The FWF Hard Money Real Estate Lending Thread

you better be pretty aggressive, risk-tolerant and unadverse to litigation.

ptiemann said: I've done HM loans as a borrower. Quick funding and not looking at DTI is a plus. I didn't mind the low valuation. Some HMLs pull credit, but it's the exception. It seems that the red tape in HM lending has increased this year.

Peter

If you have the first position and the buyer is holding substantial equity, pulling credit would seem to be more trouble than it's worth. (provided that you're lending in a state with limited real estate bankruptcy protections, of course)

What sort of red tape have you run into, and would you be willing to pay a higher rate or more points to avoid it?

EggplantWizard said: Crazytree said: you better be pretty aggressive, risk-tolerant and unadverse to litigation.

That describes me reasonably well.

What sort of litigation risks would you envision, other than contractual disputes (the impact of which can be largely mitigated with careful forethought and consultation with a good attorney in advance, I'd imagine) and the inevitable foreclosure risks?basically this is the worst time in history to be in hard-money lending. borrowers who are assuming huge interest exposure are going to be speculators or desperation borrowers. they're going to be testing you from day one.

I do this for clients all the time. if a client owes someone big money, or there is huge exposure... I start F'ing with the parties and with the attorneys. essentially that the case is a loser, and since I don't like them I am going to make the process as long and expensive as possible. and THEN... after they've spent huge amounts of money to get a judgment against my client... I'll BK the client the same day the judgment is entered. that's enough to make most people sick.

the proper response to these types of threats are, of course... that when the debtor BK's... you'll personally drive them down to the BK court. or when I'm being particularly facetious... I tell them I'll hire a limo for the day to drive them to the BK court and back.

lot of criminals and hustlers out there... predators waiting for a fresh fish.

had to pick up the phone and call the FBI for a client who is out about $1MM to a sociopathic Hollywood scammer. there was a wire transfer, and I got incriminating admissions at a deposition under oath... so they're probably going to initiate criminal proceedings.

this person has been sued over 25 times in the past 20 years. and my client gave him $1MM based on a contract that the scammer claims was erroneous and non-binding.

gator2000 said: ...don't touch a deal that you can't make money on foreclosing the next day.which is how most hard money lenders operate anyways... with the intention that the borrower default.

Crazytree said: gator2000 said: ...don't touch a deal that you can't make money on foreclosing the next day.which is how most hard money lenders operate anyways... with the intention that the borrower default.

See -- that's not really my style -- I'd rather provide bridge financing for rehabilitation, economic development, and the like. I had intended to set pricing and LTV requirements in such a way that I would be ambivalent about foreclosing or receiving repayment. Perhaps that's not a viable approach.

I will ask a few local attorneys and real estate investors more about this, and I might give it a shot on a micro scale with a friend of mine who can't qualify for a traditional loan at this time due to self employment, but has the right to a screaming deal on a 3-plex. (Vacant, $2400-2600 GMR, $40k purchase (he has 40 to put down), $220k assessment, 1.74% tax, $50-55k repairs required, ~ $160-180k ARV for quick sale). If things went sour, he would probably just hand me the keys, so the legal risks are somewhat reduced (though of course that's no reason for complacency).

He offered me 18% and three points to fund the construction, and he intends to save enough to repay in full within three years rather than refinancing.

To securitize these deals and leverage out, focusing on commercial property makes sense, both due to larger project sizes and legal risk minimization, but I have no experience investing in that area. (I was primarily considering this as an avenue for my own funds, in any case -- but expanding the concept sounds like a dangerous but substantially lucrative opportunity. I presume some sort of NASD licensure / bonding might be required -- Gator2000, would you happen to know more about this aspect of things?)

Thank you all again for the feedback.

Crazytree said: I do this for clients all the time. if a client owes someone big money, or there is huge exposure... I start F'ing with the parties and with the attorneys. essentially that the case is a loser, and since I don't like them I am going to make the process as long and expensive as possible. and THEN... after they've spent huge amounts of money to get a judgment against my client... I'll BK the client the same day the judgment is entered. that's enough to make most people sick.

the proper response to these types of threats are, of course... that when the debtor BK's... you'll personally drive them down to the BK court. or when I'm being particularly facetious... I tell them I'll hire a limo for the day to drive them to the BK court and back.You can only do things like that in deals with no equity, relatively small dollar amounts and not particularly competent lawyers on the other side. If there is equity in the deal, you are doing your clients an extreme disservice by following this strategy since the other side's legal fees are then coming out of your client's equity, so this strategy is greatly exacerbating your client's losses.

Further, if you decide to play these types of games and the lawyers on the other side know what they are doing, you will immediately find that the fees that your were paid before the debtor filed for bankruptcy are subject to preferential transfer and fraudulent conveyance challenges, so you will personally lose quite a bit of money even if the challenge ends up being unsuccessful.

Crazytree said: gator2000 said: ...don't touch a deal that you can't make money on foreclosing the next day.which is how most hard money lenders operate anyways... with the intention that the borrower default.

