What Would You Do With This Evil Hard Money Lender?

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The life of an investor is not always easy – especially when dealing with evil hard money lenders.

During the declining market of 2007-2009, I purchased a small two-bedroom home with the intent of “flipping” the house after a quick rehab. As prices began to fall, I decided instead to move into this home and live in it while waiting for the home to sell.

The loan I had taken was a two-year loan with a hard money lender that I had done several deals with. We had a good relationship (up to that point) and before moving into the home I confirmed with the lender that he was okay with my wife and I moving in – to wait out the bad market. Obviously I would have loved to refinance the home into a nice, long term mortgage and turn it into a rental. However, because I had recently quit my job and was investing full time – I could not get a mortgage (perhaps you can identify.)

So I moved in as Christmas time approached, thoroughly enjoying my home. With the due date on the loan quickly approaching, the paperwork was drafted for the “extension” on my hard money loan. The hard money lender called to discuss the final issues.

And then I made a mistake : I mentioned another project I was working on.

Without him.

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OMG… What Do I Do Now?

Immediately hell was let loose on me. How dare I go elsewhere for funding? The lender’s primary reason for extending the loan, he claimed, was because he thought I was in a tough spot financially. Obviously if I was working on another deal I wasn’t in that hard of a spot.

So just like that – with just a few days before the deadline – he backed out of the extension. I had just three days to pay off the loan or be in default.

Now, I know what you are probably thinking: Why not just go to another lender and pay it off?

Ideally -this would have worked fine. However, as the market had dropped – so did my equity. I owed roughly $55,000 and the home was only listed at $75,000.00 at this point (starting at $99,000). I made calls to as many hard money lenders as I could to no avail.

My Options for Paying Off The Loan

To be perfectly honest – my first mental reaction to this stressful situation was: “Fine – I’ll just let him come take the house.”

I honestly believed he wouldn’t really foreclose on me because I had never missed a payment to him in several years and the home had so little equity it would have made no financial sense for him to do so. The hard money lender was currently foreclosing on a number of other homes and I knew he wouldn’t want to add mine to it.

However – as much as I wanted to call his bluff – I valued my integrity in the industry even more. In a small town like mine I knew word would get around. I didn’t want to be the guy who was foreclosed on by the biggest hard money lender around.

Creativity, Desperation, and Real Estate Investing

Robert Kiyosaki once said, “The poor say ‘I can’t afford it.’ The rich say ‘how can I afford it?'”

Say what you want about Kiyosaki and the Rich Dad empire – I absolutely love this mindset. Rather than shutting down your brain and hiding in a hole I forced myself to solve the problem.

I began by taking inventory of what I did have.

Not much.

I did, however, have a fair amount of open credit card lines that I could access if needed. While the interest rates were astonishingly high – I was able to access $20,000 in credit. Rather than using “Cash Advances” which carry an interest rate hovering near 30% and a hefty 4% cash-advance fee, I instead used the credit cards and paid a close friend using Paypal – which charged under 3% and was seen by the credit card companies as simply a normal purchase (around 8-9%.)

For the final $35,000 – I swallowed my pride and picked up the phone.

Thank you Dad.

I drained my dad of his home equity line of credit and was able to pay off the loan in full on the day the note was due.

I then dropped the price on the home down to my break-even point, switched real estate agents to the most successful guy in town, and moved out – leaving my furniture there to stage the home with.

Lessons Learned From My Failed Flip

Within three days I had an offer that closed a month later. I made no money on this deal but learned a number of valuable lessons that made me a better investor. I’m going to summarize some of these lessons, along with some tips you can use in your investing, below:

  1. Your Reputation is Everything: As an investor – your reputation matters. No business thrives without good working relationships -and relationships require trust. By being a person who is known as someone who does what they say they’ll do (even when others are not so trusting) you’ll grow your business through integrity and honesty.
  2. Creativity Can Get You Far: As I discussed earlier – a good real estate investor needs to look at a situation and say “how can I” not “I can’t.” Using credit cards was not an ideal situation – but it worked. One of the best ways to foster creativity is to simply talk with others who have been there. In my opinion – this is one of the most important benefits of the BiggerPockets Forums. A simple post with a question, scenario, or idea will often times receive dozens of responses from seasoned investors.
  3. Always have a Back-Up Plan: Like most house flippers during the market decline- I didn’t have a backup plan on this flip. I’ve since learned my lesson. I now never flip a house without at least three backup plans in place. Additionally, as Clay Hubur discussed earlier in his article about applying a “stress test” to your deal – I now make sure the deal pencils out even under a worst-case scenario

What would you have done?

Put yourself in my shoes for a moment. What would you have done in this situation?

Share your thoughts in the comments below. I love sharing stories like this – especially the troubles – because it can help new investors learn without needing to experience the same rough patches. If there is one area of “guruism” I hate more than all the rest – it’s the impression given that a seasoned real estate investor never struggles. In reality – real estate investing is tough and filled with challenges at every level. I joined BiggerPockets because I share this vision and believe the best way to lift our industry is to work together to help each other. So please leave me a comment and then head to the forums to answer a few questions over there!

