SKIN IN THE GAME- WHAT SKIN?

[Toyin Dawodu]

As the number of investors swell, so do the number of "so called hard money lenders" Since the recession, a lot of hard money lenders, or as I will call them, "pretend hard money lenders" ask you this question. How much skin do you have in the game? WTF?

This is the most irritating question I get from these so called hard money lenders. The reason I go to a hard money lender is because I do not want to personally qualify or put my money in the deal. My first question to the hard money lender that asks the question is what do you mean? "Skin in the game?" I found the deal, didn't I? Don't you think my cost of finding a deal that is worth $190,000 ARV and I am buying it for $106,000 is enough skin in the game?

Usually the so called hard money lender will respond, “But I still want you to put some of your money in the deal. At this point, I just hang up on the lender, "gently"

The reason we are investors is to find good deals and have others come to the party and share in our fortunes. So if I am giving a hard money lender some business that makes sense, it is irritating for the hard money lender to be harassing me with "skin in the game baloney." After all, that is why you are a hard money lender. If I wanted to put more skin in the game, I would have gone to my bank.

Please chime in, fellow investors. Do you think these hard money lenders have a right to call themselves hard money lenders when they behave like traditional banks?

I have done over 400 deals, and rarely do I put any skin in the game besides finding the deal. I consider that my skin.

By the way, I found a lender who financed the above recently closed deal by loaning me $120,000. With an after repair value of $190,000, his LTV is 63%. After paying loan costs and other escrow fees, I walked away with $7,545 in my pocket for buying the property. When I exit in 90 days, there's at least another $40,000-$50,000 waiting for me. So why would a reasonable lender ask me to put money down loan to me money on a 63% LTV property? That is my question to you fellow investors. Are these hard money lenders for real or are they just pretenders? Let me have your thoughts.

[Jay Hinrichs]

@J Scott say it aint so us lenders could never lose money at 65% LTV>.. I only lost about 10 million from 08 to 2011... but hell who's counting :) it seems like the dark days and I can laugh about it now.. but I had to say good by to retirement... the Jet I had on order and a many other things... LOL>.. By the way the Jet was only 1 million and I had partners don't want anyone to think I had Gulfstream money :)

In some of the markets like the loans I did in Atlanta I would have had to be at 20% LTV to have just broken even... nice homes that were worth 140k I lent 80k on and end up foreclosing and selling for 30k in 09 and 2010.. But I did buy back 50 of them. from other lenders like me !!!

[James Wise]

I don't use HML but it seems pretty reasonable to me for a HML to want the borrower to put in some cash. Just makes good business sense.

[David Dachtera]

Those who believe "skin" equals "money" clearly to do not understand the phrase, "skin in the game".

My $0.02...

[Jay Hinrichs]

@David Dachtera  well it can be other things like cross collateral.. pledge of stock ... your first born etc etc.  A very well heeled PG backing it.

but by and large our audience is looking for some HML to fund 100% of his or her deal and as stated right out of the gate that is pretty tall order

[David Dachtera]

Originally posted by @Jay Hinrichs:

@David Dachtera  well it can be other things like cross collateral.. pledge of stock ... your first born etc etc.  A very well heeled PG backing it.

but by and large our audience is looking for some HML to fund 100% of his or her deal and as stated right out of the gate that is pretty tall order

I actually agree with that. Private money would be far better, in my view, especially if those lenders are educated. A private money lender who understands the deal and agrees that the numbers work would make a FAR better business "partner" than an HML who isn't and/or doesn't.

Again, my opinion. Others' "mileage" may vary widely.

[Bryce Calhoun]

Interesting discussion enjoyed all input entertaining as well as informational

[David Dey]

@Toyin Dawodu you have raised quite a number of good points as have the actual lenders here on this thread.  Both sides are right on many levels.  

Having raised millions of dollars, and having done over 1000 deals with only using one bank loan, the rest being private money, hard money, and creative financing, and not only having borrowed but also lent, I think I am qualified to speak to all points.  

