Anyone ever dealt with them? There lots of properties here in southern california which can be bought at bargains and I been looking into borrowing money without all the crap the banks put you through and it seems hard money lenders are the way to go. Anyone have had experience with such a loan?

I have used them for years. they are expensive, but for the right deal they are invaluable.

Here is what I recommend. go visit several, sit down have lunch with them. get to know them. understand what THEIR criteria is for each kind of deal they do.

once you understand the parameters of what they do. it will save every one time. and show them that you are a bit more professional if you only bring them easy to fund deals that they do.


Z

Thanks for the advises. My friend bought a property buy went through the normal way of getting a loan from the bank but man did they give him such a hard time. At the end he managed to get the loan approved and with 100K in equity. I was thinking he could have gone through HML and it would have been less stress.

JScott said:

So, is the less hassle with the HML worth an extra $3750 upfront and $750/month? I highly doubt it!

Click to expand...

as with most investments, it depends on what your going to be doing with it.

1. Hard money is best used when is a great deal, and you have very little time.
2. it a good deal, and you need to acquire it and fix it up BEFORE a bank will lend on it.
3. your going to sell it quickly

hard money is never really a good long term hold. and frankly most hard money guys want their money back in 6 months ( I know I do)

if your holding for long term. get a bank loan.


Z

That is true. He was close to losing the deal but at the end he managed to get it.

We are now looking at another property being auctioned off, it looks like a good deal , we may use a HML for this deal.

JScott said:

Sure, less stress...but MUCH more costly.

Let's say the loan was for $100K. The bank probably charged 1.25 points and 4.5% interest amortized over 30 years. The HML probably charges 5 points and 15% interest-only.

The cost of each loan:

Bank Loan: He'd pay $1250 upfront and $507/month (and some of that would be principle).

HML: He'd pay $5000 upfront and $1250/month (none of that would be principle).

So, is the less hassle with the HML worth an extra $3750 upfront and $750/month? I highly doubt it!

Click to expand...

I use them all the time, very expensive, but very easy money to get.

Not like dealing with a bank, easy to get, you can set the terms, for example I don't make payments until the end on short term loans, which they all are.

Interest is high 10% with 5-10 points is typical. They take it back on the property as a first mortgage, simple stuff.

Compare this to my bank which is 5% right now on commercial paper with 1 point!

JScott said:

Find private investors who are looking to deploy personal or retirement funds and they're generally happy with an 8-10% return.

Click to expand...

Great idea.

How are you finding these private investors? (real examples please... I've read the gurus' books but would love to hear the real, first person account from an expert like you). This is very valuable advice.

Tony71 said:

We are now looking at another property being auctioned off, it looks like a good deal , we may use a HML for this deal.

Click to expand...

The whole point of using a HML is to leverage OPM (other peoples money), however the deal HAS to be good enough to pay the lender back cover all cost and still give u a nice profit after you flip the property....so before you buy It can't look like a good deal...it has to BE a great deal...

Hard and not-quite-as-hard Money

Hard Money - Right now in NorCal, Northern Nv Hard money is about 10-12%; there are folks that will go out two years.

Private Investors are a great resource, but you really need to shop around.

There are incredible opportunities in non-conventional properties right now.
One area of focus you might consider is the log homes/modular homes/manufactured homes segment.

The big banks won’t loan on these because it isn’t worth it.
Many credit unions have a high minimum loan threshold (75-100k).
The regional banks typically funded this non-conventional market in the past, especially those that would hold their own paper (or at servicing rights) and make ‘portfolio loans’.

However, this money has really dried up because of the new Frank-Dodd stranglehold and further restrictions on RESPA section 32 HOEPA. The regional banks that would give a portfolio loan in the 30-50k range (cost of many of the cheaper homes) now are VERY reluctant to make a loan under 50 or 59k. Many banks have moved out of this market entirely: Nevada State, CalBankTrust, Heritage, Great Plains, Provident, etc. are just a few). One bank that will still make a loan in the lower ranges is Zions, specifically their Teleloan product. However, they still want conventional construction but since they hold the servicing rights, the underwriting is easier.

