All Forum Posts by: Jeff S.

Of course, using 70% will work on a $700k house, @Joseph Arellano. So will 50% or 60%. It’s not a rule but a rule of thumb. It’s a guide. Something you can use for quickly screening deals. Your offers will be so low however, you’ll never buy a property. For homes greater than about $250k in Los Angeles (which is now all of them!!) we use 75%**. This is still challenging, but achievable.

This rule of thumb says if you add the purchase price and rehab estimate together, the total should not be more than 75% of the ARV (i.e., pay no more 75% of the ARV minus rehab costs). It assumes you are using a hard/private money loan and paying an agent to sell the house. In this case, you will earn a profit of around 10% to 15% of the ARV. This is a fair profit in our view. For both our safety and that of our borrowers, we won't make a loan unless the property meets this. Lots of people on this board hate this approach and advocate deciding on the profit you want to make, estimating all your expenses, and backing your offer out from all of that. It won't matter.

We always perform both calculations, including estimating all expenses with our spreadsheet, and the results are always the same. If you want to earn 10 to 15% of the ARV, and can estimate all your expenses, it will work out that you'll end up paying about 75% of the ARV minus rehab costs.

On a $700k ARV home, a fair profit would be in the $75k+ ballpark, in our view. If you try for more, your offer will be so low you never get a property. If you're ok with less, and the market drops, or you get a fair but lower offer than $700k, you could lose money. Don't do that and don't get desperate. You are not immune to losing money.

Fair warning, once you hit 85% of ARV minus rehab costs, you will break even if you're lucky. Run the detailed numbers and you'll see. Stick with 75% of ARV minus rehab costs, and/or do the detailed calculations to confirm, and you should be safe.

** Because some expenses only go up a small amount as ARV increases, they take a bigger bite out of lower dollar homes. Thus, you can't pay more than about 70% of the ARV minus rehab costs when the ARV is much less than about $250k. That's why 70% is used in most of the country. Sorry for the journey into wonkiness.

“This time around, the housing market is a little riskier and overall interest rates are higher.”

Charging a higher rate for a perceived increased market risk will offer no protection if your loan gets contested, wiped out, or stripped. There are better ways to mitigate risk, @Corey M. These include lending only to local, full-time experienced rehabbers, who you've gotten to know, like, and trust, against properties you've walked, and using a sensible LTV.

Lending rates are regional. You might attend a few local real estate clubs and ask around for the prevailing rates in your area for both 1st and 2nd deeds of trust or mortgages, construction loans, etc., as appropriate.  Your profile is blank so it's hard to know your location, but I'm sure they will be higher than 7-8%.

If you are lending money in 2nd position, make sure the first position lender is ok with that. Some loan docs don’t allow a second and you don’t want to be in a position where the first-position lender calls their loan as a result.

“The terms of my deal say that even if he makes nothing on the flip I'm helping to fund, he still is personally responsible for the loan in perpetuity, even if he or his business files for bankruptcy.”

Sorry, but a bankruptcy judge would laugh at that. Nor did a lawyer write it, so I’ll guess that you wrote your own paperwork or obtained it online somewhere. Yes? I strongly suggest you speak to a good lending attorney to understand usury and licensing, at minimum, in the state you are making your loans. This attorney will be able to provide you with a set of professionally prepared, enforceable, loan documents. I assume you have a lender's title policy and are named as the mortgagee on your borrower's fire and hazard insurance?

“I refuse to join any club that would have me as a member.” -- Groucho Marx

Similarly, I’d be careful lending to someone who agreed to borrow money at a rate that could increase by 3% per month. What is your purpose here? If you are trying to earn a fair return on your money, why be punitive?

Flips rarely go as planned and often exceed the loan maturity date. Borrowers hate to be nickeled and dime (or taken advantage of with confiscatory rates). Instead, you might keep your rate the same, at whatever rate you agreed, and charge an additional point or two for a loan extension after a reasonable amount of time. This encourages repeat business.

If your charges become too onerous, your borrower will likely pay them – once, and you will never hear from him again. How much then will you make?

