Where to find PRIVATE MONEY - Not Hard Money - Houston, Texas

Question

Hello BP!

I am curious to hear everyone's feedback/advice on where they found PRIVATE money to do their deals (not hard money). I am currently in the process of starting my acquisitions side of my business that will be reaching out to sellers here in the Houston area, so I thought it'd be a good idea to see how others have formed relationships with private lenders to fund their flips, buy & holds, subject to rehabs, transaction costs, etc.. There's a large enough pie to share with others in these types of transactions, so finding someone who wants to build a relationship and benefit from helping each other is something I'm going to continue to look for.

I have pre-approval from a few hard money lenders in Houston, but as everyone knows a newbie isn't going to be getting favorable terms. I am getting 12%+ rates, 3-4 points, and seeing $2,500+ in fees up front plus all the stuff they charge for like draw fees. On top of six months of reserves and funds to kick-start a rehab, I need to have about $25-30k in the bank for every $100k borrowed. This has slowed down my ability to aggressively pursue deals in this market that is HOT; if they're not JUST RIGHT, the deal doesn't work for me. Sometimes I'm short just a few grand to do a deal. Definitely frustrating.

Considering I have some cash, my team lined up (realtor, title company, vetted GCs and some subs for getting bids, RE Lawyer, etc), and am getting close to launching my campaign to reach out to sellers, the only thing I am constantly thinking about, which I'm sure is common for a lot of investors, is "where do I find money to throw gasoline on this fire?"

Everyone says there's a lot of money out there looking for a place to park itself & grow, but I must not be looking in the right places yet! Some people have suggested going to meetings where self-directed IRA people are hanging out, but that's probably the only strategy I've heard. Is everyone just using hard money and living with all the fees?

I look forward to everyone's responses and thanks in advance to all those who reply.

Aaron Pfeffer · Answer

Brian -

I like your gumption and candor. A great deal. Do this...

Create a spreadsheet of all sold rehabbed houses in your farm area. Then go on Redfin and look at transaction history of each and every house. Was the house purchased in the last 24 months for 25% or less than what it just sold for? If so, then it was most likely an investor flip. Next, get access to title runs. Run title on the ones that look like flips and specifically pull up transaction history of those title runs. Why? Cause that's where you find the deeds of trust/mortgages/liens which are all public record. Why are you doing this? Cause you will see who gave those flippers their money. And while many of those liens will be from hard money lenders, many will be from those private lenders you are looking for. Many of those private lenders will be entities. Run a state entity search, which will then show you who are the point contacts for those entities. Then you need to figure out how to source their phone numbers/email addresses. Call and email them and explain you want to work with them too. And if those private lenders you found on title are not entities but individuals? Great. One less step. Figure out how to source numbers and emails. Or...often times those deeds of trusts/mortgages/liens have return addresses of the lender on them. Send a very nice letter to those addresses about why you want to work with them too.

Happy hunting.

Mark Sewell · Answer

I am going to get criticized here for having 'limiting beliefs' on this topic, but I suppose my views are very similar to those of @Shahriar Khan.

Some thoughts:

I do recommend going out to the meetings held at Quest Trust Co here in town.  This is the local SD IRA here, and the biggest in the state, I understand, and they are active.  They do a LOT of good meetups, and these really do offer good topics of discussion.

One of those recently focused on PM lending, and they had a panel of experts, local names you will probably recognize.  This suggestion in particular hit home:

If you are new at lending, find an experienced flipper/borrower.  If you are new at buying/renovating houses as a borrower, and you have never done a PM deal before, then find an experienced PM lender that has done this before.

Another key point is security vs collateral.  The RE property is the collateral, but these lenders see YOU as the security.  Meaning, will you have the reserves to backstop them when the project starts going sideways (and it will).

The four C's of credit (those that have been in lending will know this):

Character -- do you do what you say, eg., pay your debts.  Credit score.

Capacity -- do you have the tools in place to take on the project and complete it?

