Hard Money: a comprehensive DO's and DON'Ts needed

[Huy Thai]

BPers,

I searched the forums for a list of do's and don'ts for hard money lending without much luck so I'm going to see if I can get all the answers in one place. I am at a point in my REI where all my personal and private money is tied up in equity or stuck in a seasoning period. I want to scale my business with a goal of at least 10 new properties in 2018. The only way to reach this goal is to enlist the help of HM lenders. I get the basics of needing them for the rehab period but what I don't know are the details and what I should be looking for and avoiding. If I'm correct, most get HML's and only pay the interest accrued monthly, but I've also read that some are able to defer all principal and interest payments until the loan is paid back. Some give 100% to buy the house and rehab while others give a percentage. How many points is standard? If i pay for points is that a transaction cost or is that part of the loan somehow? Is the interest based on the deal being funded, my experience, or my credit report? What are the main points I should to compare between lenders? Local or National brand? .... and so on and so on. Those of you who have extensive experience please help us fellow novices from getting taken advantage of.

As and example, the deal I'm currently working on (in Houston, Texas) is a 4-plex of 1 br 1 bths that I'm buying for ~50K. 60K in rehab with an ARV of $175K to 200K (no comps in the area). My credit is in the low 800s. I've got 2 SFH financed, 1 condo free and clear, and 1 SFH in the rehab stage of a BRRRR aside from my financed primary. Oh and I still work a W2.

I'd like to keep this thread educational so please refrain from trying to pitch your services!  Thanks in advance for your help. 

[James C.]

Huy,

HML are as varied as the folks that own them. Trying to categorize them is like herding cats. Some generalizations:

1) They are expensive money. Interest rates vary, but it will most likely be north of 10% unless you have established relationships. Plan on at least 2 points, could be 5 or more. Some will lend up to 90% ARV, some only 60%. Some will give you x% for purchase and 100% of rehab. In the end, it will come out that if they have to take the property back, they will make money (or break even). Plan on paying for everything up front, and not financing in points, fees etc. Some might let you do that, most that I know won't.

2) HML are about getting the deal done. They want you to be successful. If you are successful, then they are making money. That being said, they will protect themselves completely. Think deed in lieu, additional collateral, cross collateralization, and lots-'o-cash on the table.

3) The best HML tend to be local, and want to know you. Not as in get the families together know you (although that might happen), more as in what kind of character do you have. If you say something, can you back it up? Can you perform as advertised? Nationals can have better pricing, but lack a certain amount of flexibility that the locals have. This depends on how the HML is set up and funded. The more deals you do (the better the HML gets to know you), the more flexibility and better (to a certain extent) terms you will get.

4) Your entire plan must be water tight. Like seriously water tight. Like beaver butt water tight. You should have multiple exit strategies BEFORE you even think about engaging a HML. If you only have one exit strategy, DO NOT USE AN HML. Come up with another viable exit strategy. Make sure your numbers are REALISTIC AND PERFECT, no pie-in-the sky stuff. The deal should be KILLER AWESOME. HMLs are all business, and you need to know their business as well, if not better, than your own.

5) Hire your own attorney to advise you on the HML paperwork. Seriously, this is the big time, so start acting like it. Trust me when I say the HML has at least one attorney on speed dial, if it's not owned by one. Usually they have legions of them. Get your own, you'll need it anyway. Oh, and make it one that knows corporate stuff, HML, Mortgages, Lending, Usury Rules, Notes (NPN, PN, RPN, FC, DIL) etc. inside out.

6) Set up an LLC, S or C corp. Use an attorney, do't go all cheap, and you'll need to have the opinion letter anyway. Typically HML won't lend to a person, only a company. So, better to set one up now, 'cause expedited filing fees are expensive. If you go to an HML without one, you look like you just fell of the turnip truck. If you are uncertain about setting up corporate shop, you aren't ready for a HML.

7) Comparison shop - HMLs are all over. Establish relationships with a few of them and ship them deals. See what they come back with.  Work them against each other (professionally, please) and see what pops out. The more you look like you are all business, the more they will respect you. 

8) KNOW YOUR STUFF (your choice of "S"). If you are at all queasy, uncertain or confused about 1 - 7 above, you aren't ready for an HML. GO DO MORE HOMEWORK.

I'm sure that I have left something out here... but this is about all I can think of at the moment.

HML's have their place, but you MUST be on top of your game, because they know your game and their game better than you do. It's advisable you do the same.

Good Luck!

Jim