All Forum Posts by: Jeff S.

I see you’re in CA, @Blake Carlile. You must be licensed in CA to make loans secured by CA real estate. Even if the loan is out of state, where you still might need a license, as a private lender you shouldn’t be accepting loan documents from a borrower. Trusting those to whom you loan doesn’t mean they necessarily understand lending, even if they are well-intentioned. Last, never be pressured to wire money – especially when you’re uncomfortable.

Protect yourself, Blake. You need a lending lawyer (not a real estate lawyer) to provide a complete loan package for this deal and to explain the law to you. That you only mentioned the note is troubling. Why didn’t you ask your same question about the deed of trust or mortgage? Additionally, and in no order, are there lender instructions, a use of funds statement, personal guarantee, 1003, and many state and federal disclosures?  State-specific but these would be provided to escrow, title, or the closing attorney who would process and record them as appropriate. Similarly, have you reviewed the title prem as well as the fire and hazard policy to ensure you’re covered as the lender?

I’m not trying to make this sound complicated. In fact, it’s crazy easy after a loan or two and takes very little time. Your post simply suggests you need more experience and perhaps some professional help before you send any money.

We’re private lenders and have been lending our own money to local house flippers in southern CA for a long time now. It’s always blown my mind that for any loan, the only signature required of us is at the bank to authorize the wire transfer. That even assumes we don’t initiate the wire transfer online. Unless there’s something state-specific, lenders neither sign the note nor any other lending documents except for a payoff demand letter when the loan closes.

Protect yourself, Blake. And good luck to you.

To clarify, @Brian Orr, it sounds like you want to transfer your traditional Roth IRA to a custodian that handles self-directed Roth IRAs. Yes?

Since IRAs are regulated at the federal level, it doesn’t matter what state your custodian is in. You will never visit them, but be careful. Many self-directed retirement companies are administrators and want to give you the impression they are custodians. They are really middlemen who will handle your money and then pass it on to a custodian in the background.

Custodians are highly regulated. Administrators are not and there have been issues in the past with embezzlement. Maybe not perfect, but you can tell if you are dealing with a custodian rather than an administrator because they will usually have the word "Trust" in their name or they will be a bank or brokerage. If it's not clear to you, then ask, and insist on a clear answer. Also, some companies, usually brokers, say they offer self-directed IRAs but limit you to stocks, bonds, CDs, and maybe their mutual funds. Also, ask about fees.

Fees are how these firms make their money and some can be substantial. Some IRA custodians charge by the transaction, some charge by the total value of your account, and some by both. All publish their fees online so you can use a spreadsheet to determine the lowest cost solution. This will obviously be personal and depend on your available cash and investment strategy.

For example, if you are flipping houses and have a lot of relatively small dollar transactions, then pick a company that charges by the value of your account. If you expect to do relatively few higher dollar transactions, such as lending money, you might pick one that charges by the deal, etc. What works for me, might not work for you, so be careful when others recommend a specific company.

Last is service, which really only comes from experience and reputation. After you’ve narrowed your search and selected a few companies that fit your style and investment strategy, you might post a few names here asking about their service. Also, ask around at some of your local real estate clubs, where you’ll find others more aligned with your new strategy.

None of this is difficult, Brian, but as you can see, there is more to choosing a self-directed retirement plan custodian than asking for a few names.

Good luck, to you.

It’s not just a personal guarantee that would help, @Brian Garrett. Were there lender instructions included in the loan documents? These would typically specify the position of your loan and how it was to be recorded. For example, ours say, “The deed of trust must record in 1st lien position on or prior to the disbursement date noted above.” This really says four things:

1) There must be a deed of trust (or mortgage in your case).

2) It must be recorded.

3) It must be recorded in the position you agreed to (1st position in this case).

4) This must happen before the date shown.

Lender instructions will be signed by the borrower and escrow, or I suspect the closing attorney in IL, placing them on the hook as well as your broker. For this reason, I would recommend a lending attorney. This is not the same as a real estate attorney, who might do evictions today, closings tomorrow, and easements the day after.

A lending attorney will know what documents should have been included to protect you and what to look for in those that were. A larger firm will have all sorts of specialists including someone who specializes in debt collection. I can recommend a large lending law firm that works nationwide but local is better. With you in CO, the property in IL, and you didn’t mention the location of the borrower, I wouldn’t even guess on jurisdiction but start in the state the property is located. Loan docs are generally state specific.

Call some of the larger HMLs in IL area and ask which lending law firm they use. I bet you’ll hear the same few names over and over. An initial consultation shouldn’t cost you anything.

