Hard Money Lenders 101

Intro: 0:01
You're listening to the flip houses like a girl podcast where we educate, empower and celebrate everyday women who are facing their fears, juggling family and business, embracing their awesomeness and wholeheartedly chasing their dream of flipping houses. Each episode delivers honest to goodness tools, tips and strategies you can implement today to get closer to your first or next successful house flip. Here's your spiky-haired breakfast taco loving host house flipping coach, Debbie DeBerry.

Debbie DeBerry: 0:39
What is going on you guys? I hope that whatever you're up to today, it's an easy one. My day has been not so easy. It's been so frustrating and it's one of those days where I'm like, Oh my gosh, I just want it to stop. Just make this day go away. But that's part of this whole house flipping world, right? And running your own business and being responsible for all the things. It's just part of it. So I'm definitely not complaining. It's just one of those days. And what happened was if you're following along on the follow that flip series and you watched the most recent video, you will have seen that there was a permit issue that came up last week. And what happened there was that the inspector that we drew, and it is totally luck of the draw, the inspector that we drew for that particular day was a new inspector and apparently had a lot to prove. So he started just making certain things up and he, it was just bad. But he did say we needed a permit, an electrical permit, because we changed out light fixtures. All right. And I've just never heard that in my bazillions of years. But okay. So we did that and we're obviously trying to do this renovation within the city's code guidelines or else we wouldn't have pulled a permit at all. Right. So we had an inspector out there because we had pulled a permit for the work that we thought needed a permit. So we handled that, we thought, and the inspector went out today to inspect all of that. But guess what? It was a different inspector. Oh no joke. You guys. So this inspector found other stuff and it's like, Oh my gosh, it's kind of like opening a can of worms. It's just like never ending. However, that's fine. Part of this business is problem solving. So if a problem comes up and it totally paralyzes you and freaks you out, that's the wrong reaction to have. You can 100% get angry and annoyed and frustrated and fuel all of those things. And also you have to get into action. So great, be angry, be annoyed, be frustrated, and then take action to resolve the problem. So I went into my local Facebook groups where I trust people's recommendations for contractors and I found a couple of electricians in there and I scheduled appointments with them. One of them has already gone out there, another one will go out in a couple of days and another one will go out in a couple of days as well. So get into action, solve the problem. Like I say, flipping houses is managing people, projects and problems. Okay, so they're going to come up. It's inevitable and you learned something new on each flip, which is really one of the reasons why I keep coming back. I love that. Not every project is the same. That doesn't mean that I love the things that come up. So I have definitely been kept on my toes today and that's okay. Alright , I also want to give a shout out to a listener who left an awesome review. You guys, I am so thankful because honestly the ratings and the reviews that you are leaving for this little podcast of ours, they make a huge difference. So the more ratings and reviews I can get, the more ratings and reviews we can get, the better we, the higher we appear in search results. So when people are searching for the topics that we're covering in these episodes, we will rank higher if we have more ratings and reviews. So if you would please, if you're getting any value out of this show, would you please be so kind as to leave a rating and review. And again, that just helps me in my mission to instill in just one more person, one more woman out there that she absolutely can't successfully flip houses. And then those little kids, those little eyes that are watching her, whether they are her own kids, whether they're her grandkids, her nieces and nephews, her neighbor's kids, they see the fire that is lit in her eyes and the passion and the drive and the motivation. That's freaking awesome. How amazing and contagious that is. That's what we're after here. Okay, so I appreciate it and I just want to share with you what Courtney five to eight had to say. The title of it is inspiring. I've been thinking about flipping houses for a very long time, but I never knew how to get started without being rich. Debbie's podcast is exactly what I was looking for, step-by-step and specific practical advice from somebody who