So, that is one of the sweet spots right now – the non-conventional properties between 40-60k. Easy to flip since the largest growing demographic right now is the poor underclass. And there isn’t the competition present like there is in the 150-250K range. I know Fannie is bundling tranches of 1,000 homes at a time in California and placing with private investor groups. Are you prepared to compete against that? Even if you are, likely you won’t have the chance since the banks are forgoing REO and instead selling the homes via placement rather than foreclosing.

Moreover – why focus on hard or private money? They all have their own rules, guidelines, superstitions, etc. Everyone will qualify you on a changing and unknown set of rules that only they know.

The Solution – Seller Financing. The only way some folks can unload a property with a cabin/mobile home/modular is to hold the paper themselves. Modular housing is one of the fastest growing segments of new home construction. These Seller-Financer’s often don’t care to know about your other loans or are as strict with your personal financial situation, since they aren’t concerned about the financing of the deal, they just want the deal DONE. If you crap out, they still have the property – basically their worst case situation is you were both the renter and property manager while they collected the rent.

fwiw

Where to find ‘Private Investors’?

Know your audience.

You are looking for a retired or semi-retired person that has a nest egg and trying to live off income produced by that nest egg, but is having a hard time b.c. typical ‘safe’ income-producing assets (CDs, bonds) are only yielding 0.5% to 4%. That isn’t enough for most investors and they will deploy personal assets to achieve a higher yield.

In essence they are benefitting by using your energy and willingness to work hard and you are benefiting from their balance sheet. In a similar vein, these private investors are also buying franchises and hiring a manager to run the place; similar arrangement where they front the money and the youngster with the energy runs the shop.

Where to find these people?

I can guarantee that you can find these type of folks where successful older men congregate.

Have you ever been to a coin club?
Have you ever been to a real estate club meeting?
Have you been to Rotary or Lions Club meeting?

If not, maybe give it a try...

andviv said:

Great idea.

How are you finding these private investors? (real examples please... I've read the gurus' books but would love to hear the real, first person account from an expert like you). This is very valuable advice.

Click to expand...

Here is how I have found private investors.

I ask.
I ask alot.
I ask in a certain way so that they come out of the wood work. (more on that below)

first off, go where people who are either retired, or have money go.
1. golf
2. investor groups,
3. expensive hobbie, (horses, boats)


second off.

NO MUDDY PAWS!!!!

have you ever seen a puppy come in from the rain and is just super excited to see you and RUNS up to you with muddy paws and just jumps all over you?
you know the ones...

ya, dont be that muddy puppy, with muddy paws to your investor.

when you meet one. DONT just ask for money. DONT say, I HAVE BEEN LOOKING FOR AN INVESTOR JUST LIKE YOU, WANNA SEE MY DEAL? HEY WANNA? WANNA SEE IT RIGHT NOW?????

ya, that's a muddy paws approach. dont do that.

investors, look for deals, or opportunities. and if they are looking their ears are tuned to it. so you just have to bait the hook with curiosity.

I ask in a certain way......


What I do is when people ask em about what im doing, or working on, I usually position myself in 2 sentences.
1. shock and awe.

2. identify your perfect customer, and what value you bring to them

Doing this, i raised alot of money from private investors for years.

here is an example.

when I was buying non performing notes from banks, people would ask, What do you do.

I would say,

" I rob banks"
(shock and awe, alot of laughs too.)
then i would follow up with teh second part and say

" Raise money from investors, and buy properties at 25% on the dollar, and make my investor good money with a secured deal"
that's it.


the thing is, I could say that in a crowded room, and the 2 people who "thought" of themselves as investors, would then seek me out, and say, hey, can I get in on that action?

it was amazing. by baiting the hook with what value you bring to them, you get them to come forward. the shock and awe part created a heightened sense of curiosity, and caught their attention, so when I delivered the second part, it was received and heard. and most of the time it got the response of, can you elaborate on that? which is a great invitation to give a 30 second elevator pitch.

