LOAN BROKERS - CAN WE PICK YOUR BRAINS? Hard $, Pvt. $, Direct Lenders, etc.
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
LOAN PROS, often I see on BP questions on Private money, hard money, direct money lenders, etc. Though I'm knowlegable on hard money loans, I know there are many out there that are curious and would appreciate picking your brains. Here's some questions I think will help the conversation:
1. What is the difference between private and hard money?
2. What does it mean "direct lender"
3. What are the criterias your investors ($ people) use to determine if they will make a loan (loan amounts, ROI, type of property (SFR, Multi Family, Office, Industrial, Land), area of country, credit scores, experience of borrower, new construction, rehab, etc.) ?
4. Do you have different classes of investors? (those that will only take certain credit scores or other criteria, and those that take more risk, etc.)
5. What LTV do your investors want, points and interest? Maximum loans?
6. On income properties what are the CAP rates investors are looking for? (or is that relevant?)
7. Tell us the #1 thing borrowers should know to get the loan they are looking for?
1. Private money means non-institutional money, therefore virtually all hard money is private money. The term private money, in common usage, typically means money from a private person not in the business of lending, who charges lower rates than hard money. An example might be friends, family, or other preople you know who are interested in what you do. The term hard money originates from a loan based on a hard asset. Originally, all mortgage lending was asset based, and not person-based, before credit scores and dti's came into common usage.
2. Direct lender means the company you are talking to is the one providing the funds, and making the lending decision. It is usually meant to differentiate from a mortgage broker.
3. The answer to this one is going to vary by each person or company. Since I lend my own funds, plus separately those of my private investors, I don't even have a single answer.
In general, we lend at 60-70% of ARV (70% is for very experiernced borrowers that we have history with), for 6-12 month terms. We don't use credit scores, dti's, or other personal qualifications. We lend only in a specific geography, including the eastern half of Massachusetts, and the southern portion of New Hampshire. We lend construction loans for rehab projects, occasional acquisition of buy and hold properties, and a few other odds and end of commercial properties. The important factors are:
1. Location
2. Skin in the game
3. Experience of borrower
4. Exit strategy
5. How easily could we sell the property if we had to take it back
6. The most important first question also discards any borrowers with any intent to use the funds for any household or residential purpose
This is not meant to be a solicitation, simply a general answer to a comprehensive question.
4. Yes, and I tailor the deals I send to them accordingly.
5. This varies by investor, and honestly, the answers to these questions also vary regionally. Hard money and private money rates are more sensitive to supply and demand and don't relate to residential mortgage rates. So if an area has few hard money lender but lots of deals, rates will be higher than if the area was awash with cash and few deals. Generally an individual investor wants to stay well south of 500K per loan, and likes to keep their money working. But to specify terms per investor is far beyond the scope of a post like this. You should talk to individual lenders as you may be surprised by the variation in terms.
6. Well, when you say investor, you mean the $ person? That will depend on where the property is, and how much cash the borrower is putting down. Just like with buyers, the cap rate will vary by location and condition. Certainly a property in a good location in fairly good condition will be easier to fund, but will generate lower cap rates. But funding will again be dependent on the experience and cash input of the borrower, and the ability of the borrower to get permanent financing as an exit.
7. If a rehab loan, the #1 thing is the After Repaired Value of the property. Borrowers continually over-estimate this number, which is the number one factor contributing to losing money in a deal. IMHO (#2 and #3 and #4 are underestimating the rehab $ and time, underestimating carry costs, and running out of money with insufficient cash reserves)
Sorry for the long reply, this was a pretty comprehensive series of questions. I think it would be better suited for a series of articles, maybe another lender will chime in with that. :-)
@Ann Bellamy Don Konipol @Chris Goulart I know you are in lending... maybe you can start it off?
Karen M., I'll compose an at-length reply as soon as I have a few.....thanks for asking
Ann Bellamy Hi Ann, looking forward to your reply on this. In the meantime, this post brings to my mind one single difference between private and hard money lenders, an it's interest & fees. I think that one of the main reasons that investors decide to chase for private money instead of hard is because of the hefty price tag you have to assume in a hard money transaction.