has been there and succeeded. Courtney, thank you so much for leaving that review. I'm so grateful that you took the time to share this feedback with me. Thank you. Thank you. Thank you. Alright , so let's get into it. What I want to talk about today are hard money lenders and we're going to talk about what they are, why would you want to use them, how they work, and also what is the difference between a hard money lender and a private money lender and all sorts of things. Okay, so let's just get into it. So I'm sure that initially when you hear the term hard money lender, it probably has a negative connotation either you've heard horror stories of predatory lending practices that happened years and years ago. Fortunately those lenders are no longer on the scene or just the sound of the name hard money lender. Like to me it sounds like if I don't pay, somebody is literally going to take me out back behind the property and like take me out at the kneecaps. Right. And nobody wants that. Rest assured. That is not why they're called hard money lenders. Okay. So why are they called hard money lenders? Well for the most part they are qualifying the property, the hard asset versus qualifying the property and the borrower. So a lot of times hard money lenders really are just making sure that the property meets their guidelines, that the purchase and the renovations and the after repair value are all in line and they're reasonable, reasonable as in you're not saying that a 3000 square foot house needs $10,000 worth of renovations. I mean that's completely unreasonable. That's not realistic. So that's what I mean by reasonable. Okay. So the way they usually work their funding is they will have a certain amount of the ARV or the after repair value that they will lend. Okay. So if they will lend up to, let's just say they will lend up to 70 of the after repair value of the ARV of what the house will be worth once you're done with the renovations. Okay. That's what we're talking about when we say ARV. If they will land up to 70% of that and you can keep your purchase price and your renovations and even your carrying costs all underneath that 70% then you can fund the deal in its entirety through hard money. Now this day and age, it's harder to do that. It isn't impossible, but it's gotten a lot harder to do that. Let's just say that the house will be worth $100,000 when you're done. Okay. If they will lend up to 70% of that, they will lend $70,000 so if the purchase price is, this is just for the sake of easy math in my brain, okay. If, if the purchase price is 40 grand, the renovations total, we'll say 15 grand and the carrying costs are another 10 grand, that's 65,000 right? 40 1510 yeah. Okay. Good job, Debbie. All right , so that 65,000 obviously that's less than the $70,000 that they will lend up to. Okay. So that's how they do the financing. That's how they work the numbers and that's how they qualify properties and not necessarily borrowers. Now, when I say they don't qualify borrowers, it completely depends on who you're talking to, which hard money lenders you're talking to and exactly what they're requirements are, their terms and their requirements vary lender by lender. That's why it is absolutely crucial that you speak with each one that you're interested in potentially working with and ask them all the very same questions. That way you're comparing apples to apples. Yes. There's that term that I've said before when I was talking about comps . It holds true for this too. You want to make sure you're asking the exact same questions to every single potential lender. Okay. And frankly the same goes for private money lenders. Now you might be thinking, what's the difference Debbie? Well it kind of depends. So it used to be that hard money lenders were more, Oh along the lines of a company , so maybe they have lots and lots of investors who pool their money together and put these loans out. Whereas a private money lender, which is like an average person that has money and wanted to invest it well over time those terms have become interchangeable. Much like some other terms when it comes to talking about financing, for example, a lot of lenders, a lot of hard money lenders are using terms like loan to cost and loan to value and ARV interchangeably and they are not the same thing at all. And it's very confusing for consumers and that's why, well that's another reason why I say you've got to be asking them all the same questions so that you can get the exact information you need to make informed decisions. Now, depending on the lender that you're talking to, they may or may not look at any of your credit or financial credentials. Okay. So I've never had a hard money lender or private money lender request tax returns, income statements, bank statements, or even my social security number.

