Hi,
Everyone here wants to borrow from hmls, but how does one become a hml ? Does one need millions of dollars ? or is it possible to start off by lending in small dollar amounts ?
Thanks
Real estate investors are always looking for funds. There is no reason you can’t start off with small amounts. You still would want to make sure you have the correct paperwork and place liens on the properties you lend against.
Hi Tom,
What would some of the paperwork be ?
Steve,
It’s probably different in each area, I’d start at a title company and just tell them what you are trying to do. They probably would prepare the correct paperwork. The other thing you could do is find a local hard money lender and offer to take them to lunch so you can learn about the business.
I would also speak with a solid RE Attorney and find out how to PROTECT your money. Maybe one that has handled a foreclosure or two?
After all, you have to plan for the worst case scenario with your money. What if someone doesn’t pay you? Do you know the laws and the rights of a lender in your area? How long does it take to foreclose on a property? What is the right of redemption if any?
As one who lends hard money and has for a while, in several states meaning that I abide (or not) by several rules, I agree with two previous posts.
The first is that you dont need alot of money. My first hard money loans came from a builder that called me and needed to borrow 5K to keep up the payments on his construction loan or risk a default and being cut off from his lifeblood of capital from the construction lender.
Because I was lending to an LLC and in my home state it make sense to have a second mortgage, even in the risk of forclosure, I lent him the money, and hence I was a hard money lender.
I made about 1200$ for a 60 day loan. I charged him 1500 1200 interests and 300 for documentation and recording fees (putting a mortgage for a total of $6500 on his property). He paid me, eventually after we negotiated an extension or two, and I saved his butt.
He has taken out several more loans from me over several years.
The second point, is to ALWAYS use a title company. Not getting title insurance, especially with a “hard money customer” is simply playing Russian Roulette (and Im married to a russian). Having said this, title insurance is not a 100% guarantee because there are alot of exceptions to coverage, and out of 35 or so claims, I have never gotten a title insurer to pay me without a fight, but its insurance non-the less.
So Yes you can be a hard money lender (watch out and know how to work around the usury rates) with little money and always use a title company or attorney to prepare documents and paperwork, and handle the actual close and recording of docs. The customer always has to pay for this, or you dont give them the money.
Hi Marko,
Marko, whats the process for taking a hml ? What are the things that you have to do ? Is it possible to give a step by step process ?
Thanks for your time.
Steve
Although I dont have a specific guide, my first advice in hard money is that you are making an asset based loan.
Specifically what I mean by this, is although you collect credit and other repayment information from your client, in your heart you know that the only way you are planning on getting paid back is by forclosing, or in some other way, taking the property and liquidating it.
The nation hard money statistic is that lenders are repaid through reposession more than 40% of the time, compared to less than 5% for conventional real estate loans.
Therefor, the first (or next) step is that you have to know, or have someone on the team that knows creditor remedys like the back of their hand. For some its an attorney, for some (and in my organization) its not an attorney, rather a bill collector/skip tracer kind of guy, with the constant consulation of a collections attorney.
As you may guess, this stuff costs money. But the flip side, is that the margins are healthy. On my overall hard money portfolio today, I yeild about 18% and thats after taking into account expenses and losses. And there are losses.
As a profitability rule of thumb, I collateralize my hard money loans to banks, that charge me floating rates of prime to prime plus one. My weighted average cost of funds today is 8%. On top of that, all my lenders require that I have 10% of my own cash in each deal, and contervieling collateral to cover a credit line that acts as my reserve account. Taking this leveraged portfolio into account, I yield about 6-7% (take home pay if you will) over a year an every dollar I have lent.
Remember that a hard money client (often but not always) is much more willing to “walk” on a property that becomes problematic. In addition to that, take my advice that hard money customers (although I “love em” and make lots of money off of them) are business people only interested in saving thier own skin. When its you or them, they pick them.
Fraud, misrepresentation and mismanagement of the funds has been common in deals ive done. So like many other transactions, protect yourself through every kind of contract or paperwork you can.