I do understand that you guys hard money lenders are in a very risky business and you have to compensate the risk by charging high interest and fees, but the reality is that every time that I have a deal I do my numbers with hard & private money scenarios, and most of the times hard money makes the transaction either unsuitable to purse or simply unprofitable. Unless you grab a deal at a substantially discounted price with an ample profit margin, it's very tough to make the numbers pencil out with hard money. We have to consider also that the market is recovering and as time goes by, prices are going high and discounted deals are more difficult to find.
Anyway, here is my perspective from an investor mind set stand point:
If we as investors could have the opportunity to access hard money at more competitive prices similar to what you can get in the private world, most investors would skip the hassles and possible non-compliance issues that private money usually brings, and would go directly with hard money lenders. When I say competitive, I would say more reasonable rates at around 8%-10% and more reasonable fees in the ballpark of 3%. Even being competitive from a price stand point, you are still being very conservative with the LTV at 65%. I personally don't have any problem with the 65% LTV, I do share you guys vision that the investors have to have skin in the game.
Hoping to read you point of view on this.
Regards,
Alex
Alejandro Casablanca Actually I have used 'hard money' in the past, but it was actually cheaper than some I've seen that advertise 'private money', and in reality hard money is private money too.
There are different definitions, etc., and that's why I posted this so that those that actually have the people with the money making the loans could educate the rest of us on what their definition is of each, etc., and added some questions that I think will help cover alot of the bases. Feel free to ask your questions!
Karen M. I do agree with you, there are many different definitions depending of the perspective of each investor. I'm not a Loan Broker but I can give you my perspective as an investor that is always looking for financing alternatives to fund my deals. Investors are always looking for private money (not hard money) like crazy is mainly for three reasons: 1)hard money is very pricey in terms of interest rates & fees, 2) costly in terms of initial investment, and 3) it is money at just 1-2 years. Personally, I don't see it from the perspective of what do I have to do or comply with to get the loan approved. I do see it in therms of that the transaction has to make sense first from a financial standpoint.
Actually, yesterday night I was in my local REI Club meeting and I was talking with a Hard Money Lender, I identified myself as Buy/Holder type of investor and I asked: Do you have any product that might fit the needs of the Buy/Holder? He provided to me such a great and honest opinion. He said: "Hey, hard money is for short term deals, if your strategy is to keep the property more than a year Hard Money is not for you, you should try to go with an alternative that provides you longer terms".
I think there are a lot of investors out there that are eager for some kind of mid term financing alternatives that can serve better the financing needs of the Buy/Hold investor.
Alejandro Casablanca As I mentioned we've used hard money on our deals as they were spec office buildings, and new construction (nothing like trying to put together the hardest possible deal to find money on!) Though our lenders considered themselves 'hard' money, it wasn't near what some of the other 'hard' money lenders I've seen charge.
If you go to the tab at the top of BP there's a link for 'hard money' lenders. I've suggested to Joshua and Brandon they change to 'private money' as so many people have such a negative conotation to 'hard' money, then maybe more people will list on there.
But, hard money, and/or private money probably isn't the best route for buy/hold properties.
I agree @Karen, hard money probably is not the best route for buy/hold properties HOWEVER, sometimes that is still the only alternative for borrowers with big credit dings.
HOWEVER, many hard money lenders offer reduced interest rates on longer-term loans. Most hard money brokers have private trust deed investors behind them who are financing and funding the loans. Any good HMB has several - and they may have different criteria. Some may like longer term at reduced rates and rentals only, some may like cash-out refinance projects at 65% for 1-2 or more years. It is always a good idea to ask several hard money brokers if they don longer loans and what the rates are. Do not assume it is the same high rate for short term rehab loans.
2nd, most borrowers are not aware of legal requirements for lending in their own state, and nationally per Dodd-Frank. Typically, individuals may not charge over 10% for a loan or it is usury (In CA and many other states). It does not matter if the loan is described as being for a business purpose or is secured by real estate. It is an unenforceable loan if someone chose to contest it (e.g. after not paying it) .