Unfortunately, no one is "allowing" them to operate, @Stylianos Kalamaras. And real lenders don’t troll for business by texting. They are very likely based overseas. The cold truth is no one cares. Unless it can be established that they are scamming enormous sums, the police, FBI, attorney’s general, and the like, have bigger fish to fry and won’t lift a finger. I know. We’ve been victims ourselves and I’ve been told that directly by law enforcement.

We had a scammer create a very professional website using the exact name of our lending company. It included my real name, our real home address, and what was probably a Google voice number. When you called, and it seems many did, the scammer answered the phone using my name (though I understand with a heavy foreign accent). He scammed a lot of people out of a lot up-front of money. I found this out after several victims skipped traced me and called me at my real phone number.

A search of the scammer’s phone number indicated it was used on other fake websites to falsely represent other legit lenders, as well. I wrote about it here a few times.

These guys are very slick and convincing. Thinking you can identify scammers by speaking to them or reading reviews is naïve. Similarly, looking up deeds of trust, licenses, or other public loan documents, as is often recommended here, will only confirm that the company exists - not that you are speaking to a legitimate representative. It really is a minefield out there.

I know everyone likes the convenience of the web, and they are tired of hearing it, but this really is a business based on relationships, not online anonymity. My best advice is to meet your lenders face-to-face at real estate clubs, conferences, or other professional events. If they’ve been around for a while, the club organizers or others in the room will know them. I put my money where my mouth is on this.

We lend our own hard-earned money to local real estate investors. From day one, we’ve never loaned a dime to anyone we haven’t previously met and gotten to know at least a little. As a borrower, you should do the same.

Thinking back, your mom was probably smarter than you thought when she told you to stay away from strangers.

The first person to record a mortgage against your property is in first position. The next person to record is in second position. Since they can be wiped out by the first, second position loans are very dangerous and not for anyone who doesn’t know what they are doing – typically a professional. So, borrowing from several individuals on one property might not be as easy as you think, @Laroslav Demydovych, if that’s what you’re doing.

On the other hand, if your state allows fractionalized loans, where there are several lenders named on one recorded loan, they can all enjoy the safety of a first position mortgage. Or, you should just borrow from one person per property. I assume this is a business-purpose loan and not something you will be living in (i.e. not for personal, family, or household use). Some clarification would help.

Like everything else, after you’ve done it a few times, the lending process for business purpose loans is easy but not for a first-time do-it-yourselfer. Your lenders are the bank and should act and be treated that way. This means professionally prepared paperwork, not the least of which is a note and mortgage, lender and owners title insurance, fire/hazard insurance appropriate to what you are buying (flip, buy and hold, multi-family, etc.), lender instructions, use of loan proceeds, lots of disclosures, perhaps a personal guarantee and 1003, and several others. These would be prepared by an attorney, knowledgeable about private loans, who your lender(s) would meet so they could ask questions and know what they are getting into. You’d be advised to sit in, to learn as well.

Closing would be done by the attorney, title, and/or escrow, as is customary in your state.

When it comes time to pay your loan off, your lender would list the amounts owed (principal, unpaid interest – including the daily rate, other charges) and send this to title or escrow who would pay them off from your refinance or sale proceeds. They would then send Title the original note, original mortgage, and whatever document is used to reconvey (cancel) the mortgage in your state for recording.

Very straightforward and repetitive. Just takes a bit of easily obtained education.

We’ve been lending our own hard-earned money to local rehabbers for years, @Alberto Urena. And we don’t have limitless capital. Ha. As someone with no time, but some cash, it’s the most time-efficient, relatively low-risk way to participate in real estate we know.

In our case, we find our own borrowers and either use a broker or our license to originate the loans ourselves, as required by CA law. Loan docs are always professionally prepared by a specialized lending attorney.

First position to local, experienced, rehabbers only.  If you already have a knowledgeable broker, he might do all the up-front work and simply sell/assign his loans to you, taking a small cut (like keeping the points or fees). Many brokers work like this and it’s an easy way for you to get into the business. In fact, I’m on the mailing list of a few local brokers and get their offerings almost every day.

