All Forum Posts by: Jeff S.

In reality, your holding costs will likely be zero, @Account Closed, since it's doubtful you'll find a hard money lender to fund this deal under the scenario you presented.

Because of the overly strict regulations that govern home loans, such as Dodd-Frank and the SAFE Act, most hard money lenders will not loan on owner occupied properties. I won't say they don't exist, because I know several that are appropriately licensed and can make these loans, but they tend to specialize in lending to well-qualified borrowers that the banks won't touch. These include the self-employed and commissioned sales people with excellent income, credit, and an adequate down payment. You don't seem to fall into these categories and most hard money lenders will expect you to put down around 20%. In your case, a HUD 203k loan might be a better option since it includes rehab costs.

If these don't work, because this otherwise sounds like a good deal, you might consider partnering with another investor to flip this property to build your war chest. Or, convince the seller to allow you to go FHA.

With due respect, @Shane Hetzel, you are located near Boston, why are you looking for money 1000 miles from home? Sorry to be facetious, but will you be buying your flips sight-unseen online as well?

The lowest cost and safest money is local money and the easiest way to find local lenders is at a real estate club. You can easily find these using Meetup.com and there appear to be dozens in the Boston area (click on the link).

Shopping for loans like this online offers no assurance that these individuals are licensed in your area or even reside in this country. A quick search here will turn up many threads from those who have been scammed by online lenders and none (that I could find) by those who met their potential lenders face-to-face, in advance, and developed a relationship.

I know many believe they can find everything they need online anonymously, but borrowing is a relationship-based business. Meeting potential lenders eye-to-eye, perhaps in their office, and with references from other borrowers, is at least one assurance they are not scammers. Checking licensing, looking their loans up, and maybe calling past borrowers listed on these documents, is another, and these are safe to do online.

Same response if I'm wrong, and you're really flipping homes in the Mableton, GA area. I've flipped homes out of state and spent a lot of time traveling and meeting my resources in person. Don't think that anyone offering you their money is any more honest than those that borrow. That's just crazy. If you do a search here, you'll see.

Good luck, Shane.

Obviously subject to state law, these are done all the time and are generally completely legal, @Deano Vulcano. It's called hypothecation. Your private lender would make a personal loan to you, which is secured by the loan you create to the rehabber. That is, you are "hypothecating" your rehab loan.

Your personal loan is not a real estate loan. If you default here, your private lender would take ownership of the loan you made to the rehabber. That is, they would then own the Note and Deed of Trust or Mortgage made between you and the rehabber, and would then collect the 14% payments.

This could be accomplished with a simple straight note between you and your lender with a clause that says, in effect, if you default, they get to replace their name with yours on your loan docs to the rehabber. You would typically pre-sign an assignment of mortgage or DOT and an allonge (documents that transfer ownership of a mortgage and note, respectively). These would be held by an escrow company or neutral attorney, with instructions to record the mortgage/DOT assignment and provide the associated documents to your lender, if you default.

If things go well, you would pay your lender, your rehabber would pay you, and everything would get paid off when the flip is sold. You obviously keep the difference. Very common.

As you can imagine, this is a total oversimplification and there are many devils in the details. You need a good lending attorney to write these documents. You are becoming both a borrower and a lender and need to comply with all lending laws. This is a good process for you to learn that there is no difference between calling yourself a private or hard money lender. They are both non-institutional loans. There are many legal differences between personal loans and loans secured by real estate, so be careful, but don't get hung up on what you call yourself.  The law doesn't care.

Due diligence dictates that your lender checks out your borrower (i.e. their collateral) since they might get to know one another more than they want at some time in the future. Similarly, you are now a real estate lender in the eyes of the law and must strictly comply with all laws. For a nominal fee, a good, appropriately licensed hard money lender could probably help you originate your loan to the rehabber and even provide those loan documents to you. 

Good luck, Deano.

Your better half is very wise, @Greg Kimura. Loaning your sister $100k, even secured by a note and deed of trust, at low interest and without any payments until she sells the house, could easily be construed by the IRS as a gift. Plus there are issues with imputed interest. You could easily be hit for gift taxes. Also, Dodd-Frank requires that even family loans be amortized.

To protect yourself, keep your better half happy, and so your sister knows that this is a real loan that is expected to be repaid, you need a note and a deed of trust or mortgage properly originated and in compliance with all state and federal laws, plus a handful of other disclosures.

Since you are clearly helping a family member and not looking to get into the lending business, rather than recommend you seek a CPA and lending attorney, there are companies that help facilitate family loans for exactly your purpose.

National Family Mortgage, whom I think is related somehow to FCI the giant loan servicer, does exactly what you need. I've never used them and have absolutely no relationship with them, but it appears they can help you at modest cost. There might be other companies who do this as well.

It's not clear to me you could loan using the terms you agreed with your sister (she will likely have to make some payments) but this will protect everyone and could keep some peace in the family.

Good luck, Greg.

I disagree with some of what was written here and above, @Medvin Bagh .  The structure of the deal will dictate who has ownership in the property. Either you borrow the money from Uncle Rick and have complete 100% ownership and control, or Uncle Rick buys the property 100% in his own name or in entity that he alone controls.

Sharing partial ownership in a property purchased by your Uncle could have significant tax consequences. That is, Uncle Rick can’t just buy you half a house. Plus, if anything turns south, you are both permanent owners with little recourse on the part of your Uncle.