A lender may charge a rate higher than the usury limit ONLY when it is written or originated by a licensed broker! Most folks don't realize that, and that fact is one of the best reasons I know of to use a broker and to pay the points they ask for. They are protecting you, the TD investor and are in compliance with all laws, and will create and mail out all required disclosures too.
Hard money is in some ways Safer than private money.
Hi Julie, welcome to BiggerPockets. Why don't you tell us about yourself at new member introductions?
http://www.biggerpockets.com/forums/55-new-member-introductions
Thanks for weighing in on these questions.
1. Private money means non-institutional money, therefore virtually all hard money is private money. The term private money, in common usage, typically means money from a private person not in the business of lending, who charges lower rates than hard money. An example might be friends, family, or other preople you know who are interested in what you do. The term hard money originates from a loan based on a hard asset. Originally, all mortgage lending was asset based, and not person-based, before credit scores and dti's came into common usage.
2. Direct lender means the company you are talking to is the one providing the funds, and making the lending decision. It is usually meant to differentiate from a mortgage broker.
3. The answer to this one is going to vary by each person or company. Since I lend my own funds, plus separately those of my private investors, I don't even have a single answer.
In general, we lend at 60-70% of ARV (70% is for very experiernced borrowers that we have history with), for 6-12 month terms. We don't use credit scores, dti's, or other personal qualifications. We lend only in a specific geography, including the eastern half of Massachusetts, and the southern portion of New Hampshire. We lend construction loans for rehab projects, occasional acquisition of buy and hold properties, and a few other odds and end of commercial properties. The important factors are:
1. Location
2. Skin in the game
3. Experience of borrower
4. Exit strategy
5. How easily could we sell the property if we had to take it back
6. The most important first question also discards any borrowers with any intent to use the funds for any household or residential purpose
This is not meant to be a solicitation, simply a general answer to a comprehensive question.
4. Yes, and I tailor the deals I send to them accordingly.
5. This varies by investor, and honestly, the answers to these questions also vary regionally. Hard money and private money rates are more sensitive to supply and demand and don't relate to residential mortgage rates. So if an area has few hard money lender but lots of deals, rates will be higher than if the area was awash with cash and few deals. Generally an individual investor wants to stay well south of 500K per loan, and likes to keep their money working. But to specify terms per investor is far beyond the scope of a post like this. You should talk to individual lenders as you may be surprised by the variation in terms.
6. Well, when you say investor, you mean the $ person? That will depend on where the property is, and how much cash the borrower is putting down. Just like with buyers, the cap rate will vary by location and condition. Certainly a property in a good location in fairly good condition will be easier to fund, but will generate lower cap rates. But funding will again be dependent on the experience and cash input of the borrower, and the ability of the borrower to get permanent financing as an exit.
7. If a rehab loan, the #1 thing is the After Repaired Value of the property. Borrowers continually over-estimate this number, which is the number one factor contributing to losing money in a deal. IMHO (#2 and #3 and #4 are underestimating the rehab $ and time, underestimating carry costs, and running out of money with insufficient cash reserves)
Sorry for the long reply, this was a pretty comprehensive series of questions. I think it would be better suited for a series of articles, maybe another lender will chime in with that. :-)
Ann Bellamy Great post, very knowledgeable and informative answers!
Karen M. Agree that at the end hard money is also private. I think the connotation of "hard" is because of the reasons I addressed in my previous post.
Julie Falen I do agree that hard money is safer than private, but just from the perspective that you don't have be worry about SEC compliance issues. But it is also riskier from the stand point that its pricey money at a very short term period. If you don't have an appropriate exit strategy or your plan is simply to hold it, you can be in a very risky position of not being able to repay the loan back in 1 year and lose the property.
Ann Bellamy THANK YOU for your comprehensive answer. I know there have been several questions regarding hard money lately, and this thread with your answer will go a long way toward educating people, and giving them a good understanding and place to start in discussing such loans. I realize there were several questions, but wanted more than just a short post with no real meat. You've provided a lot of valuable information, and I appreciate you taking the time to do that!