By doing that one simple thing, I found investors every where. at parties, at family reunions, at bars, at dinners.
it was amazing.

I also ask in a different way. I network.

People I know who dont have money I have no problem saying, hey, im looking for 60K for a good little deal, know any one who is looking to make better money than at a bank?

and then I shut up. if people know others, they will volunteer them or put you in touch. if they dont, they wont. period.

It also helps that I have built up a lot of trust in my circle of friends over the years.
so when I ask if someone has 300K or 1M I can usually find 2-4 people pretty quick.

basically its a constant farming thing. you plant seeds, spend time with people and just keep them informed. I had 1 guy who took almost 3 yrs before he said, ok, I have been watching you, and Im in now.

but really, I have found private investors are everywhere. the real key.... is being the person who is worth being invested in.

work to become that, and you will never have a shortage of investors handing you money..

Sorry for the long ramble,
hope that helps



Z

I was wondering how can log homes/modular homes/manufactured homes be profitable when you do not own the land and have to pay monthly for the land?

JScott said:

There is something in between -- Private Money. Find private investors who are looking to deploy personal or retirement funds and they're generally happy with an 8-10% return. More expensive than banks but much less expensive than hard money.

The best part is that if you can get them to just loan the money to your business (personal guaranty but no security by real property), you always have the cash on-hand, can close immediately, and don't have to make offers that are "financed," which hurts your chances of getting them accepted.

Click to expand...

I have never made an offer contingent on financing, the vast majority of the stuff I buy cannot be financed.

Personal guaranty loans of any size don't exist anymore. Well I'm sure they exist but they are so rare its not worth even discussing them. What I have seen guys do is umbrella loans over several different properties to free up some cash to buy deals.

8-10 percent in this day and age is very high, you are far better off working with a bank. Which is what I am converting to, after I close a house in 3 weeks I will be out of the hard money business for now. I would never consider hard money on a long term bases, way to expensive.

The problem I run into is maybe if I just needed $50k or $100k I could get a small investor to lend it to me out of their retirement and I pay on it. But the guys I borrow from have professional money managers and well money, so they earn quite a bit with their money already in the stock market, and if they are not getting a good return will just keep it in the market. So you need to offer something good to lure the money out of the stock market.

OTOH my main guy pretty much doesn't want his money back even though he is getting it back. The original loan is now spread over a bunch of deals and has grown. If I wanted to keep paying 10% I could roll up to $1.5M of his money around forever really.

Right now I'm converting my business all over to cash and bank money from a medium sized bank which as of 2012 is very interested in working with me. I'm going to keep the hard money guys around but I'll be using them less and less.

My reasons are as follows.
1. Bank money is cheaper, and I can get a lot more of it as my business grows. For example the bank I'm working with now will max out at around $50M, but my hard money guy will only go $1.5M. Looking down the road as my business grows I would like to start to take on larger deals, but I'm going to need access to more capital to make them happen. Plus the bank will do long term financing which I need for rentals.
2. I don't like having to many loans out on the business. Credit is great and can really help a company grow, but the overuse of credit can have adverse affects.

At the end of the day its all about who can provide you with the best least expensive capital to grow your business.

JScott said:

While I fund most of my deals with my own cash, I've started using private investors recently to scale the business and to start building capital for other real estate ventures (non-rehabs). Here are the ways I'm finding private investors:

- Friends: They know me, trust me, and several of them have lots of extra cash. I spent a lot of time in the tech industry working with people who have a lot of cash, and some of them have approached me over the years looking for opportunities. Most of them are thrilled with a 10% return on cash that would otherwise be sitting around or be invested in mutual funds.

- Blog / Speaking: I've had several people who have read my blog or have heard me speak at conferences who ask me if I'm looking for money. Most of them have at least a bit of real estate investing experience, so we're usually on the same page with respect to rates, terms, risk, etc.

