Hard Money Lending
 

Cliff Notes at the bottom.

My wife has recently started brokering loans for a guy who owns his own small broker company. This guy is pretty smart and has grown a fairly successful business. He has his hands, at least his money, in on the entire market of real estate investments. Brokering loans, lease-to-own self financing, flipping etc. If he thinks he can make a dollar doing it, trust me, he has his money in it.

He and my wife were talking and he asked her if we had ever considered investing in real-estate. She said we had but where we are right now, me about to start pharmacy school and two kids, we dont have the positive cash flow to take those types of risks right now.

He then asked her if he would be interested in doing hard money investments with him. She started telling him that we didnt have the resources to take care of the carrying cost in case things dont go according to plan. He didn't seemed too concerned with that as he told her that he would take care of that.

My wife told him that we would sit down and talk to him about it this Friday, so before I go talk to him I want to get any advice that anybody might have when talking to him.

So far my wife has told me this:

- He will find property that he wants to invest in
- He will purchase the house with cash and put mine and my wife's name on title
- We will go to BOA and use their non-seasoning policy to take out a HELOC
- The money from the HELOC will go back to her boss
- He will fund the repair cost of the home, he has his own sub contractors
- He said he will find the renters/buyers and apparently use his broker/ lease to own programs
-He said his profits have ranged from 8-20k with the majority in the 12k range
- We will split the profits, after operating cost, 50/50

I will not know anything else until Friday. Does anyone have any advice? I am still trying to figure out why exactly he wants us in on the deal.

I know he will want to charge points on the hard money loan and then we will be responsible for the HELOC, but what other advantages does he gain by including us in on the deal?

Cliff Notes: Wife's boss is willing to do a hard money loan and split flipping profits 50/50. What should I know before I go meet with him Friday to get more details?

Re: Hard Money Lending
 

you want to try flipping houses in this environment? no way man.

hard money loans are loans to people with horrible credit history....extremely HIGH RISK....with egregious interest rates (even worse then credit card rates).

youre starting school and have 2 kids, keep your money safe.

Re: Hard Money Lending
 

I really think you need to analyze the risk/reward of this situation from both parties' point of view. Sounds like the risk on his end is very small (repairs?) and the rest is on you guys. What are the downsides to the investments?

Re: Hard Money Lending
 

I am familiar with what Hard Money Lending is primarily used for, and trust me I am not stupid enough to take a deal with ridiculous points.

Like I said I am meeting with him to discuss what he is thinking when it comes to the terms of the deal.

My wife has been in the mortgage industry for 6+ years; we aren't gonna do anything stupid to jeopardize our current position.

He is charging a former co-worker of my wife 5 points on the front of a hard money loan he is doing for him. Same setup he wants us to do, get the HELOC and the HELOC goes to him. But her former co-worker is responsible for all his own carry cost.

5 points doesnt seem too ridiculous to me. Of course we will be responsible for the rates in the HELOC also, but she made it clear to him that we wont be able to cover the carrying costs and he still wants to meet with us.

Trust me when I say I am not going to do anything that will put my family in jeopardy of losing anything at this point in our lives.


BTW, we live around the Memphis market; one of the highest foreclosure markets in the country. So there is money to be made in this market.

Re: Hard Money Lending
 

[ QUOTE ]
I really think you need to analyze the risk/reward of this situation from both parties' point of view. Sounds like the risk on his end is very small (repairs?) and the rest is on you guys. What are the downsides to the investments?

[/ QUOTE ]

This is what I am concerned about, and the main reason I think he likes doing these types of deals. We would assume nearly all the risk in the HELOC and he would have the repairs to worry about.

If I can get him to assume the carrying cost this will leverage more of the risk back to him.

I haven't decided if he is wanting to use us solely as a risk shield or for us to be decision makers in the actual process. If its the later then I am a little more comfortable with this deal. This dude's plate is crazy full with all the things he does so maybe he is looking for someone to "take care of things" for him.

I dont think he wants to screw us over, but who knows.


[ QUOTE ]
What are the downsides to the investments?