As a final note, paperwork and creditor rights/remedys will vary based on where you are. I could and would help you navigate that information if you want, but its a more complicated response than this posting affords itself.
Marko,
When you repo a home or any type of real estate can you make money with the repo ? also, I know that lending companies are governed by strict laws of usury but can a single person charge whatever interest rate that they want ?
It is possible to make money repoing a home or other property, but few lenders including myself “have it in the business plan” to do so. In the rare event that one makes money from the repo, it is cover its losses on other transactions.
Having said that, I was talking over breakfast with a competitor of mine this morning, and I mentioned this post. He reminded me of a quote I heard long ago, and should live by as a money lender;
" Never lend more on a property than you would be willing to buy it for". So with this logic, as a prospective real estate investor you should look at a hard money loan the same way.
If you make the loan, and get paid interest, great! If you have to repo the collateral and end up owning it, price your original loan accordingly.
As far as usury rate, although each state has different rules, a rule of thumb is that a business entitiy (corp, llc) does not fall under usury laws. A concievable pitfall to this is when you get a personal guarentee, although worded properly, that should not matter either.
In MN, FL, and AZ, where I conduct most of my hard money lending, If I lend to a business entity, for a business purpose, a borrower has never succefully been able to challange my interest rate.
As a final thought, I am often approched by “consumers” saying “we will just structure the deal to look like a business transaction” At the end of the day, however they are consumer deals, and in a consumer deal, I (or you) are the wolf, and the consumer is the sheep and I am conviced this is a formula for you or (i) to loose money via litigation/he said she said/he took advantage of me crowd.
Hi,
Whats the your average repo rate ? Whats the average dollar amount you will lend to people ? Do you usually lend to developers ? entre.'s ? or just "average people ?
Thanks
Industry average I have noted as being published in the 40% range for more than a few years in more than one publication.
Im in the 50% range. Probably because I am not very risk adverse.
The average dollar amount in mn market is 120’s, in fl 160’s and az 160’s. I have been exploring other markets, and I am attracted to finding markets where the loans would be in the 100K range.
I base much of my interest in the hard money business as lending on property that could not be replaced for the price. (for instance, i do not feel that any new houses can be built in the us, for say under 85-100K, without subsidy) so basically any house i would lend against under that value, would be a relatively safe bet.
I lend to developers, investors or other business people. I do not lend to consumers.
Mark,
Thank you for sharing all of this really great information. I had no idea the repo rate was so high in this business.
Is another viable option for someone with smaller amounts of money to invest the cash with a full-time HML?
You seem to have your cost of funds down very low, so that might not interest you, but I seem to recall hearing about other HMLs who will offer, say, 10-12% to investors, then lend the money at, say, 5 points/15%, keeping the scrape for themselves.
Might this be a way for Steve to get his feet wet?
Hi Marko,
Thanks for the insite in the HML business. How come the repo rates are so high ? In order to make any money do you have to lend millions or dollars each year ? and also do you lend your own money ? meaning the money that you make from the people who pay you, or do you take that money and invest it in something else ?
Thanks
Although flattered by an offer to have money lent to me to conduct HML, (where were you when I was first getting started 
) I think that there are many opportunities to be directly involved in lending, whereever you are located, and not have to do much of the heavy lifting.
To demonstrate I will suggest a method I utilize to market some of my hm lending products.
I have found a few small business bankers (not a us bank or a wells fargo, rather the first national bank of small-suburb somewhere) and alligned myself with them to do some of my hard money lending. Note that many de neuvo or newly chartered banks have been created largely around profitable commercial real estate lending departments.
As a caviate, I will point out that My lending capacity is attractive to them, because I have significant resources, so it may take a bit to sell them on your resources or other value one brings to the table.
