Being a hard money lender. Should I do it? Advice?

Question

Hey All,I have been approached to act as a hard money lender on a small property (less than $100k all-in) close to where I live. I’m intrigued and am considering doing it, but have never done this before. I have experience flipping, but not lending.I like this because I can easily check up on the property, have knowledge of rehab costs, etc.Can anyone provide any insight on this? If I do it I certainly want to make sure I do it correctly and if it works out well I’m sure I’d want to continue doing it.Thanks,Mayer

Rob Jafek · Answer

There are some good suggestions here already, and I will add one more, given the circumstances, which is that you have experience, and they don't. You will probably be tempted to share advice, but you need to resist the urge. It's a bit arcane, but by offering advice, you may be opening yourself up to a situation where it can be construed that you were actually not just a lender, but rather a partner. If that is the case, then you are liable for building errors (10ish year tail), code violations, civil issues, etc, basically you are a 'partner' in anything stupid they did, so you are liable, and potentially for 100% of the error (you'll be rolling the dice on the joint and several thing). Therefore, my advice is: offer no advice. Read more here: https://geracilawfirm.com/lender-beware-the-risks-...and here: https://www.cnbc.com/amp/2017/03/09/buyer-beware-t... Note the lender getting wrapped in/sued. And (especially) here:http://apps.americanbar.org/abastore/products/book...@Yonah Weiss is absolutely right about the value of a lawyer. And the concerns about NJ jurisdiction, and the #s here allowing walking away are valid as well (we don't do 100% financing for that reason). Although it looks like their site may be down at the moment. This still may be a good, or even great deal. Just go in with your eyes wide open, hope for the best and plan for the worst. We wish you well!

Tchaka Owen · Answer

@Mayer M. - equally (if not more) important is how the deal is set up. How much are you lending in respect to the value? You said less than $100k, so let's go with $90 in these examples.Example 1: purchase price $100k, rehab is $20k, ARV is $170k. The borrower has skin in the game and will lose out on some money invested as well as a good amount of profit if the deal goes south. The incentive to perform is high.Example 2: purchase price $70k, rehab is $20k, ARV is $110k. The borrower has very little in the deal. There's not much profit anyway, so if things go south.....eh.

Mayer M. · Answer

@Yonah WeissThanks!I would absolutely have an attorney handle this

Mayer M. · Answer

@Kyle J.I am supposed to meet them tomorrow. During the meeting I will get a better understanding of the person. I believe they have some sort of home improvement/repair experience, just not in flipping.Being the property is in my backyard I can easily keep tabs on the property and rehab

Mayer M. · Answer

@Tchaka OwenPrecisely why I’m interested in doing it. If I have a good experience I would like to do more of them.This deal seems like an ideal first HML

Account Closed · Answer

I would put the property in your name and then take out your agreed upon lender fees after sale ,and turn over the rest to the flipper. It appears that you are making about 10k and the flipper 20k. Unless he is a relative or great friend cant figure out why you are doing 100% financing

David K. · Answer

Do not waste your time and money on a lawyer. When it comes to money, the law is very bad at getting back lost money. As one attorney told me, any agreement is only worth the person standing behind it. Why not pay this person a finders fee, hire them and flip it yourself. It's much safer. You can promise the person payment at the sale and pay them more than if they were paid weekly.

David K. · Answer

A first time flipper..... No, absolutely do not do this - unless you are comfortable finishing it yourself. I would make the terms tough - if one payment is missed you take over the entire property. We are likely at the height of the market and you are on a short leash to finish and sell it. Imagine he drags the rehab out and then the market tanks..... are you still prepared to take it on. If you do it, do NOT dole out cash to the flipper directly. In short, you are going to be baby sitting this deal day by day. Unless you really trust this person, it's just not enough to justify the risk.

Mayer M. · Answer

@Rob JafekThanks Rob! Much appreciated

Kyle J. · Answer

It’s not a deal I would do since your borrower has zero experience flipping houses and zero skin invested the deal. Too easy for them to walk away if things get hard.