Capital -- do you have the financial reserves and/or working capital to get through unforeseen circumstances?

Collateral -- how good is your equity position in your deal?

I do think you CAN find some true private money, in the hands of high networth individuals that are busy working and aren't going to spend their days running ARV comps.  But since they won't know much about investing in RE, they are going to be looking at your track record.  So if you are just starting out, or you have done only one flip, like me, that didn't go well (everybody got paid, I am the only one that did not particularly enjoy the final outcome) then probably you will want to just sign up with the experienced PM lender.  As others have noted in their responses, that is going to be that guy that is almost like a small HM lender, in a sense, and you might not get the best terms on that one.

Another thing I have learned is that many of these local HM lenders are investors this themselves and they know what they are looking at when they walk a property.  Having that second set of eyes is really a good thing - and in fact worth paying for.  Since they are being asked to put their cash into your deal, they are going to give you solid honest feedback, all the objectivity you can ask for.

Of course you have to be smart enough to listen, if/when they tell you that your deal is a turd, but if you are viewing them as a 'paid consultant' and not just a private banker, then you are going to be way more willing to listen.  So when considering HM lenders, try to think of them as adding value above and beyond just the lending aspect.  That doesn't mean pay anything to do a deal, but it does help you mentally process that big fee in the beginning.

George A. Douty II · Answer

Brian, I went through the same struggles. "Private Money" is harder to come by than people make it sound like. Not to say it is not out there, but it takes the right combination of person and circumstances to actually get that money from their bank account and into the deal. Despite significant efforts, I never found a true private money partner. I partnered on a deal with a family member, where we both put up about 30K and used that 60K to get a hard money loan to do a flip. I guess you can call that private money, maybe...lol.

I found a lot of people with money, that were not comfortable putting it in a real estate deal, or they wanted interest and a part of the deal, or they were private money lenders until the point that they realized they could draw up a contract and basically turn themselves in to a hard money lender at 3 points and 12%...

So we resorted to just using Hard Money on our flips, maximizing our income outside of real estate, reducing our expenses and spending, etc. Doing all those things we were able to accumulate some cash, which we are using now to do flips that we can pay cash for. We also got really serious about our credit, not just the score, but the amount of available credit on any card or line we had. We request increases every 4-6 months on every card or line, it made our scores go up, but it also got us to about 150K available credit, which we can't use to buy a house, but it does help with financing credibility and some piece of mind that I can finish some repairs with that if I do get in a tight spot. Some people will criticize this approach, but thus far I have never had it hurt us, about half of our credit cards allow zero interest for 12 or 18 months, so its better than sitting around wishing you were flipping houses.

If you are finding deals and coming up a few thousand short to get them done, maybe you should consider partnering with someone that can match what you bring to the table. For instance, if you brought me a deal that made sense financially, it requires 50K cash to secure hard money and finish the deal, but you only have 25K cash, I would easily agree to put up the additional 25K cash and split all costs, expenses, profits 50/50. 50% of a good deal is better than 0% of any deal.

Hope that helps, send me a private message if you have questions or want to discuss working together on a deal.

Jay Hinrichs · Answer

Mark nice explanation of reality.   for those beginning like this to me instead of doing all this work and expense to find a deal only to not be able to close becasue your a few grand short..  One would be better bringing in a money partner.. many times private lenders want MORE return than HMLs but will provide equity needed.. build your experience bucket this way until a time that you have your own capital.. dont leave your PM person in the dust when you move on.. keep them in some deals.

and some markets right now its just not a good time to be in this side of the business.. very risky. Margins to thin and too much competition driving up the wholesale prices of the properties.   This is why having a real estate license to me is critical.. for the deals that just dont quite work take a listing make a fee ..

Shahriar Khan · Answer

@Brian Alfaro ... i agree with what  @George A. Douty II said about finding partners ... typically that would be easier .. On the same token, private money exist and you need to network a lot. For us , we were looking for partners for private funding so we were interviewing right funding partner for us (key: we were interviewing) and we found 3 typical groups of lenders.

