All Forum Posts by: Jeff S.

You have to be specific when you write, "Seeking Private Money," @Sam Erickson.

Are you seeking a silent equity partner or group of investors to form a pool you can draw from and provide a return to, or do you simply want a loan. If either of the former, you have to ensure you scrupulously comply with all appropriate state and federal security laws, which usually include making the SEC happy. This is big deal and can get very expensive very fast, but I have a feeling it's not what you are doing.

When you write you have "a few leads on possible private money guys" I assume you mean some hard/private money lenders. In this case, you can ask away. So long as these are just loans from one person for one property you can ask anyone you want to loan you money. We are asked for money all the time and no one risks getting into trouble for that. It's encouraged.

Borrowers initially approach us to inquire about our terms, overall processes, and requirements. They will want to know our lending criteria, including what we look for in a borrower and their deals, what our rate and terms are, etc. This is not a securities solicitation. We in turn, will ask them about their background, related experience, and financial situation. Often, we'll go to lunch or dinner to get to know our borrowers, but most lenders don't care. They only want to see a deal in contract.

A lenders safety comes from knowing you can pay them back and that you know what you are doing. If you are approaching professional lenders (i.e. not your aunt Edna) please spare everyone the "credibility kit," explaining how we can make money investing our IRA and exceed bank CD rates. We want to know your direct experience, financial background, evidence of deals done, etc. This might involve copies of HUD's, before and after MLS listings, and the numbers. Some, but not all, lenders might want to see credits reports, bank statements, tax returns, etc. It just depends with whom you are dealing. Ask first, and don't assume.

These posts always go down the usual "What's a security" path, emphatic recommendations that you must see a lawyer, I knew a guy who knew a guy who went to jail, etc. Asking someone for a loan is not illegal and violates no security laws, if that's all you are doing.

It depends what was modified, @Logan Allec. If only the note, for example to extend the maturity date and nothing else, then this would not generally get recorded.

If anything changes the Deed of Trust, which would have been originally recorded, then any applicable modification should also be recorded. In general, anything that changes the principal balance owed affects the DOT and should be recorded.

Even when you modify a note, it's sometimes not obvious if the DOT has also been affected, so we almost always record the modification, just to be safe.

You have a great attitude, @Mike Alder, and obviously understand the value of relationships in business.

Not to burst your bubble, but no one has unlimited funds. As loyal as everyone wants to be, you can never be sure that a lender will be able to fund all your deals. The name of the game in the lending business is to keep your funds at work. Since deals fall through, many lenders often overcommit. In my view, it's a behavior that absolutely sucks and it gives the business a bad name, but it's also a fact of life. Plus, honest as others might be, stuff happens.

We get a measureable percent of our business from borrowers whose lender flaked out at the last minute (and it's not that we always have money either, though we are honest about it). Surprisingly, these can range from small one-horse shops, to the mega-large well know lenders in our area. There is no consistency, and none should be assumed.

In addition to your excellent relationship, it's always wise to protect yourself and maintain a stable of lenders, large and small. Some deals appeal more to some lenders than others and all lenders don't always have money available. This is not something you want to find out at the last minute.

It's great that you have your favorites, and you should continue to nurture your relationships. The key, as you clearly understand, is to always believe your counterpart in a business relationship is doing you the favor, never the other way around. Unfortunately though, you can't rely on assurances. Just protect yourself.

Really two.  A legitimate lender will require hazard insurance and a lender's title insurance policy. Both of these are paid for when you close, not up front, and they are not paid to the lender.

Many scammers have figured out that some borrowers know not to pay up-front application fees, due diligence fees, or "success" fees, so they had to make up another up-front fee that no one has ever heard of.  This too will pass, and they will come up with something else.

I don't think either source of funds is appropriate for a long-term buy and hold, @David Supple.

Hard money is for short-term use and generally appropriate for investments that you will be in-and-out of quickly, such as flips. Lenders don't want their money tied up for extended periods of time. Plus, this money must be secured by a mortgage. That is, no sensible hard money lender is going to simply hand you a check that you can use as a down payment. Unless you have another property that you can collateralize against, this is not a viable option. Also, unless your investment property requires a substantial rehab, if you can't get a loan to buy the property now, what makes you thing you'll be able to refinance it in a relatively short period of time. How would you prove that to the HML?

HELOCs also have their disadvantages, since most use a variable interest rate. This works great during times of low and stable rates, as we've been experiencing over the recent years. Once rates start to climb however, and they will, your cash-flowing property could turn into a money hungry alligator. Since you secured this loan using your personal residence, you could end up losing both your home and your investment property if/when rates increase.

There are other ways to buy property with little to no down payment of your own, David, but these options are not appropriate.

There are no market or trade secrets here, K. Marie Poe. We don't have to find the properties. As lenders, we have to find borrowers who can, which is much easier.

"Of course you don't need volume as the lender if the numbers are right."

Bingo. It really is hit or miss and I'll share that we are loaning more money on fewer properties. Still, business is very good.

None of this is to say that only certain borrowers are able to find good deals. While everyone is working their butt off, some are more skilled at this than others; posses better judgment, have been doing it longer, and have deeper connections. We see three types of borrowers.

