Real Estate 034: Real Estate Hard Money Lenders

In previous blog posts, we have discussed various financing strategies such as conventional lending, private money, home equity line of credit, and seller financing. You may have also heard the term hard money lending (HML) from Real Estate meetups and forums. When compared to a private money lender, hard money lenders are individuals or group of individuals that lend their money based on the value and cash flow of the subject property and not the net worth, credit history, or liquidity of the individual borrower. 

Hard money lenders are typically more sophisticated and have industry experience. As these loans are being made based on the asset, there is inquiries and reviews performed on the property through an inspection, drive by, and/or walkthrough, as well as the business plan, such as the rehab bid and ARV projections through an appraisal, Comparative Market Analysis (CMA) or Broker's Price Opinion (BPOs).

The benefits of working with Hard Money Lenders is that they are professionals that understand the needs of the deal. In a hot market, speed is crucial, and some hard money lenders are able to close in 7-10 days from signing the purchase agreement. 

When interviewing various Hard Money Lenders, they will generally give you a fee sheet that include their sample terms as follows: 

• Amount Financed - Maximum purchase and/or rehab price

• Interest Rate - APR (yearly) interest terms on the deal (Recourse vs Non-Recourse)

• Origination Fee or Loan Points - Pre-paid interest where 1 point equals 1% interest of loan amount

• Closing Costs - Escrow Fees, Document Fees, Notary Fees

• Loan Term - Duration of the loan and any allowable extensions
  

Below is a sample pre-approval I received from my Hard Money Lender:

"Hello Bo, we have you pre-approved you at 90% of purchase price plus 90% of repairs, subject to appraisal requirements for a combined purchase price plus repair amount of up to $225,000.  Final approval is subject to review and approval of the property, budget, appraisal, and final funding source approval.  The interest rate is 10% fixed, interest only monthly payments, no prepayment penalty.  

There is a 2% origination fee for repairs under $50,000 and 2.25% origination fee for repairs exceeding $50,000 plus $385 processing fee and third party closing costs. (Higher pricing for loan amounts under $100,000). This loan term will be a six month loan with an automatic six month extension, so it can go up to 12 months in total.

The monthly extension fee beginning in month 7 is the loan amount times .0033 per month and is added on to the pay off at the end of the loan for any of the extension months used for months 7 through 12.  Attached is a preapproval letter for a purchase price up to $175,000, leaving $50,000 for rehab.  Please let me know if you have any questions or if you would like a letter that is property specific. Thanks!"

Based on my experience, I noted that the hard money lending process was as follows: 

Step 1  – Pre-approval. 

Step 2  – Place a deal under contract within the price range noted in the pre-approval.

Step 3  – Inform the HML of the subject property under contract and outline of estimated rehab costs (if any) along with ARV. 

Step 4  – Appraisal, CMA, BPO, or walkthrough of subject property.

Step 5  – Underwriting of deal and adjustments (if any) to purchase/rehab loan amount.

Step 6  – Final approval and closing.

Step 7  – HML puts the loan amount into escrow at the title company or the lender will schedule draws (varies from lender to lender) to be taken upon successful completion of the rehabs in various tranches. 

Step 8 – Complete rehab and obtain long term financing or sell to a buyer to pay off HML.

In conclusion, Hard Money Lenders are a great source of capital, especially for borrowers with experience, good deals and a need to close fast. 

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Real Estate 033: What is Driving for Dollars?

For investors who are just starting out, there are many great options to gain experience and get your feet wet with little to no money out of pocket. I recently attended a 3-day real estate investing bootcamp where they introduced various concepts from buy and hold, fix and flip, wholesaling to multifamily. One of the strategies mentioned during the bootcamp was "driving for dollars".

For those who are not familiar with the term, driving for dollars describes a method whereby investors drive around neighborhoods and look for properties that look distressed or vacant and contact the owner of the home to make an offer on the property. You may have seen these types of homes in your very own backyard. They may have broken/boarded up windows, tall grass, and no signs of tenants/homeowners. This is a very manual method of lead generation, and as you may have guessed, not the most scalable and time efficient method either.

Wholesalers typically may use lead generation software to identify non-owner occupied homes that are in foreclosure, financial distress, short sales, FSBO (For Sale By Owner) among others to conduct their direct mail campaign and qualify leads. However, sometimes people hire others to assist in their efforts. A subset of driving for dollars can be referred to as "bird dogging", where these individuals find the distressed properties during their drives, and send it to a wholesaler or investor willing to pay for that lead. 

Note: Please make sure you do your proper due diligence and check with local laws and regulation to ensure that what you are doing is allowable/legal. Varies by State.