1) Hard money /professional lender : They mostly care for points and  higher rate and very less about you. They are great if you needed quick funding and you needed to leverage. This is where typically most of flippers would borrow from initially and as they get bigger they will work down to category below.

2) Semi - Private Monday / Note buyers: They have been there as flippers and now does loans aka passive a bit. They focus on borrower as a person a lot .

3) True private money: Friends and family . They have limited funds and very emotional :)

My lender is in #2 category ( we sat through a bit over half a dozen lenders within category #2) . We as borrower dont leverage much which was what he wanted his borrowers to do and in exchange we got lower rate and lower % point . His lending strategy and our borrowing strategy were aligned. Now we are good friends and i can get funding within 2-3 days without worry about any appraisal and all those.

Brian Alfaro · Answer

@George A. Douty II

Thanks for sharing your experiences and tips, George! I’ll keep your info handy in case I come up short somewhere. I am 100% of the same mindset - a % of something is better than 100% of nothing.

Brian Alfaro · Answer

@Mark Sewell @Shahriar Khan @Jay Hinrichs

Thanks for the detailed replies! I’m with you, Mark. I see benefits being new and using a HM lender, even though they’re expensive, as a second set of eyes to guide me. I do plan on attending the Quest events here in town soon, so hopefully I can make some contacts or at the very least learn something.

As far as private money goes, the info you two shared is very useful in helping me understand what I should be looking for and willing to offer to a PM partner. I guess I should have clarified that, but my goal is to find a PM partner who has been in my situation before but worked their way up and out of doing the things you mentioned - running comps, dealing with rehabs, etc. Having this type of person serve as funding but also a business partner that can provided some guidance when I stumble is more than worth giving up big pieces of the pie at first until I gain more experience and the collateral gets better (due to getting more experienced finding good deals) and the security does too (due to trust, successful deals that are returning a profit for both of us). I’m not looking for hand holding because I know these people have full time gigs and are looking for PASSIVE investments, but having access to them regularly if deals come through or guidance is needed on a very specific area.

I’m with you Jay - I see the most successful investors in our town always have their license. Seems to open doors that can’t or are much harder to open without it. Too many benefits not to have it. That’s why I’m currently working on getting mines as well. I’m excited about getting a peak “behind the curtain” and bringing investment knowledge as a benefit to those who need to buy or sell. Our market is so dang hot right now, your best bet is usually listing properties on the MLS and letting the thousands of investors skimming it hourly for deals bid up the price. This can be an easy way to help homeowners and make a listing fee without worrying about lenders. In & Out while building a great reputation and helping your client and customer.

Matt Urbas · Answer

@Brian Alfaro

Friends and family are a good place to start. Just be clear on the terms just like you would with any other lender you didn’t know.

In my case I went with a current client. We have done work with this individual for years and I told him my situation and then flat out asked him if he would be interested in funding it. I told him the terms the HML wanted and asked if he would do better. He did.

The best part of this was that it gave me a really good idea of where I stood on the scale of trust with the people close to me as well as other clients. As soon as I tell people how this guy helped me out they offer to help out on the next one. It has created a nice stream available funds to work with.

Brian Alfaro · Answer

@Aaron Pfeffer - Great tip! Thanks for sharing. I actually was recently told about this strategy too. Skimming through deeds can be a part time job, but I’m guessing it’s worth it to find a true private money partner.

Mark Sewell · Answer

Hey Brian, I think this is less a reflection of the HM lenders than it is a function of the stupid crazy hot marketplace right now.  Finding deals is really hard, almost like finding a unicorn.  Doesn't mean you cannot do the occasional deal like this, but the margins are skinny, equity is slim and it is going to require more cash at closing table and more reserves as a result of this.

Where to find PRIVATE MONEY - Not Hard Money - Houston, Texas

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