All Forum Posts by: Bradley Laddusaw

I would have to second what @Sarah Brown said.  You can get creative with a combination of private money and a seller carryback.  We have seen more acquisition loans coupled with a seller carry back come across our desks lately.

Seller carry backs will work best of the seller owns the property free and clear and or carry's a small lien position.

If you do end up combining private money and a seller carryback, you may want to make sure that your overall debt position will leave enough equity on the table for a refinance down the road.  It may be counterproductive if you end up getting locked into an over leveraged acquisition leaving no room for a refinance.

A lot of great points in the comments above. Some lenders will market 100% financing subject to an ARV cap as notated above. They will then require a hold back component for your rehab. In simplest form, you will be required to come in with your rehab funds. In most instances, this fall between 15%-30% of your purchase price. Making your 100% financed deal require skin in the game. Pricing for this structure has been well documented already.

For any lender offering high leverage for their flips, a couple quick questions I would ask to quickly vet them in addition to what has already been thrown out there:

- Is there an ARV threshold?

- Am I required to come in with rehab funds in order to close?

- Is there a fund control and with what Company?

- How do the releases throughout the loan?

- Who will be servicing my loan?

- What is your source of Capital?

In addition to this, certain states such as CA require lenders to carry licenses in order to originate loans.  My Company originates loans under a Department of Real Estate Broker's license and we are subject to quarterly and annual filings to the DRE.  This can all be independently verified directly from the DRE's website.

If you want to take it a step farther, ask them what entity they originate and/or fund their loans under?  Once received, go to the SOS of that state and verify if it is an active entity or not.

In summary, if you have to jump through hoops to see if they are actually a lender, chances are they are not and you should not work with them.

If this is a fix and flip strategy you are looking to implement, you should be able to get a low LTV purchase loan from a private lender/hard money lender that would cover the balance due. The current lien holder for the seller would be paid in full through the close of escrow, then the seller could carry the balance junior to your lender. This strategy works if there is a value add play because you do not want to be leveraged up 100% of as is value with no value add potential. Our clients implement this strategy quite a bit on their flips as for the right seller, it solves a couple different issues.

If the bank had an initial loan of $100,000 that has been paid down $50,000 over the years, ideally the value of the property would be sitting between $125,000 and $150,000. If your requested loan amount ends up being $60,000 on a $125,000 to $150,000 purchase price, that is sub 50% LTV and I would expect you to have many options on the table if this is a true purchase.

@Jay Chandler, I live in Oceanside and it has been amazing to see the growth and new development over the past 7-10 years in the area.  The city appears committed to continue this growth.  With that being said, Greg has some valid points to holding a rental in CA.  If you are looking to gain/spread net rental income, $300-$500 per property across multiple properties, then out of state is the way to roll as the cost to acquire vs. market rents in CA typically do not pencil out.  Going out of state has its additional hurdles and risks but I have clients that hold a healthy schedule of real estate out of state and do quite well.

It really comes down to your current liquidity constraints and what out of state markets you want to get exposure to.  Based on the purchase price, you may be able to acquire 1 or 2 out of state to start.  This will allow you to get boots on the ground and a property management company you trust.  Once the out of state systems are in place, you could acquire at a more streamlined pace and potentially liquidate the CA asset.

You have options which is great.

Good Morning Zach,

Over the past 45 days a lot of private lending companies have changed their parameters quite a bit while increasing their pricing.  With that being said, there are a lot of great companies out there depending on your target market.  Unfortunately today in most instances, you could expect to come in with at least 20% + closing costs to close a hard money loan.  

With that being said, depending on the market and scope of work, a lender may be willing to stretch the parameters for you but they will want to see the team you have in place as well as some ability to debt service the loan.

Now to your first sentence in your question, most hard money lenders will not extend you a loan if you are going to be living in the property.  They will only write business purpose and non-owner occupied loans.

Feel free to message me directly with any additional questions.  Depending on the market, I may have some direct introductions I could make for you.

@D Higgs, it happens more than lenders will admit and it could really bottleneck a rehab.  Sometimes the highest leverage is not always the best leverage.  One other thing to take into consideration is the fund control company the lender may engage and how quickly their inspectors are able to make it to the property for their inspections.  During this Covid19 era we are entering into, processing timelines may be delayed.  