- Professionals: I've had one situation where my dentist asked what I do for a living, and that sparked a discussion about investing. He had money he was looking to invest and he'll probably make an investment in the short term.

I don't generally like to ask people for investments, and I'm not a salesman. So, all of the money I've gotten has been initiated by the other party. I'm a lot more comfortable with it being this way...

Click to expand...

Having looked at your blog here is where I would caution you as you start to get into borrowing for deals.

I'd keep the LTV ratio nice and conservative 50% maybe 60% max, also only do a few at a time here is why. (which is how I fund mine)

Your margins on your flips are not large enough to protect you against a market correction, so if all of a sudden you run into a situation where you have lots of leveraged houses out their and are forced to reduce there prices...well you will be under water very quickly. I saw it happen to a lot of guys a few years ago, and it happened in the 80's as well.

Its one thing when the market is good and home prices are steady or going up, but what happens if all your inventory took at 10% price chop next month? This is the dangerous side of borrowing to much capital in this business, it really can make you rich overnight but when the market corrects all those guys end up in a big hole.

IMHO its best to expand like its 2007 with 2008 right around the corner. Carefully.

I never borrow more on a spec than I could cover by renting it if I had to.

OTOH I think if you were to borrow at a LTV ration of 50% you would be able to do a few more deals than you are doing now. Their is no reason to tie up all your cash all the time in flips.

IMHO just my 2 cents.

JScott said:

I'm planning to do it as a Reg D offering for equity partners.

Click to expand...

Now things are getting more interesting...

The limitation is 35 accredited investors for this, right?

How are you structuring the returns of investors? Profit splits, pref return, other?

How do you get rid of them once you don't need their money anymore?

Interesting, very interesting. I would never consider doing it, but its interesting to read about.

My style is more of an organic, bring on partners branch the business out, but I want tight control at the top. I'd be afraid of losing control with so many people in the game. I'm going just the opposite direction in many respects, I'm turning the hard money off and other people out, and consolidating.

Whats the advantage over just doing it yourself? Other than money what do these guys bring to the table?


Also what happens when deals don't make money or if things go south? Do these guys have recourse if their investment takes a hit?

You can get around the SEC thing by just creating another LLC and making them partners, than they can put money in a "pool" as a capital contribution.

But I don't have that many partners.

IDK its going to be very interesting to watch, good luck with it!

JScott said:

Yup. We're not going after that much money -- low- to mid-7 figures -- so I don't expect that we'll have more than 10-20 investors at the most...

Click to expand...

Jason,

Congrats on the fund.:eusa_clap:

Question: Are you raising capital through a brokerage (Goldman, Morgan Stanley, etc) and if so, what criteria did they require before working with you?

I recently had a conversation with the real estate director of a New York state pension fund and she mentioned the fund didn't work with principals, directly -- there had to be an intermediary, IE the above mentioned Wall Street firms. However, all fees related to capital invested with principals are paid by the pension fund to the brokerage, which I found interesting and fantastic.

The takeaway for me was cultivating a relationship with brokerage houses -- regional and national -- can be a good thing, provided you're showing up with deals worth funding.

JScott said:

Haven't decide for certain yet, but we'll likely offer something like a 12% preferred returned with a 60/40 or 70/30 split after a match.

Click to expand...

Shouldn't be hard to raise money with those figures. We've raised money for some development projects and one thing everyone kept telling us initially is that it is just as easy to ask for five million as it is one million, and often times easier. I didn't find this to be true mostly due to the unusual nature of the project, but I'm curious why you're not looking to raise more money since you're going through the hassle of legally doing a private placement? Testing the waters? Concerned that it might be difficult to place too much cash?

Steve37 said:

Shouldn't be hard to raise money with those figures. We've raised money for some development projects and one thing everyone kept telling us initially is that it is just as easy to ask for five million as it is one million, and often times easier. I didn't find this to be true mostly due to the unusual nature of the project, but I'm curious why you're not looking to raise more money since you're going through the hassle of legally doing a private placement? Testing the waters? Concerned that it might be difficult to place too much cash?

