All Forum Posts by: Jeff S.

You mean a low-value property here in Los Angeles 🤣.

Actually, this is a bit under the average ARV we've been lending on out here lately,@Travis Steinemann.

I evaluate these all the time. For properties over $250k or so, you can use 75% of the ARV minus repairs. If you're selling to flippers, a good deal to us and to our borrowers will result in a profit of about 10 to 12% of ARV. Say, a $70k to $85k profit, in your case.

You can go the route of estimating all the flipping expenses and the resulting profit, in dollars, which we also do as part of our evaluation, but the result will be the same. If your buyers are happy to earn 10 to 12% of the ARV, it will turn out that using 75% in the rule of thumb will work.

Of course, if flippers in LA (the other LA), expect more in your area, they'll want to pay less.

You worked your butt off finding a viable property and a lender wants money to show you are committed to them, @Sheree Jones? Shouldn’t it be the other way around?  Loyalty is earned, not bought.

Lending is an incredibly competitive business and there’s no reason to spend a dime to show you are serious. In this environment, the fact that you even applied should be good enough for any lender. If they want to charge reasonable fees, these would be paid at closing. Whether a scam or not, you should never pay up-front fees.

Here’s a link to a long post on this company:

https://www.biggerpockets.com/forums/311/topics/849595-hard-money-lender-xpress-loans-911

HELOCs are typically variable rate loans, @Spencer Smalley.  They are great for short-term strategies, such as to gain a competitive advantage by paying cash for a property before refinancing, fund a rehab, or to even make private loans, but they shouldn’t replace long-term financing.

In this day of 3-4%, 30-year, fixed-rate loans, why would you take a chance that interest rates will go up? True, rates have been low and stable for a while, but no one knows when this will end.

If you have an opportunity to lock your future in now, you should take it.

I tried to recommend a safe and simple alternative to this deal as a partnership, which would protect your 401k plan with 100% property ownership and a fair profit split with the contractor. With no cash outlay, it would be low risk to the contractor and keep you from a dangerous second position loan. It would also eliminate loan expenses, which can easily eat 1/4 to 1/3 of the profit. I think, what you are proposing instead is a seemingly one-sided shared appreciation mortgage of some sort with terms that are not fully thought out to me.

Assuming this contractor can really complete a $50k rehab in 45 days, do you really think it will sell (close??) in 15 days? And how would you force him to sell it to you if it didn’t sell on the open market? What if there were mechanics liens? Or substandard work? Would you want the property? What would be your plan?

Retirement money is the most valuable money you own considering the time value of tax-free growth. Do you actually know and respect this contractor? Is he someone you really want to trust with your 401k funds? And, in 2nd position?

“Double my money with interest annualized 15% interest for the duration of the rehab until sold.”

How exactly do you double your money in 60 days at 15% annualized interest? Two months at 15% on a $50k loan works out to about $1,250. Are you seriously putting $50k in retirement money at risk, in 2nd position, for $1250?

I could go on, @Kishore P., and I’m sorry to be harsh, but I truly don’t understand your thought process here.  With all due respect, you don’t know what you’re getting into, are setting terms that are probably unenforceable, and you’re taking risks you don’t have to.

Your question, @Satinderpal Rai, is not unlike coming here asking, “How do I get into real estate?” If you are more specific, you’ll get answers that are more defined.

As such, I’m not sure if our experience counts here, but we believe the safest way to invest in notes is to originate your own 1st position, performing notes, to experienced house-flippers. The most profitable would be to purchase discounted non-performing notes. These come in a variety of flavors including, residential, commercial, industrial, and on and on. Some would argue in the aggregate, that these are also safe too, but they do take a huge expertise and effort as Don, above, suggested.

Jillian Sidoti, the (former??) crowdfunding and syndication attorney, spoke here sometime before COVID and asked the audience to guess what the average crowdfunding investment was. Naively, I easily thought it had to be in the thousands or tens of thousands of dollars. Her answer: around $250. No wonder no one researches these “investments” and simply takes flyers.

Unless this is a loan from your Mom, or someone else close to you, no one is going to loan you $1,000,000 at 5% over 20 years. This is a scam, @Jack Gowan. And, why would you even consider terms like this?

From what I read, you must pay all the interest on a 20-year loan ($1,000,000 x 5% x 20 = $1,000,000) even if you sell the property or refinance next year? No matter what, you still owe $2M. This is a joke. Right?

You’ll never see a dime of this anyway. Prepare to be asked for a large up-front fee, perhaps your personal financial information – which also has value, and then watch this “lender” disappear.

Do yourself a favor, Jack, and learn how to borrow money safely before you enter deals like this. There are lots of posts here on this.

If your goal is to develop an ongoing, multiple-flip business, @Kayla Scordo, then this deal would be marginal but ok. Based on the numbers you presented, here’s where I think you’ll end up (click on the table to enlarge it):

We define a good deal where the flipper earns between 10% and 15% of the ARV. At 10.2%, you're at the bottom end of that. I also estimate a $55k profit, not the $40k you mention. I don't know how you got that which is why I always present all numbers when discussing a deal.

Note, the greatest expenses for any “normal” flip, as shown above, are always the rehab costs, financing costs, and sales commissions. These typically total between about 80% to 85% of the total expenses. In your case, they are a bit high, totaling 89%. This because your rehab costs, at $100k, are also high for a $540k property. (Note too, the smaller dollar expenses can be state dependent. We’re in CA, so you should adjust accordingly, but relatively speaking, they just don’t add up to much.)

With a purchase price minus repairs at 78% of the ARV, you could see this coming. While just a rule of thumb, we normally use this to screen out properties greater than about 75%.

