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  One thing about unsecured notes.. that many gloss over.. is there is no defense to default you can move against them Post Haste get a judgment and tie up any and all assets.. actually to a well to do borrower they are in many ways better than a first charge lien. ( just threw some Aussie in there to spice things up) ... As long as the unsecured note does not have a Usarious interest rate.. One needs to be careful there.

[J Scott]

Originally posted by @Jay Hinrichs:

@J Scott  One thing about unsecured notes.. that many gloss over.. is there is no defense to default you can move against them Post Haste get a judgment and tie up any and all assets.. actually to a well to do borrower they are in many ways better than a first charge lien. ( just threw some Aussie in there to spice things up) ... As long as the unsecured note does not have a Usarious interest rate.. One needs to be careful there.

That's interesting, and good to know.  When I borrow on these notes, I always expect that, worst-case, the money will be returned to the lender from one of my personal bank accounts, so that's never an issue.  And I know that my relatives all have the same values I do, so I'm not concerned about anyone hiding assets (though David Dey's point is certainly valid!).

And when I lend on an unsecured note, I always assume that the personal guaranty is worthless, and I make the loan only if I'd pretty much be comfortable doing it without the guaranty.

But, knowing that the guaranty is worth more than I expect certainly makes me feel better...though hopefully I'll never have to test the theory...  :-)

[Jay Hinrichs]

@J Scott  PG is different than a unsecured Prom note... the unsecured prom note is cut and dry... always get one of those then the PG is not necessary.. and in FLA of course get the wife's sig on it as well.. you know those asset protection states.. !!!!

[David Dey]

Originally posted by @David Begley:

Originally posted by @J Scott:

Originally posted by @David Dey:

Of course, hard money lenders might disagree, but I also wouldn't pay hard money rates.  😉

Also worth noting that I make plenty of private money loans, and as both you and Jay pointed out, character and capability are worth more to me than collateral. 

I think most of us here are not on the same playing field as J or Jay... and would give anything to have access to commercial bank credit with no points and 4-5% interest rates; however, most of us aren't and hence the need for HMLs. If you want to borrow at these awesome terms & rates, you should expect to provide tax returns, personal guarantys, W-2s, along with the rest of the proctology exam required by federally regulated and insured banks; however, if you are going to a HML or shylock, you know up front you will have to pay exorbitant fees and rates but the trade-off is to avoid the rectal exam. HMLs that want the best of both worlds should be avoided at all cost. It's not required, nor needed and there are plenty of good HMLs that know the difference.

 I'm not sure you understood what @Jay Hinrichs was saying.  He was using warehouse lines of credit to lend that money at a higher rate to HM borrowers.  This is a common practice for many "institutional" hard money lenders.  They use these lines of credit and thereby have to follow the ground rules that they had set up with their lender.

This system does have its positives and its negatives. The Negative you all ready know.  They have set guidelines that they need to follow in order to give you a loan.  This is going to be like a little more aggressive bank loan.

On the other hand, private hard money loans can be very volatile.  You are a hostage to how your lender feels about the deal, or if he's having a bad day, this could influence your receiving a loan.

Just somethings to think about. There is a place for all money. Private, HML, institutional HML, and straight institutional lending. Your success will be determined by knowing when to use what.

[J Scott]

Originally posted by @Jay Hinrichs:

@J Scott  PG is different than a unsecured Prom note... the unsecured prom note is cut and dry... always get one of those then the PG is not necessary.. and in FLA of course get the wife's sig on it as well.. you know those asset protection states.. !!!!

I generally do loans (prom notes) to business entities, and use the PG to get to the personal assets of the business owner.

Likewise, I borrow with my LLCs (prom notes in name of an LLC), and provide the PGs so that the lender has recourse on my personal assets.

[Jay Hinrichs]

@J Scott   that works as well

[Lee Scarlett]

I think I'm on my 4th/5th hour reading this post, (granted I slipped in lunch, dinner etc) lol. Keep it coming guys.  