Here's my take. Full disclosure: I do some hard money lending via a broker. I've also used hard money to fund some of my own deals.
1. What is the difference between private and hard money?
That's depends on who's using the term. When a borrower says "I'm looking for private money, not hard money", they usually mean "I want hard money terms, but at a lower interest rate. When someone advertises "private money" they usually mean "we have hard money, but that has a bad reputation, so we'll call it private money."
I think private money is money is a loan made between a borrower and lender who know each other. If its advertised, its not private.
2. What does it mean "direct lender"
Where the lender is lending their own money. As opposed to a broker who lends other people's money. Even that is subject to intrepretation. Is a bank that makes portfolio loans a direct lender? Because the money is really coming from depositors. What about a situation like I encountered where the lender made me a loan with their own money and turned around and sold it to someone else?
3. What are the criterias your investors ($ people) use to determine if they will make a loan (loan amounts, ROI, type of property (SFR, Multi Family, Office, Industrial, Land), area of country, credit scores, experience of borrower, new construction, rehab, etc.) ?
The broker I work with lender only in specific areas. Loans are hard money with typical hard money terms - 4 points, 15%, monthly IO payments, 70% max LTV vs. ARV. Mostly residential. Typically for rehabs or buy and hold followed by a refi.
4. Do you have different classes of investors? (those that will only take certain credit scores or other criteria, and those that take more risk, etc.)
Not to my knowledge. That said, I'm in on two deals where the first in investors in a deal (me and others, in both cases) have ended up taking a back seat to later investors. I was also involved with a startup that did this repeatedly.
5. What LTV do your investors want, points and interest? Maximum loans?
As above.
6. On income properties what are the CAP rates investors are looking for? (or is that relevant?)
Not applicable.
7. Tell us the #1 thing borrowers should know to get the loan they are looking for?
Have a good deal.
Jon Holdman Thank you for your thorough answer, that's exactly what I was hoping for when I posted this thread. You and Ann have added a lot to the discussionm and in helping educate others.
Julie Falen I was re-reading this thread, and realized I hadn't seen your reply. Thank you for your response, it like the others, it will help others in understanding private money/hard money, etc. Welcome to BP, I look forward to reading more of your posts.
This may be the case in CA, but is inconsistent with other states where parties to a home loan (over $10K) secured by first deeds of trust may contract for the payment of interest as agreed upon by the parties. There is no upper limit, for instance, in NC per NC State law.
Further, "This subsection does not apply if the home loan applicant is not a natural person or if the home loan is for a purpose other than a personal, family, or household purpose." 24?1.1A. (a1)(4)... loans for flips/rentals and loans to LLCs are outside the scope...
Interesting opinions, so far Jon is the closets with a dash of Ann to my understandings.
IMO, anyone using a compamy type lender, set up to make loans as a brokerage would be a "hard money' type" and individuals, money partners or others not really on the business would be private money, like your aunt Edna, private money is from acquantinces, 10% from a family member or one time funding types. Such being your best source of financing.
In my entire life, I never paid more than 10%, never, in over 40 years! Not in borrowing money, the worst I ever did was taking on partners allowing them a % of the deals, turned out to be much more than 10%, but not regretable I guess, all things considered. That was starting out with basically no money or very little skin in the game.
I'll address this later, good night.
Okay, "direct lender" means the lender has the underwriting authority to make the loan decision and funds the loan initially, they fund at the table. As to Jon's question of sorts, where the loan is sold...
Direct Lender in the mortgage business usually referes to VA and FHA, where the term came from, that the lender is a direct endorser or lender, they approve and fund the loan and VA/FHA mortgage bankers have agreed to purchase the loan based on that lender's process. Direct lenders can be any lender that provides the loan production functions, funds the loan and sells or transfers the note.
A lender may have investors and generate the loan and then assign the note to an investment pool or investor, thus providing a direct lender function. IMO, this is a stretch of the use of the term as it generally applies to government loans.