Toyin, your not gonna like this but it's a fact, there will always be more good deals than money.  That is why the investors golden rule exists.  You know the one, "the guy with the gold, makes the rules."

The good news is that if you follow a few simple rules and you actually have good deals, you won't have any problem getting your deals funded.

Here's the truth in lending, (pun intended) there are two questions every lender asks in making an investment decision. It doesn't matter if it's a bank asking for your 10-03 and tax returns or a Private lender asking if you have skin in the game.  It doesn't matter how they ask it, it always boils down to 2 questions.  And the good news is, if you answer these questions right, to your lenders satisfaction, you will get your deals funded 100% of the time.  And if you've ever been rejected for a loan, look at these two questions, if you're being honest you will see that you missed them somewhere.

Are you ready for the questions?  (I bet even the lenders are anxious to find out what these magical questions are)

Here they are!!

Question 1)  what's my security?  Or another way of asking it, how am I not going to lose my money?

Again, Bank of America asking for your credit score, tax returns and your 3 months of bank statements is really only asking you one thing, "how are you going to pay me back?"  Or "what's my security?"

Have no fear, the bank wants to lend you their money, they advertise and market and practically beg you to borrow from them.  They just ask this one little question.... In sooooo many words.

And take it one step further, if you do borrow from them and then default on your loan, will the bank take it personally? No.  They probably don't even remember your name.  Yes they will take your collateral and will report to the credit bureau.  They may even put a judgement against you, but it's just business, it's nothing personal.

A private lender on the other hand, has saved his money over years.  He's has worked on his job or business, and set aside this money as a nest egg for he and his family.  His family's legacy may very well be on the line in his loan process as this could be their inheritance.  Now, with all that on the line, if they lend you the money and you default, do you think it'll be personal to them?  You better believe it!!!

So, seeing how important their lending process is to them, you can see how important answering question number one TO THEIR SATISFACTION, is going to be, right?

If you have made it past the first question, the second will be a breeze.  However, don't take it for granted.  It is still very important to your lender.

The second question is, "What's my return?"  

Ta-Dahh!!  Those are the 2 questions every lender asks.  

Now I'm going stop the soap box speech for a second and give a pop quiz.  @Toyin Dawodu since you have over 400 deals under your belt you will probably ace this, but humor me.  

Mr money bags is standing in front of you, you've presented your deal, and now he's asked you question number one, "what's my security?"

What is your answer?  (I'm not being rhetorical, please answer the question.  And anyone else on this thread @Charlie Fitzgerald @Al Wilson @John C S. @Mike Arias @Rod Desinord @Account Closed )

I'll weigh in after you give it your shot.  I bet you borrowers will be surprised by what the lenders here will say.

[David Dey]

@Jay Hinrichs @James Wise @Mary B. @Bryce Calhoun @J Scott @David Dachtera @Boyd McClean
i didn't realize this was a 2 page post.  Please review my earlier post and put your $.02 in.  

Jay, I'm especially interested in what you are going to say the correct answer is to question 1.

[John C S.]

Answer to question 1 is i already own a house with x amount if equity. Question 2 it will vary from deal to deal.

[Account Closed]

David Dey

Your response is perfect, thanks for sharing.

[Account Closed]

@Toyin Dawoduundefined

The credit score indicates a person willingness to pay his/her bills on time. I is simply a quick screening method. The deal may support the loan but if your history is that you are late or do not make timely payments what is to convince me that you will not use my payment to pay a more urgent bill? I have only had to foreclose twice. Neither time did the borrower have a decent credit score. Never again.

[Anna Watkins]

Even banks have varying requirements, depending on the bank, the borrower, and the property.  Sometimes their terms work for the investor, sometimes the investor moves on to another bank for a given deal.   They all get to call themselves banks.   Sounds like your quarrel is with the definition only.   Small problem to have -- congratulations!