If you choose to borrow the money, your Uncle could loan you 100% of the purchase price plus even 100% of the rehab budget if he trusts you, or he could hold back the rehab costs and disburse them according to an agreed upon completion schedule. If it turn out you are not skilled at this, your Uncle would have full access to the property through either a deed-in-lieu (i.e. you sign the property over to him) or, heavens, through foreclosure. Either way, he is protected though he could end up with a busted rehab he would have to take over. Please don’t think this can’t happen.

If you agree to pay more than 10% APR interest in California then you must use a licensed CA real estate broker to originate this loan. Any licensed HML could do this for you for a nominal fee and also provided vetted paperwork. I'd use an HML either way, since they are used to private loans as these. There would be no side agreements. As lenders to flippers, which is what you would be, we don't care about the color of the tile.

Alternately, if Uncle Rick becomes a partner and is purchasing 100% of the property then he should own it 100% of the interest in either his own name or an entity he controls 100%. You would have a partnership agreement with him or his entity that defines your scope of work and how you will be paid. Payment, of course, could be 50% of the gross profit. Acceptable and unacceptable expenses would be defined in advance in the agreement and likely exclude any salary to you.

If again, something went wrong, Uncle Rick could fire you and perhaps pay you a finder or some other nominal fee as defined in your agreement. He would now be on the hook to complete the rehab but would at least own 100% of the house.

If you go the partnership route, you will need a lawyer to draw up the agreement. This is not something generic you copy off the internet. If you can afford the lawyer, you can’t afford the house. Good luck, Medvin.

To make Ken's point (no pun intended), the fastest we've ever been paid back on a loan was 21 days. We didn't even bother charging interest, which amounted to just a few hundred dollars. We just collected the points.

Also, our note does not use the term "Points." These are called an "Origination Fee" in our documents, which is probably more appropriate.

One point is one percent of the amount you are borrowing, @Harry D Johnson. If, for example, you borrow $100k at 12% interest only plus two points, traditionally your lender would wire $98k for the deal and you would pay the $2k as points to make up the difference.  Your monthly payment would be (12% per year/12 months per year) x $100k = $1000 per month. Note that points increase your effective interest rate since you are really receiving $98k but making payments on $100k. Note too that nothing in private lending is traditional.

These are not conventional loans. Private/hard money lenders are as different as fingerprints and able to compete freely by varying their terms, so long as they are within the bounds of the law. If you are flipping properties, some lenders will allow you to defer the points (i.e. fund the entire $100k without taking your $2k payment at closing) and even the monthly payments until you sell. Others will allow you to prepay at any time without penalties. This is important if you are adept at flipping properties quickly.

You should look at these as options, or questions you should ask a potential lender (among many), than assume they are the way "most" lenders work.

The industry is awash in money right now, @BA R.  There's no reason you should be responding to anonymous solicitations when you can attend a few local real estate clubs and probably meet as many lenders as you need, eye-to-eye and learn their lending criteria. Plus, why would anyone loan money at what now are near T-bill rates?

"I've heard of loan-to-own hard money lenders that will purposefully let investors get in over their head because they want the deal. I don't recall hearing that occurring in our circles. Anyone?"

I really think this is an alliterative urban legend, @Aaron Norris. On it's face it makes no sense. Any lender using sensible underwriting criteria should be owed much less than the property is worth in a foreclosure. This almost assures the home will sell to someone else at the trustee auction. On the other hand, over-lending would mean the lender is owed more than the property is worth and they could end up owning it at auction, but this would be at a loss. Either way, this makes no sense, unless you somehow knew in advance that you could coerce a borrower into a deed-in-lieu. How often does this happen? I've heard the term too, and don't buy it.

I know there are legitimate strategies to own a house when purchasing non-performing notes. However, this has nothing to do with the ethics of the original lender -- who probably took a beating on the loan.

Also, more than likely @Gail Greenberg, that deed (which would be a pre-signed deed in lieu) could be contested by you as invalid or unenforceable. Your first position lender is effectively circumventing your rights in a foreclosure.

I don't know the licensing laws for lending in PA, but I'm certain we could not just set up a business there from CA without strict compliance. Your private lender falls into the same category. Calling them "private" does not mean that they can avoid the regulations. There is nothing informal about this.

I agree with Ann and Ed. Both lenders in this transaction should be properly represented by someone who is licensed, and protected using a note, a mortgage, and all other appropriate disclosures that defend their respective position.

"I'm not an attorney but I strongly suspect that the hard money lender holding a deed has the potential to compromise to a degree the private lender…"

Perhaps, but likely the opposite, Ed. Enforcing a deed-in-lieu means the first position lender is stepping into the shoes of the homeowner and is subject to all other liens, including that of the private lender. Since they didn't foreclose, they must now pay off the second lender according to the terms of the loan. That's why Ann suggested they might not want anyone in second position.

Among the more incorrectly held beliefs about lending on this board, is that there is a difference between private and hard money lenders.

When someone here suggests they are looking for a private money loan, another will often jump in and provide their definition that a private money loan is from someone you know, like your dentist or Uncle Louie, and a hard money loan is from someone who does it professionally. In fact, both are non-institutional loans and the terms are completely synonymous. There are not two sets of lending law. As you wrote correctly, Ann, everyone is subject to the same requirements.

This dogma is particularly unfair to anyone who borrows from his or her friends or relatives (which in my view is always a mistake, but that's another topic). It gives them a sense that since they are "non-professional" they can get away with terms and legalities to which others (i.e. "professionals") must comply and that it's ok to be informal. I can't think of anything more dangerous.

Since the argument is so common here, I quit trying to push that rock uphill on this board, but it seemed appropriate to mention now and maybe keep a few individuals out of trouble.