@David Day you are very good, cry cry good. Please write a book, I've been reading your posts & I think you could teach well.

[David Dey]

Originally posted by @Jay Hinrichs:

@David Dey  that's interesting I would think a trustor  or Mortgagor could get that transfer to your bank set aside.. One thing having a recorded debt instrument allows is the borrower the right to the foreclosure action and the right to cure.

this is just like those that do hardmoney loans and get the borrower to sign a Deed in Lui at closing saying they are going to record it if you don't pay and thereby circumventing the foreclosure process.. while in practice a borrower may allow this and just slink away.. if this was brought in front of a trier of fact they would set aside the deed in Lui.. but interesting set up you have with oyur bank.. but it could be perfectly kosher there in FLA I don't think it would fly in Orygun.

 Yes, a Florida land trust does allow you quite a number of benefits that a traditional mtg will not.  

The cool thing about a FL land trust is that it can be real property, personal property, both, or neither at the designation of the owner.

This along with the fact we are dealing in the commercial side of lending, which in this case is closer to partnering than straight lending, allows for the buyer beware scenario to apply and contractual agreements to stand tall.  

Could it be fought?  In theory, sure.  Anything can be fought.  However, 2 things.  1) there is case law that supports this process.  2) because you are setting forth the terms before the default, the "borrower" is already expecting the repercussions and is more likely to accept them as stands.

[David Dey]

Originally posted by @Lee Scarlett:

I think I'm on my 4th/5th hour reading this post, (granted I slipped in lunch, dinner etc) lol. Keep it coming guys.  

@David Day you are very good, cry cry good. Please write a book, I've been reading your posts & I think you could teach well.

 Lee thank you for your kind words.  I've been on both sides of the fence, that's why I think I'm qualified to speak to both sides.  

I do love this platform that allows both sides to come together and voice both sides of the issue, which will allow everyone to put themselves into the other side's shoes.

Long live BP!!!  :)

[Matthew Paul]

Very good points being made on this discussion . And as I read thru the post I find it a bit interesting . Why ? Because people are willing to pay points up front and pay 18% interest . But dont believe they should give a contractor a deposit to start work , or they want to buy their own materials . Asking a contractor to front his money for materials and labor is like asking a HML to lend you money for free . AND if the contractor doesnt get paid , his lien would be second position .

[J Scott]

Originally posted by @Matthew Paul:

Asking a contractor to front his money for materials and labor is like asking a HML to lend you money for free . AND if the contractor doesnt get paid , his lien would be second position .

First, that's a bad analogy. Asking a contractor to front his money for labor and materials is not like asking an HML to lend for free -- it's like asking an HML to wait until the end of the project to get paid their principal and interest. And, I know plenty of HMLs who are willing to do that.

Likewise with contractors.  The large, professional contractors I work with generally don't ask to get paid anything until the end of the job.  In fact, many of my new construction contractors are net-15, net-30 and even net-60 on payments.

Certainly, the smaller contractors I work with don't always have the cash to buy materials upfront, and for them, I'll happily pay a deposit upfront (or provide materials myself upfront).  But, I also get much better pricing from those types of contractors.  

Just like lenders, there are lots of different types of contractors...

[Account Closed]

Not having skin in the game gives free reign to Murphy's law. The contractor ran off with the money, the home was vandalized,the roof collapses,etc etc Market values can quickly change and leave the lender without protection It sounds like you don't like the rules of the game, so stick with wholesaling it is your perfect scenario and no rules to be upset with @Toyin Dawodu 

[Jay Hinrichs]

@Matthew Paul  yes but lenders don't butcher construction  jobs. and or walk off with materials etc etc.