You are not competing with the giant mega-hard money lenders here, who lately bundle and sell their loans to Wall Street. These guys are happy to make a small handful of percent on each loan but against a billion dollars. You’ll hold your loans until they are paid off. This is the much more personal side of private lending, and you will likely (hopefully!!) get to know your borrowers. In fact, never make a loan unless you’ve personally seen the house and met and checked out your borrower and their experience.  We have a well-established process we use and specific lending criteria we developed over the years which we send to all potential borrowers.  You should discuss this with your broker friend, asking how he handles his due diligence.

Private lending rates are regional and will vary by how fast you get paid off if you can keep the points but, very broadly, you should be earning somewhere in the 10 to 15% APR ballpark for first-position performing loans. I don't know the prevailing rates in Anchorage, however.

Good luck to you, Alberto.

Private money terms are as different as fingerprints, @Bianca Rodrigues, and vary from lender to lender. No one can suggest how private money deals are structured except their own. With no track record, your biggest challenge now will be finding someone who believes in you enough to risk a lot of money and structuring it to minimize their risk, so they are comfortable.

First, other than maybe your mom, there is not a legitimate private lender on the face of the Earth who will offer money to you at 4%. Their cost of capital and opportunity costs are higher. Nor do legitimate private/hard money lenders email strangers (especially inexperienced) offering them 100% loans. You are being scammed and should instead focus your attention on local real estate clubs where you can meet potential lenders face-to-face with a long list of questions. Stay off the web when looking for a lender. This might help you: Seeking hard money lenders, Do’s and Don’ts

None of this means that 100% loans don’t exist. We are private lenders and have been lending our own money to local house rehabbers for years. After a few successful 90% loans to an experienced rehabber, 100% is our norm. Nor are we your partner, trying to take a cut of your deal.

Run the numbers and you'll see that using normal hard/private money rates (typically now around 10% APR with or without points), your lender will end up with about a quarter to a third of the profit in the deal. Why would you then give anyone an additional split of the profit?

On the other hand, some partnerships are structured so that your partner will fund 100% of the purchase price and 100% of the rehab and you would do all the work. That is, they would buy the house in their name and fund all expenses. Here, your partner (who is not a lender in this case) would buy the property in an entity he or she controls 100% and there would be a partnership agreement between you and that entity.

If you are not able to perform, per your partnership agreement, they could “fire” you and perhaps pay you a finder fee of some sort -- or nothing since you’d likely be leaving them with a hot mess. If the deal goes as planned, you would split any profit from the sale 50/50 after all costs were subtracted. This could be a lot more or a lot less than they would have made on a straight loan. There are 8342 variations on this and no standards, so long as they are legal in your state.

Risky deals, such as some new construction developments, can involve Shared Appreciation Mortgages with interest payments and a profit split, but these are certainly not the norm on the typical cracker-box flips I bet you’re looking at, Bianca. As private lenders, we’re happy with our interest and points alone and hope you make a bundle in extra profit. Good luck to you.

One of the premises behind a deed in lieu is that it’s completely voluntary, @Bryan Hartlen. It appears you are making it a condition to provide a loan extension. That’s not voluntary. You are subverting the foreclosure protections afforded your borrower and this is unenforceable. It’s not even safe for you since you’d be subject to any loans behind yours and you’d be screwed if there were any title issues.

Instead, assuming it’s legal in your state, you could include a “Due on Encumbrance” clause in your note via a loan modification. This effectively says that if your borrower obtains a loan subordinate to yours, you’d have the right to foreclose. It doesn’t prevent a second, any more than the more well know “Due on Sale” clause can prevent a sale, but it discourages subordinate loans and makes it safer for you to properly negotiate a DIL if you choose.

Deeds in lieu are done through a lawyer. They involve a contract to protect both parties, obviously the deed, and handled through Title to confirm clean ownership, so you know what you are taking over.

A DIL is not a DIY job. 😉

Wow. Now that’s a broad question, @Priya Srinivasan. Flipping and lending are completely different animals though it helps to have some flipping experience if you want to lend to flippers, though certainly not required.

I’ve done both, though quickly learned that to make any money as a flipper, especially where homes are relatively inexpensive, you must do it full time. Lending, on the other hand, is highly regulated though it takes very little time per loan and is easily something you can do part-time. It’s also relatively low risk in my view, so long as you loan locally to those you’ve met who are very experienced and full-time. I assume you’re talking about lending your own after-tax or retirement funds -- not brokering, representing lenders (becoming an affiliate), or starting a fund of some sort?

