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]

@Natasha Saunders  This is where you need a money partner on your team !!

No money No experience marginal credit is frankly not going to get it done

Unless you have an LTV that is so low that is a total no brainer.

I would be looking Hard for an equity partner that can bring money into your deals.

Put much more effort into that then trying to find that needle in a haystack HML that will give you a 100% loan..

[Jeff Lezark]

Originally posted by @Jay Hinrichs:

@Natasha Saunders  This is where you need a money partner on your team !!

No money No experience marginal credit is frankly not going to get it done

Unless you have an LTV that is so low that is a total no brainer.

I would be looking Hard for an equity partner that can bring money into your deals.

Put much more effort into that then trying to find that needle in a haystack HML that will give you a 100% loan..

 @Jay Hinrich has just given you the best advice you'll get on this site. Unless you're bringing an exceptional deal to the table lenders want experience, cash assets, income and credit. This does not go for ALL lenders but is typical of what you'll find out there.

[David Begley]

Originally posted by @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.

 @Jay Hinrichs @J Scott First I want to apologize to @Toyin Dawodu if this diversion is hijacking the original post & question. I understand completely what you're asking regarding putting your own "skin in the game" and have found that those lenders not requiring the borrower to commit some cash to the deal will have other [to me] more onerous requirements to offset what they may perceive to be too high a LTV ratio.

Natasha, you may want to try lendinghome and/or limacapital.  You'll have to pay the nominal $199 application fee with lendinghome, but I've found their points, interest rate and doc requirements to be superior to most HMLs.  (I'm not sure I can mention the two lenders in a Forum post, but I have absolutely no affiliation with either.)

I would first recommend to you or anyone that doesn't yet have a track record to try and find another investor friend or acquaintance that does Private Lending using their self-directed IRA or Solo 401k. I connected with someone that funds most all my deals at 1 point & 9% interest for a 9 to 12 month terms. Although most private lenders have finite funds to lend, at least you could build up a resume of successful projects to take to another lender, HML or otherwise, and negotiate better terms.

[Andy Cross]

Originally posted by @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.

 Hey Toyin (or everyone else on this thread),

Newbie here...When a HML asks for "skin in the game" what specifically are they asking for. If it's cash, for what? A down payment? Collateral? Confused here, not sure what this all means. I thought HML make money on all the fees and the crazy interest they make on the loan every month.

Thanks!

[Jay Hinrichs]

@David Begley 10% APR money is great money I pay at my bank 6 to 7 apr.. so not much more and if there is not enough room in the deal to handle the extra few bips then the deal is too skinny.

the best thing though about bank loans is you only pay interest on drawn funds not on the commitment.  So in ground up construction were we will have a 400 to 500k loan this is a HUGE advantage I have over my other builder competition that has to borrower at 2 and 12 and pay on the whole magilacuty from day one.

[Martin Grizzanti]

I respect the fact you have done that many deals with out any skin in the game.

It s impressive. 

[Jay Hinrichs]

@Account Closed  I am one of the 1% you speak of  LOL..  I owned a Hard money company in Oakland CA in 1988... and the man I bought it from started it in 1950's

HML at least in our neck of the woods in those days were 80 10 and 10 seconds.

banks would not lend more than 80% on any asset no matter what.. so many folks could scratch the 10% together but not 20% especially in high dollar bay area.. RE was already at almost 500k average sale price by late 80's in bay area.  So we did a crap load of 30 to 60k 2nds..

now if the banks had stuck to this formula I don't think they would have gotten into as much trouble.

then came along the thrifts I can remember long beach savings and loan they kicked us in the butt with their new fangled programs.. and we changed gears.

Could not agree with you more on your thought process. if your going to take the risk of 100% financing there needs to be big upside because at that point your a capital partner not really a lender.. so that's how I look at it these days. 

[Account Closed]

There's a difference between a "lender" and a "wholesaler" in the hard money loans/funding deals/banks m arket the same way that there is a difference between "buyer" & "wholesaler" in the investors-buying-houses market.

Many banks & hard money lenders don't lend their own funds.  They are wholesaling funds from another source (ie-private lenders, publicly traded securities fund, etc.)  

I personally know many "hard money lenders" who are loaning money that they have raised from individuals they know.  They are collecting fees, points, and often an interest spread on the payment.  They are middle men trading in money the same way that wholesalers are middle men trading in deals.

Most mortgage "lenders" are actually just originating mortgages and then reselling those loans on the secondary market.

