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.

[J Scott]

Originally posted by @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.

I disagree that there is much value in the ability to get deed-in-lieu.  What benefit does a borrower -- who has no money in the deal and who is borrowing from a hard money lender -- have to avoid foreclosure?  With a typical lender, the borrower may get cash (cash-for-keys) or avoid a foreclosure on their credit report; a hard money lender isn't going to want to give much cash (for the reasons I mentioned earlier), and typically hard money lenders aren't going to report to the credit bureaus.

[Jay Hinrichs]

@David Oldenburg EXACTLY HML turn downs are a private lenders chance to work a great deal... Not a under market loan but a deal that far exceeds what a HML would cost IE a JV... but its 100% and the JV partner is making an infinite return without the worry of a debt instrument..

I have one in North sac going right now that I funded 100% we are going to make about 80k on it. Went pending yesterday . my JV partner could have probably got her cost of capital down to 15k or so. but would have had to come in with 60k to do the deal.. My return will be north of 30% apr but I took all the financial risk .. the JV partner ONLY put in time...

once it clicks for the JV type person that a TRUE capital partner is valuable and they can really scale their business... its funny how well it works... But this partner of mine met my three C's she is not a BP wanna bee newbie... she worked for a hedge fund doing acquisitions all over CA.. and specifically Sac. She has her teams all lined up.. her GC license etc ete highly organized and can perform.. So she will make about 40k on this deal with not one thin dime of her money.. And we usually have 3 going at anyone time. try to do that with HML.. its hard, you need money for each deal so many folks even though they only look at what's in it for them.. they hamstring themselves because they really don't know the value of a true capital partner... so they just trundle along doing 2 or 3 a year and keep searching for the unicorn investor .. Mr. Doctor who will loan then millions at 100% for 8% interest LOL.

does it happen for sure.. can it easily be replicated no.. not for most of the BP audience anyway..

[J Scott]

Originally posted by @Tom Krol:

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. 

Anyone who has been successful in this business for a good bit of time and who has good credit should have little trouble raising money in today's environment.  Most of my deals over the past few years have been 100% financed through private lenders at 10% with no collateral other than a personal guaranty.  I haven't had to put a penny of my own money into a deal since 2013 (though I often do).

This isn't bragging; this is just the current state of affairs in today's investing climate (if it were 2008 all over again, I'd probably be unable to raise any money). Many, many people have more money than they have investment opportunities (myself included) and are willing to make low-risk loans at 8-12%, sometimes with little collateral, sometimes at high LTV and sometimes both.

If the OP has done 400+ successful deals and has good credit and a healthy personal financial statement, there is no reason why he shouldn't be able to find lenders beating down his door.  If they're not beating down his door, he either hasn't put himself out there or doesn't have the necessary financial health to make lenders comfortable.  As Jay said above, character/credit are high on the list of things lenders look for; focus on those for your business and the rest will fall into place.

[David Dey]

@Jay Hinrichs thank you for weighing in, having been a lender and still being a backer, I knew you would get to the heart of it.  Character and capacity!!  I love it!!

goes back to the credit because she is looking at that as her evaluation of character herself.  (The borrowers willingness to repay as she put it)

@John C S. and @David Dachtera both have good answers and are the ones that 99% of all investors think is the right answer, but unfortunately are missing what the lenders are looking for.

You see, most of the borrowers think that the lenders security is the property and the equity in the property.  Actually that is not the security it's the collateral.  

Their security is you!!!  As Jay put it, your character and capacity.  

Let me put it to you this way, if they like you, trust you, and believe in you, 90% of your job is done.  Now all you have to do is bring them a good deal.

On the other hand, if they don't like you, trust you or believe in you, you could show them the greatest deal in the world, at pennies on the dollar, and they will not invest.

This is why most borrowers miss the boat, they're so busy selling the property they forget to sell themselves, i.e. Work on the relationship.

I wrote in another post about how, while still living in a motel room, I met my first private lender.

I had read my Carlton Sheets course and had made my offers and even got a few excepted but could not get the funding at all.  

The desperation showed, and I was always pushing the deal.  

One day, I called a seller of 5 duplexes that I found in the classifieds.  (Yes this was over 18 years ago, we still looked at the newspaper classifieds)

Within 5 min we both knew that this deal was not for me, but we had struck up a good conversation and were both enjoying it so we kept talking.  

I listened as he regaled me with stories of deals he had done.  I asked questions and he had answers.  About an hour or more into the conversation I mentioned a deal that I had under contract, a duplex that was worth about 40k and I had under contract for 25k with me finding a 16k first and my seller carrying back the balance of 9k in a second.