In alligning myself with these conventional lenders offering hml in the form of subordinated or second mortgage financing, or in many cases I am *participating in a larger first mortgage loan that they are making to an existing or new customer that does not qualify under their standard guidlines. Ususually they dont qualify because they are seeking a higher ltv than a conserviative bank would offer.
*A participation means that I technically own 20-30-50 % of the first mortgage loan by putting up that much of the money and the bank owns the other part. Generally speaking in these arrangements we proportionately split the interest that is collected and they handle the servicing, which I like.
The reason a bank or any other lender would like this, is it is helping them to provide a service, making money for thier instiution as well as helping to cement a relationship with a customer, yet hedging their risk because 1) they have less capital at risk in a deal if something goes wrong and 2) there are inherent benefits to all lenders when you have a “partner” or simply someone else with “skin in the game”. The logic here is that I am going to work just as hard as the bank and the borrower to make sure the deal goes through and I get my money and profits back. (three heads are better than one concept).
Also by participating in the loan I have the same reciprocal benifits, that the bank is looking at thier risks and making sure for thier part the deal makes sense, is secure and will perform.
Finally, this becomes a good source of long term relationships on the client side. These joint efforts usually work out best to create value and accountability to all involved. By me helping both the bank and the real estate investor to strenghthen thier business models, they become a better long term customer ensuring profits (from the investor) and referrals (from the bank) to me for a long time.
A falacy in many types of lending, is that if you do to good by your debtors that they will not need you. In fact any good businessman knows, the better you treat your customers, and the more you are willing to invest in them, the better realtionship (business wise) you will produce. If I make sure the investor has a good banking relationship, and can grow his business, with cheap (first position or long term debt) while letting me make the (risk) money, which is what I want to do anyway because the margins are higher, I will grow the investors business and need to continue to use me for growth.
I have investments in this hard money sector and also receivables factoring, and have for nearly 10 years. I have rarely if ever, over all that time had any of my customer base defect from using my high cost money, because a good business man knows that the flexibility my “easyer to use money” is more valueable to his/her business model than cheaper but harder to use money could change.
Having said all that, I still encourage one basic rule from my previous post, “Never lend more money on a property that you would be willing to pay for to buy the property”.
Many of the Hard Money Lenders accept Investors too. Get their paperwork and imulate them.
As a follow up, I also think that lending to an existing HML would be an option. I simply have more trust in lending with banks.
Someone asked if the money is mine? About 25% of it is, the rest is in some way leveraged against bank relationships I have developed. My weighted average cost of funds is in the 8% range. And I do try to reinvest any loan amounts back into the business because I think the returns are very good.
I do not think that you have to have millions of dollars to get involved in offering hard money loans. I think one can create a niche making small second mortgage loans of 5-10K each, at very high rates, and make money also; or alternately only make one loan of a hunderedK or so, and spend extra time making sure it works and is secure.
I have attended several meetings in AZ and FL markets whereas I have been solicited to invest in other HML for a return of 12%. I have generally been comfortable with thier concepts and security, but also feel I can get a better return in opportunities I have available.
I do have a significant amount invested at near 18%, paid annually with a hard money lender that focuses on a specific niche of lending on raw land. The investment was a result of a 3 year (getting to know one another) relationship.
I do not think that you have to have millions of dollars to get involved in offering hard money loans. I think one can create a niche making small second mortgage loans of 5-10K each, at very high rates, and make money also; or alternately only make one loan of a hunderedK or so, and spend extra time making sure it works and is secure.
Hi Marko,
Marko,
If a lender makes a second mortgage on a home and the home goes into foreclosure does they first lien holder get priority ? how about the second lien holder ( you ) ? How does that process work ?
Thanks !
If the second is the one foreclosing, it will be subject to the first, meaning that the first will be made whole.
If the first is the one foreclosing, it has priority, meaning that the second will be wiped out.
This is why you hear stories about second liens being sold for 5 cents and 10 cents on the dollar in a short sale.
In certain cases where there is enough equity, a second could pay off the first to keep its second lien intact.
Paul,
I don’t understand ?