Milling?

Question

I have an investor friend that recently told me about milling. I'm looking for some input and experience with milling. Does it work? Does it not work? What have you seen? What are the legal issues?

This is how I understand milling:

You take a home that has 100k + in equity. You take out a loan for the entire value of the property. You lend out the equity to Hard Money borrowers who are willing to pay 5 to 10 points per month. You use the cash flow to pay the mortgage payments on the home and pocket the rest less taxes.

Am I missing something? Is there another name for this?

Look forward to the discussion

N/A N/A · Answer

The way to get around Usury is a waiver. Just found that out from our attorney.

Ryan Webber · Answer

Not that I'm aware of.

Ryan Webber · Answer

Usury is actually factored on the effective interest rate, otherwise known as the annual percentage rate or APR.  Meaining you take the monthly rate and multiply it by 12.  The APR also includes origination points.  Meaning 12% annual with 7 points origination is a 19% APR and is usury.

Now there is a loophole to this.  A commitment fee is not included in the effective interest rate.  A commitment fee has some different requirements than an origination fee but it is one way some HML's get around usury.

So to factor usury, you would factor what interest you would pay on the money if you were to keep it a year plus origination points.  Some HML's charge usury and don't know that they can be legally liable for it.

All of this is of course subject to the advice of a qualified attorney, which is where I learned of it.  :D

N/A N/A · Answer

So in order to get around Usury you can charge a commitment fee?
Are there any other ways that you're aware of?

N/A N/A · Answer

Do usury laws apply to Hard Money lending as well or privately lent funding? I have borrowed hard money at 2% per month for a 3 to 4 month term. Some charge an origination of 6 points and 1.5% per month which seems to fall in line. Others go higher than that. If you were to charge 10 points per month, are you saying you could only charge that borrower for 1.75 months in a one year period or 9 months at 2 points and so forth?

N/A N/A · Answer

I think the coined phrase "Milling" comes from the properties with the equity.

Ryan Webber · Answer

What you are pretty much doing is hard money lending.  I haven't ever heard of it called milling.  I don't think the equity in a house really has much to do with it.  Its more about the cash.

Lending hard money at 5 to 10 percent per month on real estate is called usury, and can leave your principal liable.  Currently 18% annually is the highest you can charge for most things connected to real estate.  In a homestead situation, its less.  In Texas at least, its 8 points over the 20 year Treasury Bill , about 12.5% the last time I checked for homesteads.

Frank Adams · Answer

Why go the extra step of acquiring a house with $100K equity? Just put your own money on the street. I'm pretty sure that Ryan is correct about the usury laws, and anyway if you charge so much interest that the investor who's borrowing it can't make a profit you'll end up with a bunch of property that you don't want.

I've made some HMLs and I've never charged anywhere near those numbers, although with points and fees I make sure I'm NETTING a very nice return.

For those kinds of numbers you have to become a "payday" lender. Which I did a little bit of when I was in the military; "I'll lend you $7 today for $10 back on payday".

all cash

Milling?

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