Click to expand...

yep, I'm doing proof of concept in receivables financing area w/ own money and have found that out as well. My hedge fund buds want to put in $5-$10million in seed money at a minimum, but you have to ramp up to put that money to work. Having idle money dilutes your return in justifying a 2&20. Hell, I could just buy apple with the rest of the $$ like every other fund does, haha. To ramp I'll prob end up being an intermediary myself wholesaling money out to existing receivables/factoring companies depending on their needs/cost of capital.

The big financial houses want a much larger minimum deal size to generate sizable fees as much of their work $$cost is similar whether the deal size is 100million or 10billion. There is a whole nother universe in small/med deals.

The realm of "alternative investing" is really growing now that more and more people are realizing the stock/bond mkts are affected by risk on/risk off central bankers, central planners. Very dangerous. I hope the alternative investing trend continues because getting capital to great businesses efficiently(=opportunity! is critical to the future success of America

Chitown said:

I recently had a conversation with the real estate director of a New York state pension fund and she mentioned the fund didn't work with principals, directly -- there had to be an intermediary, IE the above mentioned Wall Street firms. However, all fees related to capital invested with principals are paid by the pension fund to the brokerage, which I found interesting and fantastic.

The takeaway for me was cultivating a relationship with brokerage houses -- regional and national -- can be a good thing, provided you're showing up with deals worth funding.

Click to expand...

It would be great if you can 'interview' this director and publish her answers.

This is a topic of great interest to me, and I am sure it will be interesting to many others.

CommonCents said:

My hedge fund buds want to put in $5-$10million in seed money at a minimum, but you have to ramp up to put that money to work. Having idle money dilutes your return in justifying a 2&20.

Click to expand...

Oh, please do tell us more. Pretty please? Please?

What type of investments is your buddy going after? What criteria is he looking for?

What are the fees involved?

JScott said:

Btw, the fact that the investors are passive and have no control over the investments is the reason the SEC filing needs to be done and we need attorneys/accountants.

Click to expand...

Do you mind sharing ball park figures of expected costs to have this up and running?

andviv said:

It would be great if you can 'interview' this director and publish her answers.

This is a topic of great interest to me, and I am sure it will be interesting to many others.

Click to expand...

Andviv,

She was a passenger in my vehicle -- chauffeur gig -- several months ago. I peppered her with questions as we drove to the airport. I can't remember if I got her card or not. If I dig it up, I'll definitely contact her for an interview. Her asset class specialty was industrial.

hatterasguy said:

You can get around the SEC thing

Click to expand...

I cant tell you how many times I have heard that

Usually just before someone ends up in jail.....


Dont do it.

Get an attorney

Z

JScott said:

we expect it to be about $15-20K all said and done. The real value is that future placements should be a good bit less expensive once we have the first created, assuming we work with the same team of professionals (attorney, CPA, etc).

Click to expand...

Thanks.

I wonder how much will it cost to setup and run a public REIT then...

Is this a 504-D type of setup?

JScott said:

But, then you have to give them voting rights and they have to participate in the business. How are your partner participating in the business?

If they are not really participating in the business, then you're likely running afoul of SEC regulation and face stiff penalties if caught. If they are participating in your business, do you really want to be giving up this control? That's no different than having a job with your partners as the bosses...

I want to raise money, but I have absolutely no desire to have lots of partners who need to participate in the business and have voting rights.



Even having one other guy who has a say in my business (and who has to do stuff to avoid SEC issues) is too many for me...

Click to expand...

I only bring in partners who offer me more than money. Money is easy to get, more so these days since interest rates are so low.

zen******* said:

I cant tell you how many times I have heard that

Usually just before someone ends up in jail.....


Dont do it.

Get an attorney

Z

Click to expand...

I have several attorney's and an excellent accountant in my team, I only run 100% above board.