The first are those that are inexperienced and trying to break into the business. We don't do business with these but they'll approach us every once in a while with a property. Most are terrible deals but every once in a while they are viable. I suppose everyone who works hard deserves to get lucky now and then. Still, we usually pass, though there have been occasions where they found an experienced partner which led us to do the deal.

The second are those who have been around a while and are full time. Lately, they find most of their deals by direct mail, door knocking, probates, REO, and even off the MLS. We often have to caution them when they bring a deal that's close, but too risky for them and for us. After a while they get tired of hearing it and tend to bring us properties they know we'll say yes to. This is not to say they won't find another lender for that deal, but they don't put us on the spot. Over time, these borrowers tend to come and go.

The third are those who have maybe five plus years doing this full time, have deep connections in certain cities, and are often doing dozens of flips at a time. I know no one wants to believe this but there is a subculture of agents that focus mostly (not exclusively) on distressed properties. They know the players, the players know them over the years, and it's a relatively tight community, which can be tough to break into. Our goal as lenders is to meet the players and develop our relationships. This is really not too difficult, and we are very loyal to one another.

For this third group, most deals are brought to the flipper. They might be pocket listings, MLS, probates, and even an occasional REO. There is no door knocking or direct mail. The agent's usually know not to bring the crap they might bring to those who are less experienced. No one wants to waste his or her own time or lose credibility.

As I think, there is actually a fourth group that we have done some business with. Just a handful of experience flippers are starting real estate clubs through Meetup, focused exclusively on teaching newbies how to flip. They provide the expertise, training, and the resources. The students provide the labor -- knocking on doors, mailing flyers, making the initial contacts, etc. In effect, these clubs train their own private bird dogs. The longest running club in southern CA who does this is the Invest Club for Women, who have offered their 60-Day Challenge for years. Other "lone-wolf" flippers are now starting their own clubs in a less formal manner.

Way off topic K, but that was a good question everyone asks us. Maybe should have been a separate thread.

You didn't mention the use of the money but I assume it was to help the borrower stay in their house. This falls squarely under Dodd-Frank.

I don't know what your marketing campaign is trying to accomplish, but this is a predatory loan. Sorry to be harsh, but you knew (in capital letters) that the seller does not have the capacity to repay the debt and you were even thinking of asking if it made sense to loan them money secured by the property?

I'd be very careful advertising to help those under the threat of foreclosure by loaning to them, if that is your strategy. Plus, why would you loan in second position with a pretty good chance that you would get wiped out in a foreclosure?

I'm glad you re-thought this one, even though it was for a different reason.

Please be careful, Greg. This is not a way to break into the business.

No, @Clarence Johnson, the legal description and address is Inglewood. I don't know if that's the house you're referring to or not, but it doesn't matter. I can't tell anymore what you are paying and what your rehab estimate or duration is. Also doesn't matter. We don't do business like this.

We have to have met you and gotten to know you and your experience a little before we do a loan. It also matters a great deal to us that your flip is profitable for you. Some lenders care and some don't and there are pros and cons both ways.

Profitable to us means your project cost is no more than about 75% of the ARV. Using our rehab estimate and duration, since I don't understand yours, means you really can't pay more than about $285k for this property. In this case, you'll make about 12% of ARV or $54k. Much less and both you and your lender are taking risks you probably shouldn't, considering you're obtaining a high LTV loan. We actually loan like this as well, but have a process we like to follow.

Watch out, @Clarence Johnson. If your numbers hold up, you will net about $27k or a meager 6.3% of ARV. This shouldn't be a surprise since your project cost (Purchase price + Rehab) is 82% of ARV. Here's our income and expense estimate using your input:

I don't agree with your numbers, however.

Your scope of work is probably closer to $40k to $43k and there is no way you will complete this job in 1.5 months and sell in another 1.5. Six months is more realistic. You should also be getting repair estimates from a trusted contractor. Here, your project cost is 87% of ARV and you'll likely lose about $6k, as shown below:

To make matter worse for you, we funded an Inglewood flip several months ago that's just coming to the market. It's a 4/2.75 and asking price is $440k. This was a full blown, down to the studs gut job, so the house is virtually new. It also has a guesthouse in back. I don't know where you are getting your comps but you might revisit them.

The only good news here is that, though the best time to sell a house is always in the spring, southern California's fair weather climate doesn't really restrict sales any time during the year. More important is to select a qualified buyer and quickly get them cross-qualified with a lender you can rely upon. It's not the weather that will kill you, but a deal that falls through a few times.

Be careful Clarence, and good luck.

If the SUV were real estate (it's not, it's personal property), you were owed $2k (including all principal, penalties, interest, and expenses), and you sold the "SUV" for $10k at a foreclosure auction, then your borrower would be owed the full $8k difference, not a "few G's out of fairness."

You would come out even, having been paid everything you were owed plus expenses.  It's an important point because there is a misconception that lenders want to foreclose to own the house and make more money.  In fact, by law, they can't earn more than they are owed.

Lenders want as wide a spread as possible to motivate the borrower to pay them back (i.e. not lose the $8k due to interest and lenders expenses) and also in case the value of the collateral drops for any reason after the loan is made.

You're asking the same question over and over, Benjamin. Reread the responses above. What is it that you don't understand?