Debbie DeBerry: 13:22
The trade off for hard money loans, right? You're paying higher interest even though they're short term loans, you're paying higher interest and in return they should only really be qualifying the property. And most of them did only qualify the property. And then I'm sure they made some really bad investments and then they decided, well, some of them decided, you know what? Maybe we should qualify the borrower a little bit more too to save our butts a little bit more, but we aren't going to reduce the interest rate or the points at all. We're just going to keep things the same, but we're also going to qualify the borrower saw , so shop around, okay, because I've been doing this since 2008 and I've never had to show anything about me personally, my business, nothing. It has always been, does the property qualify? Okay? I mentioned higher interest rates. Please don't get distracted by that. A lot of people get so hung up in, Oh my gosh, they charge 12% interest. I'm not doing hard money. You guys, hold on, take a deep breath and let's break it down. Let's say you're borrowing $250,000 okay? And your projected profit is, I don't know , let's just say $45,000 alright ? You're borrowing $250,000 and if they charge 12% that means it's 1% per month, so you're paying $2,500 a month. Okay, and let's say you have the property for three months, so that's $7,500 that you're paying in interest in order to make a $45,000 profit. I think that's okay. It's a short term loan. It is not intended to be used long term . You've got to be flipping properties. You've got to be in and out three to four months. If you're doing bigger projects, great, the prophet better be bigger too. You've got to have better margins on those bigger, longer projects, but don't get hung up in, Oh my gosh, they charged 12% interest because I hear it time and time again and people are saying it just because they've heard other people say it. They've never actually leaked , broken down. What does that mean in terms of monthly payments and is that reasonable for the profit I'm going to make in the end because I say yes, which is why I use it. Another term you're going to hear in reference to hard money lenders or private money lenders is points. Now, points is something that is charged upfront . So let's say the lender charges two points. What I commonly see is two to three points. So if the lender charges two points, that means 2% basically, if you're borrowing $2,500 and they charge two points, that's $5,000 now, ideally, again, that's going to be wrapped up in the entire loan. If not, then yes, it's going to be something that you're going to be coming out of pocket at closing or you're going to borrow private money and cover that and any other carrying costs if you don't have cash for that. Okay, so points and interest rate, those are the two big things you're comparing when you're comparing hard money lenders. But there are other questions you've gotta be asking as well. And guess what? I'm going to share those with you. So look for a link in the show notes. Now, some of you might be thinking, well, why wouldn't you just use a traditional loan? So let's talk about the big differences. Okay. As an investor, you're having to act very quickly and close very quickly. One of the reasons why a distressed property owner would even sell to an investor is because it's a quick closing. So they're going to be cashed out in seven maybe 14 days. That's why we get discounted properties. Okay. Cause we can act fast and we're not requiring all these ridiculous repairs. We're not traipsing through the properties at all hours of the day. Like what might happen with a traditional MLS listing. So they want a quick closing. Traditional banks will take 30 to 45 days typically to close a residential loan. We don't have 30 to 45 days. We've got to get this done. Usually within seven to 14 days. Hard money lenders can act very quickly. Same for private money lenders. Okay. They are one in the same now. So I explained earlier that they did originally have some differences, but now there are private money lenders calling themselves hard money lenders. There are hard money lenders calling themselves private money lenders. Okay. Regardless of what they call themselves, the benefits of working with them are quick closing and usually only qualifying the property and not the borrower. And you can usually finance the vast majority of it, oftentimes without a required down payment, unlike a traditional loan. So those are the reasons why most real estate investors are utilizing hard money lenders or private money lenders. Okay? And that's why we'd done it for decades. All right, let's talk about what types of properties that you can use. Hard money line. Well, you can use them on all kinds of properties. Single family , multifamily, residential, commercial land. Again, usually the driving factors are you need quick money, you don't have great credit and you don't have a ton of cash to access. That's a prime opportunity for private money or hard money. All right ? Now they are not going to land on an owner occupied property, okay? They are going to land on specifically on investment properties, vacant investment properties. Something else to keep in mind is a hard money lender or a private money lender. They're not going to want to be in second lien position. What the heck does that mean? So let's say you want to save on the points and the interest rate and you're convinced that a traditional loan is the way to go. All right, so let's say you close on that traditional loan, you buy the flip and you're like, okay, now I'm going to go get private money for the renovations. It does not work that way. They do not want to be in the second lien position. Most investors don't want to be in the second lien position. Why? Because when there's a foreclosure, the person or the entity that's in the first lien position is going to get paid off first before the person or entity in the second lien position. And if there's not enough money to pay off both liens, the person in the second lien position is usually the one that gets screwed on that. So they aren't going to want to be in the second lien position, which is why it's best to take out a loan for the entire amount, either all of the purchase price and renovations and carrying costs or the full amount that they will allow. Okay. Let's say they allow 70 grand, it's a $100,000 ARV and they'll allow the 70% so they'll end up to $70,000 just like our previous example, take out the entire $70,000 that's a first lien of $70,000 okay. That's how to do that. I've seen people get caught there where they think, Oh, I'll just go get alone, I'll go get a hard money loan it . It just doesn't work that way and a lot of times people are stuck in a house that they own and it needs lots of repairs but they don't have cash to make the repairs so they think I'm going to go get a hard money loan. They can't do it. Lenders do not want to be in the second lien position. Okay, so please keep that in mind. That super important. Again, the terms are going to vary from lender to lender. The percentage of ARV that they will lend up to, for example, whether they require a down payment, how many points they charge, what their interest rate is. All of the terms are going to vary lender to lender. So use that. Awesome. 21 questions that I'm providing you in the show notes or if you're listening on my website, scroll down and download the 21 questions. You must ask every single hard money lender including private money. Okay. Remember we're including private money lenders in there as well. It's how you can make sure that you are comparing all of the terms and I'm going to say it apples to apples. Sorry I had to say it. So how do you find hard money lenders? How do you find private money lenders? Well first of all, you can do a Google search. Okay. Secondly, join local Facebook real estate investing groups. They are great resources for contractors, lenders, stagers, electricians, plumbers, everything. So for your local community. They are great resources for that. Additionally, along with the 21 questions, I've provided a few very useful links that take you to various directories and also you can get lenders to compete for you. And I'm going to share one of my lending links with you where you can put what you're looking for. You can put up all of the terms of your specific deal and get lenders to fight for you. Okay, so check the show notes or if you're listening on my website, scroll down for all of those links. All right you guys, I think I have pretty much capped out on what I can share with you about hard money lenders. We touched on the big things you need to know and the main things really are those questions that I'm sharing with you. Please use them. The feedback that my students get when they use them is, Oh my gosh, you are way more prepared than most people I talk to. Okay, so go in to these conversations prepared. I want to quickly before we end this episode, I want to quickly give you some big red flags to watch out for when it comes to hard money lenders and it's not the actual hard money lenders, it's the con people out there who are getting into different Facebook groups and pretending to be a legitimate hard money lender and telling people terms that sound really, really great, but then what they're doing is they're saying that you have to wire them money in order to proceed with their lending. So never, ever, ever. Why your anybody money? Okay, please hear that all money, any lender at all should be handled by the title company or whoever closes deals in your state. Whoever closes the transaction, that's who gets to the money. Okay? Do not wire anybody money outside of the transaction. All money needs to go through the title company or the closing agent. Okay? That's really important. I don't care how nice the person seems, I don't care how great the terms sound. There are people who do bad things, okay? And I don't want you to get taken advantage of, okay? That's all I needed to say about that. All right , you guys, that's it for today's episode. I have a couple of announcements, so one is if you aren't already following that flip, go to follow that flipp.com and register. We are on week five and they're completely done with the renovation and in a couple of days my stager, my incredibly talented stager is coming in and working his magic and then we get to list it. So super exciting things are happening there if you're not already follow it because I'm also sharing some really great tools with those who are registered for that video series. Secondly, if you are on the fence or at all considering joining my group of amazing women who are wholeheartedly chasing their dream of flipping houses, my awesome coaching and mentoring tribe. If you are interested at all or on the fence at all, it will behoove you to act now versus in 2020 because prices are definitely going up in January. So if you want in on the number one training, empowering, coaching, mentoring and support program there is for women flipping houses. That's us. All right , go to first, flip done right.com and then follow the three step process that is very clearly defined about how to learn with me in the tribe. Registration will only be open for a short time and then it will be locked down for the rest of 2019 so take action. If you recently followed that three step process, but you didn't act quickly enough and registration closed on you, which I've gotten some emails from a couple of you, reach out to me and tell me, Debbie, I'm freaking ready. Let's do this. I'm terrified, but let's do this. Yo, that's the point to be terrified and do the big scary thing anyway, because guess what? I am 100% here to support you and I do not take that lightly and I am not saying that just to say it. The support you get inside the program is unbeatable. How do I know that? Because it is the number one mission of my program. [inaudible] beatable support. Okay? There's nothing to upsell you on once you're in your in, all right? It's an awesome family and we love and encourage the heck out of each other. All right ? So do that. If you're sick and tired of not making the progress that you want to make, you're sick and tired of trying to figure it out on your own, and you're sick and tired of seeing people around you flipping houses when you know that you would create a much better product. Okay? All right you guys, thank you so much for sharing this journey with me and spending time with me today. I appreciate it. I really do . So until next time, go out there, flip houses like a girl. Leave people and places better than you find them and make it a great day. Bye y'all.