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Updated almost 17 years ago, 12/20/2007
Hard Money Lender Wannabe
I'm an early retiree from the airline business, investing my retirement assets in a self directed IRA. To date I have written 3 private loans at good LTVs and am very pleased with the results. I would like to get more involved in Hard/Pvt money lending, with the ultimate goal of building a business of HM lending by pooling funds with other like minded retirees/investors. Beyond the obvious risks (like default) can any of you tell me what the pitfalls in such a business might be? Because I can travel inexpensively I can easily look at deals nationwide. Which states are best avoided? What licensing requirements (if any) are there? Any information on the steps I need to go through to set this up would be greatly appreciated.
Ben,
A few things to consider.
Pooling funds can be a very bad idea. Too much pooling and the SEC comes calling. Something about jail time. They feel that pooled investments are really securities and are regulated much more heavily than real estate transactions.
Lending nationwide means knowing the rules and regulations in 50 states. Again not advised.
There are many positives to being a hard money lender. Even better in many cases when using IRA funds. There are some serious land-mines though.
Get in touch. The best way at this point (when you have less than 10 posts) is to contact me through Skype or the website link below. One way or another I can then respond and we can discuss. We might be able to do some business together in addition to discussing the hard money pros and cons.
John Corey
Thanks John...I'll be in touch soon.
Hi Ben,
I've been doing this, too. I've been doing it through a broker here in the Denver area. They do the due diligence on the borrower and the property and provide me with the info to make a decision.
I did attempt to partner up with another guy so we could take down bigger deals. Turned out to be troublesome and expensive, so we never went anywhere with it.
Jon
Jon,
I met last week with a mortgage broker in Boise who places private money. Seems like an upfront guy. And the ability to have someone do the screening indeed sounds like the way to go. Have you had any problems using this approach that you could share?
Thanks,
Ben
So far so good. One deal outstanding right now, and another in the works. I think the main broker is trying to put together a fund she would use for these loans instead of brokering individual deals. Trouble with the individual deals is that its hard to keep all your money invested all the time. The idea of hooking up with this other guy was to better handle the leftovers.
The broker evaluates the borrower's credit and track record, gets the appraisal done and does all the paperwork with the title company. I do the paperwork on my end to get the money into the escrow account and handle the payments back from the borrower.
Jon
Nanzer, there are a lot of wannabe brokers out there as well as some crooks. Unfortunatly, the good crooks are good enough to sound like good brokers. Ask for references. You want investors who have had loans funded and paid off (paid off so you know the broker has been in business a while).
Also, remember that while a good broker will do due diligence for you, *your* job is to do due diligence, the broker's job is to place the deal in front of you. A good broker, of course, will only give you deals that will pass your due diligence. It is still your job because it is your money.
Also, if you consider pooling money, the magic number is 10. You still have to do it right. In California, where I have experience, you can do it under the Department of Corporations. If you do any kind of pool, get a good attorney and be careful what state you are in. Different states have different rules.
If you want to form a pool consisting of California investors, I can reccomend a good attorney for setting it up.
I can tell you, though, it is a PITA and probably not worth it.
Now that I think about it, the best way to pool (which isn't really a pool) is to form a corporation with the other investors. Be very careful who you parther with though as you will be married to them for better or worse. Again, a good attorney will help here.
Originally posted by "ShadoCat":
Also, remember that while a good broker will do due diligence for you, *your* job is to do due diligence, the broker's job is to place the deal in front of you. A good broker, of course, will only give you deals that will pass your due diligence. It is still your job because it is your money.
Also, if you consider pooling money, the magic number is 10. You still have to do it right.
Two very good points above.
No broker can really screen the deals. By that I mean no broker is going to guarantee or otherwise back the deal. If the loan does not go well the broker has effectively no liability. You have to do your homework.
On the magic number of 10. That is really not a magic number. In CA the state allows up to 10 entities to blend their funds so 1 loan is issued. Most other states have no such rule. It is not the same as pooling funds where 1 person is in charge. It is more about each lender having the same position in terms of the lien rather than a 1st, 2nd, 3rd, ... 10th.
John Corey
Thanks Shado and John,
I've been doing a little research on the issues you both have brought up. One Mtg broker I've spoken with likes the idea of setting up a Rule 504 offering to accredited investors. I suppose that could be made to work, *BUT* I don't think I want "Fund Manager" (with all its attendant hassles and risks ) to become my job description. So lets forget that!
How about this? I assume there is no prohibition or restriction on partnering with others ( like friends and acquaintances) so long as they are not solicited publicly. If that is so, would I be correct that a multi-member LLC could loan on deals that either exceed the capacity of an individual member and/or allow the members to spread the risk across more deals? Would this run afoul of the Feds?
At the moment, all of this is moot as I'm still in a position to do this solo. But if I find it successful ( and so far so good) I'd like the option of being able to grow this in some way.
Best,
Ben Reese
Thanks John. I only knew about California because I worked for a hard money lender here. I've never tried to pool funds in any other state.
