All Forum Posts by: Jeff S.

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.

Wow. I just read a thread where one of the responses all but called several others out in disagreement over what I thought was a stupendously mundane issue.

There seem to be a number of topics that historically raise the hackles of many on this board. Here are a few I’ve observed that cause many to jump in emotionally:

1) Is wholesaling legal?

2) Does the 70% rule work?

3) What's the difference between hard money and private money?

I rarely read anything more than my few followed categories so I’m wondering what topics others are emotionally invested in.

Often, the posts go on and on and never really address the OP’s original question. Please, let’s not open these questions up. I’m more curious why these topics, and perhaps others you can add, seem to draw the ire of some participants here.

And yes -- guilty. I’ve admittedly gotten sucked in on occasion.

Wow, the made-up definitions here could drive you crazy. I’ll guess, @Kimberly Arington, you’re not concerned that the lender's money is coming from their retirement plan or what title they call themselves. Legally there is no difference between a private money lender, “true” private money lender, hard money lender, asset-based lender, correspondent lender, bridge lender, warehouse lender, white paper lender, or any of the myriad terms you’ll see floating around. “Private lender,” is a good enough, all-encompassing, generic term everyone understands and something the industry is (unsuccessfully) trying to settle on.

All that when it appears you’re just looking for is money!!! Whew.  Here's some advice I hope is actionable.

Your situation is strange because out here you can’t toss a stone into a real estate club and not hit a private lender. It might be easier if you call some of the local multi-family real estate club organizers and ask who frequently attends their club as well as who has the best (or worst) reputations. Here’s a list of what appear to be more specialized multi-family clubs near Dallas from Meetup.com that might help you. I’d call or attend those first since multifamily seems to be your focus. When you find someone, visit their office and/or take them to lunch. I know it’s overstated, but this really is a business based on relationships.

Alternately, Scotsman Guide and the lender list at the American Association of Private Lenders (full disclosure, we’re members) might also be a good start though there’s nothing better than meeting your lenders face-to-face. Note you can specifically select a multi-family search.

As a warning, stay away from Craigslist, Facebook, LinkedIn, Connected Investors, and the like. These are unvetted and crawling with scammers. Do you know how to tell the difference between a legit lender and a scammer? Please let us all know when you figure it out. Note that the lender list on BP is also unvetted. There are just too many face-to-face avenues to find honorable lenders than to take a chance with online strangers.

Understand that a lot of banks lend on multifamily properties, and they might be your better bet. I’d start there first.

Best of luck to you, Kimberly.

We do exactly what you are asking about, @David C., and I've published our process here a few times over the years. It really hasn’t changed much and has proven safe and reliable for us. We do not run a fund or accept investors, and we hold all notes until they mature. Every dime we lend comes from either our hard-earned after-tax or retirement (SD401k) money.

When we’re at a real estate club, which is where we find almost all our borrowers and are asked what we do, our elevator pitch is, “We loan our own money to local, experienced, house flippers toward their properties in Los Angeles and North Orange County.”

At a top level, and hopefully actionable, here is our process in 10 easy steps …

1) You’ll need to spend some time with a good lending attorney. This is not the same as a real estate lawyer. Call some hard money lenders in your area and ask them if they sell their notes or need investors. Buying their loans is one way to get into the business. Also, ask which lending attorney they use. Lending attorneys are a rare breed, and you’ll likely only hear the same few names. Pick one and spend an hour or two with him or her to get educated.

Lending attorneys sell loan documents to HMLs or provide them on a deal-by-deal basis. You could wait on this until you do a few deals and instead use those from a broker at first.

2) Ask some of your potential borrowers for a broker recommendation or ask around at some local REI clubs. Take him or her to lunch and get to know one another. Never do business with anyone you don't know, like, and trust. Negotiate a flat dollar amount per loan. Don't pay a percent of the loan amount. Your borrowers will pay this anyway so you're really negotiating on their behalf. Some real estate knowledge is great, but your broker must be super knowledgeable about private lending and have experience as well as access to legally vetted bulletproof loan docs, perhaps from your lawyer.