AS J scott points out there are rehab contractors that just can't carry a job and then there are contractors that do new construction.  I find they are very different. ON new construction they get paid Net 10 on my jobs. so they carry us 40 days. if they started work at the beginning of the month.. the only thing we pay for is the lumber pac.. which is usually the largest single cost item.

rehab contractors by their nature almost always require funding up front.  I think that is two fold one  they are working for many folks who are just starting in the industry and they get stiffed and or they are just not well enough capitalized to carry a job.

Now to be fair our contractors all have accounts and their accounts carry them as well. Our guy buying plumbing from Fergusons does not walk in with a check he gets billed. Of course unless he has bad credit and they have him on cash up front.

your working in the wrong state.. a properly filed materials man lien in Oregon is a super lien jumps ahead of everything but ad valorum tax's and IRS or state liens.. therefor a sub in Oregon gets paid 99% of the time is they know what they are doing.

[Scott Carder]

Originally posted by @Matthew Paul:

Very good points being made on this discussion . And as I read thru the post I find it a bit interesting . Why ? Because people are willing to pay points up front and pay 18% interest . But dont believe they should give a contractor a deposit to start work , or they want to buy their own materials . Asking a contractor to front his money for materials and labor is like asking a HML to lend you money for free . AND if the contractor doesnt get paid , his lien would be second position .

Most contractors get paid after the job is complete, sometimes 30 or 60 days later. I'm a contractor and never get paid upfront. I have refused it before when offered.

[Jay Hinrichs]

@Scott Carder  we hit a happy medium.. get invoice on the 1st pay on the 10th  get invoice on the 7th we pay on the 10th of the next month.. teaches our subs to get the billing in time.

Now to be fair we are using bank loans.. so they send an inspector out before we can get our draw so we need our draw request to them by the 2nd to get our draw by the 10th.. so if our subs want to get paid they get us the invoice.. plus they need to sign lien release with check.

[Ndy Onyido]

@Toyin Dawodu

I really did not want to comment in this post as it truly does not make any sense to me.

Its a simple basic financial principle to ask for a 'skin in the game' , a 'commitment' before parting with any funds, even in the concentional lending. Yes, you bring a so called deal on the table, but what is your risk? What stops you from taking a walk when the deal goes south? what do you stand to lose? And again, put yourself in the shoes of the money lender; they are not there to take reckless and uncalculated risks; any risk without mitigation option is not worth it.

Again, @Rod Desinord asked a question: which HML did you work with that does not require skin in the game?

Any credit officer ( bank or HML) that does not require a contribution or 'skin in the game' is not worth the paper his name is written on, because the basic principle of credit is already compromised. This was the same kind of financial recklessness that caused the sub-prime era; people who were not credit worthy were given exposures/credit limits they never dreamt of qualifying for; and because they did not have skin in the game, it was very easy to casually walk away and leave the mess for the bank/lender to count their losses. I blame the govt for quaranteeing such a program--(another debate for another day)

Lastly, a question for @Toyin Dawodu :

If you did over 400 deals ( probably without skin in the game?), do you still have need for HML ?.

If I was a HML, I will be very careful with people who do not want to comit to the deal; its a red flag that they either do not believe in the deal, or reallythey are just time wasters...

My one cent! 

[Tom Krol]

Originally posted by @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?.

Short term for refinance.  

[John D.]

A HML may be by definition lending on an asset, but that does not mean the asset is the only (or even necessarily the majority) of the decision criteria used in making the loan.

And there's no reason it should be. The asset lent on, and the criteria used to understand the potential risk of a loan, are not 1:1, not even close -- nor should they be.

[Ryan Dossey]

I think the reason folks use HML in the first place isn't so much to not have skin in the game but for asset based lending. If you could qualify for a traditional bank product you often will get better rates. But a lot of folks in REI for one reason or another can't qualify. Not to say that's always the case.

There are tons of people who will JV deals if you can't put skin in the game.

But you're going to be paying more. 

I think it's just like anything else... The industry is changing. You either adapt or drop out. 