As far as I know, without further investigation, the term was taken due to its precieved implications of a lender who has greater influence in making a loan as opposed to those not authorized to make the loan decission in government loans. Purely marketing.
Most mortgage companies are banking affiliates or brokerages.
Most brokerage companies are not direct lenders in government loans, primarily due to the required reserves, repurchase requirements as well as demonstrated knowledge and performance with respect to the quality of loans originated. I did governments and was approached to have direct endorsement and did not do so due to the the surrounding issues.
Realtors and the public have a preceived notion that if a government loan is to be originated that they should seek a direct lender as they don't need to send the loan package off for approval, which, in reality takes about 3 days, no big deal especially if the borrower is getting a better deal. So, I 'd say that any lender promoting themselves as a "direct lender" is simply tapping into this marketing advantage.
I don't care for the "hard money" term either, it denotes a flavor of a title loan company, pawn broker or street front leg breaking loan shark. Perception! Private money seems more appropriate, even through a brokerage operation, if they are a brokerage call them a brokerage!
I'll speed up.....
Brokerages that use private investors can be using or arranging loans in two basic ways, where the money guy approves what deal he gets involved with or, holding the broker responsible and allowing the broker to make the loan. Ahhh, where the "direct lender" term may have been adoted, LOL.
LTVs; This is an underwriting issue that few brokers really understand, much less individuals who are not really lenders. I say that because LTVs are pretty well established through conventional lending that manage risks based on very large samples through statistical analysis. The LTV needs to be viewed with other risk factors such as property type, ability to repay, credit and borrower's capacities. Just to say we or I will loan at XX% LTV is not much of an underwriting talent, but driven by the assumptions generally adopted when viewed with other basic parameters.
I've made loans at 50% LTV and 100% (even over) in a few cases, being somewhat unsecured places more considerations being given to other borrower capacities. But today I'll bet not many investors or brokers go there.
You'll likely see most staying with conventional LTV requirements and then making additional requirements from gut reactions rather than informed analysis, it's much easier to drop the LTV a few points to a comforatable preceived amount than to really justify it. Even so, it does boil down to a gut reaction by any lender in a particular case.
Probably not the assessment you wanted for a stated LTV, but you can negoiate and limit risks by allowing other collateral to be given, assign income, direct deposits limit risks, allowing other assets to be taken as collateral and paying more.
Speaking of paying more, usury limits may be set by law as stated above, the lender needs to make sure they are in compliance and ensure the typeof loan being made is actually correctly identified. The purpose of the loan as well as the collateral taken can identify the type of loan made and that may not be obvious.
Classes of investors; As to SEC requirements, they are either qualified or not with a qualified investor having assets of a million or more basically, it sure is not a very good indicator of ones ability to invest.
You may be asking about classes and might be asking more about sources. I think here, can consider small lending operations.
Individuals, Aunt Edna, can do what she is comfortable with. The broker has the greatest influence over these lending partners, usually, but the broker will have some who may not be so comfortable and will inject thier views into the deal. I had one guy that regardless what was ever presented, he's attempt to show some negative aspect to try to negoiate a higher yield, he got the message when opportunities passed him by, but some brokers may have to work with such investors, could be the reason you are not getting the deal that was originally mentioned.
Brokers may work with other brokers and institutions as well, in such cases the loan terms will be set by agreement and the broker will have little wiggle room.
Asking your broker the source of funds will give an insight as to how the deal will or may go. They should also be upfront and tell you, I'd be leary of any broker side stepping the question. EIther institutional investors or private individuals or pools, don't expect them to say Edna Jones.
Jon, the number one thing to address when asking for any loan is to show the ability to repay it. The next thing of concern is how the lender gets the money back if things go wrong or collateral issues. Whatever you can put together to address these two main issues will help in dealing with any lender. A commercial lender will generally tell you that a debt coverage ratio of 125% is required. More is much better. That is from the subject business or property, in addition to that you need your other incomes to remain in existance and personal needs.
