All Forum Posts by: Jeff S.

“I thought I should be mail wiring the money to the title company, but this borrower will be writing a check at close to the title company and then wants me to wire him a check direct.”

No, you wire to title and only to title. That your borrower wants you to wire money to him, makes me wonder if he knows what he is doing.

“I have my lawyer draw up a mortgage and promissory note.”

Sort of. The note and mortgage are just a few of the documents you need. If you want a better idea, see this thread, Private Lender – forms required for a typical list of other important loan documents. You get these from an experienced lending attorney. Lending attorneys are not real estate or closing attorneys.

“I get my name on the home insurance.”

Probably not. Assuming this is a business-purpose loan of some sort (flip, buy & hold, STR, etc.), your borrower will get the appropriate insurance. If a flip, for example, you would require a vacant dwelling, fire and liability, replacement cost policy with builder's risk. If the insurance company found out this was a construction site or a rental, a standard homeowner's policy would not cover your borrower if he filed a claim. You will be listed as the mortgagee.

Also, make sure your borrower includes a lender’s title insurance policy for you.  This would be part of his owner's title policy.

You might consider finding a local HML to originate this loan for you and show you the ropes, @Wendy Busa. A local HML will have loan docs vetted by a knowledgeable attorney. They will also understand usury, licensing, and origination in Wisconsin and should be able to evaluate your borrower, the deal, and you for suitability.

Last, if this is a second position loan, I recommend you reconsider.

Until we recently refinanced our home, @Bria Johnson, we used HELOC money as one of our sources of funds. HELOCs almost always have a variable interest rate and are therefore only appropriate for short-term loans. We loan on local flips and use a 6-month note. You don't want to make a long-term loan when rates can change quickly against you. Plus, loans against flips tend to have the highest rates.

“How do you protect your asset?”

Which asset? You don’t own the home. You own the loan. I think you mean how do you secure the loan. Yes? A properly originated loan will consist of many documents. Chief among these is the mortgage or deed of trust (state dependent) which places a lien against the property until you are paid back.

See this post for a typical, though incomplete, list of documents involved in a basic loan. Your loan package should only come from a skilled lending attorney. Alternately, since you are new, you might consider buying a loan from a local experienced hard money lender (who sources their loan documents from a lending attorney). An experienced HML will know how to evaluate the borrower, the property, and you for suitability.

After you’ve bought a few successful loans, and learned the ropes a bit, you might then venture out on your own.

Good luck to you, Bria.

@Eric Boshart wrote:

“… and they're all racing to the bottom in the terms of pricing, which leaves little profitability on a per-loan basis …

The material I'm digesting that covers this topic isn't really providing me any creative new ways to add margin ...”

I think you’re having digestive issues, Eric. 🤣 Why do you believe you have to compete on price?

Do Nordstrom’s or Whole Foods compete on price? How did it work out for K-Mart?

Everyone will always say they want the cheapest money they can find. In our experience, their actions speak louder than their words. I can tell you with certainty that experienced flippers, our market focus, are much less sensitive to a few points or percent than they are to speed to fund, maximizing LTV, minimizing payments, and above all a great trusting personal relationship. It boils down to having as many competitive advantages as you can. Here are a few I know are actionable:

• Even in our current overheated crazy market, most successful active flippers often have more deals than money and need as much as they can put their hands on. What LTV are you willing to loan at? 70%? 80%? 90%? How about 100%? The greater the percentage, the more popular you will be.
• Ditto, monthly payment deferral. This helps your borrowers preserve cash flow.
• Experienced flippers always make aggressive offers with a short closing period; say a week to 10 days. Often less. What if you could fund a loan in 2 to 3 days? Or, 24 hours in an emergency, such as when a lender flakes out at the last minute? Note that I wrote “fund” not “make a decision.”
• Similarly, are you 110% reliable? If you can’t be trusted to fund when required, not only are your competitive advantages irrelevant but so is your entire business model.  It takes time to develop this reputation and one bad deal to lose it.
• Lend to newbies. Perhaps specialize in this. Many lenders won’t loan to the inexperienced and this leaves a gigantic gap in the market you could fill (if you’re willing to hold some hands.)
• Obtain the proper licensing to make consumer-purpose loans to the self-employed, commissioned salespeople, or other well-qualified but hard-to-fund individuals. I’m not suggesting becoming a conventional lender. The few HMLs I know who do this are as rare as hen’s teeth and doing quite well.
• Lend to retirement plans. Many lenders always require a personal guarantee. You can’t require a PG when lending to a retirement plan. This is a crazy easy problem to solve.
• Most important, do you have a process to develop a strong trusting relationship with your borrowers?
  

What other competitive advantages can you offer which have nothing to do with the price of your money?  What asset class are you lending to? Are you trying to be all things to all people like the giant mega-HMLs? The narrower your focus, the better.

If you lend to out-of-state strangers, require two appraisals (I really know HMLs who do), credit reports, bank statements, W-2s, income taxes, 2 weeks to fund if you're lucky, and then hope to obtain 8% on a 75% LTV, then you are almost indistinguishable from most conventional lending criteria. This is the model used by many of the billion-dollar mortgage pools.

The billion-dollar mortgage pools can get by on a 3% spread. You can’t.

If you live out of state and don’t think this bill could apply to you, you’re wrong. California is often the proving ground other states use to justify unpopular laws. If this measure passes, every state will chomp at the bit for the extra revenue. You are not immune.

The American Association of Private Lenders has a great website dedicated to opposing AB 1771 HERE. There are several explanatory videos, sample letter templates you can fill out and mail, as well as an online petition which takes almost no time. They’ve made it as easy as possible to educate yourself and to express your opposition.

If nothing else, you can go HERE and voice your opposition directly to the sponsor, San Diego Assembly Member Ward.