Not trying to beat you up but I’m interested in lessons learned. How did you get into this? Did the flipper recommend the broker? My head swirls with thoughts of fraud and conspiracy. If they are active, rest assured you are not alone. You might contact some of their other lenders to see how they are handling the issues. For all you know, there is another law firm already helping with the same problem.

Also, since this borrower is/was active on BP and you’re using your full name, be careful what you share here. He or she and their attorney will absolutely read this.

Indeed.  This sucks.

They are associated somehow with Sherman Bridge Lending. I'm aware of two individuals who paid NWA's $10k non-refundable EMD with the expectation they would receive a loan from Sherman. Both times, Sherman pulled out just days before closing and left the buyers hanging. In both cases, I believe NWA kept the $10k.

Were these buyers qualified for a loan? Should NWA have known? Who knows, but the opportunity to keep a $10k non-refundable deposit when your partner decides not to fund is a slimy business model in my view.

Separately, I had a very friendly conversation with one of their reps some time ago and we discussed pricing. I told the rep (who honestly didn't look old enough to shave) that we won't lend on a property if the purchase price + repair is more than 75% of the ARV. He all but laughed and said they were closer to 85%. If you add closing costs and misc. expenses, that's basically ARV with no rehab as @Michael Evans noted above.

Overpriced homes and a slimy business model are a company you want to stay away from.

It looks like you are in Kansas, @J.C. Martel. I believe Kansas is a mortgage, not deed of trust state. Where are you lending?

Private loan documents involve a lot more than a note and a mortgage or deed of trust. These include various state and federal disclosures, 1003, personal guarantee, a use of funds statement, and a few others. Some documents are legally required, and some are not. Some are also state-specific. Plus, you must also consider lenders title and fire/hazard insurance requirements which you didn’t mention but I hope are included in your recent loan.

You get your loan docs from a lending attorney (please, not a title company). Understand that a lending attorney is not a real estate attorney. Call some local hard money lenders and ask who they use. Lending attorneys are as rare as hens’ teeth and you’ll likely hear the same few names.

You're doing this as a business so it's super important you develop written lending criteria. For example, and this took time, but we have an email we sent to all prospective borrowers. It defines the types of properties we lend on, how we define a good deal, location restrictions, etc. It also defines borrower requirements such as minimum experience, type of experience, and financial requirements. Last, it addresses the financial aspects of our loans such as points, interest rate, LTV, loan duration, etc.

Your lending criteria will change frequently at first and then very little over time. It’s the blueprint that keeps you on track and from making deals up on the fly, which is dangerous. Keep it narrow and simple.

Good luck to you, J.C.

Buying your first property by committing mortgage fraud suggests to me that real estate might not be for you, @Account Closed.

Where did you find a broker willing to play this game?

If the property is reasonably habitable and you really and truly intend to live in it during the rehab, there are several ways to do this including a 203k loan or conventional.

There are a lot of ways to make money in real estate honestly. I’m not sure why breaking the law appeals to you.

If the difference in interest rates between a 203k/conventional loan and a Private/Hard Money loan means the difference between a profit or loss, you bought the wrong property.

There are a few ways to do this, @Parker Shoaf. Traditionally, when someone is paying all the costs, i.e. purchase and rehab, and you are doing all the labor (acquisition, rehab, selling, etc.) then you would split the profit 50/50 as a partnership.

Your partner would buy the property in an entity he controls 100% and there would be a partnership agreement between you and that entity. Don’t forget, he’s taking all the financial risk. If you are not able to perform, per your partnership agreement, the entity could “fire” you and perhaps pay you a finder fee of some sort (or nothing since you’d likely be leaving him with a busted flip).

If the deal goes as planned, you would split any profit from the sale after all of his costs were subtracted.

On the other hand, your partner could fund the purchase to you as a private loan using professionally prepared loan documents obtained from a lending attorney. In this case, you would own the property 100% but with a first position lien from your lender. He or she could include the rehab costs in the loan, you could pay for them yourself, or you could borrow those funds using a second mortgage/deed-of-trust from someone else.

You would make monthly payments to your lender(s) or pay everything back at closing, as negotiated into your loan docs. Here, your lender would be entitled to his interest (and points if he’s sophisticated enough to require them) and you would keep the remaining profits.

Only about 1347 variations on this, but those are the basics of an equity interest and a debt interest in a flip.