[Tom Krol]

Originally posted by @Toyin Dawodu:

By the way, I found a lender who financed the above recently closed deal by loaning me $120,000. With an after repair value of $190,000, his LTV is 63%. After paying loan costs and other escrow fees, I walked away with $7,545 in my pocket for buying the property.

It is amazing how many wealthy Americans are searching for a place to put their money to work and how many Investors are searching for private money. As soon as we began speaking about our deals differently we attracted more cash then we could ever leverage in a lifetime. We found so many moneylenders in our network we were overwhelmed. 

HERE'S HOW WE DID IT...

Our first deal was a hard money bridge loan at 12% and 3 points upfront. YUCK!

After taking these action steps our second deal was a private note for 9% and no points!

In our case we are Wholesalers cherry-picking our pipeline for our rental portfolio. 

The most effective way we have found to find money is to speak about how well our lenders are doing by working with us. We did this at multiple REIA meetings, networking events and even included simple notes in our cash buyer emails along with our deals.

Additionally we called (called, not emailed) every cash buyer, agent, wholesaler and title company on our list and asked questions, not taking "no" for an answer. This is so effective. 

I am not an attorney and do not know the laws and regulations with soliciting cash so check with your attorney before taking any action on this advice. 

Just like sellers and just like buyers, we have found you catch more dogs when you run away from them and they chase you - rather than you running towards them and they run away from you. By never trying to convince anyone to lend us money but by just speaking about how well others were doing we had lots of people with money chasing us! 

One guy even found my house and knocked on my door to lend me money!!! LOL Man I love this business! 

To Great Adventures!

Tom Krol

[John C S.]

Tom Krol brilliant way of approaching it

[Jay Hinrichs]

@Tom Krol  are you inferring that you have private lenders that are taking on long term debt so that it makes sense for you with buy and hold deals ?

Or are you talking about this in the context that they give you short term money to stabilize the asset so that you can refinance it?.

One of my mentors and business partners who was and is very successful in the Wine industry in Napa... I asked him once how he raised capital to buy all these hundreds of millions of dollars worth of vineyards which they own... his answer I ask every one I ever met.. So here I am at the time a little Timber dude from ORegon and I put 25k into one of his deals... So you can see he asked everyone..

[David Dachtera]

@David Dey

The answer to your question #1 is a first position lien on the subject property. Like any other lender, if the borrower defaults, you foreclose and sell the property at auction to recover your investment. If you know how, you can also market the failed deal to other investors (we're always looking for leads!) - people you know who have your confidence that they can complete it to recover your investment and produce your return.

The answer to your question #2 is spelled out in the documents your borrower presents to you. You should be sufficiently savvy to understand what is being presented to you and then do your own due diligence to verify the numbers and that the deal works as the investor has presented it. If you don't like the deal, you don't lend - period.

That's why my group and I prefer to deal with educated lenders: so we all "speak the same language".

[Jay Hinrichs]

@David Dachtera  that all sounds good in theory but is not reality in practice especially in mortgage states that have loooong foreclosure incubation times.

Attorneys who have set up a practice to throw every monkey wrench into the foreclosure process thereby letting the owners live there rent free for up to many years in many areas.

then what happens in the owner occ side of this.. is the owner finally rationalizes its not them its the big bad bank and the bank has screwed them over etc etc...

Now did banks do that to themselves in some instances you bet... But in 99% of the cases its just owners wanting a free ride and turning the tables on the banks.. accusing them of wrong doing by even loaning them the money in the first place...

With investors it falls into a few catagories were their properties go into default.

1. butchered rehab totally upside down. ( this can be the contractor stole the draw money) and any other myriad of things.

2. Investors buying in management intensive areas and not knowing the TRUE risks associated with those assets and neighborhoods.. they get a lot of turn over a lot of damage they were first time landlords and bought a few rentals and only have maybe 20k in reserves they run through there savings property never gets better and they finally fail.

Half of the foreclosres we see out there are number 2.