3) Go to some real estate clubs and let people know you have money to lend. Everyone will want to know your terms. Set one interest rate and point percentage. Don't get into making deals up or negotiating on the fly. They'll also want to know the percent of purchase price you'll lend (LTV/LTC), max loan amount if you have one, note duration, location restrictions, what happens if they need an extension, and a host of other questions you'll hear over and over. Here's where you'll have to determine what you're comfortable with. For example, we will never make a 2nd position loan and you shouldn’t either. Don’t be shy about asking the same questions to the other lenders in the room.

4) Only loan to those with experience and who do this full time. No newbies, hobbyists, or anyone learning on your dime. MOST IMPORTANT OF ALL before you lend to anyone, spend some time driving around with them looking at their properties. Go to lunch or dinner a few times. The idea is to get to know, like, and trust them and vice versa. If you don’t, then don’t loan. Your safety is not in the property but in the experience and integrity of your borrower.

5) Don't loan far from home because you'll want to drive and see every property you loan on. For deals greater than about $250k, if their purchase price plus rehab total less than 75% of the ARV, an experienced rehabber will earn 10 to 15% of the ARV. In our opinion, this is a fair profit for your borrower and the minimum for a loan. (Yes, it's a modification of the dreaded 70% rule-of-thumb that some here hate. Sorry, but it really does work.)

6) Separate from here is to learn how to evaluate the property using comparables, to verify it's a good deal for your borrower. You are not making 96.5% of ARV loans like FHA but it's important you confirm the ARV and Rehab Estimate. Using the formula above, your loans will end up being less than 60 to 65% of ARV so you don't have to hit the ARV exactly, but you should generally agree with their estimate and do an evaluation on your own. Your state law notwithstanding, there's generally no need for appraisals once you are comfortable with your comping skills. Your broker should also be able to help.

Ditto rehab costs, which you can generally estimate with a walk-thru after you’ve done this for a while. This is unless the rehabber is going crazy with finishes, as some seem to be doing lately in our only slightly cooling but still overheated market. Here, you absolutely want to see contractor bids.

These are just some of the reasons you always want to visit every property. Obviously then, you should only lend locally.

7) Soon after you’ve developed a relationship, your borrower will call you with a property they have under contract that fits the criteria you defined for them. Tell them honestly if you don’t have the money to lend at this time or if it doesn’t meet your criteria. Never agree to fund a deal if you don’t have the cash in the bank. Never rely on one deal closing on time to fund another. Ever. The cash must be in the bank.

Meet your borrower as soon as possible at the property but no later than 24 hours from the phone call. Bring comps with you and ask them to bring theirs as well as their contractor bid if they have one. You should already know the answer.

Confirm the amount you’ll loan and shake your borrower’s hand at the site.

8) Call your broker and put him in touch with your borrower. The first document he/she will provide should be a handwritten one-page description of what they need the money for. You are not making consumer-purpose loans. The “Use of Funds” in this case must be for a business purpose. These are typically flips, in the case of our loans. (Not to be confused with non-owner occupied which is all but irrelevant for almost all private loans -- another topic.).

Various parties, including your broker and lending attorney will provide the Note, Deed of Trust or Mortgage, sales contract, preliminary title insurance report (prelim), lender instructions to escrow or title, fire/hazard insurance policy, lenders title policy requirements, a host of state and federal disclosures, and much more I can’t remember off-hand. Read and understand everything – at least at first. Your broker (who is very experienced at this, yes?) should be able to explain everything. If not, call your lawyer but don’t obsess.

9) I don’t know how it works in your state. In CA, your broker will work with your borrower, escrow, and title. Perhaps you use closing attorneys? There’s really little for you to do except review the loan documents and wire money to title. Here, the loan will be in your name or that of your entity (state dependent).

10) You chose professionals so let them do what they do well and rehab the property without your help. Visit maybe once and take them to lunch or dinner. Attend the open house. Definitely look at more deals with them.