Just so you know, it typically works out that a hard money lender will end up with about 25% to 33% of the profit in a flip, for relatively little risk. In a 50/50 partnership, your partner will obviously get 50% but incurs all the risk. That is, even at the confiscatory rates most HML's charge, and we're lenders, financially you're almost always better off borrowing the money.

Last, if you asked someone to risk 100% of what could be a life-changing amount of money, and then added that instead of using a lawyer to protect them, you’ve chosen to obtain your documents off the web, how do you think they would feel? As important, do you think this is a fair way to treat someone willing to help you?

Realistically, once you decide your involvement with one another, your partner or lender must hire an attorney to protect their interests. You should sit in.

Unless you are borrowing against a large commercial property, upfront fees are almost the perfect sign that you are dealing with a scammer, @Bryan Normal. You could stop right there, but I didn’t.

By Googling a few phrases on the website, it took just a couple of minutes to determine it's almost an exact copy of 365 Home Lending. The photos in the testimonials also appear in CryptoBanxaTrade (whatever that is). Looks like there could be more, but I quit there.

I hate to say it but the look of this website is eerily similar to the one a scammer created to spoof our company several years ago. I had reserved all combinations of .com, .org, .net, etc. but missed some. Unfortunately, some scammer didn’t and created a very professional website that included our exact company name, my exact name, our real home address, and what was probably a Google Voice phone number. This guy answered the phone as me, except I’m told he had a foreign accent. I don’t.

I found out about this after several victims skipped traced me and called my real home phone number. I won’t reveal publicly what I did to end it, but from just those who contacted me, it totaled a lot of money.

We are licensed through the state and with an LLC in good standing that you could look up. You could also look up Deeds-of-Trust that we really made. You could call some local real estate club owners and they might know and vouch for me. Ditto our borrowers. The problem is that unless you knew to mention the foreign accent, you'd think you just checked me out. Oh, and we use a P.O. Box and a cell phone. Not sure what that proves.

My point with all this is that verifying licensing, LLC's, and Mortgages/DOTs is the standard naïve advice you read here. It might confirm a legit company exists, which is good and something you should do, but in no way guarantees you are speaking to whom you think. Plus, I hope I'm scaring you.

Stay off the web when looking for a lender. Unless you have some rock-solid references, face-to-face is your safest bet, Bryan. Plus, there are many advantages to doing business with local lenders you can meet a local real estate club and with whom you can develop a relationship. No guarantees, but Scotsman Guide and The AAPL are also safer bets than a random website. (Full disclosure, we’re AAPL members.)

Once you figure out how to tell the scammers apart from the legit lenders using a website, would you please let me know?

“The numbers when we bought sucked … I wanted to prove that I could do it … My purpose with this project wasn’t to make a killing. It was to make minimal moneys or break even.”

I hear this frequently. Many new to rehabbing will say it’s ok to break even or lose money on their first flip because they just want to learn – or prove something in your case, @Michael Zervos. When it comes down to it, however, reality always sets in, and no one ever wants to lose money.

If I understand your numbers, you will break even now at a $690k sale price but the house is not done yet. Thus, $690k is irrelevant. If you spend the additional $9k your break-even will presumably be $699k and you seem confident the property will sell for at least that.

You don’t say what the alternative is. If your friend can knock this out in a few weeks for $9k but it will take you 6 weeks for $5k (just my guess), how much are you saving when you add in your holding costs at what look like $6k/month? Probably nothing.

More important is your agent’s comment. You don’t want to endure the delays of a winter sale. Even out here, where the sun shines every day, there’s an urgency to sell before say, Thanksgiving. After that, sales slow, the house sits, and holding costs just build.

It sounds like you might not lose anything if you spend the additional $9k and sell this property as soon as you can. Waiting any longer could cost you money. 

“Hopefully get better financing for the next project.“

I will never say that every dime doesn’t count. Financing certainly matters, but construction costs are almost always the greatest expense with a flip (then financing, then agent commissions). Your problem here appears simply that you overpaid and also changed the scope of the job. Can you imagine if you didn’t do the work yourself?

It counts @Nicholas L., because many of the responses here I bet reflect the things that really set the person responding off. I know my initial list contains some of my personal pet peeves.

I’ll only modify your response slightly:

… lend your retirement plan out to random out-of-state flippers (i.e. strangers) on a home you’ve never seen in a town you’d have to find using a map.

Or

Put your family's house at risk using a HELOC (in this day of rising rates), borrow from your elderly grandmother, and use credit cards, so you can learn how to do an out-of-state flip.

Jeeze.