[David Dachtera]

You can always negotiate with the failed investor to see if they will quit-claim the property back to you or give you a warranty deed (preferred) in lieu of litigation, a.k.a. "deed in lieu". They might and they might not. It's the nature of the business. Can't take the heat? Stay out of the kitchen.

Remember, we're talking about rehabs and fix-and-flips - it is unlikely the new owner is currently occupying the property, though that can happen (I bought my first two properties as owner-occupant with FHA-insured conventional financing).

That "half of number 2" you're seeing out there are uneducated investors dealing with uneducated lenders - neither "did their homework", or even knew that there was "homework" to do. Most of number 1, as well.

[Jay Hinrichs]

@David Dachtera  I would not call BofA or wells fargo uneducated lenders.. they are forced into lending in areas they would probably red line if they could.

on the fix and flip again your coming form a position of inexperience as a lender.. it all sounds good in theory. But the reality is when a borrower goes bad... ESPECIALLY a HML borrower they know first off that this probably won't impact their fico.. so they play hard ball.

Its simply not as easy you make it sound.. you have to actually have been a lender and gone through the foreclosure wars to understand this fully.. I certainly understand your view point from a lay person's perspective.. but as stated its not reality and not something a professional lender would agree with.

[Hector Guerra]

 I prefer the conservative approach of bringing something to the table when approaching any deal, primarily liquid capital.  

[David Dey]

@Jay Hinrichs so peek at the questions above and weigh in.

As a lender, I've been holding my breath to take in your answer to my question.  

You are mister money bags in this scenario. ;)

So I have a deal and bring it to you, and you ask me the question, "what's my security?"

What are you looking for?

[Jay Hinrichs]

@David Dey  I like @Charlie Fitzgerald  ( I am assuming Charlie is like me in this regards) are kind of old school lenders.

I don't loan money anymore so take that for what its worth.. But when I did and or if I am doing my JV stuff with folks its really simple for me.

Its the 3 C's    and in this order of importance  Character, Capactiy, Collateral.

So as you can see we want good collateral but if you don't have the Character I am looking for in a business associate I could care less about the Collateral, and if you have no Capacity same thing.. sorry when you get some Capacity come back.

But if you do meet those requirements and we start a relationship I will usually keep that client for years on End and will bend over backwards to make sure they are successful and if that happens it means I am successful.. many of my guys and gals have been with me since 2001 and of course we rode through 08 to 2010 together .. Crying in our beer many times.. But the sign of a good HML is how they work deals out as well.

If your borrower goes dark on you .. well its Katy bar the door.. if your borrower exhibits top notch Character then you go to the ends of the earth for them.

that's my take on it.. But with the new NMLS rules and all of that I have no interest in HML anymore. I just partner with those that exhibit my criteria and off we go.

[David Dachtera]

I would not think of BofA or Wells Fargo as HMLs, rather as traditional lenders.

[Jay Hinrichs]

@David Dachtera you were responding to my # 2 scenario buy and hold.. which BOA and WELLS fund a ton of that paper. HML rarely if ever do.. I never did

[David Oldenburg]

@Toyin Dawodu I will admit I haven;t read any of the messages here, so I hope this is not a repeat. There is a big difference between "Hard Money Lender" and "Private Money Lender". A hard money lender is just like a regular lender, with different guidelines. Thye have set "rules" and "conditions" that most loans must meet, and often times that includes a down payment "skin in the game". I have done both types of lending, and institutional lending (FHA, VA and CONV) for 25 years.

Private money lenders are individuals in most cases who loan their own money, and usually do not care about skin in the game, as they are much more concerned with LTV and ROI. I have loaned 100% of what people want many times, but it was because it was a great deal and great return for me. I also had low risk because of the investment and ARV. As a private money lender, I have also benefited on these deals, because no one else would loan them money, even though they made sense. This allowed me to earn a higher return, or even "partner" with them on the deal.

Good luck with your investing!