All Forum Posts by: Ryan Blake

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@Adrian Birchler I think your best resource will be calling and speaking with other lenders.

As far as investments, it depends on the company. They may also require you to be a Qualified / Accredited Investor in the eyes of the IRS. That will put limitations on who can invest.

@Christine Newbrough

Hard money is the best way to BRRRR. Find a local lender that offers 100% financing (covers all purchase and all repairs). This means your out of pocket would be just the closing costs and holding costs. Then after 2 months do a rate and term refi to get out of the high interest rates. This will leave about 7% of the home's value invested in the property. It isn't a deal where you end up pulling out all your cash but it is still pretty good. The issue with trying to get all your cash out if you use hard money is the seasoning requirement for a cash out loan 6 months to 24 months. That is a long time to hold hard money.

@Adrian Birchler

You will want enough to fund and provide service for the loan given. I know that sounds basic but that is where you start. Most private money lenders lose business when they are not able to fund a deal. The unreliability is what drives investors to larger lenders. I can't tell you how many times I have seen investors burned by a draw not being able to be funded or told they would be able to close with a private lender only to be told a couple days before closing that the lender didn't have the money.

If you don't have at least $300k (enough to do probably two loans in my market), I wouldn't start lending on my own. I would invest in an HML or do joint ventures with others where you are the money partner and they provide the time and expertise.

@Copeland Duhon

Also, you asked "how does one justify paying 10+%." Just to be clear, you are referring to the APR, not the actual rate paid. You are probably paying around 1% interest / month in interest only payments plus 2 - 4 points up front as the origination fee. By the end of the loan this should be close to 7% total. Make sure you have room in your profit and this will not be an issue.

@Copeland Duhon

1- We don’t finance flips. They don't. They will fund the purchase of a property but generally will not fund the repairs. They will also want a 15 - 25% down payment for a non owner occupied home depending on your credit and financial position.

2 - If you finance as primary residence you have to hold it for 180 days. What you are suggesting is called mortgage fraud. I do not suggest you do mortgage fraud. That can financially ruin you. NEVER say you are buying a primary residence if you do not plan to actually live there.

3 - We only finance rental properties if they are “move in ready”. Anything that requires major renovations does not qualify. This is fairly common but the lender's idea of move-in ready can be subjective. They don't want to be stuck with a broken down house because they have no guarantee that you will eventually make it move-in ready. You have to be able to fund the repairs by yourself after you have made the down payment required.

I even have $30,000 of my own money to put down......still no deal.... For a conventional note, $30k is probably not going to be enough in any major market. For conventional financing, you will need at least $30k for every $100k of purchase price in reserves for down payment and repairs (30% of purchase price).

If you want to flip you are going to need to use hard money, a family loan, or partner with someone who already has money. Why would you want to get a 30-year loan to hold a property for 3 months? Or the better question is, why would a lender want to go through the process of lending you money on a 30-year note when you only plan to hold it for 3 months?

What margin do you look for in your flips? I personally only go for 72% or better (Purchase + Repairs / ARV = margin %). If you have this number right, you will be able to make money and still use short-term financing of some sort.

@Kurtis Johnson

After finding an HML that will lend where your prospect house is (most will only lend in major metro areas or have steeper rates if they do lend outside metro areas), I would ask these questions:

What is your investor success rate?

This is important to know but can be lied about very easily. Many don’t track this statistic. I don’t know if it is because they don’t really care or just haven’t thought of it. I think it is probably the most important stat. Look for groups who offer referrals to local contractors, Relators, etc. Also, look for groups that have boots on the ground in each market that know the specifics of investing in that area.

How many loans have you closed in this month?

Any good HML will know this number off the top of their head. You want a lender that is busy and closing loan in your area. Who cares if they closed 100 loans in other states, find out what they are doing in the same area you plan to be. If they are closing a lot of loans, they probably have something good to offer. A good number will vary based on the current market and the size of your metro area.

What is your maximum LTV and Initial Funding?

This is normally expressed as a percentage and that percentage is of the ARV. Most companies are between 65% and 75%. The higher the percentage, the better for you. That means they will lend more. Initial funding levels are a back way of putting the down payment required. If a company says they have 85% initial funding, what they really mean is they are going to require you to pay 15% of the purchase price as a down payment on top of the closing costs and LTV requirements. Right now most HMLs are between 85% up to 100% initial funding. Initial funding of 100% means there would be no down payment.

Do you require an appraisal and survey?

Most HMLs will require these. I am wary of the ones that don’t require an appraisal. The lender will perform a desktop appraisal but they will typically have a short view on the value of the property to protect the company’s investment which means you will be coming out of pocket more. Small-time HMLs may not require an appraisal but this could be because they will drive out and view the property themselves. Survey is a toss-up on whether or not it will be required.

Is there a pre-payment penalty?

Some will require you to pay the interest through the term or another length no matter how long you hold the loan. Just make sure that you include this requirement in your costs.

Do you have relationships with refinance lenders?

Make sure that they have a good relationship with companies that will refinance the loan for you if you are using a BRRRR method. You want to see something that has low or no seasoning for a cash out refi or that may require low amount of documents.

What is your draw fee & benchmarks for the repairs portion of the borrowed money?

Know what your fees will be to take out the repair money borrowed. Draws are almost always held back until you reach certain points in the project or that work is completed. They will also charge you to have an inspection by a 3rd party to make sure the work is done. I have seen this range from as low as $100 up to $300.

Do I need to pay anything before sitting at the closing table?

There have been numerous people on BP talking about how they paid application fees but they could never get their loans closed on any deal brought to the company. This is a practice by some less than reputable companies. One I saw charged $500 upfront to be pre-approved and would never actually fund any loans. Just beware. Most reputable HMLs will not charge anything until you are sitting at the closing table and all fees will be listed on the HUD-1 closing document.

And of course, what are the points, interest, and attorney/document/admin fees for the loan?

This will vary based on region but in general 2 – 5 points, 11% - 14% APR (meaning this is the annual rate so divide it by 12 to get the monthly interest amount), and documents fees can be from $600 – $1,900. The document fees are what will vary wildly from company to company. Just know them going in so that you can properly budget. You will also want to find out if payments are interest only or if some principal is built in. Most hard money will be interest only payments on the full approved balance of the loan whether or not if you have pull the draw funds for repairs.

If you have any other questions, post them below so that we can all learn from the answers.

@Corinne Carrasco

You have it right. The only way to get a proof of funds/pre approval is to have them run your credit. There is a chance that it will not conform to what the hml is looking for. Interview your hml before you choose one. Search for a lender that is willing to look at the property before you offer, doesn't charge an up front application fee, and is actively lending in your area. Loans are not often denied but just may not be at the loan to value you are looking for. Most lenders are looking for homes to be in major metro areas, within city limits, conforms to the neighborhood (not super small, super big, or weird architecture), and within the ARV range they tend to work with.

@Henry Paul Trinidad I think that is a fine place to start. Just work with a real estate attorney as every state has some rules around this and they tend to change frequently. Lots of red tape. As long as you play by the rules of your state, it can be a good opportunity.