Once you have found a lead, you now need to contact the seller to figure out their motivation and "qualify" that lead. Lead qualification can quickly be done with three questions:

1. Tell me about your property - Let the seller do the talking, and you will realize they may sometimes reveal much more than you sought. I have often encountered sellers disclose the amount of debt (e.g. line of credit, mortgage) remaining on the home, personal distress (e.g. death, divorce, or health issues), and other information that will help you understand the seller's motivation as well as strategies to purchase the property. For example, a seller looking to quickly move to another state may entertain a buyer taking over the property "subject to" the existing financing. On the other hand, a seller needing to pay off an existing debt may consider a full payment of the existing debt, and owner finance the remainder of the equity.

2. What would you like to be the outcome? - This question will reveal what the seller has thought of in regards to terms and price. If you listen attentively, you may find the seller negotiate against themselves and give you more equity that you thought possible. Remember we are looking for sellers that need to sell, not want to sell. 

3. If we were to reach an agreement, how fast do you want to close? - This question will separate the tire kickers from the motivated sellers. If a seller response with "less than 30 days", this is a sign that they are willing to hear reasonable offers and proceed with the transaction. The last thing you want to be doing is deal with sellers who simply "want" to sell may throw out unreasonable terms or price that eventually waste your time.

Once you have qualified the lead and negotiated the deal, place it under contract and control the deal. Maintaining control of the deal is the most important part. Once you have a good deal in your hands, now you have the option to use various strategies such as wholesale, fix and flip, or buy and hold. Since you have performed your own lead generation efforts without a middle man, it is more than likely that there is extra equity in the deal. In conclusion, driving for dollars is a great way for people who are starting out to network with other investors by sending them leads, and or acquire their own property with little to no marketing costs upfront.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Book Review 011: The One Thing by Jay Papasan

The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results

The One Thing, by Jay Papasan and Gary Keller, talks about their journey in overcoming issues with focus and creating better habits. They discuss the idea that multitasking isn't as productive as some people make it out to be and maintains that success requires long periods of laser-like focus, and not scattered swats. Papasan states that if you focus on the "One Thing", everything else will fall into place.

By prioritizing on "One Thing", it allows us to get more done in a day when compared to to-do list and multitasking. Adding more projects to your list without cutting others will negatively impact your results, health, and relationships. If you want to achieve your goals, Jay Papasan reminds us that it actually takes subtraction and focus, not addition.

Papasan tells us that living according to the "One Thing" mentality is rather simple. The more difficult area is to ignore the "conventional wisdom" that we have been told all these years. There are so many myths and straight out lies about productivity that sound reasonable, but when tested against results, simply do not work out.

For many of us who work in Corporate America and have a W2 job. There are often talks of finding a "work life balance." Papasan tells us that work life balance is a myth, and we need to implement "counterbalance" to lead a life of significance and meaning as we strive to adjust our priorities to focus on the most important tasks at hand.

The main theme of this book is that the best way to get the answers you seek is by asking the right questions. Papasan encourages the readers to ask the following question: “What is the one thing I can do such that, by doing it, everything else will be easier or unnecessary?” This is a simple question, but not an easy one. It provides both an overview and a laser focus on what you must do today to achieve your one thing. The question propels you to go beyond simple tasks on your to-do list and directs you to what is most important, that “first domino” that will make everything else fall into place.

Favorite Quote: “Knowing when to pursue the middle and when to pursue the extremes is in essence the true beginning of wisdom. Extraordinary results are achieved by this negotiation with your time.”

Asking, “What’s my one thing?” defines your “big one thing” by prompting you to craft a conceptual path for your career, your business and your personal life. Asking, “What’s my one thing right now?” reveals the “small one thing” that drives your daily activities. This puts your top priority at the center of your focus and leads you to a productive workday and a properly focused home life.

Papasan challenges us to identify our priority each day and focus only on the present, the only moment you can affect. Stacking upon these moments leads to success, because most people work harder for present rewards than for the future. As with dominoes, visualization helps, as does writing down your goals. People who write their goals are 39.5% more likely to accomplish them than people who don’t.

Key ideas:

• Multitasking and following long to-do lists pose the biggest obstacles to achieving your goals.

• Align purpose with your one thing to bring you clarity and happiness.

• Your purpose will direct your single priority and inform you on how to spend your time.

• Learn to say no and accept the chaos that accompanies any pursuit of greatness.

• Create an environment that supports your goals.

• Take care of your health with good food, exercise, family time and sleep.

Hope you enjoy this book!

Click below to get your own copy. See our affiliate disclosure here

The ONE Thing: The Surprisingly Simple Truth Behind Extraordinary Results