How to use Private Money/Hard Money on a deal

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Thanks @Miguel Garcia for the response! I am not sure it is that easy, but sounds like it could be from your story. Any others have insight on this subject!?

Michael Totman

Real Estate Agent · Berlin, MA · Member since 2013 · 130 posts · 95 votes

From my understanding of it, which admittedly is low, you won't be combining your HML/PML with a traditional lender at the same time. You're doing either or. A hard money lender is an actual lender in the business of lending money for the entire purchase. With the private/hard route you're looking to get the property quick, rehab or improve the cash flow significantly, and look to sell with a flip or refinance with a traditional lender on a hold before their short terms are up. I have yet to find any that would loan you 100%, at least not without a track record, but they may not have the same rules on the gift of the down payment problem you're finding.

I hate buzzwords like OPM as they tend to get people all worked up and excited for some basic hype to sell a seminar, course, package, etc. I'm sure you can find plenty of info on this site or in others comments with more detail than I can give.

Can you show enough money on paper through savings, 401k's, etc to fulfill the lenders request to show proof of funds? If so you could use that in your application, and accept your parents gift on closing day in the form of a bank check in your name. In my experience once the loan closes they don't come back and look at your statements again.

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Thanks @Michael Totman for the response. Yea, it is very confusing to me because even @Brandon Turner makes it SOUND as easy as finding someone who has the money, whether it be 1,2,3 + people to make a deal happen! In theory, I can see that working, but the how, is the problem I am having! I have always understood it like you mentioned saying they pay the full purchase price, but finding the people to lend you that amount of money while being new, isn't exactly easy! And I am more so looking to the PMLs not the HMLs at this point. Sure I have found people to lend me the money to HELP with the purchase/rehab for implementing the BRRRR method. But how am I supposed to use it without accepting it as a gift and letting it sit for 60 days!? No one wants to do that!

4 Reply

Michael Totman

Real Estate Agent · Berlin, MA · Member since 2013 · 130 posts · 95 votes

Yup. I believe a lot of it has to do with economics as well. I'm sure you, like me, are looking at $200k+ properties that are dumps. A lot of the "pitches" I've seen espousing "OPM" are looking at $30k, $40k properties that need $500 in rehab then rent for $700/month. If only...

Once you have a track record it will get easier, but as the interviewee says: "You won't give me the job because I don't have experience, but I need the job to build the experience..."

Have patience. Get the money in your account, wait the 60 days, and do your deal. It's tough, but maybe that's your path to start.

Keep hustling, talk to more lenders, you'll find a way.

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @Michael Totman:

Yup. I believe a lot of it has to do with economics as well. I'm sure you, like me, are looking at $200k+ properties that are dumps. A lot of the "pitches" I've seen espousing "OPM" are looking at $30k, $40k properties that need $500 in rehab then rent for $700/month. If only...

Once you have a track record it will get easier, but as the interviewee says: "You won't give me the job because I don't have experience, but I need the job to build the experience..."

Have patience. Get the money in your account, wait the 60 days, and do your deal. It's tough, but maybe that's your path to start.

Keep hustling, talk to more lenders, you'll find a way.

10-4! Thanks for the encouragement! With that said though, anyone else have some insight!? Looking for all angles of this to be discussed!

Michael Le

Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes

It seems like you're looking to use private money for the down payment and you're still needing to borrow the rest from a bank. This won't work generally for a couple of reasons.

1. The bank wants you to have skin in the game so they won't let you borrow the down payment. That's why they want that money to be in your account long enough to prove that it is your money.

2. Private money lenders want to be the first lien holder on your property. That won't happen if you're also borrowing from the bank because the bank will be first and that forces the PML into a second position. That is too risky.

So generally you want to find a deal that is good enough that you can get a PML for the full amount of the property. A private money lender won't lend for the full value of the property but they would for 60-70%. So if you are able to buy a property for around that range then you can borrow all of the funds required to get it.

4 Reply

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @Michael Le:

It seems like you're looking to use private money for the down payment and you're still needing to borrow the rest from a bank. This won't work generally for a couple of reasons.

1. The bank wants you to have skin in the game so they won't let you borrow the down payment. That's why they want that money to be in your account long enough to prove that it is your money.