The Silver Bullet-Go Direct to the Source

My private lenders are direct contacts of my partners and I.  No middle men.  My private lenders are also not running around advertising themselves as "hard money lenders".  

My lenders are professionals, business owners, doctors, etc. that have had relationships with us before ever having conversations about investing in real estate through private mortgages with us.

Obviously, finding & building relationships with private lenders is the silver bullet of funding deals. Nothing beats funding a deal with no other strings attached other than a note, mortgage, and balloon interest payment upon resale for 10% APR or less.

I Do Have Skin in the Game 

Although I don't put "money down" on the private loans I take from my private investors, I absolutely have skin in the game.  My monthly advertising budget-which keeps the deals flowing-is $10,000-$15,000 per month.  

I guess some good deals come along sometimes and just fall into your lap, but that is not how to build a business.  I keep my deal flow moving by Investing heavily in direct marketing to provide the opportunities for that investment capital to work.

A successful real estate investment machine will produce returns for lenders & profit for investors ONLY when that machine has inventory to process-ie DEALS.

I can only agree @Toyin Dawodu.  These "hard money" wholesalers are a waste of my time.

IS ANYONE ACTUALLY FUNDING DEALS WITH THESE "LENDERS" OR DO THEY SURVIVE SIMPLY BY COLLECTING "APPRAISAL FEES" "APPLICATION FEES" & "DEAL PROCESSING FEES"?  There the only currency exchange I've experienced when taking a shot to fund through them.

[Chris Field]

I have done a number of HM deals and still do, but honestly I don't know why you established guys still mess with it. Its expensive as can be, great for getting started but once your past that point other options open up. 

I have been doing more and more with a commercial bank, they love lending me money at 5%, its far better than paying the 12% vig the HM mafia wants. Will my bank do 100%? No! But I don't want to do 100% financing anyway, I built and invested threw 2008 I know exactly what 100% financing does when the markets turn. 

IMHO this new surge in HM interest is because the markets are heating up again and a lot of new people are getting in. A lot of these new people have never been threw a recession so all the bad ideas are sounding good again.

Any decent HML is going to want a new investor to have skin in the game, and yes contrary to the guru's that means money. Any HML that does not is either playing a very risky game or likes the newbies deal and is hoping to get it from them.

[David Dey]

Originally posted by @Andy Cross:

 Hey Toyin (or everyone else on this thread),

Newbie here...When a HML asks for "skin in the game" what specifically are they asking for. If it's cash, for what? A down payment? Collateral? Confused here, not sure what this all means. I thought HML make money on all the fees and the crazy interest they make on the loan every month.

Thanks!

 "Skin in the game," refers to your "pound of flesh" that you're willing to put into the deal to make sure that it succeeds.

What the lenders are looking for is, what are you willing to put into the deal to make sure that you don't just walk away when the going gets tough.

Usually this refers to a down payment of at least 10-40%.  This could also be collateral in another property that you own free and clear or at least with a truck load of equity.

When I am asked that question by a lender, I ask them if they will allow there to be a second mtg from the seller for 35-50% of the price in lieu of a down payment.  Many times the lender will agree under the thought that if the loan goes bad, the seller will step in to protect his interest.  So though it may not have come from you, there is skin in the game.

In the end, the lender's thought process is simply this, I don't want to be the only one holding the bag if something goes wrong.  That's why he asks for "skin in the game."

Hope this helps

[David Dey]

Originally posted by @Account Closed:

"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?" 

Let me attack this 1st. Its quite obvious your a new guy on the block (been in the game under 10 years) so ill give you a little education on hard money. Hard Money started here on the east coast, you used to walk down the block to the guy you knew had money and would say "hey i need to borrow some money and ill give you a lien on that building i own as collateral" the guy with the money or lender would lend no more than 50% of the value, usually at 2-3x bank rates, no questions asked and get a lien on your prop as security. The older guys here in the NYC/NJ area that have been lending 30,40, 50 years (yes they are still around) because they dont go above 50% and laugh when you try and go higher. But I guess that's why they can write the checks and never take a loss. 

"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?"

First let me say I made my 1st loan on a property in 1998, long before probably 99% on here knew what real estate investing was, which leads me to my 2nd point.. all the 100% lenders or so called lenders/100% private guys, whatever you want to call them, all come and go with the up cycles, but never take into their business model the next downturn. They all disappear with the down cycles and they leave us real lenders standing. 

So, while some ''investors" are looking for 100% (i use the word investor lightly because if your money is not in the deal what are you really investing?) I laugh at the schmucks making 100% loans and I'm counting the days til the next correction that will wipe them all out and leave us real lenders standing as it did in 2007/08. 

