All Forum Posts by: Bill Worsley

Yan - every lender is different.

Many lenders are brokers who have a group of investors who invest in the note. This is the simplest investment structure. One investor per note, and typically the hard money lender/broker will service the note for the private investor.

Next you will find lenders who do fractionalized note investments, ie multiple investors on one note. This is a new level of complexity, as once you have more than one investor on a note, you officially have a security, and fall under scrutiny of securities law. In my experience you will find these types of structures in markets where loans are on average larger than a typical market. For example, in California, fractionalized notes are more common than in my state, North Carolina, because your average deal size is larger and thus requires larger amounts of capital.

Typically, the next steps for a hard money lender will be to form a mortgage fund through a private placement, and that fund will raise capital through either an equity or a debt structure (there are many ways you can set up a fund). The advantage of a mortgage fund is the hard money lender has more authority in regards to decisions on the placement of funds in loans. With a whole note or fractionalized note platform, you are in effect having to raise capital for each individual deal. The fund allows the hard money lender to be in effect a direct lender.

The fund offer investors diversification - funds are invested in multiple loans collateralized by multiple properties. Fund investors will be paid a yield based on the overall return on the notes held by the fund, with the hard money lender acting as fund manager, being paid a fund management fee and by points and fees charges on loans originated to the fund.

Often, these funds will secure debt financing through a bank, private equity firm, etc. There are several lenders who offer these types of facilities, and typically they will advance a percentage of the note amount (50-80%), and their collateral will be a pledge of the note receivable, along with guarantees of the principals of the fund (not the passive fund investors).

Beware - leverage in a mortgage fund is great when the market is going up... and stinks when the market is going down. Non performing notes combined with declining collateral values is a recipe for a challenge, so any fund should be cautious with the degree of leverage utilized in the mortgage fund. Not saying leverage is a no no, just saying be careful.

Hope this is helpful.

@Jake Cardillo, working with a reputable broker in my opinion is an excellent way to better understand the many nuances of private lending. What you don't know will hurt you, and there are many ways you can part with your hard earned capital if you do not have the experience needed to properly underwrite, document, and service a private mortgage note.

Trust me... lessons learned in the school of lending hard knocks!

Much wisdom can be gained by placing your money with and learning from an established hard money/private money broker in your market. A good broker will have a well thought out underwriting process, a strong understanding of the legal environment in Texas, and an established network of borrowers looking for loans.

I have someone I'd recommend based in the Austin market in terms of a reputable broker. Feel free to PM me for more info.

Joshua Dorkin, sign me up... glad to help.

This is totally a function of cost and scale of what you trying to manage. If only a few notes, I'm with Bryan - Excel. If you are building a sizable operation, and money is no object, The Mortgage Office is excellent.

Charlotte deals are skinny. Inventory is low.

I have to chime in on this conversation. I want to make sure several things are clear as it relates to hard money as an important tool for real estate investors - feels like hard money lenders being thrown under the bus in this thread:

1. Hard money is there when people need it. I love for my borrowers to be in a position where they have their own sources of capital and don't need me. Invariably, they have an opportunity and not enough cash, and are more than happy to bring us in as the lender so they can make a high percent of something versus 100% of nothing because they couldn't fund the deal.

2. While the real estate investor borrowing hard money has performance risk, it is the lender who is taking the bulk of the financial risk and has the most to lose. Investor rehab lending is risky, and for taking on that risk, the lender should get a fair return on their investment. Just ask any hard money lender who was an active lender in 2007-2008 about the risks of lending hard money.

3. Hard money is cheaper than an equity partner - allows the real estate investor to put more money in their own back pocket on a well managed deal than in the pocket of a money partner.

4. As a hard money lender, I always challenge our borrowers to look at their overall return on their investment when using hard money. They are able to leverage their available capital and increase their cash on cash return significantly, and free up cash for additional deals.

5. In regards to the questions around SAFE act. First of all, I am not an attorney, but I am in a business where I darn well better understand the impact on our business. SAFE Act is focused on the intent of the borrower - this is what determines Consumer Purpose versus Commercial Purpose. So for an investor buying a property with the intent to fix it up and sell it for a profit, their intent is a commercial purpose. If someone wants to borrower money against their office building to pay for their child's college tuition, that is a consumer purpose, and the loan falls under the SAFE Act. So while I loan on Residential property, I am a commercial lender because we only loan to individuals or entities borrowering for a commercial purpose.

Excellent - let me know how it goes.

I am in agreement with J Scott and Michael D - you have someone close to you in your step-dad with a vested interest in your success who would hopefully love the opportunity to mentor you and guide you along the way. Now that said, I don't know what your relationship is like with your step-dad, so can't totally appreciate your situation. I know along the way I am thankful that I checked my ego at the door and went to my father in law, a very seasoned investor, for advice and wisdom that has proven to be vital in my growth as a a business person and investor in real estate.

Chris - proceed with caution. I am not saying this is not a good opportunity (I know multiple turn key investors who do an excellent job for their investor clients), but I will tell you that I have worked with many investors who entered into joint ventures with turn key real estate companies where they put up the money for a down payment and then put their credit on the line, only to be left holding the bag when the transaction went south.

The one person who has anything to lose in this transaction? The investor. In your scenario, that would be you.

If you enter into this type of arrangement, please do your due diligence. Trust is everything, and the integrity of the team you are working with (not to mention the experience and success they can demonstrate, along with a long list of referrals) are of utmost importance. Otherwise, you are right... it will have a good chance of being "to good to be true".

With cash available to invest and limited time, trust deed investing either directly to a borrower or through a local hard money/private money lender, who will facilitate the loan process from origination to underwriting to closing to servicing is a great way to go. Your time will be invested in completing your own due diligence prior to making your investment. And your yield will typically be north of 10%, secured at an LTV that puts you in best position to protect your investment.

Let the borrower, or if you are working with one, the hard money loan broker, do the heavy lifting. Let your money work for you.