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.

[Stephen B.]

I had someone PM me from a company called HYVEST Home solutions.  They proposed a deal where basically I had to put up the purchase price of the house plus the repairs. They offered to pay me the interest as a balloon when the house was sold. They further implicated if the house didn't sell they would just "give me the deed" . This was almost laughable. When I wrote back to them and mentioned "what skin in the game" they had they never responded anymore. There are just too many scammers out there.

[Jay Hinrichs]

@Hugh Ayles  Character to me is the most important however it also must be backed up by Colorectal and CAPACITY...   ( I did spell check on collateral and the other word came up so I thought it was appropriate to lending as well).

you can have the top notch Character and a smokin deal but if you have no CAPACITY IE underfunded.. your stuck .. if it turtles..   Ergo for me its the 3 C's if not I want a huge pay day taking the lending risk .. after all its after tax money we are talking about.  So what ever cash we lending it took us darn near double that to earn it in the first place. its not just a 100k loss it was 140 to 150k in taxable earnings to net 100k to lend  that we are at risk for... another little pearl there !

[J Scott]

Originally posted by @John Hamilton:

I agree that a potential investor/borrower with "no skin in the game" has virtually no risk, and can walk away if anything seems like a losing situation. But, in essence, this is not a sustainable model for the investor/borrower. Try getting another loan or even purchase a property with that on your record. You'd have to wait 7-10 years to then MAYBE do another deal with an HML. And even then, you're name and reputation will be Mudd.

First, most investors who need 100% financing probably aren't yet thinking about "a sustainable model."  The biggest reason to need 100% financing is that you haven't yet done enough deals to build up the capital to start putting money in themselves.

Second, I don't know many HMLs who report to the credit bureaus, so it's unlikely that a defaulted hard money loan will result in difficulty obtaining future credit. Certainly, if you screw an HML who has other HML friends, you may find it difficult to get loans from lenders in the same circle, but there are enough lenders out there that someone won't get the memo.

In my opinion, the risk is much higher for the lender in this situation than the borrower...

[Jay Hinrichs]

@Stephen B.  would take a very inexperienced person to run with that deal :)

[John Hamilton]

Originally posted by @J Scott:

Originally posted by @John Hamilton:

I agree that a potential investor/borrower with "no skin in the game" has virtually no risk, and can walk away if anything seems like a losing situation. But, in essence, this is not a sustainable model for the investor/borrower. Try getting another loan or even purchase a property with that on your record. You'd have to wait 7-10 years to then MAYBE do another deal with an HML. And even then, you're name and reputation will be Mudd.

First, most investors who need 100% financing probably aren't yet thinking about "a sustainable model."  The biggest reason to need 100% financing is that you haven't yet done enough deals to build up the capital to start putting money in themselves.

Second, I don't know many HMLs who report to the credit bureaus, so it's unlikely that a defaulted hard money loan will result in difficulty obtaining future credit. Certainly, if you screw an HML who has other HML friends, you may find it difficult to get loans from lenders in the same circle, but there are enough lenders out there that someone won't get the memo.

In my opinion, the risk is much higher for the lender in this situation than the borrower...

 Agreed...most "investors" and the reason behind it. I always thought if I could just get 1 deal done, I would have enough to keep the train rollin'...maybe I was naive.

I wasn't necessarily thinking of credit reporting, but just circles of lenders, especially in a small world like BP, word can get around. However, true that there are lots of lenders out there that probably wouldn't get the memo.

[Alex Miles]

Originally posted by @Toyin Dawodu:

>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?

Well, if they find it 'hard' to lend out the money..

[Rod Desinord]

Forgive me for my ignorance but an approval for a Hard Money Loan should be based on how good the deal is no? I hear people saying they base it on credit score, debt to income ratios, and all these other requirements that sound awfully like what a conventional lender would require. 

[J Scott]

Originally posted by @Rod Desinord:

Forgive me for my ignorance but an approval for a Hard Money Loan should be based on how good the deal is no? I hear people saying they base it on credit score, debt to income ratios, and all these other requirements that sound awfully like what a conventional lender would require. 

How good the deal is is just part of the equation.  A great deal for a rehabber could turn out to be a horrible deal for a lender if the rehabber bails (see earlier posts for why this is). 

Hard money lenders are typically willing to take some increased risk on the borrower (worse credit, lower income, etc), but I don't know many lenders who will completely ignore the financially history of the borrower.  

[J Scott]

Originally posted by @Toyin Dawodu:

@Gino Barbaro, you are right. If there's plenty of equity in your deal, LTV is at 65%. The balance of the equity is the only skin the investor needs.

I think what many people on this thread are forgetting (or never understood to begin with) is that in my foreclosures, the lender is only going to be made whole -- he's not going to make an extra profit off the equity in the deal.

For example, say a rehabber borrows $100K to buy a house that's worth $200K.  The next day, the rehabber bails on the loan and the lender forecloses.  In most situations, the lender isn't going to make $100K on this deal from the equity -- he'll simply have to sell the house at a trustee sale, and be legally obligated to give most of that $100K equity back to the rehabber.  The lender will only get the principal, interest and fees that he's owed.

In other words, the lender makes the same amount of money on the deal as if the rehabber paid off the loan, but has to work MUCH harder to make that money and also take MUCH more risk (in the case that the house doesn't sell at trustee sale).

So, while you may think lots of extra equity is a profit center for lenders, it's not.  It's just a form of risk mitigation that, if needed, means the lender had to work a lot harder to make his money.

[Chris Reeves]

Originally posted by @Toyin Dawodu:

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.

I haven't used a hard money lender so I can't offer any experience - but in all seriousness if you've done 400 deals and have a track record of making money - don't you have working relationships with hard money lenders by now who will give you the terms you say you want? Why do you need to keep approaching new ones?

[Toyin Dawodu]

@Chris Reeves It is always good to create new relationships. Unfortunately for me, majority of my deals were done with one or two HML because I was so loyal. But they were not so loyal when the recession hits and I needed them. So I want to have as many as possible in my radar and make them compete for my business. I am their source of income.