All Forum Posts by: Jeff S.

When you bought your permanent residence, @Doug Pham, did your lender, say BofA, accept loan documents that you provided, or did they require you to use theirs? Do you see a conflict of interest here?

I know you’re well-intended, and I suspect your private lender—a friend—has no background in lending any more than you do. That’s okay, but you owe an obligation to him to ensure he’s educated and understands what he’s getting into. That is, your friend is the one who should be speaking to a lending attorney (not a real estate attorney) so he understands what you will be signing and the risks and recourse behind his loan should something bad happen. Additionally, the loan documents should be drawn up under his control. Of course, you should sit in on this conversation.

He must also understand licensing and usury laws in the state where he’s lending and ensure compliance. It’s important that he understands the significance of making this a business-purpose loan to protect against the consequences if it is not (for example, if you decide to move in at the last minute—it happens a lot).

I don’t know Jon Hornik, who’s located on the East Coast, but Geraci and Doss can provide a solid loan package. We use Lightning Docs, which is owned by Geraci, and we receive nearly 20 documents for every loan. Plus, we require a lender’s title insurance policy as well as fire and liability insurance policies with specific requirements, as well as a handful of endorsements for each that are recommended by our attorney. Why is that never mentioned here? Your friend might also want to enlist a construction management company to manage draws and perform inspections to ensure your project is progressing according to plan. This would also be in your best interest. I’m not trying to overcomplicate or scare you, Doug. All of this is normal, not too costly, and the process is fairly easy.

My point is that your friend is likely lending you a life-changing amount of money and should understand what he’s getting into, how to protect himself, and his options if something goes sideways. I know you’re trying to do the right thing, but with all due respect, you’re not the one who should be providing his loan documents or educating him about a process that you also seem new to. He has too much money at risk on your behalf. Whether he likes it or not, this will involve a bit of work on his part.

The good news is, if things go well, he could become your perfect private lender over many deals.

Good luck to you both.

No one should be lending unsecured money to strangers, @Magnus Wikström. And only those who specialize in it should be lending in second position. You’ve written about your history of success, but every active investor we know—including us—eventually runs into an issue. What happens then, especially since you’re in a foreign country?

From what you wrote, I have no doubt that you are honest and sincere, but I become suspicious when someone asks for an unsecured loan. I know you didn’t say this explicitly, but to me, your request says: “I want to borrow money from you with the ability to walk away from the debt, free and clear, for any reason, and leave you no way to get your money back.” I'm sure you'd agree that even if you were based in the U.S., this would be a problem.

Foreigners can get secured loans in this country if they own some domestic real estate. This route might be easier for you.

We only lend to experienced rehabbers who have been doing this full-time and locally. Our process is to initially get to know them face-to-face, by meeting a few times over lunch or dinner and even walking a few of their properties. Since we only lend our own hard-earned money, this gives us the confidence that they are the kind of people with whom we want to do business—and vice versa.

Most people are good people, but occasionally, we meet a stinker. We don’t consider the higher fees on a deal or two as the “win.” The long-term relationship, with those we genuinely like, over dozens of deals, is where we make our money. What a shock that these are our most valuable borrowers. The property is always a close second, and the borrower must always make money.

I attended a real estate club recently where they played "Shark Tank." Here, four major lenders sat at the front of the room, and potential borrowers presented their scenarios. I thought it interesting that none of the lenders seemed to care that some of the borrowers would obviously lose money on the property they presented. I even asked this of the panel but only got evasive replies. It was one of the most interesting REI clubs I've attended and very telling.

We make it clear to all borrowers up front that we will only lend if we are confident they will make a fair profit. Since we hold our loans, their profit is the only way we get paid back. We have strict financial criteria we use to ensure this and can prove time and again that our criteria work. It’s not perfect—“stuff” always happens—but the most important part of any loan is that the borrower makes a fair profit. If they make money, we make money, and I know we’ve talked more borrowers out of deals than we’ve approved loans.

