How to become a hard money lender? - Posted by Nancy

Posted by Ed Garcia on March 29, 2006 at 12:08:08:

Chris,

I can?t tell you how much I appreciate your post.

Thank you,

Ed Garcia

How to become a hard money lender? - Posted by Nancy

Posted by Nancy on March 26, 2006 at 17:05:37:

After having done some rehab, rentals and flips, it seems to me that eventually, becoming a hard money lender will probably be the most profitable way to earn passive and secured income with much less work than many other forms of REI… I noticed a huge demand for hard money lenders in town.

I happen to know several money rich people who want to earn passive income with minimal work… Any suggestion on what I need to learn to get into the hard money business? like setting up an entity and bring in investors with money? what licensing do I need and any one who has done this successfully?

thanks
Nancy Dallas, texas

chiming in late… - Posted by lukeNC

Posted by lukeNC on March 28, 2006 at 08:33:15:

I know I’m late on this one…but I’ve been a hard money lender of sorts.

I dont suggest using OPM, in fact I dont ever suggest using OPM, its too much trouble for me.

My main thing was that it had to be my closing attorney and my appraiser before any deal got done.

Only loaned up to 65% of value.

But I’m not doing it anymore and only did 3 or 4 times some years ago.

Re: How to become a hard money lender? - Posted by Bill H

Posted by Bill H on March 27, 2006 at 19:14:10:

Nacny:

Now that you have read the posts from me, john, ed, richard, and bob…I hope you can understand that being a HML can be lucrative and can also be very dangerous.

The main thing you should get from all the posts it that it is absolutely necessary that you “Investigate thoroughly BEFORE you invest.”

Learn what you are getting into…WELL…you can get burned her just as bad as any other aspect of real estate investing.

And: I will say again the the governing agencies frown on using other peoples money and having the deal go sour…be careful with OPM.

Good luck with whatever you decide to do.

Bill H

Not passive and not minimal work - Posted by John Behle

Posted by John Behle on March 27, 2006 at 18:15:08:

Yes, there can be great profits in being a hard money lender, but it can be far from passive and far from minimal work.

Doing proper “Due-Diligence” is an art. It can be learned, but never ignored. There are people that scam hard money lenders and without knowing how to properly rate your risk it can take you and your investors down. When it goes down, they go after the lender or broker with a vengenance. So, it’s not as simple as a book, home study course or weekend seminar.

Then, “Passive?” NOT if they don’t pay. Foreclosures really aren’t all that fun and can destroy your profit pretty quickly.

Since I teach people about paper investment and do hard money loans myself, I have seen both sides in a couple ways. I know the risks and rewards and I’ve seen many, many, many people make errors.

I’ve seen many people get interested in investing in discounted mortgages and then get sucked into hard money loans. Most of the time they just hook up with a broker. Sometimes they move that way themselves and start originating hard money loans. I’ve seen more people hurt than helped. I’ve seen energetic, intelligent people with a bright future get destroyed when they head off towards hard money.

So, be cautious. It’s not all that simple or safe either. Personally, I much prefer buying existing notes or loans. Buying existing paper has many advantages, can be more profitable and much safer. I wrote an article contrasting the two for Noteworthy Magazine some years ago. I don’t think it is published here, so I will give you a link where you can find it to read up more about the risks and rewards of Hard Money lending. it is at: http://www.papergame.com/article006.htm

Hard money lending can be profitable. So can note investment. Both have risks people need to be aware of and aren’t necessarily as simple as they sound on infomercials or on the real estate evangelist circuit.

Re: How to become a hard money lender? - Posted by Ed Garcia

Posted by Ed Garcia on March 27, 2006 at 10:18:59:

Nancy,

Becoming a Hard Money Lender is one of the easiest lenders to become. The reason being the underwriting criteria is not based on credit but is based purely on EQUITY position. The proposed LTV I?m sure you know is 65% LTV.

QUESTION:

I happen to know several money rich people who want to earn passive income with minimal work… Any suggestion on what I need to learn to get into the hard money business?

ANSWER:

Bill has already told you, LEARN ALL of your states statues, usury laws, (ignorance of the law is not an excuse) etc…BEFORE you even consider starting.

I agree with Bill you need to know the legal aspects of lending. You?ve mentioned that you?ve noticed a huge demand for Hard Money Lenders in town so for sure I would at least learn all of the legal ramifications in your state. The primary reason is being legally able to collect your money in the event of delinquency.

QUESTION:

Like setting up an entity and bring in investors with money?

ANSWER:

Bill say?s, To do this you may run aground of the SEC…they do not like you to use OPM without some fairly strict guidelines. Most states require that if you are going to have others invest with you (NOTICE… WITH YOU…not they just put up the $$$) that you have a minimum of a good social or business relationship PRIOR to encouraging them to invest with you.

I don?t agree with Bill. As long as you put in 1 no more then 2 investors per loan you?ll be in no violation with SEC. As for the rest of his answer, even though it sounds good they have no way of governing a good social or business relationship so disregard it also. However they may do a back ground check. It?s also preferable if you fund the loan and then sell it off to an investor.

