I would like to become a Hard Money Lender. Any resources?

[Chris H.]

I would like to become a hard money lender.

I have the customers on both sides and a specific business model. I can sell it.

I have the cash reserves myself to lend, as well as know both individuals who want to fund real estate investors, and customers.

I've talked to hard money lenders in depth before and understand the traditional model. I've actually got a specific business model in this case due to a specific set of potential clients whom I've already talked to.

What I lack is the experience and knowledge of the details involved of being the dealmaker, the hard money lender.

Can anyone suggest any resources for me on how to go about structuring this right? Books, websites, personal anecdotes, anything?

Thanks much to any responses and help!

[Jeff S.]

1) You’ll need to spend some time with a good lending attorney. This is not the same as a real estate lawyer. Call some hard money lenders in your area and ask them if they sell their notes or need investors. This is one way to get into the business. Also ask which attorney they use. Lending attorneys are a rare breed and you’ll likely only hear the same few names. Pick one and spend an hour or two with him or her.

Most lending attorneys will sell their paperwork to HML's. You could wait on this until you do a few deals and instead use those from a broker at first. (I'm assuming you use brokers in Washington?)

2) Ask some of your potential borrowers for a broker recommendation. Take him to lunch and get to know him a bit. Never do business with anyone you don’t know, like, and trust. Negotiate a flat dollar amount per loan. Don’t pay a percent of the loan amount. You borrowers will pay this anyway so you’re really negotiating on their behalf.

3) Go to some real estate clubs and let people know you have money to lend. In general you can't advertise at all. Nada. Not even on a business card. Your lawyer will tell you that. Everyone will want to know your terms. Set one interest rate and point amount. Don't get into making deals up or negotiating on the fly. They'll also want to know the note duration, what happens if they need an extension, amount you'll lend, location, LTV, and I don't remember what else.

Don’t loan far from home because you’ll want to drive and see every property you loan on.

For LTV, we loan on a percent of the purchase price, not ARV. Purchase price is an easy number to establish and our percent is very high. The higher the percent, the more popular you will be.

4) Only loan to those with experience and who do this full time. No newbies, hobbyists, or anyone learning on your dime. MOST IMPORTANT OF ALL: Before you lend to anyone, spend some time driving around with them looking at their properties. Go to lunch or dinner a few times. The idea is to get to know, like, and trust them and vice versa. If you don’t, then don’t loan. See a theme here?

5) Soon thereafter, they will call you with a property they have under contract that fits the criteria you defined for them. Tell them honestly if you don’t have the money to lend at this time or if it doesn’t meet your criteria. Never agree to fund a deal if you don’t have the cash in the bank. Never rely on one deal closing on time to fund another. Ever. The cash must be in the bank.

Meet your borrower as soon as possible at the property but no later than 24 hours from the phone call. Bring comps with you and ask them to bring theirs. As a lender you don't have to hit the ARV exactly, but you should generally agree with their estimate. Ditto rehab costs, which you can generally estimate with a walk-thru after you've done this for a while. No need for appraisals or contractor bids. That only holds things up. SECOND MOST IMPORTANT: Make sure you understand the property enough that you're confident you could sell it to another flipper if the deal goes bad.

Confirm the amount you’ll loan and shake your borrowers hand at the site. No application necessary.

6) Call your broker and put him in touch with your borrower. You don’t care about most of the paperwork except the Note, Deed of Trust, the sales contract, preliminary title insurance, and lender instructions to escrow. We go so far as to fill out our note for our broker. Read and understand everything – at least at first. Your broker (who is very experienced at this, yes?) should be able to explain everything. If not, call your lawyer but don’t obsess.

7) I don't know how it works in Washington. In CA, your broker will work with your borrower, escrow and title. There's really little for you to do except review some documents and wire money. Here, the loan is in the brokers name and the Note and DOT are assigned to us at closing.

8) You chose professionals so let them do what they do well and rehab the property without your help. Visit maybe once and take them to lunch or dinner. Attend the open house. Maybe look at more deals with them.

9) When the property sells, you will receive an email from escrow asking for a payoff amount (called a “demand”). You said you’re good with spreadsheets so calculate the amount owed and document it in a demand letter. Be clear and show all work, you’re borrower will authorize this and should understand your numbers. So should title, because they will be wiring the money into your account.

10) When the money hits your account check the amount. You can now commit it again. Not sooner.

I probably missed many steps, and others here might be horrified, but this process works for us. Always put yourself in your borrowers shoes. They appreciate extreme speed, fairness, and someone who is easy to deal with. They also work their asses off and earn a lot of my respect. Keep it mutual. Good luck.

Jeff