All of this is why I say your deal is marginal. Not a solicitation (we don’t loan outside of CA) but if one of our borrowers brought this deal to us, we’d think hard before we loaned on it. A bit of a coin toss, it would depend on the background and experience of the flipper.

My greater concern is that you plan to do the work yourselves. This leaves no opportunity to expand the business. As you wisely noted, taxes will kill you here. These would be ordinary income, not capital gains as you seem to think. If, on the other hand, you could do 6 or 10 deals at a time, as a goal, then it could be worth the effort. There’s no way you’ll do that on your own, however. I’d encourage you to rethink this part of your plan.

Last, you mentioned that this property was "off-market" – lately, the most overused phrase in real estate. Don't get sucked into the hype. "Off-market" means not listed on the MLS. That's it. It does not mean, "Good Deal."

Good luck, Kayla, to you and your husband.

First, be careful of the solicitations you will receive, @Trae Robrock, now that you announced you have money to lend and no experience. I notice some of them were already deleted here. You don’t want to loan money to out-of-town strangers who solicit you over the web. There’s no opportunity to meet them or see their properties. Nor do you want to do business with anyone who would jump ship from any lender over a point or a percent. Ignore those PMs.

Many of the larger syndicated hard money lenders are killing themselves now in their race to the bottom, charging 6.99% to 8% and dropping, plus some points and a ton of fees. Since their investors, typically Wall Street, haven’t a clue about private lending, they have to structure their originations like conventional loans to obtain investor money.

These lenders often require credit checks, appraisals (sometimes multiple), tax returns, bank statements, and healthy down payments. It can sometimes take weeks to close a loan and if a project is delayed, they hammer their borrowers with fees and penalties. Cutting someone a break is rarely in their vocabulary. These are often non-starters for active, professional flippers. You can do better and charge for it. In fact, in my opinion, you asked the wrong question, Trae.

Lending is about relationships and, like most businesses, about competitive advantages. If you want to rent a commodity (money) and compete on market rates alone, you can join the race noted above. Good luck to you. Instead, you should be asking what competitive advantages (i.e. value) you can offer to maximize your returns. Here, you must know your market and who you want to lend to. This will take some work.

I know some here might not believe it, but there are house flippers out there who are truly skilled at finding viable homes and who can build substantial inventories and monthly backlogs. They hoard cash and often need as much money as they can obtain and want to minimize their loan payments to put toward their flips. They are aggressive in their offers, requiring extremely fast reliable closings. Emotional or not, they hate junk fees and don’t want to worry about unreasonable lenders who flip out and overcharge if a project needs more time. They always need more time.  I could go on, but this is a narrow snapshot of needs you can think about where to add value. There’s lots more.

It’s up to you to decide the type of borrower that makes you comfortable and how to satisfy their needs. For example, we only loan to experienced house flippers but there is a huge market lending to newbies. Too risky for me, but many lenders will loan to them at a premium. Ditto lending out-of-state or even out-of-town. It appears you’re located in San Jose. I know there are enough viable homes in the area to keep you loaned out making relatively safe, 1st position, secured, loans only. Rates and terms are always regional. With attractive terms, there’s no reason to be the cheapest money in town. Those are not the borrowers you want anyway.

I published our lending process here a few years ago in this thread and it’s still 95% accurate for us. Step-by-step, it should be actionable enough for you to get started. You should also read what I add to this post for an idea of the minimum paperwork involved in a real estate loan in addition to the note and deed of trust.

Good luck to you, Trae.

You have no idea who you are dealing with, @Allen Martin. Even if Samuel Thomas were a nationally known respected lender, blessed by the Pope, you don’t know it is he who contacted you.

I had a scammer create a very professional-looking website with the name of our company. The site contained what was probably a Google voice phone number, my name, and our real home address. This scoundrel answered the phone using my name and scammed a lot of people out of a lot of money.

Stay off the web when looking for money, Allen. Lending is a business based on relationships, not online anonymity. There are just too many scammers out there and it’s impossible to tell who is who or even whose website is legit. Facebook, LinkedIn, Craigslist, Connected Investors, and most other online sources like these are cesspools. Even the lender list on BP is not vetted.

Local real estate clubs are your best bet; face-to-face. Until we can freely socialize again, which is hopefully soon, your best option is to go to Meetup.com and call some local real estate club operators. Ask which lenders regularly attend(ed) their club and who have the best reputations. Call these people and have a conversation with a list of informed questions, such as these. Better yet, go to lunch with the same list of questions, and develop a relationship.

Never rely on anonymous strangers you met on the web to find your money.

Second position loans are about as risky as it gets, @Kishore P.  Your loan could easily get wiped here. And don’t even think of getting loan docs from a title company. Title companies have lawyers, but they are not your lawyer. Nor will they provide a complete loan package that adequately protects you. You need a lending lawyer (not a real estate lawyer). This link will give you a sense of the documents that are typically required for a real estate loan.

On the other hand, since you mentioned you have enough money to buy the property if the deal goes south, you might consider a 50/50 partnership. Here your 401k plan would buy the house outright and it would also fund the rehab. Written by a real estate attorney, there would be a partnership agreement in place between your plan and the contractor. Your plan would pay all the bills and you would maintain all control and all accounting.

When the house is completed, you would sell the property and split the profits 50/50 between your 401k and the contractor. If your contractor does not perform, you could fire him and pay perhaps a nominal finder’s fee or nothing. After all, he’d be leaving you with a busted flip.

This is much cleaner and easier than negotiating a shared appreciation mortgage of some sort and relying on him to do the accounting. You will have the most control and also make more money.

Best of luck to you, Kishore.