Photo: Daniel Orth

About Author

Brandon Turner

Brandon Turner (G+ | Twitter) spends a lot of time on BiggerPockets.com. Like... seriously... a lot. Oh, and he is also an active real estate investor, entrepreneur, traveler, third-person speaker, husband, and author of "The Book on Investing in Real Estate with No (and Low) Money Down", and "The Book on Rental Property Investing" which you should probably read if you want to do more deals.

24 Comments

  1. You have a great mentality with looking at this as a lesson learned and being creative in your solution. Although, I think you should be careful about a few things (don’t take offense to this, just trying to add to the lesson):

    1) It’s not fair to call the lender evil. He followed the contract.
    2) Borrowing from parents could have lead to a disaster if things hadn’t worked out this way.
    3) Using a friend to make the credit card deal work could be a potential disaster for your friendship too.
    4) Being this leveraged in an investment = high risk

    In any case, I’m glad it worked out, you broke even, and you learned some lessons. Good luck on your next deal.

    • Brandon Turner

      Hey Keith and Kinsey – Very great points. I agree- by carrying out his part of the deal he wasn’t evil. The frustration came from saying he would refinance me, then pulling out. (Okay, “evil” might be a tad harsh…)

      I also agree- borrowing from parents isn’t ideal. In general- family and friends are rough.

      As for my friend – all I did was use my credit cards to pay his paypal account and he just wrote me a check. Yeah, he could have screwed me I suppose. Good thing he’s my best friend!

      And yeah, for sure- High Leverage = High Risk. I wish I would have been smarter back then!

      Thanks for the comments! I appreciate it a ton 🙂

  2. Thanks for sharing that Brandon….when I first read it I thought it was some newbie like myself that just screwed up like I did…I went back and checked the author ….wow….that is a big deal to share ….It is prompting me to share my story….I had to swallow my pride with hard money lender and ask for help….I didn’t read the fine print about how much I was going to have to bring to the table to close two deals really close, within days of each other…and I didn’t appreciate their guidelines how hardnosed they would be about inspections…and the timing….it really drained all my reserves and slowed down the rehab a whole lot…had to use credit cards to get it done until the hard money inspector was satisfied also….knowing the two properties I purchased were excellent deals I didn’t pay attention to details like I should have…didn’t lose money in the very end….but my pride was injured…but I just picked up the phone and called them and told them my screwup and they helped me get thru it even though I had to use credit cards…I almost didn’t call them…that was really hard to do….I was shaking my head about it because I thought I had ample reserves for the closings and to start the rehab…but I didn’t and that made me upset at first….thank goodness I had a seasoned and successful contractor also that coached me some as well….he didn’t help me financially…but he told me to swallow the pride and go talk to them….thanks Brandon for sharing your story….

    • Brandon Turner

      Hey Paul – yeah, I think learning from mistakes is better than learning from a book – which is why I share. I hope someone else can benefit from my mistakes. I’ve made quite a few over the years but have been super lucky/blessed not to have any negative lasting consequences!

      And thanks Paul for sharing your story! I think we all have rough patches, and it’s good to reflect on those so others can learn. Thanks!

  3. Brandon,

    Excellent post as always. Your honesty and sincerity in disclosing all the real facts about your transactions and your experiences is what’s really makes you different and at the same time provides such a high value added for us as investors. I used to participate in the forums and even when you can get some good advice, there are also the “so called experts” that seems to appear that they are always right and doesn’t make any mistakes.

    As for the post and your experience with your first flip I can say couple of things:
    1. Yes, the lender was some kind of evil. If you had been very responsible and diligent with your payments, there was no reason for not allowing the extension that he had initially offered you.
    2. I really liked the credit card idea. Having to draw from your credit card lines is something that no investor wants to do, but If you have to, in order to preserve your reputation, I don’t see any problem with that.
    3. High Leverage=High Risk – Real Estate Investing is all about risk and leverage, sometimes you can leverage less and sometimes you have to leverage more. Leverage is just part of the business and the real beauty of RE Invesing.
    4. Borrowing from parents – I do agree that is not the best thing to do, however if you pay your Dad back in full, I don’t see anything wrong.

    Robert Kiyosaky tweeted the other day. “To be an entrepreneur or successful investor you must have two characteristics…ignorance and courage”

    I would also add Ingenuity, Audacity and even some ignorance about all the facts, are one of the reasons we now enjoy so many great modern inventions. I’m convinced, that works the same way with Real Estate. Thanks for sharing your story and keep up the good work!

    • Brandon Turner

      Thanks Alex! There are always going to be people who “know they are right,” but there are countless others who NEED to hear differing opinions. Hopefully as Community Manager now at BP I can help encourage the constructive assistance to help others share their voice. That’s how I got through most of the tough times in my investing and I’m excited to assist others in the same way! Thanks for the comment and the Kiyosaki quote. That guy has so many good quotes, it’s crazy. I think I should start speaking in “quote speak” more often! 🙂

  4. I’m going to comment on the “Evil hard money lender” part. As you know, there are always two sides to every story.

    That lender was going WAY above and beyond by agreeing to have you move into the house. How? By putting himself at huge risk. SAFE act requirements mandate that all private lenders be licensed to make residential loans. Your moving into the house, even after the fact, made compliance with residential standards a requirement. Few hard money lenders are licensed, and if he wasn’t, he was trusting you, by virtue of your past relationship, not to complain to the banking commission.