Underwriters and loan officers, investors making loans will also consider compensating factors, those elements that may not be listed as a requirement or formal consideration that must be met but other circumstances that influence the loan decission. The biggest compensating factor is cash on hand after the deal. Another is education and experience, the ability to manage the deal and/or business. I think these areas are often overlooked by RE investors as well as any small business person and it can make the difference in swinging the loan. Most borrowers are not super borrowers, exceeding on every issue beyond what is usually required. Where aspects of a borrower are rather lean or show a concern, it's the compensating factors of being over the top in other areas that can make a difference.
I know many here are just getting into RE, they have no real experience, most are short on cash. Really, the best way to overcome these issues is to partner. Partner with someone who has experience, better yet partner with someone who has good credit and income, not necessarily whohas a million, but having two with incomes to cover the debt is twice as good as one all things being equal.
If you end upgoing to a "hard money" type, you're at a disadvantage as the premium you are paying should have been profit. You are basically sharing the profits for someone to swing the deal. You may be better off having another partner who can shore up the short commings to be able to finance your deal conventionally, but if not, then you need to decide if the lending arrangement allows sufficient profits when it's all said and done.
I urge investors to find thier own private money. You do not need to be a financial whiz to show aunt Edna you can make her secure and provide her with a better return than her CDs. These folks are everywhere, finding them is not difficult, approaching them has constraints but can be done, presenting the deal is not that hard if you strees return of money rather than the return on the money. You don't need to know fannie mae guidlines to do what brokers do in finding money!
Hard money, seems rather macho....My money is hard! Strong! Tuff! LOL, it's money! I think "Private Money" is a better description, as it is from private sources. Otherwise, seems it's from a broker or brokerage or institutional funding from a banking concern. IMO!
Bill G., while I acknowledge your years and years of experience and your superior knowledge, your post is leaning toward conventional residential mortgages - Those funded by banks and mortgage companies, usually in good enough condition to qualify for same. While I understand that you feel that recent legislation such as the SAFE act mandates that all loans qualify under residential guidelines, I can assure you that that varies by state. Each state defines their own specific criteria within the guidelines of the ACT.
I believe Karen's goal was to get insight into hard money and private money loans. In fact, I personally feel that a large number of real estate investors on BP are trying to get a handle on hard money and private money, because they are buying properties as a business with no personal or residential use intended, much as a builder of single family homes has houses for inventory. In addition, frequently the houses are in poor enough condition that they wouldn't qualify for conventional loans no matter what. We've had this conversation before, of course, and I know we will continue to cordially disagree.
But although I know you don't much like either hard money lenders or the term hard money, it comes from it's original use in that all mortgage loans were collateralized by a hard asset - namely real estate. And that "soft" criteria, such as the borrower's ability to repay, were not used at all back when the term originated. That's where the term comes from. Not "Macho", or "Strong". As I mentioned above.
Another note about Aunt Edna: I agree that private sources are a real estate investor's best sources of funds, and should be used before hard money is sought. However, a responsible real estate investor, if borrowing from private individuals, and most especially from family, will make sure to get good advice for Aunt Edna so that she is not violating state licensing laws unknowingly. Find her an attorney who understands private lending in the state where the property is, and have him/her make sure the deal is structured properly to protect her, in case you, the borrower, get hit by a bus.
Ann, I believe you have skewed my remarks somewhat, we are not in disagreement so much.
Hard money lenders are NOT all asset based, if they are, they are not lending as much as they are buying the collateral. If you are lending with the full expectation of foreclosure that can be preditory and I know they are out there. You can be an asset lender in real estate, just like many title lenders provide funds.
Actually, in your first paragraph, saying a bank or mortgage company that uses its own money, does not lend on rehabs or blighted properties is not correct at all. It's done all the time.
I don't think you meant to imply that banks don't lend on blighted properties of those that need repairs! Construction loans can and often do include demo and debris removal for new construction. The lending is based on plans and specifications not what sits there today.
If you are considering the hard and soft sides, soft is not underwriting or compensating factors in any type of loan, soft refers to money used for expenses or services required, appraisal work, engineering, utility expenses, surveying, attorney fees, brokerage expenses, etc. Hard is the land and building, materials, labor and aspects that contribute to the value of the property. Hard costs can also be equipment, like a printing press, turret puch machine, bull dozer or vehicles in equipment financing and leasing.