11) When the property sells, you will receive an email from escrow asking for a payoff amount (called a “Demand”). Tabulate the amount owed and document it in a demand letter. Be clear and show all work, you’re borrower will authorize this and should understand your numbers. So should title, because they will be wiring the money into your account.

12) When the money hits your account check the amount. You can now commit it again. Not sooner.

Ok, 12 steps, and I’m sure I skipped some. Others here might be horrified, but this process has worked for us 100% of the time. Always put yourself in your borrower’s shoes. They appreciate extreme speed, fairness, and someone who is easy to deal with. They also work their asses off and earn a lot of my respect. Keep it mutual. Good luck.

Gee, maybe this is the outline for my new book. 😆

Do you have money to lend, @David C., or are you looking to lend others money through a fund for or by selling to Wall Street, as examples? The resources and education will be different and you’ll get better answers if you can be more specific.

One answer could be right under your nose, @John Guy.

As the sole employee of a rental agency does this mean you work for a single investor who owns the 63 units or are there many? No matter, these are the first real estate investors you might contact. Since you're good at helping them make money, you already have what I would presume is a trusting relationship with each and I bet any would be happy to speak to you, give you some advice, and possibly help you out.  That is, you’ve unknowingly cultivated a built-in set of partners.

If you're able to find STR properties for your investors. You bring the deal; they bring the cash, and you do all the work.

Similarly, they might be willing to partner or loan you money toward a small MFH at a high LTC (maybe 100%) or low-interest rate or any other non-typical private loan to help you. We loan money privately too and helped a good borrower buy his first house in many years after he lost everything in the great market crash. This was not charity, but the terms were well, well below our normal market rates.  Coincidently, he made his girlfriend and two young girls very happy.

It sounds like you live in a beautiful area, so I understand the dilemma your girlfriend has with moving. Investing in real estate doesn’t mean you still can’t rent. I know many other real estate investors who rent. This is because they want to, not because they have to. I suppose they enjoy a certain freedom. You should live where you want to live but invest where the numbers make sense. As a property manager, I’ll guess this is still nearby to you, but it doesn’t mean you're trapped.

Ask some of the experts you work with what they would recommend. You could be surprised how they’re willing to help.

“I would rather not put the money in my account.”

Very wise, @Robert Herrick.

Surprisingly, escrow companies are not set up for this. It depends on how formal you want to be. Maybe not too formal if your lender is willing to provide all the rehab money at once.

Your lender could set up an account at your bank and transfer money to you electronically as you go. Personally, I don’t like the idea of the lender controlling the money. It’s not fair to either you or your lender and I think you recognize that. There’s too much temptation to use it, lend it elsewhere hoping to get it back when you need it, or simply change their mind. This actually happens a lot and is the reason CA mandated that all brokered construction loans over $100k be fully funded by the lender at loan origination. Can’t speak to AL.

A loan servicer, like FCI, will act like escrow and hold the $60k for the two of you and disburse it at the direction of your lender, per an agreed-upon draw schedule with milestones and the disbursement amount for each. These could be Demo, Rough utilities, Roof, Final finishes, CofO, etc. – whatever you and your lender agree to. Even some money upfront.

As each milestone is completed, your lender would notify the servicer to send you the pre-agreed amount. I like this because it keeps everyone honest and doesn’t put anyone in a compromising position.

To be even more formal, and total overkill for your loan, there are construction fund control companies like Hasz that will hold the money and also perform the construction inspections, so your lender knows these were done per code, with formal lien releases, etc. They would notify your lender when each milestone is completed for their approval to send money to you. Very, very expensive and they’re good for large construction projects, not a $60k flip.

Hope your job goes well, Robert. Good luck to you.

Maybe bad form to quote myself, but this cuts both ways, @Bobby Feinman. When I see the words, “Commitment Fee,” I sometimes wonder where the commitment is from the lender to show they can follow through and not leave a borrower hanging. Of course, we occasionally have borrowers walk from a property. All lenders do. It happens so infrequently that I view it as a cost of doing business.