    I don’t blame him for being annoyed when he found out you were doing another deal with someone else. He puts himself at huge risk because of the relationship, and to help you out because he perceived you were in a financial bind. Your doing another deal demonstrated you weren’t in as tough a spot as he thought.

    Was it a mature response on his part? No. Would I have reacted the same way? Emotionally, yes, but I would not have then immediately started foreclosure. But then again, I would not have taken the risk of allowing you to move in in the first place.

    In the end result, as Keith and Kinsey said, he wasn’t evil, he was simply enforcing the contract. Far too many borrowers are happy to sign terms until it’s time to meet the terms of the contract, at which time the lenders are villified. Paul Crowson’s comment above is good example of not understanding the process, and making assumptions.

    So kudos to both you and Paul for stepping up and doing what you had to do to make it work and make it right. I find unmet expectations is the root of many a conflict. And the root of the unmet expectations? Poor communication. So read the contract and ask the questions.

    Good blog post, Brandon, for opening up about your experience. I hope this comment adds a little to seeing both side.

    • Brandon Turner

      Hey Ann – I always appreciate when people look at the other side. I recognize that there are always two sides and that the lender probably thinks I’m a little evil 🙂

      I agree also about him letting me stay there. This lender was not one of the big professional HML, but just a big fish in a small pond. He actually preferred people staying in them, said it made break-ins less likely.

      And yeah, I understand his annoyance. He probably assumed that I went and dropped 20k or 30k on another property when I could have used it to at least pay down his note. In reality – I did the other deal with no money down. But I know he probably didn’t know that.

      Lastly – I think another mistake was not getting the extension in writing or at least getting it done earlier. I’m sure if I had a month or two notice I could have sold the home without moving in and dropping my price. It was only because of the HML’s agreement to extend the loan that it came down to the wire. Like you said: Poor communication. I do believe I understood the contract entirely – hence the payoff on time.

      Thanks for the comment Ann! I appreciate your perspective! The purpose of this post (and the sensationalist headline) was to engage in some conversation about this – so thank you!

    • Brandon Turner

      Hey Bryan,

      The first lender only would ever do one deal at a time. It was part of his policy, so I went elsewhere. Additionally -the first lender was a little too “involved” with every deal (showed up weekly, micromanaged, etc). Sometimes it felt like that lender was my boss or dad – instead of just a lender.

      I also wanted to expand my connections so I decided to try out the new lender – who turned out a lot better 🙂

  5. That’s a great story (in an educational kind of way)! Props to you for holding to the agreement you signed.

    You nailed it on the head…long term… nothing more important then your reputation, even if that means taking some short term bruises.

  6. Wow, a wonderful example of pulling from multiple resources to preserve your reputation. Definitely not the preferred approach, but sharing your story goes to show that real estate investing is not for the faint of heart.

    The one part that made me wince was borrowing from dad. Can’t say I haven’t done similar things, so maybe that’s why it made me uncomfortable. Did you consider any other options with the lender other than paying it off in full? Wondering if pride prevented you from communicating further, or he/she completely shut the door on all communication.

    The other important part of this story is the human side. People’s feelings get hurt, no matter how much skin they have in the game or how hardened they are. The reminder that relationships are paramount is so important!

    • Brandon Turner

      Yeah – that was a huge lesson in this: the human factor. People do get offended and hurt (including me, as I’m sure people can hear in my writing- several years later I’m still a bit bitter!) and that’s just another factor in the real estate investing game.

      And yeah – borrowing from Dad wasn’t one of my favorite moments. I paid him back, with interest, and now he actually invests with me on a few deals – as partners. 🙂

      Thanks for the comment!

  7. Maybe it’s just me but I felt the HML had a right to be upset. From what you posted you asked him to work with you past the original agreement because of a hardship yet at the same time were using your money to fund another deal.

    I would think ethics dictate you honor the commitment of the deal you already have and then do another property when you can afford it.

    Maybe I am just missing something not mentioned here.

    • Brandon Turner

      Hey Joel,

      I appreciate your comment. The only thing I’d say you missed was that I didn’t use any of my money in the new deal. I got 100% financing, including repair money, from the new hard money lender – something the angry HML would not have done. The new deal, with no money down, would have been silly to pass up since no money was needed. Furthermore – I did honor the deal. I called the lender months ahead of time to discuss options. He offered to re-new the term – I didn’t beg for it. Thanks for the comment Joel!

  8. Bradon, Thanks for sharing your story.

    Out of curiousity – How is your relationship with the lender now? Do you attend the same REIA meeting with him (you mention your small town)
    Have you two met or have anything in common since then?
    Integrity is a great virture & I know you’ll have slept better that night hat you paid off his loan than if you had cut off his bluff and he proceed with foreclosure.
    Tracey

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