Not in my experience. The financing itself is significantly more profitable than a foreclosure. 16% interest is profitable and for potential default borrowers, the delinquency costs/fee's are profitable. Foreclosing puts an end to both of those and in no way guarantee's that you buy the property for a fraction of its value. Good hard money deals are hard to find, there is serious motivation to keep the capital invested.

geo123 said: Crazytree said: I do this for clients all the time. if a client owes someone big money, or there is huge exposure... I start F'ing with the parties and with the attorneys. essentially that the case is a loser, and since I don't like them I am going to make the process as long and expensive as possible. and THEN... after they've spent huge amounts of money to get a judgment against my client... I'll BK the client the same day the judgment is entered. that's enough to make most people sick.

the proper response to these types of threats are, of course... that when the debtor BK's... you'll personally drive them down to the BK court. or when I'm being particularly facetious... I tell them I'll hire a limo for the day to drive them to the BK court and back.You can only do things like that in deals with no equity, relatively small dollar amounts and not particularly competent lawyers on the other side. If there is equity in the deal, you are doing your clients an extreme disservice by following this strategy since the other side's legal fees are then coming out of your client's equity, so this strategy is greatly exacerbating your client's losses.

Further, if you decide to play these types of games and the lawyers on the other side know what they are doing, you will immediately find that the fees that your were paid before the debtor filed for bankruptcy are subject to preferential transfer and fraudulent conveyance challenges, so you will personally lose quite a bit of money even if the challenge ends up being unsuccessful.we have highly competent UFTA and appellate BK counsel... along with incredibly intelligent tax/financial structuring advisors. And I can definitively say that I have dealt with the most aggressive international fraud litigation counsel in the world, brought it by a major foreign petroleum company... and I am aware of exactly what can be done and what can't. These are people who trekked days into a triple canopy jungle in Africa looking for a particular kind of asset they believed that a major judgment creditor was hiding. They found that asset... but about three months too late. They never got paid, and I doubt you or anyone you know ever would. However, there is some hope for them as a major international newsmaking transaction just took place earlier this year that directly impacts this case... especially since we lost the UFMJA appeal right before we subbed out. But we were only ever told exactly what the clients WANTED us to know... which was not that much. And considering that the clients were individuals who 100% verifiably worked with the CIA during a major American Military engagement in a county that we had never declared war on... this is all probably a little bit over your head. But it does explain why the US Attorney never indicted any of them.

StockTrader6080 said: Where are the hard-money lenders?
I've tried to contact many on the internet, and either get no response, or they say they are not lending.

ST

Try your local real estate investor's club, or similar. I know of several people who are hard money lenders (and I've checked the mortgage liens in a couple of cases to verify that I'm not hearing someone's BS).

If you're looking for hard money on the internet, you probably have a serious supply / demand problem --- jaded lenders with limited supply (perhaps fully invested), and an insane amount of demand, probably 75% scam-oriented demand.

It seems to be the sort of practice that still requires in-person interaction to implement effectively.

If I do begin lending, I certainly don't plan to lend much beyond my local area.

Crazytree and Geo123 in the battle of the legal-epeens.

EggplantWizard said: What sort of red tape have you run into, and would you be willing to pay a higher rate or more points to avoid it?

Well, the wonderful government has come up with this mortgage disclosure improvement act (MDIA) which appears to apply to HML (now?) too.

http://raincityguide.com/2009/07/16/mortgage-disclosure-improvem...

Now a good-faith-estimate has to be provided in writing, I sign it and then the lender has to wait 3 BUSINESS days after receipt.
This is for "my protection". Protection that I do not want.

I can see the terms when I sign in the title company. I have rejected terms at that time before, to the dismay of the notary public, and the terms were modified after a few phone calls.

<Rant>Politically, I am probably a quite left-leaning person. But Mr. Obama starts to get in my way. Not that it matters in terms of voting. I have no US citizenship anyway</Rant>

A quick funding was when I made the phone call on a Monday, told the guy the address of a house that I have free and clear, he came by, took a look, next day he had an opinion of value, etc, Thursday I signed at Chicago Title, Friday I went back to pick up my cashier's check.

Someone said there hard money is for desperate or speculating people. I am in the 2nd category.
By the way, foreclosing can be profitable too. I recently saw a HML lender foreclose on a 200k loan and he sold the house for 399k (1 week on the MLS).

EggplantWizard, where are you located/ where do you plan to lend?

-Peter

I'm in Manchester, NH and would probably attempt to keep my lending in NH and VT, where I am more aware of the legal environment surrounding foreclosure procedures and the like.

Massachusetts may have more opportunities, but I get the impression that laws in that state are stacked against lenders.

Eggplant, if you are considering residential lending I strongly urge you to be more than careful. Compliance and predatory lending laws are incredibly complex and any violation of these laws can both put you personally in legal jeopardy, and also invalidate your claim to repayment of the debt. Google; Section 32, high cost mortgage, MDIA, HVCC, and TILA, for a taste of why there is very little residential hard money out there.

gator2000 said: Eggplant, if you are considering residential lending I strongly urge you to be more than careful. Compliance and predatory lending laws are incredibly complex and any violation of these laws can both put you personally in legal jeopardy, and also invalidate your claim to repayment of the debt. Google; Section 32, high cost mortgage, MDIA, HVCC, and TILA, for a taste of why there is very little residential hard money out there.