You do not have to be a constituent of Assembly Member Ward, nor even a CA resident to oppose this measure and I encourage you to do so.

You’ll never find anything viable at 70% in Los Angeles and this has been true for years, @Michael Figueroa. In our higher dollar market, you can push the number to 75%, which is what we use to define a good deal. To be clear, the rule-of-thumb is:

Purchase Price plus Rehab Estimate <= 75% of the ARV

Under normal times, i.e. not the last few years where prices have been beyond crazy, using 75% will result in about a profit of roughly 10 to 15% of the ARV. That is, you can normally expect to earn $50k to $75k on a $500k ARV and $100k to $150k on a million-dollar ARV property. Lately, rehabbers are making 20% to 40% of the ARV on higher dollar properties. This is great but completely unsustainable and nothing you should rely on.

75% deals exist, though they‘ve always been hard to find. Once you hit 85% you will roughly break-even (and it's linear). Those paying anything over 80%-90% are either out of their minds and desperate, or they are completely overestimating the ARV, or will simply lose money.

Run the numbers in detail and you’ll see that after your purchase price, the rehab costs, hard money fees, and real estate agent commissions will comprise most of your expenses. If you pay cash and/or can minimize sales fees, then you can pay more. If not, stick with 75%.

Here's some background.

CAR recently reported that 51% of all home purchased in CA were purchased by investors. The national average is 19%. As a result, the state legislature is concerned that average homeowners are getting priced out of the market. In turn, they proposed AB 1771, the ‘California Housing Speculation Act,” which is intended to increase affordable housing.

This is not just an anti-flipping measure.  It’s much broader. AB 1771 applies to anyone or any entity who owns residential property in California with exception of active-duty military personnel and anyone deceased whose property is subsequently sold.

The bill applies to anyone who sells a property within 7 years, not 3. The maximum capital gains tax is 25% in the first 3 years and then it gradually drops to 0% after year 7. Funny how most people move within 7 years.

With very little exception (first-time homebuyers and affordable housing), if you own any residential property in California, and that means SFR thru Multifamily, even your primary residence, this new tax will apply to you.

The claim is that the money from AB 1771 will mitigate the housing shortage in CA and that the money will go into a proposed “Speculation Recapture Reinvestment Fund.” Of course, only 30% of the fund will be allocated for affordable housing, and the bill is not specific what that even means. 10% will go to administration, and the remainder will go to public transportation and school districts. These have nothing to do with affordable housing.

In sum, this is yet another money grab by the CA legislature who can’t stand that anyone makes a profit from the sale of their property.

No sales allowed at the FIBI clubs. Education only and no upsell to a future program. Whether you lend, borrow, or want to get into the business, I promise there will be something for you. It will be mostly generic, with just a few California-specific topics (namely usury & licensing).

I hope to see some of you, even if you do it online.

“The upfront fee is the insurance payment of $3,000.”

This is a pretty common scam, @Gilbert Foelscher. There is no such thing as an insurance policy that guarantees a private loan. Don’t I wish.

The unfortunately named Private Mortgage Insurance (PMI) is only available for conventional loans (Fannie, Freddy, etc.). The only insurance any legitimate private lender will ask you to buy is a lender's title policy and fire/hazard insurance (or landlord ins., etc., as appropriate). These would be purchased when you close your deal. The title insurance would be paid out of the proceeds you wire to title or to your closing attorney. The fire & hazard insurance would be paid by you directly to the insurance company.

There is never a reason to send money for insurance to a lender. There is also no reason to ever pay an upfront fee.

I commend you, @Anne Jenkins, for meeting the rehabber and personally walking every property you lend on. It’s a long shot, but you could own that property one day. It’s also important to know who you are lending to. I never heard of David Garnaco. Just make sure he’s someone you like and are comfortable with. This is exactly our process.

As important, and maybe it’s just how you wrote it, but you started off saying you are “lending” money and later changed that to “investing.” Perhaps the same thing using a different word and, if so, that’s fine. (Some of our borrowers call us their investors even though I call us their lender.) So long as you mean your name will be on the note and the mortgage at a sensible LTV, with proper lenders title, fire, and liability insurance, and so on, then you have safe and direct recourse to the property.

If by "invest" you mean a membership participation in an LLC of some sort that flips or "stabilizes" the property, then you are completely unsecured with no recourse to anything. There are flippers who try to isolate themselves and their properties like this. Unless there is a properly originated note and mortgage with your name on them, don’t even think about it.

I can't imagine who you are talking to about setting up your self-directed IRA but their fees shouldn't be anything close to what you quoted. Perhaps this is for an IRA LLC? You don't need that to loan retirement money. Any experienced plain vanilla self-directed IRA custodian should be able to help you. The setup and ongoing fees should be relatively minimal.

If you and/or your spouse are self-employed with no full-time employees, you can open an SD 401k plan and contribute over $60k each, compared to an SD IRA. That might be irrelevant at this point and neither has a benefit over the other with regard to lending. The lending process is the same.

The bigger problem is that $7000 is not enough to do a safe loan, @Wendy Busa. We’ve been lending out of our retirement plan for years and safe to us is first position purchase money. No gimmicks like gap or transactional funding and nothing in second position, out-of-state, or even far from home. After a few years, you might be able to build up enough to do a fractional loan (participate with others on one first position loan) if legal in your state, especially if both you and a spouse can contribute $7000 each per year for a while.  Of course, you are not limited to lending.

Start going to some local real estate clubs to learn what others are buying, borrowing, lending on, or otherwise investing in. There is almost nothing in real estate that can't be done through an SD IRA. Even if you can't lend yet, there are many safe options to enable you to grow your money tax-free or at least tax-deferred.