What is the Order in Which to Secure Hard Money?

Question

Hi All,

I am an aspiring real-estate investor from San Diego, and after spending several months in the research phase, I have come to the conclusion that a buy-and-hold strategy for cash flow is going to be extremely hard to implement in the area given the insanely low cap rates and CCR. To put it into perspective, the house next door sold for over $800k and the renters were paying just under $3k a month in rent. This is not an exception to the rule by any means.

As a result, I have come to the conclusion that I will try to flip my first few homes to take advantage of the fact that San Diegans are willing to pay a premium for a turn key house and often avoid homes that need a lot of initial rehab. This will also be an amazing opportunity to learn the rehab portion of my future buy-and-holds.

I am in the later stages of building a step-by-step guide for myself on the process that I *expect* to take in my rehabbing journey and I am having trouble wrapping my mind around the financing part. It seems pretty obvious to me that I will need to use hard money at this point, but when can I expect to secure this money?

Common sense as well as every book / blog / forum post that I have read says that you should secure your financing before making an offer on a property, but this seems backwards for hard money, as the lender wants to see your investment before lending out any money.

Can anyone shed light on this part of the process? Would I expect to make an offer on a property, put in a financing contingency assuming that it is accepted, and then find a hard-money lender? Or would I find a property that I think is a great deal, put together an analysis on the property, and then propose it to the hard-money lender, hoping that the property doesn't get snatched up from under me? Or do I need to somehow build a relationship with several hard-money lenders before even looking, increasing the odds that they will lend me money once I find something?

Thanks in advance!

Justin R. · Answer

Account Closed HML is a brutally competitive business here and they all know they need a constant stream of new borrowers to keep the business working.  If you go to an event or two (such as the established monthly meetings for NSDREI, the BP Project Meetups, or the BrewRE events), you'll see 3 or 4 HMLs networking.  I'd suggest just going there and chatting - talking to and meeting people is what they want to do.

Expect to be taken with a grain of salt if you don't have experience, but you'll be setup so when you've got something under contract and call, you can at least say, "I talked to you at such and such event and have a project in hand... thought I'd give you a call to see if you're interested."

Ariel Salvaro · Answer

Hi Nicholas,

First, I think you made the right decision in switching from buy & hold to fix & flip. Also, I completely understand your reluctance to move from San Diego - I visited over Christmas break, and it was wonderful - I saw a lot of new developments coming up, restaurants opening, families playing in the parks, and there are a lot of transplants from all over the country. Factor in the great climate, the relatively cheaper prices than neighboring Los Angeles.... As an economist, I think San Diego is one of those metro areas that will continue to grow, and with it, so will the demand for new homes from flippers such as yourself.

To your original question, usually the ideal timeline is as follows:

1. form an LLC for your REI projects,

2. identify the HML you want to work with,

3. establish a relationship with them (e.g. we do an integration call with all our new clients where we establish exactly what their goals are, whether and how they can achieve them with us, etc.),

4. find your property,

5. quickly check with your HML if their numbers match your estimates, and if yes (i.e. if your HML will fund that deal), make an offer on that property.

@Lee Ripma makes a great point about forming an LLC - it's not always required, but it is definitely advised, not just from an HML perspective, but even generally for your own protection - why put your entire personal wealth at risk, when you can easily protect it with the LLC. Especially if you get into REI full-time, there's always the potential for a lawsuit, or other legal expenses, and it's best to minimize the risk of those things hurting you where they don't have to from the very start.

To identify your best HML, I would recommend both networking with lenders at your local RE meetings (the way @Justin R. suggested), and reaching out to established HMLs from BiggerPockets' database for California (as suggested by @Sean Walton), which you can find here:

https://www.biggerpockets.com/hardmoneylenders/cal...

There are not that many, and it pays to connect with all of them, shop around, see which ones work best for you.

I hope that helps make the timeline more clear!

Bob Okenwa · Answer

Account Closed

I'm from San Diego and I'm all to familiar with the real estate prices there. Simply astronomical. That's the main reason why I've stayed in Phoenix. Anyways, if you haven't already reached to an HML, I'd suggest calling a few and getting some information as to how they fund deals. Most, if not all, will have some sort of application process and some may require a background/credit check as well. You can at least go through the initial paperwork phase and get pre-approved through the HML and then be ready to strike when a deal becomes available.

Account Closed · Answer

Thanks for the information guys! I'm new to BP and it's amazing to see how many people are willing to reach out with clear, concise and extremely helpful information.

@Ariel Salvaro your timeline made things crystal clear in my mind, and will become part of the guide that I am building for myself. It sounds like you guys create solid relationships with your clients by establishing their goals and deciding how you can help them to achieve those goals. I hope to find some quality HMLs like that here in in San Diego.

Bruce May I will definitely be contacting you in the near future as I wind down on my initial learning /planning phase and begin to get myself out there!

Bruce May · Answer

@Nicholas, I do hard money lending and would be happy to answer your questions. The basics of this type of financing is that the loan is done based on the property and less on the borrower. It's called hard money because the loan is made against a hard asset, ie. the home you are flipping. Most of us can give you an quote the same day or the next day. I'll connect with you so you have my number and can call if you want to ask specific questions.

Account Closed · Answer

Thanks @Justin R. and @Sean Walton for the great advice. Sounds like the deal is to basically get the ball rolling ahead of time by meeting with and networking with several lenders while figuring out how each particular lender functions. Then, when the deal is found, you already have a foot in the door. I will definitely be going to a couple of events in the near future.

@Lee Ripma I didn't realize that some would require you to hold the title in an LLC. Knowing this may save me a lot of time in the future! Will definitely PM you by tomorrow when I get more time.

Account Closed · Answer

@Bob Okenwa

Thanks for the information! I've seriously considered leaving San Diego for some time to try to find a more beginner-friendly market, but I'm not sure if I'd be ready to leave my friends, family, hobbies and job behind. I will definitely reach out to a HML prior to beginning the process and see if I can get any initial pre-approval out of the way. I wasn't sure if they would even talk to me without bringing some kind of deal, but it sounds like contacting a few could help and certainly wouldn't hurt!

What is the Order in Which to Secure Hard Money?

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