With little to no real estate or flipping knowledge, I would attend some local real estate clubs and get to know some of the local hard money lenders or brokers (and some flippers). Many obtain their funds by selling their loans and should be willing to educate you a bit on evaluating their offers. In fact, I’m on the mailing list of some local lenders here in So. CA and get several emails a day with local loans I could make thru the associated brokers. In our case, however, we meet our own borrowers, evaluate, and fund their deals ourselves. With some narrow rules, it’s a really simple and relatively safe, time-efficient, business.

A few years ago, I published our entire process here in a reasonably actionable form and it’s still about 90% accurate: Becoming a Private Lender

Now that you posted publicly that you have access to money you might be willing to lend, you will get emails from all the crackpots and charlatans. Unless you have an enormous amount of money, Atlanta is a big place with more than enough deals for you. If you can’t drive to see the property and also meet your borrower face-to-face, in advance, don’t make the loan.

If you are paying a flat dollar amount for your loan, @Marcos Gonzalez, you might very well save a lot in interest by going with another lender. 

Paying $25k for $250k is a 10% APR if the loan is for a year. It's 20% over six months and no private/hard money lender will charge that (plus your loan could be usurious). If you can complete the flip in less than a year, you might be better off with a more professional lender.

In addition, you are grossly underestimating your expenses and will not make anything close to what you wrote. The greatest expenses on most flips are generally rehab costs, interest on your loan, and sales commissions when you sell. Then there are property taxes, title and hazard insurance, utilities, and escrow or closing attorney fees on both your buy and sell-side. There could also be other state-specific fees.

I strongly suggest passing this deal by a few local hard money lenders. An experienced lender will have a spreadsheet that considers local expenses and can give you an idea of profitability. A local lender will know your area, the cities, and the prevailing lending rates. Maybe even the building departments.

Some lenders will work with newbies, and some won’t. Unfortunately, most will also want you to have some skin in the game and have a financial cushion. This is in your interest since the last thing you need would be to run out of money mid-way through your project.

Good luck to you, Marcos.

@Alexis Gonzalez & @Natalie Lykes,

You guys are going to get hammered. Assuming they are even reasonable, any fees you pay should be done thru escrow, title, or a closing attorney, as customary in your area, when your loan closes. The only fees any legitimate lender might request up front are an appraisal fee and perhaps a $40 credit check. The appraisal fee would be paid directly to the appraiser and the credit check to the lender. Thus, your only risk should be in the $40 ballpark.

Some will come back here and say they require an application fee, also euphemistically/laughably called a “commitment fee.” These can be legitimate in large commercial loans. Lenders that require an application fee for any loan most on this board might need are all but going the way of the dinosaur. The industry is just too competitive now to take that seriously.

Ditto, loan proceeds. Legitimate lenders will only send funds to a neutral party after they’ve vetted you and your deal, received the signed loan docs they provided, received/reviewed your title prelim, evidence of hazard insurance, and a host of other requirements.

Nor should you be sending any personal credit info to anyone or accepting drivers licenses or other phony baloney info from the “lender” as some sort of proof that they are real. This is a sure sign of a scam. Legitimate lenders don’t act this way.

Before you start making unsolicited calls to lenders, understand that virtually none of the sites you’ll probably go to (Facebook, Connected Investors, LinkedIn, Craigslist, and even BP) vet their lenders. There are no barriers to entry for anyone to advertise themselves as a lender. The AAPL (FD - we’re members) and Scotsman Guide tend to attract a more professional membership, since you have to pay, but no guarantees either.

Just like you (hopefully) have a process to vet your properties, you need one to vet your lenders. There have been many posts written here on doing that. Eyeball-to-eyeball at real estate clubs, with a list of informed questions, is your safest start in my view. Stay off the web. You’ll have no idea with whom you are communicating.

Last, be careful of anyone coming to this public board and offering to help you privately. If they don’t believe their advice can withstand public scrutiny, you can effectively ignore it.