I had already taken it to all of my regular HM guys and had gotten my regular "no's" and had no idea how I was going to fund this.

To my surprise, this gentleman now tells me, "oh I also run a private money business, is like to look at the deal."  "How's tomorrow?"

Long story short, Walter funded me on my first deal.  He actually walked me through the entire process and took me under his wing.  

He went on to fund my next deals over the year and by the end of that year, I owned over 35 units that I was renting out with over 5k per month in cashflow, enough to move out of the motel and into my own house.

Also, 18 plus years later, I still work with the guy.

The thing to think about, if I had actually known that Walter was a lender, I would've probably ruined the whole thing by jumping at the money, but because I didn't, I could stay calm and work on the relationship.

@Tom Krol is an extremely successful borrower , because he nailed it in his approach of showing how others have succeeded working with him.  He is working from the success aspect.

Ask yourself, if desperate cousin Vinny came to you with his latest "can't lose scheme," would you lend him your money?

On the other hand, I have a friend who is an online trader who litterally made over a million dollars in 9 months starting with a 30k and is now worth over 40 million.  The number one question he's asked, (included by me) "could you invest my money for me?"  

So if he showed up on my doorstep and said, " I'm putting together a fund to invest like I do my personal funds," "do you want in?"  

I would put every dime I could afford into this thing!!  In fact I'd probably start borrowing like cousin Vinny!!

Why? Number one, I know the guy and his character, so I know my money is safe with him. 

Number 2) I know his track record.. His capacity!!

Anyway, here's a practical way you can put this to use.

Start building yourself a "credibility kit."

Every time you successfully close a deal, get a letter of reference from everyone involved in the deal, The seller, the buyer, the lender, the realtor, the escrow agent, everybody!!  Keep doing this and put it into a binder and everytime you meet with a prospective lender, bring your credibility kit.  

I guarantee you will get results.  

Hope this helps

[Jay Hinrichs]

@J Scott I went and looked at a deal in Costa mesa last weekend that one of my partners asked me to look at for him. This is a classic example of how HML default scenarios can work out and why HML needed to retool their lending criteria.

its a CA multi bene deal... its been a year.. talked to the neighbor house has not been worked on in months... The lender who is brokering others funds does not want to go the foreclosure route if they can help it.. But the borrower won't give a Deed in Liu they want a big check to do so..

In this particular case being a PRIME ca asset it should work out for the lenders at least to return capital may not get interest.

And of course once borrowers know HML don't report to fico they really get tough on the lender..

So this cash for keys scenario is probably going to involve a pretty big check.. and the broker will have to do a cash call to the investors for that.. and those are not pleasant calls.

[Larry Turowski]

Originally posted by @Toyin Dawodu:

@Mike Arias, I am not really blaming the lenders, I just want them to let the world know that they don't qualify as HML. Hard money lending is asset based. Period. Not Credit or skin in the game driven.

But they are hard money lenders.  Just not the type you want.  

I know hard money lenders who will fund 100% with people they have done enough business with that they are comfortable with that.

With someone they've never done business with I think expecting skin in the game is prudent.  After all, how difficult would it be for you to put $10k in?

[David Begley]

@Toyin Dawodu I feel your pain, but I can usually work with an HML wanting skin in the game, if the requirement isn't too onerous. It's the so-called HMLs that have the audacity to request a couple years Tax Returns that send me into orbit. If I wanted to go that route, I'd go to a proctologist - or BofA.

[Jay Hinrichs]

@David Begley prior to my selling out of my HML company I required

1. 700 fico

2. 2 year tax returns

3. 65% LTV

4. I had to like their character above all else I stopped lending to one off folks and concentrated on supplying the top tier folks with capital.

[David Begley]

Originally posted by @Jay Hinrichs:

@David Begley prior to my selling out of my HML company I required

1. 700 fico

2. 2 year tax returns

3. 65% LTV

4. I had to like their character above all else I stopped lending to one off folks and concentrated on supplying the top tier folks with capital.

Jay, as a 20+ year banker that witnessed both the S&L meltdown in the late 80s/early 90s, as well as the commercial bank failures beginning in the early 2000s, from Ground Zero, I thoroughly understand the need for strict underwriting standards. HOWEVER, we are talking HMLs that charge 4-8 points and 12%-18% interest rates to borrow. They are well compensated for their risk and an individual's tax returns will add nothing to mitigate that risk. You mentioned in an earlier post you lent over 100% LTV - lent on the potential profits. In that case requiring a Tax Return may make you sleep easier at night, but it really isn't mitigating your risk. HMLs by definition are lending on the Asset. Again, if I wanted to go through that kind of documentation and rectal exam, I'd go to BofA or Wells Fargo. Luckily, many HMLs realize and understand their role and underwrite the asset, not replicate FHA/FHMLC/FNMA underwriting guidelines.