Wow.. some of those regulations are disturbing, indeed.. Government killing off reasonable investments yet again...

I will certainly consult with an attorney, but unless there are ways to generate exceptions to section 32 regulations, it appears that any residential lending should be confined to the 5+ family space, which are considered commercial apartment buildings.

geo123 said: Crazytree said: I do this for clients all the time. if a client owes someone big money, or there is huge exposure... I start F'ing with the parties and with the attorneys. essentially that the case is a loser, and since I don't like them I am going to make the process as long and expensive as possible. and THEN... after they've spent huge amounts of money to get a judgment against my client... I'll BK the client the same day the judgment is entered. that's enough to make most people sick.

the proper response to these types of threats are, of course... that when the debtor BK's... you'll personally drive them down to the BK court. or when I'm being particularly facetious... I tell them I'll hire a limo for the day to drive them to the BK court and back.You can only do things like that in deals with no equity, relatively small dollar amounts and not particularly competent lawyers on the other side. If there is equity in the deal, you are doing your clients an extreme disservice by following this strategy since the other side's legal fees are then coming out of your client's equity, so this strategy is greatly exacerbating your client's losses.

Further, if you decide to play these types of games and the lawyers on the other side know what they are doing, you will immediately find that the fees that your were paid before the debtor filed for bankruptcy are subject to preferential transfer and fraudulent conveyance challenges, so you will personally lose quite a bit of money even if the challenge ends up being unsuccessful.I've received a couple of PM's asking me to elaborate on the above. If you have an illiquid asset worth, let's say, $1MM with a $600K lien on it, which you've defaulted on, in a lot of non-judicial foreclosure states the creditor will be able to foreclose or otherwise attach the entire asset in full satisfaction of its indebtedness without paying you a penny of your of your equity. This is because in a lot of non-judicial foreclosure states the creditor is not required to establish that the asset was acquired for its fair market value.

The only way to protect your equity in the asset in this case is by filing for bankruptcy protection. In bankruptcy court, creditors can only collect the amount of their indebtedness and the rest gets refunded to the owner or to junior creditors, if any. Remember that in a default scenario the creditor is entitled to collect not just the amount of its loan, but also its cost of collection, including but not limited to attorneys' fees. Hence, if you represent a debtor with equity in an asset, if you are stupidly doing things to run up the creditor's legal fees, you are hurting your client because all those fees will eventually come out of your client's equity in the asset. Hence, in this situation, if workout negotiations with the creditor fail, the best thing the debtor can do is to file for bankruptcy right away, which will maximize and preserve the debtor's equity by minimizing the creditor's recoverable costs of collection.

The other point that I made above has to do with the debtor's attorney's fees. The bankruptcy code has what is called a "preference period," which is generally a 90 days period that immediately precedes the bankruptcy filing. The bankruptcy trustee generally has the power to "avoid" or to "disallow" payments that were made or debts that were incurred during the preference period. Hence, the debtor's legal fees that were incurred and/or paid during the preference period can be challenged by the bankruptcy trustee/creditors. Even if you, as the debtor's attorney, eventually prevail on this point (and you can't bill your client for your efforts), it would cost you significant time and money, which quickly dilutes the value of those fees. The debtor's attorney's conduct prior to the filing of the petition can greatly increase the risk that the creditors and trustees will go after the debtor's attorneys fees paid and incurred during the preference period.

All these issues above are just black letter law.

ptiemann said: gator2000 said: Eggplant, if you are considering residential lending I strongly urge you to be more than careful. Compliance and predatory lending laws are incredibly complex and any violation of these laws can both put you personally in legal jeopardy, and also invalidate your claim to repayment of the debt. Google; Section 32, high cost mortgage, MDIA, HVCC, and TILA, for a taste of why there is very little residential hard money out there.


I am more or less familiar with MDIA (I mentioned it above), HVCC (does not hurt me), TILA (another paper I have to sign and lender has to wait).
That's what I meant with "recently added red tape".

From my POV, it is more a time issue (delay). It won't stop the lender from foreclosing if I won't pay.

My point was to Eggplant, not you. And for the record, if you had a good attorney, and the lender didn't follow these reg's carefully, then it sure as hell would inhibit their ability to foreclose. You probably deal with sources that have been lending for a while and because of that are fairly adept at navigating through new and existing regulations, I'm cautioning Eggplant because even for those of us in the business it is a full time job to determine and follow through on compliance.

geo123 said: All these issues above are just black letter law.Translation: I am not a litigator.

crazytree said: geo123 said:

All these issues above are just black letter law.

Translation: I am not a litigator.

Geo123 ... all these years and you don't know what a litigator is ??

litigator

dictionary results

1. a person who cares only about himself or "billable hours"
2. a litigant.
3. a courtroom lawyer.

Synonyms: Snake; scum; essential problem with Americas legal system.
Antonyms: Geo123