You might clarify, @Angelo Santitto. Note investing can be broadly categorized into two classes – performing and non-performing notes. To generalize broadly, most who call themselves private or hard money lenders (or any of the other euphemisms for the same thing) typically originate first-position or (rarely) second-position performing real estate loans. These lenders originate their loans and hold them to maturity, like us, or they might sell them one at a time to an investor like you (?). Larger lenders might bundle their loans and sell them en masse to a Wall Street hedge fund, bank, or insurance company.

Those who like to label themselves as “note investors,” as you did, typically buy defaulted or non-performing notes. Often, these investors buy bundles (tapes) of defaulted loans at a great discount to the principal balance and then create workout agreements with the borrowers to get the notes to perform. Occasionally, they buy a non-performing note with the intent of foreclosing to obtain the property. Except for some commercial investors, this is virtually never the intent of a residential performing loan investor.

Lately, performing notes investors are typically earning between around 10% to 15% for very little work after origination. On the other hand, non-performing note investors can make into the hundreds of percent, though usually against relatively smaller dollar investments. There is also a huge amount of strategic and legal expertise across many states in getting non-performing notes to “re-perform” and be sold, perhaps to someone like you.

Performing loans don’t require anywhere near the same amount of work or expertise but typically involve a lot more capital per loan. Availability of funds is one reason some buy NPNs. That is, you can buy many non-performing notes for a relatively small amount of money.

Well-originated performing loans rarely default. The typical P/HML has a default rate around 1% to 3%. Even then, if originated at a sensible LTV, the lender is usually made whole through foreclosure. On the other hand, it's quite common for non-performing note investors to get wiped out on a significant percentage of their loans. They make this up by earning tens to hundreds of percent on the remainder and can do quite well.

Though some funds do it, it's a rare individual I know who invests in both types of notes. We are firmly in the performing note camp and spend only a handful of hours on each loan from beginning to end. The rest, to me, can be a full-time job.

I’m not trying to define you, Angelo, just wondering your direction and why.

(Also, post where you wish but you’ll get better interactions if you post each question or comment to one forum instead of several. I’m not sure which forum you expect responses for the same comment.)

Wow!!! Be super careful, @Tyler Dunkel. Fund and Grow appears to offer nothing more than one of those credit card stacking schemes that were popular here years ago. Banks caught on to this nonsense at some point, but it seems there are new angles. Now, these outfits hire lots of influencers and affiliates, with no expertise, no financial background, and apparently limited ethics, to put it kindly. Do some research on this practice and on this firm before diving in. A few eye-opening online searches will easily indicate if this is what you want to get into. Shame on those here recommending it.

Similarly, don’t even consider borrowing against your personal residence—even if you could qualify. This puts your family’s home at risk and is unfair and irresponsible, in my view.

The claim that “hard money loans for existing deals are difficult to get” is simply not true. Many private and hard money lenders will refinance your investment property if the numbers make sense. This is where I would start if I were you—perhaps leveraging one of your existing properties.

As a last resort, you could look for a partner willing to fund the project in exchange for a share of the equity. This would be the safest money but probably the costliest.

Don't build a house of cards, Tyler. And, don't get scammed.  Best of luck to you.

Sounds interesting, @Chris Magistrado. Of course, anyone or anything can make predictions, but the proof is in the pudding. I'd be curious how accurate your tool is with a comparison to real-world deals after they are sold. That is, how well did your deal analyzer estimates match the actual rehab costs, holding costs, ARV, and profit? A detailed before-and-after P&L comparison would be useful here to show accuracy and weaknesses.

I have a relatively sophisticated rehab spreadsheet I’ve been enhancing for years, and I know it’s reasonably accurate. It only knows what it’s told, however. Automating what spreadsheets already do is not useful since spreadsheets are already automated. I don’t think that’s what you meant. The top three expenses in a flip are the rehab costs, lender fees, and sales commissions. These typically account for about 80 to 85% of all expenses in a flip.

If you know the lenders' terms and the loan duration, lender fees, the second greatest expense, are easy to calculate. Agent sales fees, number three, which are normally a percentage of the ARV, are similarly trivial. You don't need AI for those. This leaves rehab costs, number one, and ARV, which is where the skill comes in.

Estimating today's ARV is fairly straightforward. A tool to accurately predict the ARV in 6 months or in a year, as well as the project's rehab costs, would be extremely valuable. I'm curious how well your tool could do that.