I ask this question to all "investors" that approach me looking for 100% funding and not 1 has been able to answer it  - "if my money is good enough for the deal, why isnt yours? my 12 year old can find properties, what makes you special?" 

 Ken

I too am part of the infamous 1% as I started in 97.  And while I loved your post, I couldn't resist taking you up on your challenge.  

I'll put my money up against yours if your 12 year old can beat my deals!! 

But if he can't, I want my 100% funding!!  😜

Seriously though, I do agree with 90% I disagree slightly that if you don't put cash into a deal, you are not investing.  

Sweat equity is currency!!  

Problem solving is currency!!

If you look up some of my posts that show the problems I solved in exchange for equity, I think you'll be hard pressed to say I have no "skin in the game."

I do agree, that if you aren't doing or contributing anything to the deal then you have nothing to lose and that's not investing.

I just can't throw the baby out with the bath water.

P.S.  Should you happen to want to take me up on that challenge, I happen to have a track record of winning those types of bets.

I bought a 22 unit apt complex (5x 4plex 1x 2 duplex all block 2/1 units) for 150k.  I offered to resell it for 350k.  A big buyer brought me to his office where he surrounded me with his banker, CPA and his Atty.  He then went on to barrage me all the things wrong with the place, his CPA went so far as to tell me that if actually could sell the place for 350k that he would take all his money from all his other investments and jump in bed with me.

I politely declined his offer and called him back the following week after selling the place for 365k and told him to call his CPA to provide me his money in 50's and 100's but to stay out of my bed as I wasn't that type of guy.  (I at least need to be wined and dined first!!)

You have been warned!! 😀😜

[David Dey]

Originally posted by @Account Closed:

Ill disagree with this here 110% 

"Sweat equity is currency!!

Problem solving is currency!!"

Do you know how many "investors" i speak with that have a deal but no money. So you think your "sweat equity is currency" If your 30+ years old and you have no money, how much is your time really worth? Id say not much! you might think it is, but its time to be honest. If you make 40k a year and have no savings then your time isn't as valuable as you think it is right? At least according to your employer. So if I made a loan to you at 100% then you really are working for me in round about sort of way, aren't you? But if you have no savings and you don't make much at your current job then how can you think your time is really worth more than you currently get paid? So therefore Id value your "sweat equity" using my example as a $19 an hour laborer and not really bringing much value to a deal id be taking all the risk on. Does this make sense? 

As for my 12 year old, that was an example. I see about 200+ deals a week from "investors" and have to weed through them to find 5-10 good ones to fund. So of the 190 or so i pass on, id say my 12 year old with 90 days of training from me would find the same deals. 

 Lol, uh-oh now you are qualifying your son may need some training.  I thought that he was real estate progedy.  

Again, 1) you can't buy my experience.  2) you definitely could not put it together in 90 days.  3) I make a heck of a lot more then 40k and even saved a lil bit too.  

That being said, I do hope you are taking this in the fun that I am intending it to be, with the exception that I do stand behind my stance that sweat equity and problem solving is currency. The fact is, because sweat equity is currency and problem solving is currency, I now rarely ever have any use for HML.

But I betcha, if I brought you one of my deals, I would be one of the 5-10 that you liked. 💰💰😎

I think maybe even your 12 year old would agree that my deals were pretty good.

[Vonetta Booker]

Originally posted by @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.

Looking from the HML's standpoint, it's simply bad business to loan at 100%. Because as many others on this thread stated, someone with no so-called "skin in the game" has a lot less incentive to do what they need to on their end, come through w/ the deal & NOT walk away.

Another thing is this--I wish someone WOULD come to me, asking to borrow money from me--and then get pissed off & all "WTF" at my terms, lol.  I'd be like, "Last time I checked--you approached ME. So if you don't like my terms, you're free to shop around for better ones elsewhere."  It is what it is. There are certain, standard terms that most HMLs are known for.  If you don't like it, simply find other funding.  But to get ticked off about it is kind of a moot point.  Just my $0.02. 

[Nancy Conrad]

If I were making a HML then I'd want skin in the game too. However, it sounds like you should be looking for funds from an investor-partner who might be happy with a straight 12% and some kind of negotiated bonus when you sell the property on the flip. Why not go to self directed IRA investors?

[Mimi J.]

As I newbie and what l have learned reading and listening to podcast (@Ann Bellamy in particular as well as others) about HML thus far...the lender always wants some skin in the game...if not that should be a red flag. I never assumed that the borrower did not have some out of pocket expense in addition to the higher interest rate. Again, I am a newbie...have I missed something?