[Jay Hinrichs]

@David Begley  could not agree with you more.. but my partner was or is an attorney and my controller a CPA it made them feel good.. also we were using bank lines of credit to fund these deals.. and it made our commercial banker feel good. 

it did NOTHING to protect us... in those days.

and now a days just try to find anyone who was in the flipping business or construction that has a 700 plus fico ... ( who was active coming into 08) they are pretty far and few between at least here in PDX>. Save myself  LOL...

[David Begley]

Originally posted by @Jay Hinrichs:

@David Begley  could not agree with you more.. but my partner was or is an attorney and my controller a CPA it made them feel good.. also we were using bank lines of credit to fund these deals.. and it made our commercial banker feel good. 

it did NOTHING to protect us... in those days.

and now a days just try to find anyone who was in the flipping business or construction that has a 700 plus fico ... ( who was active coming into 08) they are pretty far and few between at least here in PDX>. Save myself  LOL...

 With FIRREA & REFCORP, the division I ran at the time was charged with securing and trying to liquidate several hundred BILLIONS in mortgage collateral during those times, and believe you me, I've seen everything - but nothing a tax return in the loan file would've prevented! lol  When the caca hits the fan, the lender better have security interest and equity in the collateral - nothing else really matters and just serves to make those lenders that really don't understand the asset or business sleep better.  A placebo really.  

[David Oldenburg]

This is a good thread. It's interesting the many different views on HML's and downpayment!

[John C S.]

 David Dey Thanks i thought i was on the right track. PS great advice to beginers.  I guess someone  can get  so focused on making a deal they forget to be themselves. Great points by all and I've learned a lot here. Thanks everyone 

[J Scott]

Originally posted by @David Begley:

You mentioned in an earlier post you lent over 100% LTV - lent on the potential profits.  In that case requiring a Tax Return may make you sleep easier at night, but it really isn't mitigating your risk.     

If you're getting a personal guaranty on the loan, I would think knowing how much they're making from w-2 income can certainly help you sleep better at night in the case that you ever have to come after their personal assets. 

[Cory Binsfield]

Great discussion folks. I've never used hard money and finally understand why the HMLs offer such onerous terms.  Yet, if you have a screaming deal the terms are definitely worth it. 

In terms of skin in the game, what's the big deal? I would never rent to someone with no deposit, no income verification and horrible credit who boasts to me how many times they have successfully rented. Land lording and lending are truly alike! 

[David Begley]

Originally posted by @J Scott:

Originally posted by @David Begley:

You mentioned in an earlier post you lent over 100% LTV - lent on the potential profits.  In that case requiring a Tax Return may make you sleep easier at night, but it really isn't mitigating your risk.     

If you're getting a personal guaranty on the loan, I would think knowing how much they're making from w-2 income can certainly help you sleep better at night in the case that you ever have to come after their personal assets. 

 This is true Jason - if one is providing a personal guaranty and/or has W-2 income.  However, a Hard Money Lender is by definition an asset lender  - lending on asset  collateral value.  If the RE investor has a W-2 job and/or wants to put their personal assets at risk, then that investor would be better served going to their local bank and borrowing at no points and 1/3 the interest rate.  That is the trade-off.  HMLs can't (or shouldn't) have it both ways - charging near usury rates AND subjecting the borrower to underwriting and documentation requirements mimicking Wells Fargo or BofA.  Their exorbitant fees and interest rates compensate and negate the need for superfluous docs such as Tax Returns. 

[David Dey]

Originally posted by @J Scott:

Originally posted by @David Begley:

You mentioned in an earlier post you lent over 100% LTV - lent on the potential profits.  In that case requiring a Tax Return may make you sleep easier at night, but it really isn't mitigating your risk.     

If you're getting a personal guaranty on the loan, I would think knowing how much they're making from w-2 income can certainly help you sleep better at night in the case that you ever have to come after their personal assets. 

 On the other side now, if you have to go after their personal assets, then you really lent wrong.

I pushed the borrowers side earlier, now I'm putting on my lenders hat. I was taught by one of my own lenders and it has served me well since.

When looking at the property, I always ask myself, "would I buy this place in its current condition or in its ARV (based on an ARV loan with strict guidelines that my money will not be released except as work is done according to a draw schedule that I personally approve) for my loan amount?"

If the answer is yes, then as long as the borrowers pass my sniff tests I will move forward with the deal.

