeps us from doing the same to them? It would be bad business on our part.

Thankfully, those days are long gone. When someone brings us a potential loan, the first things we ask for are the purchase price, repair estimate, ARV, and the property address. I can't recall in years that there has been any hesitancy from a borrower to provide this info. The unwritten rule is that every potential loan is private between us and the borrower. How else could we stay in business?

Some of the large commercial brokers insist on exclusive, non-compete agreements. These are overkill for us. Plus, most deals are under contract by the time they reach us.  If anything starts to smell, we just walk away.

@Ky Perry  wrote:

“Hard money lenders are easier to find since they advertise, but the tradeoff is the rates/fees. A partner will take more trust-building but can lead to repeat deals and better splits long term.”

I'm sorry, but this does not represent financial reality. You should run the numbers, Ky. The typical terms, nationally, for a recent private/hard money loan are around 11% interest-only, plus a few points over 6 months. Run the numbers and you'll see that the P/HML will take roughly one-quarter to one-third of the profit in a sensibly originated deal. FWIW, this happens to be our typical loan.

Another option is to find a partner who provides all the money for the purchase and repair, while you do all the work. The typical agreement in this case would be a 50/50 profit split. Years ago, we flipped houses using this model, so we have experience with both options.

Financially, unless you expect more from your 50/50 partner than just money, such as project management or flipping expertise of some sort, you are always better off borrowing the money.

@Kieran Collings wrote:

“I understand the hard money lender position is more secure in regards to a financial risk position.”

Not necessarily, Kieran. An HML will have to foreclose to recover the property. This could be a long legal process. If you're expecting a 50/50 partner to provide all the money, they should buy the property 100% in their own name already. There would be a partnership agreement between the two of you detailing your respective responsibilities. If you don't keep your end of the bargain, your partner should be able to "fire" you and maintain control of the property, perhaps paying you a finder's fee or nothing at all, since you would be leaving him or her with a busted flip.

@Ky Perry

Funny how the DSCR brokers here, who have no skin in the game, get upset when someone points out that the emperor has no clothes. We heard the same thing in 2006 as the market turned. Instead of addressing the facts in the video, we're supposed to be impressed that someone made 500 of these loans? That's the argument?

We used to hear that the housing market never drops; therefore, it never will. How’d that turn out?

I’m not sure who the video was intended for. Certainly not for the borrowers who take advantage of these loans. Why should they care? Perhaps as a warning to brokers who rely on commissions to keep their resume current? The lenders who own these loans should care, but I doubt Jamie Dimon takes his financial advice from YouTube.

And of course, what the video doesn't mention is that some lenders are now writing 75% DSCR loans. Forget the 1.0+ standard, which at least assumes the borrower can cover PITIA. Now the assumption is they've got extra income just to make PITIA. And that's supposed to be a sound loan?

Do I fault brokers for taking advantage of this? Of course not. But I wouldn’t stick my head in the sand, believing this gravy train will last forever, or get offended when someone points out it won’t.

Hardly clickbait.  Just the wrong audience.