Nanzer, An LLC works great. But while 10 might not be a magic number federally, it is still a good rule of thumb. It gets difficult to explain how you and 30 of your closest friends decided to go into business together....
It is best then to form multiple LLCs with 3-5 people each and what do you know... ...LLCs can JV to work on a deal. I wouldn't make a habit out of that though. Keep in mind that they will be more reasonable with a deal that just happended to be structured like that than they would be with a business practice that runs that way.
Extending Jeff's points a bit.
If you pool money with 1 person you can still be in violation of the security laws. It comes down to what takes place.
If the group is all family and friends and each decision is reviewed by each person then you are likely fine.
If the other person is a stranger you met through Craigslist, they are an elderly lady with no RE knowledge and you are the one making the decisions for the deals that are funded you are in serious trouble. One guy who did this spent just under 5 years in prison when a deal went bad. Lets face it, hard money deals can go bad so expect a few will.
In most states there are assumptions about how many can group together before you have too many. 35 is one number if they are not all accredited investors. 50 if they are. Even then you could be required to register with the state and many the Feds. Similar to what Ben mentioned.
Pooling funds is a slippery slope so know what you are doing before you start sliding down the slope.
John Corey
Yeah, what John said.
Also, take any of my advice as a starting off point for a conversation with an attorney. Remember, that as far as the law is concerned, HOW you do it as as important as WHAT you do.
No matter how much I think I know aobut this, I would NEVER attempt it without a good attorney's input.
In the long run, it always costs less to do things legally.
Following up on Jeff's point...
Everyone has heard "innocent until proven guilty". That is the law of the land in the US. Right?
Not true when dealing with security law violations. To protect the naive public the people offering unregistered securities are guilty until proven innocent.
That means that you can contaminate a deal just by making a comment in a public forum or other misstatement. You actually have to screen the investor to see if they could fit the deal before you can even explain the deal to them. This is specific to securities
Real estate is not like that. The problem is the line between RE and securities is fuzzy. When you stop talking about a specific deal and you start talking about pooling funds with others you might have crossed the line.
Security lawyers are expensive. That is because the stakes are high (risks plus capital involved in most deals).
Keep the focus on RE deals. Focus on the specifics of the deal when talking with people. If you start shifting into group investing, pools, or things like MTNs, etc then watch out. You really need to shut up if you do not know who is listening and if they qualify to have the conversation. This has a lot to do why people who really do deals involving securities (and some form of MTN trading) will never post here on BP or other public forums.
John Corey
Personally I would follow John's advice.
I have an attorney lined up who has set up a number of these pools in California. Even with his help, it would take at least a year (probably two) to get something set up that would allow me to pool non-acredited investors.
If you stick with acredited investors or, better yet, sophisticated investors, you can get going faster since the SEC assumes that those investors know enough to protect themselves.
As John pointed out, if I go that route, don't expect to hear much from me about it.
Aside from all the set up, there is a lot of paper that needs to be generated, stored. reported and audited just to prove that you aren't cheating a 90 year old alzheimers patient out of her life's savings.
I'd rather work with someone who already has such a pool set up. Pay them to take the risk and the headaches.
I know this post is old but if you are still doing the pvt financing, let me know. I have some things we could discuss. Please post your contact info
Unsecured, once you participate in the forums and have 10 posts, you can PM us. Yes, I'm still doing them. Closed one today.
Jon
Originally posted by "Wheatie":
Jon
Jon,
If this is the deal we discussed in London, well done on getting it closed.
To others. If you are looking for private funding I will provide HML for the right deals. Send email rather than a PM.
John Corey
Originally posted by "REI":
Jon,
If this is the deal we discussed in London, well done on getting it closed.
John Corey
Yep, that's the one. Something of a hassle to deal with it while traveling, but with some persistence everything fell into place. I am leaning toward doing moving my account into a checkbook control LLC with Guidant Financial, after this experience.
Jon
Originally posted by "Wheatie":
Originally posted by "REI":
Jon,
If this is the deal we discussed in London, well done on getting it closed.
John Corey
Yep, that's the one. Something of a hassle to deal with it while traveling, but with some persistence everything fell into place. I am leaning toward doing moving my account into a checkbook control LLC with Guidant Financial, after this experience.
Jon
Rumor that such a structure falls foul with the IRS. I believe Equity Trust stopped allowing checkbook accounts for this reason.
I believe there is very little room for the IRS to argue if there is more than one person involved with the LLC. Even if the other person is a related party (wife, other relative, business partner in other deals).
John Corey
I am a Broker in Sarasota, Fl and have been funding deals through a capital source in the Cayman Islands. I underwrite the deals prior to sending them on to him. I would certainly love to have other capital sources to fund deals that are never more then 65% LTV with solid exit stratagies. I currently have deals in TX. NY, KY, Fl. from commercial mixed use to multifamily. Let me know if you have an interest in working together.
I am always looking to develop new sources for private money. If any of you are looking to place money or have your own sources for private money, let's get connected (I hope I didn't violate any SEC rules there. If so, I wonder if they will let you do loans from Jail) :wink: