Presentation for possible HML - Posted by Eric (MI)

Real Estate Investing Real Estate Financing
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Posted by John Corey on April 11, 2006 at 15:14:28:

Eric,

Here are some suggestions.

  1. Assume a deal with a stranger who is a professional when it comes to RE and hard money. Use that as the benchmark. Terms and conditions plus the documentation for such a deal gives you a reference point.

What I would call typical is:

15% interest rate
5 points
Interest only monthly payments
65% LTV max on the as-is value (not ARV)
No credit check
1st position lien
Normal escrow process with HUD1, title insurance, fire insurance, everything that is normally recorded is recorded.

  1. Then consider how you might improve the deal (if at all) given the trust relationship.
  • If the trust is strong then a higher LTV might be reasonable. Added risk to the lender. Also risk to the borrower that they will do deals that make little sense given access to higher LTV loans.
  • A change in the points (0 to something higher than 5)
  • Deferral of the payments until the property is refinanced or sold.
  • Use of ARV rather than as-is for the LTV calculation.
  • Otherwise keep the deal simple and similar to other HM deals - mostly indicating to use the normal process and paperwork so it looks and feels like a HM deal.

You seem to be saying that you will be emotionally guaranteeing the deal (legally you can guarantee the deal but we both get the point). The family friend is also helping you out by providing capital to grow your investment business. Hence there is a little give and take. Maybe you pay him a lower interest rate but more points on the back end so he has an upside when a deal is done. It all depends on why he wants to invest with you and how far you two trust each other.

Do assume that it has to be clean so someone else can pick up the pieces later.

As to your other comments…

Unless you are going to obtain some or all of the funds without securing the capital against real estate assume that you will not have free access (your phrase). The funds will remain in the other person’s IRA, bank account or similar. Each time you do a deal you will present the full documents and the funds will be wired or otherwise transferred. You can make offers knowing the funds are there but you never have direct access or otherwise control the funds.

It should be noted that there is an alternative model. You could form a partnership or a LLC and have the person invest the capital into the entity. You would then work out how to control the LLC, etc. Different with both positives and negatives.

I think you should stick with the hard money model and just operate knowing that if the deals make sense the funds are there up to some limit (the max the person wants to lend out at any one time). Have a set of criteria so that every deal that meets the criteria is approved subject to any upper limits.

By doing deals with the other person acting as the lender they get the liability protections that are accorded a lender. For example the liability from an accident, a toxic spill, etc. stop with you and are not something that will hit a lender. If the person is some sort of a partner then the funds are more at risk in most cases. You also know that you will not get a new ‘partner’ if there is a death or something. The funds are in the form of a loan and there are limits to what a lender say or do about a loan already in place.

John Corey

PS. Any ‘note’ or paper deal where you are creating the paper to do the deal fits what I am talking about when I say HM. As long as the party with the cash appears as a secured lien holder and not a partner or some sort then all is consistent with my points above.

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Presentation for possible HML - Posted by Eric (MI)

Posted by Eric (MI) on April 08, 2006 at 19:05:47:

I am in an unique position. I have the oppertunity to groom my own hard money lender. He wants to do it but knows nothing about it. It is a friend of the family and knows I won’t steer him wrong purposely.

I am wondering what would be considered generous terms for the rehabber and fair to the private money lender? I also need information or resources that will help me to protect him and me. What terms or type of contract or protections should be in place so his money is completely at risk should something wrong happen. I am just looking for an overview of how the process should go so I can research it further. He is retiring from GM via the buyouts offered recently and has over $1 million in his retirement savings and would like to invest a portion of it.

I am also wondering if someone can give me some pointers on how to conduct a presentation to other potential HMLs. What information should be included to be most effective. I want to do all cash deals with strictly private money.

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Re: Presentation for possible HML - Posted by John Corey

Posted by John Corey on April 10, 2006 at 10:35:51:

Eric,

As I provide HM I can walk you through the mechanics.

Before helping you become armed and dangerous…

How deep is the trust?

What will happen if a deal goes bad?

Assume that either you die or he dies? Who will pick up the pieces and where will they look for instructions as to what to do?

You have to assume 1 deal will go bad for some fluke reason. Then you have to have it clear how the parties will exit. That should be covered in the legal documents and discussed if you two really trust each other. As HM is a secured loan there is lots of president and prior legal research so the documents are pretty simple. You still need to make sure that you both understand what will happen when the XXXX hits the fan.

People get injured, they get a divorce, they get sued and have their assets drawn into a court action, they die when you least expect it. When a stranger or relative steps in to deal with the situation you do not want to have to explain what was supposed to take place. Maybe you can not talk or maybe they do not understand what you are saying. You want the paperwork to be clear. Loan documents are pretty clear so much easier than if you were dealing with a partnership agreement.

You could be on either side of an unexpected event so plan for both sides.

Your friend needs to move their retirement funds to a self-directed account is the funds are not already in one. I can recommend a company that a number of people use.

I do not suggest that you make the deal too generous to the rehabber. I would focus on fair terms that tend to mimic the market. That way there is no favoritism going on. I also think that if the terms are too generous for the rehabber that person will do deals that really are not that smart. Like Silicon Valley during the dot.com crazy, easy money allows for too many bad decisions. Either the deals are good and you can pay the going rate or skip the deals.

Note that a rehabber that has cash in their back pocket is getting a generous deal. Really knowing that the cash is waiting is more than enough to tip the scales in your favor.

Send me email if you like. There is some benefit if the discussion happens here (at least for the items that are general in nature).

John Corey

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Re: Presentation for possible HML - Posted by Eric (MI)

Posted by Eric (MI) on April 10, 2006 at 12:27:54:

The trust is very deep. The gentleman is actually an old Vietnam buddy of my father. They have been friends much of thier lives and are both getting ready to retire from GM. The difference is the friend has had some good luck over the years and has earned himself a handsome retirement.

I didn’t mean for it to sound like I was looking for better than market terms for myself. I don’t know what terms the HM market considers fair for both the HML and the rehabber. I definitely want something that is fair to myself and him.

If something unexpected where to happen such as death or the deal go sour I would like to have everything in writing as to what should happen. I still have to think through all the possiblities so any suggestions you have would be appreciated. I want to have all the bases covered for my sake and his. This person is thought of as us as a member of the family so the last thing I want to do is lose his trust. I will go without before putting him in a bind due to my mistakes if it comes to that.

I would like to have money freely accessable in some sort of account to be taken out in draws to complete the work.

Any information you can share as to how this should be structured will be greatly appreciated by both of us.

Thanks
Eric