You can use terms like “refundable” or that you are not asking for the “entire origination fee upfront,” but only a portion. Does it matter to the borrower? With all the actual scams and scam warnings out there, do you really want your business to be known as one that charges an up-front fee? I’d wonder about the amount of business this would scare off just on its face.

Do your loans fail so often that it's hurting your bottom line? If so, I’d respectfully suggest that you reevaluate who you are lending to or how you are attracting these borrowers. I know you might not think of it like this, but I’d question penalizing all borrowers because of a problem with a tiny few or a tiny amount of their deals.

What about a monster borrower? I know you know what I mean. They always have an occasional deal fall thru and nickel and diming them is not a great way to encourage business.

Who are you attracting?

It’s your business and you can run it as you wish. Just trying to be helpful. Borrowers have so many choices now that this hardly seems like a good solution to what I hope is more of an annoyance than a significant problem for you.

(And no, to be blunt, no borrower should be paying any upfront fee. Sorry.)

Many here don’t realize that for IRAs, there are custodians and there are administrators. By law, all IRA funds must be held by a custodian. Depending upon whether they are a bank or a trust company, custodians are heavily regulated by the IRS, DOL, possibly the FDIC, State Banking Commissioner, and maybe the Comptroller of the Currency. Administrators are not subject any to such scrutiny and are really just middlemen. Be super careful.

An administrator will pass your funds to a custodian, provide statements, and hopefully help you stay within the law when you invest your IRA funds. Custodians do exactly the same thing but with the added regulatory and financial scrutiny. Why would you place your money with an administrator?

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. Always ask and don't accept the sales pitch that it doesn't matter. If you think this is unimportant, take a look at what happened to those that placed their IRA funds with American Pension Services, an administrator.

Then there are fees, which is how these firms make their money. Some IRA custodians charge by the transaction, some charge by the total value of your account, and some by both. All publish their fees 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 provide a laundry list or recommend a specific company. They might never have loaned their retirement money.

You should ask your custodian how they will handle your loans and what they need from you. Years ago, before we transferred everything into our SD 401k plan, we loaned money from our IRA's using IRA Services Trust Co. They've since changed their name to Forge trust. At the time, we were very happy with them but it's been many years.

IRA custodians are not loan brokers, servicers, CPA's, or title companies. You must already have a lending process in place to find and evaluate borrowers and their properties, as well as a set of loan documents from your lawyer. Your IRA custodian will execute the paperwork as you would. That is, your loan process would remain unchanged except instead of @Jeremy Kitchen, the beneficiary on your loan docs will now be something like Forge Trust FBO Jeremy Kitchen IRA #1234567. You can charge whatever is legal in the state you make the loan but understand that all money must remain in the IRA.

Last is service, which really only comes from experience and reputation. After you’ve narrowed your search, you might post a few names here asking about their service from others who have actually used them to loan money. Also, ask around at some of your local real estate clubs.

Choosing an SD IRA custodian is not difficult and it should not be agonizing. It involves a bit more work and understanding however than simply asking for a recommendation.

Good luck to you Jeremy.

The $12,500 average loss you calculated, @Patrick Kaiser, is an opportunity cost. It never actually comes out of the rehabber’s pocket so it’s not something most ever think about. This is not true for other expenses.

Property taxes, insurance, and utilities are ongoing. The longer a flipper holds the house, the greater these expenses become. They are real and out of pocket, though usually small. Far beyond these are borrowing costs. Most rehabbers buy using hard money and this is not cheap. In fact, finance charges are usually the second highest costs behind construction expenses. Most rehabbers are reminded of this at the beginning of each month when they make their loan payment.

You would add value to the sale by asking your client what they are paying each month in holding costs. Divide that into the premium they are asking over ARV and ask if they are ok with waiting that many months to sell. If they are confident the property will sell within that time period, it might be worth it. Beyond that period, or if the house sells for less, they will be losing spendable cash.