[Jay Hinrichs]

@Ryan Dossey when your talking about rehab loans that are the province of HML and private lenders nationwide there are just not many banks that will do these.. they (Banks) really never were deep into the space.. and after the GFC its really one of the last loan products they chase.

in my experience with Orygun banks the nationals have no product for fix and flip.. the community banks will do it but only for their absolute top tier clients. Ergo the big wide void left for HML crowdfunders and private lenders.. the product just really does not exist at banks.. And it absolutely does not exist for someone with limited to no experience.

So with HML being really the only game in town they/ tightened their guidelines as well they should have.

[David Begley]

Originally posted by @Ryan Dossey:

I think the reason folks use HML in the first place isn't so much to not have skin in the game but for asset based lending. If you could qualify for a traditional bank product you often will get better rates. But a lot of folks in REI for one reason or another can't qualify. Not to say that's always the case.

There are tons of people who will JV deals if you can't put skin in the game.

But you're going to be paying more. 

I think it's just like anything else... The industry is changing. You either adapt or drop out. 

This is true Ryan. I don't think my situation is unique. I left my W-2 job almost 2 years ago and am doing REI full time. I'm in that unenviable place (purgatory!) where I don't have a W-2 and don't yet have 2 years tax returns as a self-employed real estate investor. I even approached my private banker at the large commercial bank I've had accounts for years and offered to pledge sufficient securities collateral in a close to 7-figure investment acct (not IRA or 401k) for a working real estate line of credit, primarily secured by a blanket lien on real estate assets being acquired, with the securities collateral secondary. It didn't fit in their cookie cooker formula, and I was encouraged to wait until I had 2 years tax returns and not apply then and get a certain denial. Crazy...., and so HMLs and Private Lenders do fill a needed niche, but there are many good ones that know how to lend without replicating the banks underwriting and documentation process.

[Jay Hinrichs]

@David Begley  have you tried a investment banker.. you should be able to pledge securities and get one of those 1 over libor loans.. I know some of my buddies with big securities portfolios do this for RE deals.

[Ryan Dossey]

Originally posted by @David Begley:

Originally posted by @Ryan Dossey:

I think the reason folks use HML in the first place isn't so much to not have skin in the game but for asset based lending. If you could qualify for a traditional bank product you often will get better rates. But a lot of folks in REI for one reason or another can't qualify. Not to say that's always the case.

There are tons of people who will JV deals if you can't put skin in the game.

But you're going to be paying more. 

I think it's just like anything else... The industry is changing. You either adapt or drop out. 

This is true Ryan. I don't think my situation is unique. I left my W-2 job almost 2 years ago and am doing REI full time. I'm in that unenviable place (purgatory!) where I don't have a W-2 and don't yet have 2 years tax returns as a self-employed real estate investor. I even approached my private banker at the large commercial bank I've had accounts for years and offered to pledge sufficient securities collateral in a close to 7-figure investment acct (not IRA or 401k) for a working real estate line of credit, primarily secured by a blanket lien on real estate assets being acquired, with the securities collateral secondary. It didn't fit in their cookie cooker formula, and I was encouraged to wait until I had 2 years tax returns and not apply then and get a certain denial. Crazy...., and so HMLs and Private Lenders do fill a needed niche, but there are many good ones that know how to lend without replicating the banks underwriting and documentation process.

 That's exactly what I was talking about. Purgatory!

[Charles Worth]

@David Begley

I second what Jay said. I know a number of people that can help you there and at a much much lower cost than what you get from an HML.

If you are wondering I am not a broker and I do not offer any of that. 

[Natasha Saunders]

I have a question, Being a new investor does anyone know of any HML that will lend with no money down or upfront fees? I have been having the same issue for the past 6 months trying to find an HML that will fund our first deal so we can get started. If they really are that scarce does anyone have any advice on what else I should do to get started? Maybe up my credit (which I am already working on) etc. Any info will be appreciated as the success of my business depends on funding.