If we are saying "hard money" in that sence, then all real estate financing is "hard money". All real estate financing is secured by land and improvements, I didn't see that as the question at all. Rather the difference between those providing money from either a formal lending company and the hip pocket private lenders calling themselves hard money lenders.
IMO, marketing by lenders has alot to do with what they call themselves and often it's not correct. Popular verbage seems to prevail by custom rather by financial correctness.
You'll find another definition of hard money within tax credit syndications and lending, the differences between hard and soft costs allowable.
Immediate family members are exempt from the SAFE Act.
Bringing an individual in to fund a deal can have issues, especially thoses who do repeat business or who become lenders by thier activities, but these issues are easily overcome through partnerships or company entities. It's pretty easy to put three investors in an LLC and have multiple LLCs.
I always advocate the use of an attorney when investors devise any financial relationship in lending and borrowing, unless there is a broker involved and even then, it's still a good idea for new investors.
My mortgage company provided funds, 1. as a broker and funding at the table in the secondary market and as a brokerage (not funding in conventional and governments). 2. Providing non-conforming loans and construction financing in portfolio, 3. Originated and serviced loans directly from investors to borrowers, both from pools and individually assigned. 4. Financed mortgages with other lenders with assignments, participations. 5. Originated, serviced and guaranteed seller financed transactions. 6. Purchased notes and mortgages for portfolio and in brokering between others. And lastly, financed lease financing, commercial transactions and accounts receivables under a seperate capital entity. All of these functions fall under brokerage activities. Before someone thinks this was some large organization it was not, it kept 4 processors, 3 full time originators (a couple part timers) and two loan officers as well as myself busy, usually under 10 million (between 7 to 10), in portfolio, not counting the brokerage (#2 functions). The reason I retired early is now evident, I feel like I worked 24/7! I have never seen another brokerage set up doing different aspects like we did, such aspects were simply expanded as we grew. Not just a secondary market originator!
So, what you are calling "hard money lenders" is nothing more than non-conforming loans/lenders.
I called it case-by-case lending, actually underwriting the deal instead of hard and fast program type lending. Similar terms like common sence underwriting, common sence lending and other phrases are just loan marketing aspects.
Now, with MERS and regulatory constraints, such an approach may be limited, the art of underwriting being lost in favor of a mechanical approach meeting certain requirements.
Lastly, and I am not including Ann in this at all, but if you look around as I did in my area, you'll find that many of the older, less regulated mortgage brokers began by an investor, an ex-bank employee (loan officer or processor) and someone who had a real estate background, like a Realtor. That's about all that was required to get some mortgage bankers (like Wells Fargo for example) to allow a company to originate mortgages in the late 70s. That's how I actually got involved initially was with an investor who stole a mortgage processor from a bank and got an agent to become a "loan officer". Later the guy started hiring other "loan officers" one guy was a used car salesman another had been a truck driver, nice guys but certainly not financial types! Another was an insurance agent, turned out to be a good originator. These folks are still out there today. Many don't have a banking or financial background and the slang used can be incredible, what has evolved can be confusing and conflicting. Beyond that, you'll get office jargon, especially in backroom servicing and underwriting firms, you'll get some MBA just out of school, an ex-stock broker and others who develop thier own office lingo to describe some aspect that may have been derived from mixing terms, if that's what new workers are exposed to, that's what they learn. But you gotta go with the flow, things change! Now that we have standardized classes for mortgage brokers, that should get better...... Point being, look to the basics and understand how loans are originated, sources of money and standardized relationships and you'll do better than most as a borrower, if you don't understand a term used ask so that it is clear to you.
Reviewed and need to say.....
I do NOT DISLIKE all hard money lenders at all! They certainly play a role. I love catfish!
I'll bet Ann has told an applicant that they could get bank financing or a better deal. I pumped a ton of borrowers to a couple local banks and brokers should point qualified people in another direction if they can't make the same type of loan and be competitive.