Will it tell you to go back and take a few more photos to get a better idea of the rehab costs? Since it will evaluate photos, bonus points if it could look at the MLS and recommend the best finishes and paint colors to maximize the ARV. Or the best MLS photos to take, how many, as well as staging styles. More bonus points if it could look back at the borrower's track record and predict how they will do on a particular type of rehab? I can ask for the world, can't I?

Everyone and their brother is now offering AI tools to evaluate loan documents and bank statements. Something to accurately evaluate a flip would be a welcome addition.

I’m curious to follow your progress, Chris. Sounds great.

You posted publicly that you want to connect with HMLs, but really only wish to connect privately. Can’t whatever you’re selling withstand public scrutiny?

What nonsense.

Save your money, @Stanley Yeldell. You will get hammered. Lending to those who can’t even afford a down payment, unsecured, or in second-position at best, is about as dangerous as it gets. Worse, is the demand for rural properties if you end up taking one over. As a second-position lender, however, this is unlikely, because your loan will probably be wiped out by the first.

This is not a way to get into the lending business, Stanley.  Save your money until you can make first-position loans, at sensible LTVs, to qualified borrowers whom you have met, secured by easily marketable properties that you have seen because they are local to you.  This is our process.

Many here don’t realize that there are custodians and administrators for IRAs.  By law, all IRA funds must be held by a custodian. Depending upon whether they are a bank or a trust company, custodians are heavily regulated by the IRS, DOL, possibly the FDIC, State Banking Commissioner, and maybe the Comptroller of the Currency. Administrators are not subject to any such scrutiny and are really just middlemen. Be super careful.

An administrator will pass your funds to a custodian in the background, provide statements, and hopefully help you stay within the law when you invest your IRA funds. Custodians do exactly the same thing but with the added regulatory and financial scrutiny noted above. Why would you place your money with an administrator?

It's not always obvious, but you can tell if you are dealing with a custodian rather than an administrator because they will usually have the word "Trust" in their name or they will be a bank or brokerage. Always ask, and don't be swayed by a sales pitch suggesting that the distinction doesn't matter—it absolutely does. If you think this distinction is unimportant, consider what happened to investors who placed their IRA funds with American Pension Services,—an administrator whose founder mishandled their money causing a $22 million loss.

It sounds like you want checkbook control, @Katie Accashian In this case, you need a special-purpose LLC. This means an LLC with an operating agreement specifying the IRS regulations regarding prohibited transactions, disqualified individuals, and others. It will allow you to invest the money on your own but under authority of the custodian. You would typically use a lawyer to set this up for you. Not LegalZoom.

Last, be careful of recommendations. Some here have self-interests. Other recommendations might not suit your situation. For example, fee structures among custodians are all over the map. Some charge based on account value, others per transaction, and some use a combination of both. If, for example, you are lending money, which involves few transactions, then select a custodian that charges by the transaction. If you are flipping houses, which is transaction-intensive, then choose a custodian that charges by the value of your account. What works for some might not be your best choice.

Best of luck to you, Katie.

If they want your money, @Pavan K., why aren’t they offering you a stake in the partnership? This sounds like it could be a good deal for the partners, and perhaps the bank, but a terribly risky deal for you, with little upside.

What exactly do you mean by, “There will be a promissory note drafted for the amount and the duration and interest rates”? This is not even close to the documents required for a properly drafted loan. Do you think the bank’s loan will consist of one document, drafted by your borrower? Did your borrowers mention securing your investment with a recorded mortgage or deed of trust, personal guarantees, lender’s title insurance, or anything else? Of course not. Even this is an incomplete list.

Worst of all, the main reason not to make this loan is that you will not hold a first position-lien against the property. This means that if the bank forecloses, and you can’t pay it off, you will lose all of your money with no recourse to anyone.

One option to secure your loan is if one of the partners has a free and clear property worth significantly more than your loan. In this case, you could use it to cross-collateralize your loan with a first-position lien. If their deal goes bad, you could foreclose on that property and hopefully recover your funds. If not, don’t even think of this.

No matter what, consult a qualified lending attorney to understand your legal options and ensure you have proper loan documents in place to protect your investment.