All Forum Posts by: Eric Boshart

contact Peer st.. I have been in a few cases lately where they have substantial bad loans with one particular borrower .  

Hi Eric!

First there are a few considerations you need to acknowledge BEFORE you start diving into take other people's capital for lending activities. First, if you have been lending "informally" in the past, I would say get real formal real quick. Once you start accepting capital that isn't your own, you now have a fiduciary responsibility to uphold. Informal goes right out the window. You will also need a good idea of WHAT, WHERE, and WHO you would want to lend to, and HOW you want those deals structured. Are you going to invest in your local market where you live? Do you know the lending laws in that state? What about the foreclosure process? Do you have any key vendors in place that will help with increased deal flow? (think attorney to draw up docs, attorney to handle foreclosure/default situations, vendors to establish a value or do background checks on potential borrowers, a system to securely transmit sensitive information from borrower to lender, the appropriate disclosures in place, an application, etc etc). What market advantage do you have in your area for lending? Are you faster? Go to higher LTV? Lower fees and points? Do atypical construction like container homes for example. These are all things you need to have in place BEFORE you think about scaling up and taking on investor capital.

Now- the other part of your question about the fund model versus assignment process.  I would only venture into the fund realm after you have been doing this for awhile or have someone you can partner up with that has been lending for awhile and has a following. The process for a Reg D fund will likely cost about $20k to set up with legal fees for the documents, investor portal set up, if you are going to have a fund admin company that even more than the $20k start up.  There will also be ongoing monthly fees associated with the fund, so if you are going to go that route, be well capitalized to get it off the ground, so don't count on the income from the asset management fee to actually be income for awhile.  There are a ton of considerations for this option that are beyond the scope of a simple online post, but I will say tread lightly and really think about this option.  The fiduciary responsibility it HUGE here.

The assignment agreement can work, especially when you are newer to lending and won't have a ton of deal flow. There are a variety of ways to do this, and if your state allows it you may even be able to fund the loan and then sell the loan to another investor as well.  

Another consideration in all of this is not only the capital involved, but the time involved. Scaling up is not always the answer. More of something doesn't mean it is better. The thing I enjoy about private lending for me is that it is a business in a backpack. I can go anywhere in the world and work on this stuff with minimal input from me and it keeps going. I wasn't trying to work myself into another W2 job. As a military spouse I needed geographical and time freedom, so if I can make the passive income number I want doing what I am doing, then why keep going and take away more time from my family and my hobbies? Part of your initial consideration needs to be what do you want your lifestyle to look like? What amount of money are you shooting for monthly? Why is it that number? 

@Eric Boshart

Even with the amount of lenders out in the market given how a lot of lenders are doing i'd say there is plenty of customers out there. Not all investors are rate, point, or leverage sensitive if anything they just want speed and transparency. Also keep in mind certain lenders have minimum, maximum capabilities on certain propertis. Some only do smaller loans under 500k, some only offer 70% LTV, some only lend to seasoned investors, some only do bridge loans. We are a newer fund but have been doing this for 10+ years and we had no issues funding over $200M loans in our first year. Look at larger shops like Lending Home, Anchor loans these shops do 1 billion in loans a year, but a lot of other shops are doing 100M -500M in volume and thriving. One thing I found is when a lender becomes too big they end up lacking in other areas such as customer experience and seasoned investors just want the ease of mind to know their deal is going to get funded in a timely fashion without issues or headache.

@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.

I did a loan with a private lender that still had 70%ARV where they held both loans. The difference being that the two amounts were separated into a purchase price loan and a rehab loan that was held in escrow. I didn't end up with $20k in closing costs like I found in the combined loan because they weren't just placing my rehab funds in escrow. It became an actual secondary loan. Same as many lenders would do as a single loan at 70% ARV, just separated with the rehab loan as an escrow account with draws so my closing costs made it doable for me.