I've been considering the attractive returns in hard money real estate lending.
I've been around the block with property, so to speak, so I'm comfortable with valuations.
I was thinking about getting started with this offering either 12% or 18% Fixed interest with two or four points (depends on my assessment of the rate environment and borrower project risk), 65% min LTV, interest only with a balloon payment in year three.
Obviously, I will consult an attorney if I pursue this.
Have any FWF members interacted with hard money, either as a lender or borrower? What was your experience like?
EDIT: Updated title, since the thread has grown beyond my original question a bit
Message edited by: EggplantWizard on 2009-10-08 13:03:38 CDT
Ive been a HM lender to a business colleague, much better rates, lower LTV. We decided instead Of doing the points , there would be a cash gift at inception, so it wasnt part of the docs.
Worked out well, and when their construction was completed they refied to a traditional lender. I did need to extend the loan term baloon once.
Message edited by: SUCKISSTAPLES on 2009-09-25 22:50:49 CDT
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.
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?
Message edited by: EggplantWizard on 2009-09-25 23:15:35 CDT
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?
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.
I put myself through college raising money for a hard money lender through a SEC regulated subordinated debenture offering. It was a 3 man operation with me raising the money, him lending it and an assistant for both of us. I was with him for over 4 years and saw and did pretty much everything. He had a few strategies that he lived by; --Commercial lending only, risk/reward is not a fair balance in residential due to predatory lending laws that have a stop point to the reward. There are angles that enable residential lending to be called commercial, these are the only times residential can be considered. --Everything is about the property, don't touch a deal that you can't make money on foreclosing the next day. --Refinance before you foreclose, judges can limit legal fee's and penalties in a foreclosure, but they can't touch them if you roll delinquency costs into the principle of a new loan and then foreclose on the new one. --Search for business everyday. --Focus on the costs, terms, and liquidity of the money used to fund the loan as much as the cost/terms of the loan. --When it comes to assessing risk, trust no one. If you rely on another person's assessment of any component of risk, you are asking someone else to underwrite a part of your loan. --An appraisal is a tool, not an absolute determination of value/LTV (see above. --A good real estate attorney is required, will be expensive, and is worth every penny.
As a point of reference, we paid our investors from 6.5-9% and he charged from 14-16% and 5-10 points. All deals were 60 LTV or under and credit/income/assets were less important than the conversation/s with the borrower.
I just got done reading some of your comments in the optimal net worth thread and I think I am about 4 years older and ahead of you with the exact same no life and bust your ass early and slow down later strategy. I accumulated the big chunk of my egg and have started the slow down part. Keep chugging and remember to smile like a fool every time a move pays off!
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.
gator2000 said:I put myself through college raising money for a hard money lender through a SEC regulated subordinated debenture offering.and you don't know how to spell "principal"?
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?)
EggplantWizard said: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.The market's too volatile right now and your good intentions will put you at an economic disadvantage.
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.
EggplantWizard said:(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.
Unless things have changed, there are no licensing requirements for commercial lending. If you want to raise money, there are plenty of ways to do it, I don't know of any that don't include some kind of regulated approval.
Message edited by: gator2000 on 2009-09-26 09:23:31 CDT
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.
Message edited by: Crazytree on 2009-09-26 12:46:23 CDT
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