Many don't, some sell loans, there are many lending sins. That's what I don't like. When I lender is doing something that is simply done to take advantage of the public, that's what I have a problem with. Anyone who simply says I loan money at 18%, that will raise my eyebrow, if they are truly assisting other and using all thier money at 18%, that's fine with me, but if it's simply out of greed due to the fact they can get it out of someone regardless of that persons loan issues, then I vew that as a shark tank.
I just believe that lending is not only a business but also a social and community responsibility to promote business and personal needs. If a hard money lender has a similar outlook, I'm all for them!
Ann Bellamy Bill G. What a GREAT thread for everyone to refer to. I know I for one am saving it! You two really aren't that far off in your interpretations and opinions, and have a wealth of knowledge between you. Thank you.
As Bill basically covered, many brokers advertise 'private money' 'direct lendeer' 'hard money lender' etc. yet the terms and criteria for their loans isn't really much different than conventional lenders.
People such as myself have sought out private lenders/hard money, etc. for various reasons over the years. Many times it was due to the fact that we were building 'spec' buildings, office buildings, office parks, etc. sometimes with no definite tenant or user lined up, and sometimes we did have them lined up but were waiting on their financing, etc. Also as Bill mentioned, when there is a deficit of some type, be it skin in the game, experience, credit, etc. the project has to be able to compensate, and that's where I think the average investor on BP has to be careful.
As Ann mentions, many times the investors on BP are buying properties in poor condition etc., that can't qualify for traditional financing, or the buyer has credit issues, etc.
No matter what the reasons, private money is a necessary component in real estate investing, and serves a very valuable purpose to many of us.
However; borrowers need to understand ALL the costs involved, and be sure that their deal can handle them. I see too many on here being told they have to pay for various things upfront (inspections, appraisals, application fees, etc.), and the points and interest being charged in many cases is outrageous; and that's one of the reasons why I wanted this discussion, to help everyone better understand the world of private money.
To that end.. THANK YOU both for taking so much of your time, to give so much detail and help educate all of us.
Great topic. Thanks to everyone who has contributed.
I am interested in learning more about Private lending. My main question is how are these loans collateralized to ensure repayment?
I realize this is a broad question but maybe someone could elaborate on some of the more common ways?
Thanks.
Saw this thread. Appropriate for discussing a negative trend. Thoughts?
CA (and other markets) inventory for "deals" in good locations is very tight. Investors need props (me included), and some are willing to do anything to find them. Scenario: Investor advertises as PMLer. When buyer responds with Q's re % of LTV/ARV, term, points, rate for prop x, PMLer responds that they must have the address to assess the deal. Buyer gives it to them. They correspond through the week (PMLer keeps the buyer tied up), while the PMLer (or PMLer's principal) purchases the property for cash. PMLer then denies the loan and is gone. The buyer seeking financing has essentially (unknowingly) been a bird dog for an investor posing as a PMLer. Note: This did not happen to me. Mainly a heads up. I'd also like to know if other PMLers and buyers have seen this.
Craig E. Most people aren't going to call a HML without having the property tied up, for just that reason. There's no way to stop gutter rats, they'll always be with us.
I am interested in learning more about Private lending. My main question is how are these loans collateralized to ensure repayment?
I realize this is a broad question but maybe someone could elaborate on some of the more common ways?
Thanks.
I see that this was your first post, so welcome to BP.
Therein lies the problems I was attempting to point out Brian. Loans are not clooateralized to ensure repayment of the loan, that is viewed as the borrower having the capacity to pay, the collateral only comes into play if the loan is not repaid as agreed and allows the creditor to reduce the risk of loss of principal, the loan might not be covered by collateral and with cash advanced loans the lender may seek a deficiency judgment to collect amount remaining.
Asset lenders, who loan strictly on the value of a property without other considerations are really, hoping for default thinking they get the property and that is not the case either unless the borrower deeds the property to the lender as payment for amounts owing. It's explained here in other threads, search foreclosure, deficiency and equity financing, that should bring up some these matters. Good luck