How to get into hard money lending

Question

Most of the discussions about had money lending are from the borrower side.  What I'm looking for is more from the standpoint of how to get into the lending side.  Are there any resources available (and especially avoiding the guru route), on how to break into this business, and how it works from the lender side?

David Ackerman · Answer

I got involved in Hard Money Lending in 2010 through my real estate lawyer/friend from high school.  He knew I had money and I trusted him.  He did all the paperwork, I did my due diligence through appraisals, research, and meeting the borrowers.  Here's my results to show you how it works:

2010 - Did 3 loans.  Earned between 13-16% (including points upfront).  Loans were all written for 1 year but most came back between 4 months and 11 months.

2011 - Did 1 loan on June 2011.  Borrower stopped paying after 6 months of payments.  Hired a specialist foreclosure lawyer in NY because my lawyer didn't know foreclosures enough.  The unit is being auctioned on July 10th, 2014.  Yes, 2.5 years after last payment.  Property is in Kings

County (Brooklyn) which is one of the slowest court systems in the county.  Im very excited for July 10th to see how it plays out.

2012 - Did 3 loans.  All worked well.

2013 - Did 5 loans and all working well.  Started borrowing money from my HELOC (3%) and my "Portfolio Line of Credit through Wells Fargo" (3.25%).  Some loans were in Chicago, instead of all NY.  I'm charging 3 points and 12.5%-13% on my money.  I have borrower pay for appraisal when I feel I need one.

2014 - Up to around 7 loans.  My selection on people who I lend too is much better now.  Learned my lesson from 2011 when I rushed into a deal.

Things I'm still grappling with :

1)How to protect myself in next economic meltdown.  Which will happen.  Even if I lend at 70% LTV, there is a lot of risk when the real estate market crumbles.  The conclusion I'm coming too is too try too get a feel for when things are getting over-heated and then try to pullback one's lending.  In 2005-2006 there was plenty of time to recognize that things were extremely bubble-like.  But, there are no guarantees that it will play out the same way next time.

It's a good business if you find the right borrower and you do your due diligence.  Also, you need a good lawyer who will make sure all the paperwork is correct.  Each loan I do in NY has about 30-50 pages of paperwork.

Good luck

Dave

Jeff S. · Answer

Lending locally, to experienced flippers, using first position paper, is the safest way to get into the business @Michael Wolffs.  There are a few ways to begin, but before you do anything, I suggest you start attending some of the local real estate clubs in NY.  Here you'll meet the highest concentration of those that need money, those that lend, and some local brokers (if used in NY).  You'll also get to know the prevailing lending rates and terms.

One way to start would be to buy a few notes from some of the larger local hard money lenders.  Many sell their notes, keeping the points and fees and leaving you with the interest.  Buy one or two and poof, you become the bank.  The disadvantage here is that you're relying on their origination, borrower screening, and assessment of the property.  Plus, your return will be lower than if you did everything yourself.  I've never been comfortable with this but a good HML could serve you well if it's a direction you like.  Either way, be sure to ask all the HML's which lending lawyer they use.  I bet you only hear the same few names.

Lending lawyers are not necessarily real estate lawyers.  They tend to be rare as hens teeth and are the specialty you need in the lending business.  Spend an hour or two with one and ask him or her to explain the lending process in NY as well as the relevant state and federal laws.  You'll eventually buy your paperwork from him, but you could likely get away with standard title company paper for your first few deals.

We use brokers to originate real estate loans in CA.  Sorry, I don't know the requirements in NY.  The easiest way to find a good one (here, at least) would be to ask some local flippers.  We pay a flat fee to our broker once we find a borrower with a viable property and agree on a loan.

In our experience, the easiest way to find borrowers is at real estate clubs. This is among the most personal relationship-based business I know.  We won't loan our money to anyone we don't know, like, and trust.  These words have become a real estate cliché but they work.  You can get a good idea whom your comfortable with by simply spending a few hours with a potential borrower driving around looking at their properties and perhaps going to lunch or dinner once or twice.  Our normal process is to visit every property we loan on with the borrower to check the area, compare comps, and get an idea of the scope of work. We never loan a property we haven't seen and I suggest you don't either.

I don't know the process in NY once you agree on the loan.  Here we at least read the purchase contract and title prelim and I fill out the note myself to make sure it's perfect.  Then it all gets handed to our broker who takes care of the rest.

Like anything else that seems complicated, once you've done a few loans, and avoid anything or anyone weird or risky, this is a pretty easy and repetitive business.

You might also check this thread, which further details the processes some of use here, as well as some relevant links.

Good luck, Michael.

Jeff

Ann Bellamy · Answer

Michael, here are a couple of suggestions:

First, if you are going to take advice, take it from people actually lending in the state you want to lend in.  The SAFE act varies by state.  So since I lend in MA and NH, I'm not qualified in any way to advise you on state specific issues.  So don't listen to me except for general information.  If someone tells you "you need a broker" or "get a deed of trust" those are people working in states other than NY.  I believe in CA you need a licensed broker, and NY is a mortgage state, not deed of trust.

Second, find an attorney in NY who has lots of private / hard money lenders as clients and who represent those lenders.  Not a regular real estate attorney.  Some people feel there is no such thing, but I assure you, there are attorneys who handle lots of private lending transactions and specialize in representing those lenders.  If you can't find one, call other local hard money lenders IN YOUR STATE and ask them who they use.  They will normally tell you, because your using their attorney doesn't take business away from them.

Third, there are a number of threads here on BP about becoming a private or hard money lender.  So up in the "Search the site" bar, try "how to become a private lender" "how to become a hard money lender" "learn to become a lender" etc.  You'll find a bunch of threads, with many well thought out posts that will be helpful.   @Don Konipol , @Dion DePaoli and @Jeff S have all chimed in.

Fourth, you can look up licensing requirements on this site, it lists all requirements by state.  If you are going to choose to do private lending on residential deals, discuss these requirements carefully with your new attorney that you found in point #2.  Before you decide which route to go down.  He can tell you what you can and can't do.

Good luck.

David Ackerman · Answer

Here is my update on my hard money loan that was in foreclosure.  It just closed today:

Loan amount = $300,000 (June 2011 for a property in Brooklyn)

Initial Rate = 2 points/14% interest

Foreclosure Rate = 20%

Today = got made whole with a $472,000 check

Netted around $160,000 after everything over 3 years

So, that's how the process works in Brooklyn, NY (known as one of the slowest/worst court systems in America).  Patience is key.  Plus having a big enough spread is important too.

Ann Bellamy · Answer

And it seems @Jeff S and I were posting at the same time.  :-)

Michael Wolffs · Answer

I had thought about most of what you're saying.  I'd like to find someone to work with on this.  I'll have to take some time to find someone with experience who'd be willing to work with me.

Michael Wolffs · Answer

At the next NY meetup, I'll start talking to people there who are doing it.

Michael Wolffs · Answer

I think I want to have some idea what I'm doing before I start putting money out there :o)

Billy Okoye · Answer

hello everyone, I am in MD and will like to think that it is different in NY. Any suggestions on the Laws in MD? I am a local Real Estate Broker with some money in the bank. Thought I have the money out working instead of starched in the bank. Are their any local legal licencing to lend hard money?

Michael Wolffs · Answer

David,

Since we're both in NYC, this question is probably more appropriate for you.

What is the average size loan you make?

Thanks,

Mike

How to get into hard money lending

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