QUESTION:

What licensing do I need and any one who has done this successfully?

ANSWER:

Licensing is required in most states when doing loan origination. Some states may not require if for a small amount of loans so you have to check with the Department Of Corporations of your state.

Interesting enough Nancy, most Hard Money Lenders are not licensed. They feel that because they?re doing hard money with what they consider private investors and not the public, that it?s no big deal. This is incorrect. Private investors are also the public and once you?ve decided to be a lender of any kind you should be licensed.

This morning I?m in a generous mood so I?m going to teach you something that I usually reserve for the students of my workshop. I?m going to teach you how to make loans without becoming a Hard Money Lender.

Rather then becoming a HML and being governed and regulated by the laws of your state. You can purchase the property on the borrower?s behalf and Lease/Option it back to them. In doing so you?ll never have to foreclose which is a costly and timely process and the borrower can?t go into bankruptcy. You?ll be in no violation of any lending laws. And if for any reason the borrower doesn?t pay you, you just evict them which is an easy quick process. In stead of charging interest and loan fees on a loan, you decide what the interest and loan fees would be and charge it as profit, as in doing a flip.

Sorry Nancy, I can?t teach you everything in one post, but I hope that I have given you some food for thought,

Ed Garcia

Re: How to become a hard money lender? - Posted by george

Posted by george on March 26, 2006 at 22:13:31:

Nancy,

HML is an area that not only requires expertise in knowledge but vast experience to become successful. This is an arena where you can get your hat handed to you big time if you even make a few basic mistakes.

It would be great if you could apprentice with someone before venturing out on your own. Problem is, a local mentor is not likely to train his competition.

george

Re: How to become a hard money lender? - Posted by Bill H

Posted by Bill H on March 26, 2006 at 18:14:23:

Nancy:

I happen to know several money rich people who want to earn passive income with minimal work…
I guess we all fall into that category.

Any suggestion on what I need to learn to get into the hard money business?..
LEARN ALL of your states statues, usury laws, (ignorance of the law is not an excuse) etc…BEFORE you even consider starting.

like setting up an entity and bring in investors with money?..
To do this you may run aground of the SEC…they do not like you to use OPM without some fairly strict guidlines. Most states require that if you are going to have others invest with you (NOTICE… WITH YOU…not they just put up the $$$) that you hve a minimum of a good social or business relationship PRIOR to encouraging them to invest with you.
what licensing do I need and any one who has done this successfully?..
Whatever license and bonding your state requires for mortgage brokerage.

Good Luck,
Bill H

Re: How to become a hard money lender? - Posted by Bob Smith

Posted by Bob Smith on March 28, 2006 at 10:23:43:

Is liability insurance covering the work to be done by your tenant and his workers easy or difficult to find?

Can your tenant foul up your title with mechanic’s liens even though he isn’t a title holder? You have no option to do a protective foreclosure and wipe the liens out.

Re: How to become a hard money lender? - Posted by Bob Smith

Posted by Bob Smith on March 27, 2006 at 16:57:05:

Should one presume that the terms of your sale/leaseback should not be usurious under your state’s law? Or is the fact that exercse of the option is contingent, not mandatory, make usury inapplicable?

How do you avoid a judge requiring foreclosure as an equitable mortgage? I’ve seen it done in sale/leaseback situations.

THANKS!! - Posted by Nancy , Dallas

Posted by Nancy , Dallas on March 27, 2006 at 10:44:37:

Ed,

Thank you so much for the detailed information and generous tips!! I really appreciate it! I can’t wait to meet you in person at the CREonline convension!

Lease option is a great idea, however is almost no longer doable in Texas due to the new law, we can’t do contract for deed here either. How about the lender purchase it and sell the the borrower with owner financing? charging down payment and baloon, then provide a 2nd construction loan? in that case will the owner get around all the government regulations?

Thanks again!

Nancy

Re: How to become a hard money inmate - Posted by Richard

Posted by Richard on March 27, 2006 at 10:23:28:

Ed,

I respect your need to keep secrets until you are paid a teaching fee, but to bait potential students with only the up side without also disclosing the downside of a technique just isn?t right.

Lease/Option back to the homeowner under certain circumstances can and will be viewed by the courts for what it really is?a usurious loan done without a license. And, in some states, like California, can be not only usurious but unconscionable thus subjecting you to JAIL time.

Richard

Re: THANKS!! - Posted by John Corey

Posted by John Corey on March 28, 2006 at 07:30:39:

Nancy,

Check the TX laws closely. Someone else reported the restrictions on a lease/option apply when there is an underlying 1st and you do not already have title.

What Ed suggested would have you buying the property for cash and then doing a L/O to the investor who wanted it in the first place. The cash to buy is the same cash that would have been the loan. As this was a HM discussion there is the assumption that cash was brought to close and prior debt on the property is cashed out.

Without knowing the full details of the TX laws I have reason to believe that the restriction may not apply.

