All Forum Posts by: Beth Johnson

@Cody Hunter

As a private lender, we've done deals where the seller is in 2nd position behind us but that requires a fair amount of coordination and most sellers aren't willing to do this. The ones who are, generally are more versed in seller carrybacks and believe strongly in the market value/purchase price. If the borrower defaults on a hard money loan, default interest will be super high and can squeeze the sellers equity buffer super fast in second position, which is why it isn't desirable. And many hard money companies have subordination agreements that aren't good for junior liens or they may bar junior liens altogether. Additionally, most lenders would still require some borrower funds to bring to close and won't count the carryback as down payment. Hope this helps and lmk if you have more questions.

@Nicole Allen

The definitions of Private money and hard money will vary greatly depending on who you talk to but the primary concepts to understand is where the capital source comes from.

Private money is typically from private individuals or entities but can also be from a pooled mortgage / private debt fund. This type of capital generally has far less strict lending guidelines and may or may not have origination costs. As some have said, some private lenders will not require security from a piece of real estate because they know the individual borrowing the money. I always recommend securing the loan though for a whole host of reasons. These loans are backing relationship-based and local.

Hard money generally is from a company that either has direct access to capital or is involved in brokering loans. Many will have ties to institutional capital that make underwriting stricter.

- leveraging their pooled fund via warehouse line is credit to have access to more funds

- selling through their funded loans on the secondary market to institutions who want a loan portfolio for the interest income

- lenders who table fund deals with help from capital markets providers

These types of bridge lenders deal in larger volumes and will be a step or two below getting bank loans. They often have a national or regional presence and will often offer teaser rates that are based on credit, capital and other non-asset based underwriting which can drag out the funding process, especially when an appraisal is required.

Another way to look at it would be portfolio or balance sheet lenders who have supreme control and flexibility over the deals and terms they offer while those lenders tied to capital markets will have constraints from their capital providers. For example, any lender with institutional capital backing will likely not do a 2nd position loan but a private lender could and often does.

Why does capital source of the private or hard lender matter? In 2020 when covid hit and all the banks and capital markets shuttered in fear of what would happen; truly private, balance sheet lenders like us were still funding deals.

@Zachary Carver

Is the DSCR calculated on 20-, 25-, or 30-yr amortization? If it's 20 or 25, shop around for a 30-yr so your hitting the right DSCR. I found local banks offer better terms on commercial blanket loans.

@Adri Jusczak

The legal and safest way to do it would be with a written, signed promissory note (and deed of trust/mortgage, if you want to make the loan secured with real estate) with the interest rate and maturity date, along with any other terms you both agree to, included in writing. And yes you would want to provide a 1099-INT for interest earned at end of year so you can claim the interest you paid on your taxes as well.

Plenty of people do these types of small loans together without the legal paperwork but I find it leads to a lot of resentment when things go wrong. For example, I had a friend upset because they couldn't get their money paid back from a friend that they lent on a project. Without a maturity date on a written contract, the borrower kept the money after he sold the flip and put it into another project he got under contract. And since there was no default interest discussed, let alone put in writing, the lender didn't have much she could do to get her money back when she expected it.

The best way to find and keep truly private individual lenders in your inner circle for the long run is to help them understand how to safely and securely protect their principal investment with you. If you show them you know how it's done properly and formally for their protection, regardless of your personal relationship, they will be more understanding and trusting when hiccups occur that aren't in your control.

@Scott Mukensnabl

Hey Scott! I'm in WA state too and we do bridge 2nd position loans for acquiring properties. Depending on your need, if it's short term, that may be a faster solution and likely cheaper since cash out refis have gone up in rates and costs.

The other option if your rentals are not in WA could be to find a private lender willing to fund in 2nd position at a conservative LTV behind your bank loans. Lots of investors are looking for safe places to keep their money and short terms show them to keep it somewhat liquid and get you what you need for cash. Happy to float other ideas your way depending on the cash needs - long term, mid or short.

