How to become a hard money lender?

[Michael Randle]

So we all know what a hard money lender is. But the question I have is how do you become one? Does it require any sort of state or federal accreditation? Do you need to have a certain amount of start up working capital? I find it hard to believe it is as easy as siting in the back of a REIA with a trench coat offering stacks of 100 dollar bills to everyone passing and breaking knee caps when they do not pay up. If anyone has the short answers that would be good. But if anyone can point to a book, that would be amazing. Thanks

[Patrick McGowen]

Okay, I probably shouldn't admit this on a public forum because at best my hard money loans are stupid, at worst illegal.  I have no certifications etc.  When I broke my 401k out of jail and rolled it into self directed ira, I planned to continue buy and hold with financing.  Then I learned about UBIT and figured this would be a pain, so I started hard money lending, the first one was kind of on a whim, now I am kind of addicted.  I am starting to get deeper into it, and have not found a lot of info for the mom and pop hard money lender just getting started.  So I thought I would post my thoughts and general approach.  I only lend to people I know, not necessarily close friends but people I networked with through local reia.  I have seen a flip or two of theirs and know they know what they are doing.  When they have a project, they show me their construction estimate, purchase price and arv.  

Due diligence:

I don't do a lot here, I get my own agent to give me an opinion of value.  I know enough about construction to know if their repair estimate is at least reasonable.  I might get a close look at the property, sometimes it is out of town so I at least get someone I know in area to do a drive by.  

Guidelines

I am looking to lend up to 70% of arv.  If the buyer got it for 60% and their construction estimate is 10%, I don't worry too much about lending the entire amount.  I also am not too concerned with the skin in the game thing, as long as they are experienced and they get it cheap enough, if they have to go over 70%, that is their skin.  If their construction estimate is big or they are going over 70%, I may hold back some and put completion metrics, kind of like a construction loan. I ask to be listed as co-insured on their insurance.   

Terms

I do 12% simple interest, 1 year max.  I do not make them pay monthly, just at the end.  I make them pay all the title company and lien filling costs. No points.  Min. 4 months (i.e., if they pay me back in less than four months, I still get 4%).  I know I could get more, but this gets me a good return.  considering I have money sitting sometimes, and my ira custodian is around 1% fee; I am really shooting for about 8-10%.  The real benefit is helping my rei colleagues get to the next level.  

Closing

Always use a title company or lawyer. make sure your lien is in first position, title insurance, and paperwork in order. Once title company has signed note, lien etc. sent to me, I cut a check (more accurately, I have my IRA custodian cut a check). I try to check occasionally on property (again, if out of town need a friend to do a drive by); is work going on, any vandalism, progress, etc. Poke the borrower once in a while for an update.

Property sells, borrower uses same title company, I get paid, start talking with flipper about next deal.