[Don DeMarco]

Targeting SD IRA Investors is a great idea to raise private money, they are familiar with investing and if you have a good deal they will be more than open to listen and possibly fund

[Natasha Saunders]

@David Begley @Jay Hinrichs @Jeff Lezark Thank you so much guys! Private money it is!!!

BTW We get excellent deals when it comes to ARV. If anyone knows of any private money guys that don't mind looking at a deal for consideration. Pleae feel free to email me.

I really appreciate the answers, Bigger Pockets rock!!

[Jett Rao]

Just read the thread front to back. Very interesting. 

I think its safe to say the majority of folks on BP (myself included) agree that there should be skin in the game. 

[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.

What I don't get is these HML who demand 10-30% down, up to 19% rate, add 2-5 points for a 6-12 month loan. Some even require a certain FICO score and even a 65% LTC for a 65% ARV. Are you serious? That's just downright highway robbery. That to me is not a sustainable model, unless you get a bunch of fools, because they're so desperate to be an investor, they grab at anything. I think most HML's I've experienced are worse than any wholesaler (believe me, I'm not trying to highjack this thread). There are some good ones, but not nearly enough to offset.

Back to the point of this thread. I, for one, if I was a lender, would feel more comfortable with the borrower having some skin in the game. Potential appreciation or profit is not enough of a cushion, even at 30% ARV. A whole lot of factors come into play. If I did 100% lending, I would be doing my own due diligence on the house to ensure it's a good deal, ensure the rehab is done on-time and in budget, have a buyer lined up, and require 80-85% of the profit. No points and no interest. If the borrower did the rehab, or project managed the rehab, and brought in a buyer, I would renegotiate the profit split. However, what experience do they have in rehabbing? What resources do they have to rehab? What kind of channels do they have for resale?

See where I'm going? I would have to put work into the project to make my money work for me even before the first $ is exchanged and the first nail is hammered. For some lenders, just getting a deal is not enough to secure they will make a profit, but not have to deal with a non-performing property if the borrower defaults.

If you've found a lender that works with you and provides 100% financing, keep them happy as that is your golden egg.

[Gino Barbaro]

@Toyin Dawodu

I think you have skin in the game, you created value.  Don't they want 65% ltv, and that's what you got.  You did right by moving on and looking for another.  I guess you have to keep looking until you find someone who understands your business model, which is cranking.

Gino

[Hugh Ayles]

@Natasha Saunders

You need to find a private lender or an HML who will want an equity stake in your deal.

You won't make as much money on your first deals because of profit sharing but you will begin to establish a track record.

When presenting to a lender, it has already been mentioned here a few times-what is your character?

It seems most lenders are approached with "I have a screaming deal you need to fund."

Those approaches don't get a second look starting off that way.  You need to present what you will do for the lender or at least what skills you have to protect their investment.

[Natasha Saunders]

@Hughayles Yes I believe in character as well. We have something we put together detailing who we are, what our experience is and what we stand for. Kind of like our introduction. I am open to any other suggestions as well. How important is it to have a website and things of that matter I would love to know.

When you say equity stake Hugh, does that work for fix and flips as well or just buy and holds? I don't mind less profit as long as we can build a track record. I know the profit will come. 

[Toyin Dawodu]

HML have their place as agents and money brokers. I have been one, loaning out my own money. However, I do understand it from an investors point of view. If the deal has enough protective equity, i will not impose further on the investor by asking the stupid question, "how much skin do you have in the game" Most hard money lenders do not buy properties for a living, so don't regard an investor's cost of acquisition and lead generation as expenses and part of his equity. I offered the property I just bought to four so called hard money lenders. Three of them gave me the same requirements I could have gotten from BOA or Wells Fargo. 20% down of your purchase price. based on that, the hard money lender would have been loaning me money at 43% LTV. This did not make sense to me.

[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. There are some here who still think an investor needs a skin in the game. That may be right, if you present a HML with a deal at 100% LTV and there's no upside.

When you buy a property like I was taught to buy a property, there is already a built in profit of 30-40% equity waiting for me when I exit the deal. If you do it any other way, then you are not in this business for real. My goal has always been to buy low and sell lower.

[Chris Martin]

"My goal has always been to buy low and sell lower." That's pretty trivial to do. I hope you don't invest in the stock market as well. I assume you mean something like... 'buy low and sell higher, but below market to facilitate a fast sale' .