2. Private money lenders want to be the first lien holder on your property. That won't happen if you're also borrowing from the bank because the bank will be first and that forces the PML into a second position. That is too risky.

So generally you want to find a deal that is good enough that you can get a PML for the full amount of the property. A private money lender won't lend for the full value of the property but they would for 60-70%. So if you are able to buy a property for around that range then you can borrow all of the funds required to get it.

This clears it all up! Thanks! So is the 60-70% you mention of the ARV? Or is it of the purchase price? If so, how would you find the remaining 30-40%? Guess this is the hard part eh?

Michael Le

Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes

It is 60-70% of the ARV. So if 60-70% of the ARV covers 100% of your purchase price then basically you're no money out of pocket right? The private money lender might require some upfront points but even that can be deducted from the loan.

For example, let's take a basic 3/2 house that is worth $100k. Let's say you are able to purchase that property for $60k and you need to put in about $5k to get it fixed up enough to be worth the ARV. The PML might charge you 10% interest plus 2 points. So two points on a $65k loan would be $1300. If they're willing to take those points on the back end, they would wire you the $65k but you would owe them $66,300. They would hold a first lien position on your property just like a bank would. If after 6 months you fix it up and refinance then you just pay off the balance. If you default then they take the property over and because their loan amount is only 65% of the value of the house then even at a fire sale they could at least get their money back.

So the hard part really is finding a deal like this.

5 Reply

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @Michael Le:

It is 60-70% of the ARV. So if 60-70% of the ARV covers 100% of your purchase price then basically you're no money out of pocket right? The private money lender might require some upfront points but even that can be deducted from the loan.

For example, let's take a basic 3/2 house that is worth $100k. Let's say you are able to purchase that property for $60k and you need to put in about $5k to get it fixed up enough to be worth the ARV. The PML might charge you 10% interest plus 2 points. So two points on a $65k loan would be $1300. If they're willing to take those points on the back end, they would wire you the $65k but you would owe them $66,300. They would hold a first lien position on your property just like a bank would. If after 6 months you fix it up and refinance then you just pay off the balance. If you default then they take the property over and because their loan amount is only 65% of the value of the house then even at a fire sale they could at least get their money back.

So the hard part really is finding a deal like this.

Perfect answer. Thank you sir!

Wade Fisher

Investor · Dade City, FL · Member since 2016 · 18 posts · 7 votes

@Miguel Garcia hit the nail. My experience was with a local bank; I know the money did not need hardened if it was a 'gift' and that you had a signed document that it was a gift and not a loan.

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

@Tom Vecchioni

Here's how it works in our world.

If you're doing a fix and flip you generally need about 10-15% of the purchase price plus closing costs. I just priced one out today in Carlisle PA; the cost of the house was 109K, we were going to go 97K (11%) plus closing costs. The loan costs were 4%, a $450 processing fee for a total of about 18K not counting third party fees at closing (title fees, prepaid interest, taxes, hazard insurance). The rehab (about 30K) is going to be paid out in draws and held in escrow. Each draw has an inspection that cost $150. The ARV is supposed to be 175K.

So on a 109K purchase, the estimated cost to close is about 21K. The estimated profit if all the numbers come out right and it's sold in a decent time frame like 6 months, should look like this:

Cash out of pocket at close: 21,000

Carrying costs for 6 months: 7,800

Total borrowed including rehab: 127,000

Sales price: 175000

Total closing costs at sale including Realtor, approximately 5% of sales price = 8,750

Net after sale is 166,250

Loan amount is 127,000

Gross profit is 39,250. Subtract carrying costs of 7800 and initial cash to close 21,000 and you're looking at 10,450 total profit. Pretty thin margin in my opinion, but the numbers work if you do a bunch of these.

Remember, the key to fixing and flipping is buying it right, fixing it right and then getting rid of it.

Stephanie

5 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

Podcast Guest on Show #222

@Stephanie P. nice post well laid out.

and agree HIgh probability that that deal will result is next to nothing for the investor... and or a loss.. best case scenario is what you laid out and of course us lenders are protected we win regardless unless the rehab is botched.. then a lender can take a loss as well..

for me when I was lending like this I wanted to see 30k gross profit.. and figure the flipper would make 15k..

I would also point out like you did that this is very slim.

now if this is a vendor or borrower that does 20 to 50 a year.. that's different if its mom and pop two a year type... its a loser all day long for them.