However, if my answer is no, then I don't care how good the credit or tax returns look, it's a dangerous loan and I wouldn't do it.

In the end, I do still agree with @toyin's concept that this is asset based lending, and if I loaned right then I will be happy with the asset itself.

[J Scott]

Originally posted by @David Dey:

When looking at the property, I always ask myself, "would I buy this place in its current condition or in its ARV (based on an ARV loan with strict guidelines that my money will not be released except as work is done according to a draw schedule that I personally approve) for my loan amount?"

If the answer is yes, then as long as the borrowers pass my sniff tests I will move forward with the deal.

As I mentioned earlier in the thread, the loan to value at the time the loan is made can be very different from the loan to value at the time the foreclosure is complete. Lenders may incur large costs between default and foreclosure, not to mention a lot of lost time.

As Jay pointed out earlier, a loan could make perfect sense when it's made but still be a huge money loser to the lender if things go wrong.

I'Ve borrowed lots of money strictly based on personal guaranty (I rarely provide any hard collateral these days), and I'm pretty sure my lenders would tell you that access to my tax returns, bank statements and credit score are worth far more then my providing property as collateral.

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. 

[David Dachtera]

Originally posted by @J Scott:

Originally posted by @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.

I disagree that there is much value in the ability to get deed-in-lieu.  What benefit does a borrower -- who has no money in the deal and who is borrowing from a hard money lender -- have to avoid foreclosure? 

Reputation, and the ability to do deals going forward. 

[J Scott]

Originally posted by @David Dachtera:

Originally posted by @J Scott:

Originally posted by @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.

I disagree that there is much value in the ability to get deed-in-lieu.  What benefit does a borrower -- who has no money in the deal and who is borrowing from a hard money lender -- have to avoid foreclosure? 

Reputation, and the ability to do deals going forward. 

A deed-in-lieu is only discussed after default... At that point, reputation is nil and I don't know many lenders who would loan to someone who previously defaulted on a deal they did with that lender... 

Would you loan  to someone who defaulted on one of your loans in the past? 

[Toyin Dawodu]

@David Begley, you are right, what's my tax return got to do with anything. I control an asset that will pay back your loan. The loan is the security. I am not complaining about HML, they just need to quit trying to be like traditional banks.

[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.

[David Dey]

Originally posted by @J Scott:

Originally posted by @David Dey:

When looking at the property, I always ask myself, "would I buy this place in its current condition or in its ARV (based on an ARV loan with strict guidelines that my money will not be released except as work is done according to a draw schedule that I personally approve) for my loan amount?"

If the answer is yes, then as long as the borrowers pass my sniff tests I will move forward with the deal.

As I mentioned earlier in the thread, the loan to value at the time the loan is made can be very different from the loan to value at the time the foreclosure is complete. Lenders may incur large costs between default and foreclosure, not to mention a lot of lost time.

As Jay pointed out earlier, a loan could make perfect sense when it's made but still be a huge money loser to the lender if things go wrong.

I'Ve borrowed lots of money strictly based on personal guaranty (I rarely provide any hard collateral these days), and I'm pretty sure my lenders would tell you that access to my tax returns, bank statements and credit score are worth far more then my providing property as collateral.

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. 

With all due respect, yours is a deal I would never do.  Nothing against you, as the fact that you have others doing it shows that you are paying them back dillegently. (Or running a great Ponzi scheme. JK Jk!!)😜

My concern is, God forbid, what happens to my money if something happens to you? In that case, your tax returns and bank statements make little difference.  (Because accounts can be drained very easily and assets can be well protected and hid)

In my book Collateral is king!!  

Even with lines of credit that my lenders give me, I have an automated system, through my attorney that puts the property into a land trust with him as trustee and the lender in co-beneficial interest with direct instructions to remove me should I default, or removing them once I've paid them off.  this removing a need to foreclose.  

I do agree with you that as a lender, you need to make arrangements and have "that conversation" with the borrower before default happens.  After is too late.

If you make arrangements in the beginning, it can solve all sorts of issues later.

[J Scott]

Originally posted by @David Dey:

With all due respect, yours is a deal I would never do.  Nothing against you, as the fact that you have others doing it shows that you are paying them back dillegently. (Or running a great Ponzi scheme. JK Jk!!)😜

My concern is, God forbid, what happens to my money if something happens to you? In that case, your tax returns and bank statements make little difference.  (Because accounts can be drained very easily and assets can be well protected and hid)

Completely reasonable stance...and it's certainly something I factor in when I'm making unsecured loans (loans with just a personal guaranty) to others as well...

[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.