For those in other states where they are banning L/O deals. You will generally find that they can not ban a L/O deal. They are only putting restrictions on situations where there would have been a sandwich lease or where there is a senior lien. If you are the F&C owner on the title most of the new consumer laws do not impact you as you can convey clear title to the end buyer when the option is exercise. Check your state laws for the details.

John Corey

Re: THANK YOU… - Posted by Ed Garcia

Posted by Ed Garcia on March 27, 2006 at 11:40:56:

Nancy,

I’m sorry I got so engrossed in answering the question it never occurred to me that you?re from Texas. You signed it, Nancy Dallas Texas, dah.

You?re right, Texas has made more law changes then any other state in the last few years. 6 years ago, you didn?t even have to be licensed in Texas.

Nancy, I?m checking Lease/Options in Texas as we speak. If I get any information that I think will be of benefit to you, I?ll get back to you.

Till then,

Ed Garcia

Re: How to become a hard money inmate - Posted by John Corey

Posted by John Corey on March 28, 2006 at 07:34:31:

Richard,

The problem you allude to does not exist.

Seller A is the seller. The Investor who wants a HM loan is the buyer. Until they buy they have no stake in the property is the assumption.

Rather than the Investor buying the property Ed has suggested that a HM Investor buy the property.

A separate transaction would be set up for the original Investor to purchase the property from the new Seller (Seller B - The HM investor).

Hence there are no usury issues from a lease back with option as none is taking place.

It is subtle but clearly not the same as what you are indicating is a problem.

In addition the deal has nothing to do with an owner occupant so there are even fewer restrictions.

John Corey

Re: How to become a hard money inmate - Posted by Ed Garcia

Posted by Ed Garcia on March 27, 2006 at 11:24:00:

Richard,

I suggest you go back and re-read my post. My suggestion was to purchase the property in lieu of making a loan to the potential buyer and then Lease/Option it to them. The buyer isn?t even the owner of the property yet.

I?m from California and have been making Hard Money Loans for over 27 years and yes I?m Licensed.

If after you re-read my post and you still feel the same way, then I guess we can agree to disagree.

Richard, there?s one thing you?ll learn about me. I may not always be right, but I?m never wrong,

Smile,

Ed Garcia

Re: THANKS!! - Posted by Nancy , Dallas

Posted by Nancy , Dallas on March 28, 2006 at 09:46:21:

John,
You are absolutly right!! when there’s no lien on the property, there’s no restriction on LO… I totally forgot about that exception.
Thank you so much… in this way, this will work just fine since there will be no liens on the property other than the owner financed loan…I’ll just have to check on the max interest rate can be charged in Texas.

Thanks!

nancy

Re: How to become a hard money inmate - Posted by Richard

Posted by Richard on March 27, 2006 at 12:22:24:

Ed,

I read your post correctly. Your techniques could very possibly be in violation of the law. If you are going to teach this technique you should also become familiar with the dangers, even if you make less money teaching, it?s only right. I?m sorry for both you and your students that you take the ??I?m never wrong? attitude, it can be devastating to everybody involved. In your first post I thought you knew the dangers but were not elaborating because of the sales nature of the post, but now it?s clear you are not even aware of the dangers?this is truly shocking.

Ed, please read this article, you owe it to your self and your students:

Also, since you are in California, it?s imperative you become familiar with CC1695.12. It basically states that if you take ownership then lease option back and the option is exercised it will be considered a loan by the courts. You will have an opportunity to prove it was not a loan but the assumption is a loan.

You claim to be licensed. If you have the CFL license I can understand your ignorance because there is very little or no education required for the license. If you have a DRE license you should go back and review the licensing material.

Richard

Re: THANKS!! - Posted by Bob Smith

Posted by Bob Smith on March 28, 2006 at 10:17:33:

If I recall correctly, even if there is a lien if you have the permission of the lender a lease/option is still OK.

Re: How to become a hard money inmate - Posted by Ed Garcia

Posted by Ed Garcia on March 27, 2006 at 14:02:50:

Richard,

I have both a CFL and a DRE but that?s irrelevant of this conversation.

When you mention my never wrong attitude, I?m sorry you took it that way, that wasn?t my intention, it was meant as a joke. I am conscientious of the information I share, and usually either know or check out what I say before I say it.

Because you mention my teaching others in both posts, I feel you have a concern, and respect that you?re just trying to make sure I don?t miss lead my students and our viewers.

I can appreciate that; however I want you to know I?m an honorable person and stick with what I have said. I?m fully aware of predatory lending and what?s applicable to Owner Occupied and what?s applicable to None Owner Occupied.

I?ve been aware of Bill Bronchick?s article that you?re referencing since its conception. The article was written for the benefit of investors who would purchase properties and Lease/Option them back to the original owners. Again I feel you?re out of context of what I have suggested. Quote in the article (The transaction, in its most basic form, involves the sale of a property to an investor who holds title and leases the property back to the former owner.) Again, the way I have suggested it, the original buyer never held the title. The buyer will hold title for the first time when they exercise the option.

Ed Garcia