In dealing with any lender, especially hard money lenders, try to get the structure really broken down in writing from them early in the process. Unfortunately, some companies present themselves as lenders but then they are just acting as a broker, or middle man, and do not make the final credit decision. The term LTV gets thrown around loosely in this industry to say the least so make sure they quote define what your gross loan amount will actually be because there will be an ARV cap as @Nathan Cross alluded to.

The loan structure you quoted is quite common but in most instances, you will need to have the liquidity to up front the rehab costs and then you will get reimbursed based on a percentage of completion.  You will also want to have reserves just in case the lender's inspector does not agree with your percentage of completion.  ie: You think you are 50% complete but the inspector says you are only 30% complete.

For these reasons alone, sometimes it is just best to elect to go for a straight purchase loan, 75%-80% LTP with no rehab holdback. At times your cash to close will be comparable dependent on your purchase price and scope of work and the lower LTV off the purchase price can give you more exit opportunities as a borrower in case your rehab does not go as planned.

@Joe Cassandra, there is a lot of great feedback on this chain so I will not be able to add much.  Wall Street is on pause, ie: most likely re-allocating.  That money will be on pause for the foreseeable future since they do not have any end buyers for their securities.  They have a difficult time pricing in uncertainty and government over reach pertaining to evictions, payments, foreclosures, etc. not to mention the property management aspect of needing to handle foreclosures on bundled up hard money loans.  As alluded to earlier in the chain, the risk/return profile has been completely skewed over the past couple of years.  You could price out a bridge loan at a higher note rate than a fix and flip loan which should not be the case in most instances.  

There are a lot of quality private lending/hard money companies out there that are structured in the more traditional way of either using their own funds, managing a fund or managing their own investors and placing their capital into loans. The tricky part is vetting the good from the bad and determining who is actually direct to the capital.

For the state of California, it is easier to vet a "Broker" that is not direct to the capital vs. a "Hard Money Lending Company".  In the state of CA, unless you are funding loans under a CFL, the Company needs to be registered under a California Brokers License.  Companies that fund under a Broker's License are usually direct to the capital and need to register as a Threshold/Multi-Lender reporter.  They are required to submit quarterly and annual reports to the Department of Real Estate and all the Companies are listed on the DRE's website.

In CA, in order to vet a Broker from an Actual Lending Company (lender will be cheaper since you wont tack on the broker fee), you could ask a couple simple questions:

- Do you fund loans under a CFL or DRE Broker's license (if they say huh?, just move onto the next)

- Are you direct to the capital?

- Do you make the final credit decision on my loan?

Here is the link to the DRE's website in order to add context:

http://search.dre.ca.gov/MultiLenderThresholdBrokers.asp

Just because they are listed here, does not mean they have not put their investors in hot water and are still lending.  It just serves as a decent starting point.  You are also able to click on each lending company through the website and if their is a violation recorded against them from the DRE, the complete report and audit finding is posted to their license profile.

CA is a little over the top with their reporting requirements but they do it for a reason.

Each state is different.  Good luck in locking up some rehab money.

@Tonya Jones, even in these changing times, that still seems a little steep.  I would question if they are a direct lender.  In other words, direct to the capital?

ith all the institutional money that left the market about 2 weeks ago, some companies are over pricing deals to try and capitalize on the market uncertainty.

The only deals I see priced at 5% points is if there are more than 1 broker involved. At least in CA that is. Unfortunately, w

A couple quick questions you could ask them:

- Are you a direct lender/direct to the capital

- Will your team be underwriting my file?

- Will your team be making the final credit decision?

- Will you be drawing loan documents in house?

- Who will be servicing my loan?

Depending on how these are answered, that will allow you to know why it is priced so high. I could be wrong, but my gut tells me there is an extra broker involved connecting you to the actual private lender.

In these times, if you are coming in with 20% to close on a value add and the projected ARV is only 70%, you should pass on that deal as there is not enough room in it for you to profit.

-Brad

These will definitely be choppy times going forward but there will also be opportunities that arise, new strategies that are put into place, and efficiencies forced to be implemented that in the long term will increase overall returns.  With increased panic in the market place, even the most "mentally stringent" investors can be forced to make an "emotional" investment decision.  This short term decision based on emotion will be another investors entry point.  Short term, there is great market uncertainty but if we are able to position ourselves properly, and this has a different meaning to every investor, then in the long term, the benefits will outweigh what we are going through now.

Not meant to be motivational, hahaha but more so a reminder to stay diligent, be proactive, and keep the wheels turning.