JLH Capital Partners51 Review

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OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Makes sense. I wouldn't be trying to flip though as I am looking to buy and hold, but I see your logic either way!

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

@tom vecchioni

Buy and hold for us costs 25 to 30% down depending on your ability to show income. If you are just starting out, house hack. Its cheap, easy and gets your feet in the game.

@Jay Hinrichs

Thanks. You're right. I think they are paying too much for the house.

Stephanie

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @Stephanie P.:

@tom vecchioni

Buy and hold for us costs 25 to 30% down depending on your ability to show income. If you are just starting out, house hack. Its cheap, easy and gets your feet in the game.

@Jay Hinrichs

Thanks. You're right. I think they are paying too much for the house.

Stephanie

Just wanted to clarify that it is Tim, but House Hacking, as great as it may be, is not an option for us as the wife won't allow it with a 10 month old!

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

@tim vecchioni

Sorry about that Tim:)

Congratulations on the little one!!

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @Stephanie P.:

@tim vecchioni

Sorry about that Tim:)

Congratulations on the little one!!

Thanks!

Loren Clive

Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes

@Tim Vecchioni Another option is to see if the seller will do a PMM=purchase money mortgage and privately lend you the balance of the 20% down. The seller carries the second, you make payments to him/her until you can refinance out of it our pay him/her off entirely.

3 Reply

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

@Loren Clive thanks for the tip!

Mark Cerminaro

Flipper · Scranton, PA · Member since 2012 · 32 posts · 5 votes

I have tried having the seller carry 20% of the balance and use my lender to give 80% LTV. My local banks that I work with would not allow for that. I did see some posts saying this works but I guess you would have to find a bank to go along with it, which I did shop a lot of banks when I started out.

James A.

Flipper/Rehabber · Pittsburgh, PA · Member since 2016 · 121 posts · 60 votes

@Tim Vecchioni Congrats on the baby! So I recently got some money from my parents and got approved with a HML they did not care i got it from my parents and did not have to be seasoned. I would caution if you are trying to invest and use OPM you have to either have good amount of income from wherever, w2 job or maybe you have a large 401k or retirement account or you have to have a great deal. I also have a Private money guy who gives me all the money and he gets the money on the back end. So i know ppl say it can't be done but it can; the only caveat is you gotta work your tail off to find an amazing deal that they are sooo convinced they will lend you all the money. At the end of the day you gotta remember they probably are in a position to lend that money by being very smart with it in the first place. Another suggestion which i got from the pod cast if you really think you have a great deal and I mean a great deal, don't pitch a half thought out deal, do a JV. Partner with someone who has money "a part of something is better than all of nothing" Hope you got some useful info and get creative if you really want to do this don't worry about the money as much, focus on finding that awsome deal and you will have ppl handing you money.

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @James A.:

@Tim Vecchioni Congrats on the baby! So I recently got some money from my parents and got approved with a HML they did not care i got it from my parents and did not have to be seasoned. I would caution if you are trying to invest and use OPM you have to either have good amount of income from wherever, w2 job or maybe you have a large 401k or retirement account or you have to have a great deal. I also have a Private money guy who gives me all the money and he gets the money on the back end. So i know ppl say it can't be done but it can; the only caveat is you gotta work your tail off to find an amazing deal that they are sooo convinced they will lend you all the money. At the end of the day you gotta remember they probably are in a position to lend that money by being very smart with it in the first place. Another suggestion which i got from the pod cast if you really think you have a great deal and I mean a great deal, don't pitch a half thought out deal, do a JV. Partner with someone who has money "a part of something is better than all of nothing" Hope you got some useful info and get creative if you really want to do this don't worry about the money as much, focus on finding that awsome deal and you will have ppl handing you money.

Thank you sir!

Ian WalshBusiness Member

Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

We don't care about seasoning of funds. Most likely a HML that requests that is institutionally funded on the back end and not privately funded. There is a big difference. You would still need 20% skin in the game regardless.

OP

Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes

Originally posted by @Ian Walsh:

We don't care about seasoning of funds. Most likely a HML that requests that is institutionally funded on the back end and not privately funded. There is a big difference. You would still need 20% skin in the game regardless.

Good information. Thank you Ian!