[/ QUOTE ]
Not quite sure what you are asking here? The downside as I currently see it is that we would have too much risk for my family's current position; unless of course he is willing to absorb some of that risk. But if he is willing to do that why does he want us in the first place?

Re: Hard Money Lending
 

[ QUOTE ]
[ QUOTE ]
I really think you need to analyze the risk/reward of this situation from both parties' point of view. Sounds like the risk on his end is very small (repairs?) and the rest is on you guys. What are the downsides to the investments?

[/ QUOTE ]

This is what I am concerned about, and the main reason I think he likes doing these types of deals. We would assume nearly all the risk in the HELOC and he would have the repairs to worry about.

If I can get him to assume the carrying cost this will leverage more of the risk back to him.

I haven't decided if he is wanting to use us solely as a risk shield or for us to be decision makers in the actual process. If its the later then I am a little more comfortable with this deal. This dude's plate is crazy full with all the things he does so maybe he is looking for someone to "take care of things" for him.

I dont think he wants to screw us over, but who knows.


[ QUOTE ]
What are the downsides to the investments?

[/ QUOTE ]
Not quite sure what you are asking here? The downside as I currently see it is that we would have too much risk for my family's current position; unless of course he is willing to absorb some of that risk. But if he is willing to do that why does he want us in the first place?

[/ QUOTE ]

What I mean is, is the major downside to these loss of money or ending up with too much money tied up than you can afford to have out there? What are the worst-case scenarios for you?

Re: Hard Money Lending
 

I guess the absolute worst case scenario is that I have to move my family into the house that I have the HELOC on.

We rent right now with no contract (family owned property) so I guess I could use my current rent money to cover the carrying cost until the house was sold.

He told her that he usually has the house finished and either rented or sold within 6-10 weeks.

Re: Hard Money Lending
 

The risk/reward doesn't seem to add up here. The potential to make 12k or so just doesn't add up here. I think he's trying to use you as a risk shield if something goes wrong and it becomes hard to resell the house you bear the costs. The potential for a long listing to resell is also a danger, every month just eats away at your already small margin and even if the house is worth more then what you paid + repairs you can still loose out on the carrying costs.

In short if the boss was sure this was guaranteed profits he wouldn't be looking for a partner

Steve

Re: Hard Money Lending
 

Phi,

Have you asked him whether or not you need to indicate that you and your wife are owner occupants for the HELOC?

J

Re: Hard Money Lending
 

[ QUOTE ]
you want to try flipping houses in this environment? no way man.

[/ QUOTE ]

Flipping can be profitably done in any housing environment. This statement is completely and utterly untrue.

[ QUOTE ]

hard money loans are loans to people with horrible credit history....extremely HIGH RISK....with egregious interest rates (even worse then credit card rates).

[/ QUOTE ]

Not even close the the truth. Hard money loans work for investment scenarios that traditional banks will not finance - i.e., flips. HMLs are not generally high risk for the lender - profit is built into the loan in the case of default. HMLs are not too risky for the borrower either because HMLs aren't going to come after you for damages anyway. The interest rates are high on HMLs because there is insufficient competition in the market place - due mostly to the fact that you need substantial real estate, legal, and lending expertise to even get started.

Re: Hard Money Lending
 

[ QUOTE ]
Phi,

Have you asked him whether or not you need to indicate that you and your wife are owner occupants for the HELOC?

J

[/ QUOTE ]

I have not, but I will.

What does the owner/occupant status do in terms of the HELOC? or any other part of the deal?

Re: Hard Money Lending
 

[ QUOTE ]
I think he's trying to use you as a risk shield if something goes wrong and it becomes hard to resell the house you bear the costs.


[/ QUOTE ]

This is my thinking also. Am I wrong in my thinking that getting him to cover the carry cost will reduce my risk in the deal?

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In short if the boss was sure this was guaranteed profits he wouldn't be looking for a partner


[/ QUOTE ]

I have said this exact same sentence to myself 1000's of times.

Re: Hard Money Lending
 

[ QUOTE ]
[ QUOTE ]
Phi,

Have you asked him whether or not you need to indicate that you and your wife are owner occupants for the HELOC?