@Daniel Halsted

He means as a pooled mortgage fund participant. Similar to an LP in a syndication but geared towards being the lender/creditor and not an equity partner. These are typically offered by hard money lenders and private placement fund managers. Pros are having it diversified and capital deployed constantly while earning monthly or quarterly distributions. You also get the benefit of having someone educated and experienced help source, underwrite and fund the deals on your behalf. Downside is you must be an accredited investor to participate in most funds (even if you are using retirement plan funds), minimum threshold for capital is typically a couple hundred thousand (in my market, at least) and minimum number of years to keep money in funds. Finding your own deals and funding then individually gives you more autonomy and control if the loan doesn't perform but there can be lags in between each deal, which would reduce your overall return. However, I've found I can typically get higher rates on my own than through a fund so slightly diminished returns were still better than some average fund preferred return precentages.

They are definitely more geared towards the institutional lending space / capital markets these days, and less towards newer independent private lenders, but I'm hopeful we're going to change that this year! :) 

There are several third party loan servicers that operate nationwide. They all leave a little to be desired as the industry itself could use a lot of improvement. Some of those companies you could research would be Note Servicing Center, FCI, and BSI Financial. All have their pros and cons. Be sure to find a servicer that will produce a 1099-INT for you at the end of the year and also handles multiple payment options for the borrower including ACH debit/deposit. Makes for a smoother monthly transfer of funds. Stay away from Evergreen Note Servicing. They have pretty poor customer service, long lead times for payoff demands (up to a month, in some cases), and have had serious accuracy issues in the past couple years. I had 3 loans with the same borrower pulling payments from the same account and they only pulled 2 and somehow forgot the 3rd one. They told my borrower it was his responsibility to check his accounts and make sure the payment was pulled. In my opinion, it's the borrower's job to ensure there are sufficient funds in the account and it's the servicer's responsibility to make sure they pull the funds timely and accurately. 

Another option would be to check around with local credit unions or banks, or local escrow companies. Many in my region provide contract loan servicing as a service as well and could be a much better solution than these national companies. I found one we love working with in a small town in NW Washington State. They have been amazing to work with on all our loans! 

A few suggestions as well - be sure to get a lender's title insurance policy with each of your loans and as well as an insurance binder listing you as the mortgagee. This will protect your interest in the property should there be any insurance claims from damage done to the property. I know it's a just an empty lot and not a building but it's always a good way to protect yourself as a creditor.

I assume this is a 2-4 unit multi-family? If so, then a conventional refinance would be subject to some sort of seasoning of the increased rents after rehab and the pricing and rate will be higher for a cash-out refi versus a rate and term. If its a 5+ unit, then you would be refinancing with a commercial loan and that doesn't typically have pricing differences with a cash-out vs rate and term, and the ARV would largely be determined on the increase in rents (DSCR) rather than market approach, which you likely knew already since you are an appraiser. If you are looking to do a rate and term conventional refi and you have a really good relationship with your private lender, maybe you could work something out to have a higher loan amount placed on the deed of trust/mortgage to include your 200K out of pocket or a partial amount, so that you have a stronger chance to pull out the money you have put into the deal without being dinged for a cash-out.

@Jay Hinrichs Valid points on the PG since it's two separate legal actions, should your foreclosure leave you with a potential principal loss situation, and possibly could be wiped away with a bankruptcy. Another way to add protection would be to add additional collateral rather than, or in addition to, a PG. 

I actually am a private money lender, lending out through my own personal savings and SDIRA. I just happen to also own a business that sources and originates private money loans on behalf of those "truly private lenders" you speak of who prefer to lend out through us for the dealflow, added security, and concierge loan support throughout the loan lifecycle until the principal is paid in full. So, while I'm an originator by day and that is my source of active income, my passive income is through private lending of my own funds as well as buy and hold multifamily. Not sure why that is particularly relevant in the context of this string.

I personally view the difference between private money and hard money by the source of capital more than anything else. True private money doesn't rely on the capital markets, institutional backing, or warehouse lines typically associated with hard money. My business has none of these constraints and we place the lender individually on the Note and Deed, not in a pooled mortgage fund. So, what we provide is technically private money. The differentiation can be debated since the AAPL is moving away from hard money terminology altogether and positioning the alternative / bridge lending space as all private money, which I don't necessarily agree with. But, regardless of private versus direct placement with an originator, or hard money, character and collateral are arguably EVERY alternative lender's biggest weapons of safety, with equity buffer being the strongest protection of principal, not just individual private money. I've seen way too many independent lenders place too much value on the person's character and not enough in the property or project and it's landed them in hot water.