J

[/ QUOTE ]

I have not, but I will.

What does the owner/occupant status do in terms of the HELOC? or any other part of the deal?

[/ QUOTE ]

Changes the willingness of the lender to participate because historically default rates are far lower for owner occupied properties. Misrepresenting this status is one of the more common ways to defraud a lender.

J

Re: Hard Money Lending
 

I agree with the other posters here. Something about this scenario seems fishy. Traditionally in hard money lender, the investor finds the deals, does the fix up, sells the property. The HML only sits back and collects money. So I can't imagine why this guy would want to find, buy, and fix the property, but give someone else half of the upside? What does he get out of bringing you guys into the deal?

One thing that occurs to me is that maybe his plan is to buy the property, write you a mortgage, but conceal the mortgage when you go to get the HELOC. Honestly, I doubt that you'll get any bank to work with you on a HELOC when there is a hard money loan out on the property. Who is going to want to get in line behine a HML? I can't imagine that the HELOC will fly unless the HML is concealed. That, of course, is mortgage fraud, so be careful.

The world of serious RE investing is pretty small. I can't imagine that an established investor would throw out a hard-won reputation over a few $50k deals. But who knows?

Honestly, I think that you should meet with the guy and have him give you a written proposal. He needs to clearly spell out how the deal will work. Ask him very directly why he needs you at all to put deals together. It seems odd to me that an established guy would want to partner with some newbies that aren't experienced. If these deals are so good, he could pretty easily find another established investor to work with.

In sum, I think that you should hear the guy out. Probably it'd be worth it to join the local REI club and start asking people about his reputation. Also you could find an objective party to look at the deal and offer advice.

Re: Hard Money Lending
 

>>>>>>>>>>>>&g t;
This is my thinking also. Am I wrong in my thinking that getting him to cover the carry cost will reduce my risk in the deal?
>>>>>>>>>>>>&g t;

Not really, at the end of the day the title is in your name and the risk on resale value is yours. And this is one of the largest expenses and this is why he brought you into the deal I think to cover carry costs. He he pays the costs then what do you bring to the table? Just a name on the title? Makes no sense. I doubt this guy is really looking to steal money from you, just lay off the high risk involved and dont see why you would risk your credit and savings for such a small potential gain in a tough real estate market

As a general note I have no problems with hard money lending and myself took out a hard money private loan on my last real estate investment. But be watchful of the fees and costs involved. My deal was a market rate deal. Too many people are swayed as amatures into the real estate market and look to get in at any cost possible, which obviously makes no sense when it comes to profit margins and why there are tons of foreclosures out there now.

Steve

Re: Hard Money Lending
 

It sounds like this guy has no available cash to make the deal happen and wants you to finance the deal and carry the risk if the deal goes bad. Basically he is offering the service of finding the deal (moderately hard if no experience), doing the rehab (not very hard to find a reliable contractor), and then reselling (hire a realtor).

He isn't really asking you to do a hard money loan. This is a lender who offers a short term bridge loan at high interest. (Which is very desirable type of loan in many RE transactions).

EDIT: OK im actually very confused after looking over the post again.

So the hard money loan from your wifes boss is what will be used to purchase the property initially? Is this what you meant by "he will purchase the property cash."

If this is correct then my initial assumption is correct in that he needs your credit and/or access to hard money (it being you wife's boss) to make this deal work.

Also i wasn't aware that BOA has a non seasoning policy. even if they there wouldn't be much equity until the repairs were complete. I thought HSBC had the best with a two month seaonsing.

Re: Hard Money Lending
 

he's going to buy the home cash.
you are going to take out a heloc
he uses the heloc funds to repair the property and increase value.
sell/rent or L/O the property
split profits.

am I missing something, because I don't see a HML in that equation. is he lending to the future buyer? why would they need hard money?

the other thing is that he's controlling the 'costs' of repair.

let's say you pick up the property for $200k.
You take a 50k heloc out.
How much you want to bet that the whole 50k gets used in the remodel, one way or another?

Post deleted by Mat Sklansky