July 30, 2020

How to Not Get Scammed by a Hard Money Lender (and other FAQs)

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In this episode I'm answering some of the most frequently asked questions around hard money. 

Questions like:

  • How to protect yourself and not get scammed
  • What are typical points and interest rates to expect
  • What happens if you default on the loan
  • Are there payments along the way

...and more, 

If you haven't seen the Facebook live I did that broke down how hard money works, go watch that after you listen to this. (You can watch it by clicking here.)


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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 00:39
Hey, thanks for hanging out with me today for a little bit. I hope that whatever you've been up to today, you've had an easy one. So I want to start off this episode by sharing a big win of one of my awesome coaching program members. All right, so one of my students recently went under contract on her first flip. And it happens to be her first and second flips. Because check this out. So she is buying a house. Shout out to you, Dina. She's buying a house that comes with a second lot. All right. And it comes with the second lot because there's an encroachment that spans both lats and that encroachment is an old shed that has a cement slab that needs to be demoed. Okay, so once that is demoed and removed, that shed and slab, there's no encroachment, and she's got two freaking lots. And she is renovating the first house. Okay, so she's renovating the existing house. And then on top of that, she went and did all this stuff. Like she's amazing, right? She's just taking action. She went and found an old house that is being sold to be moved. All right. So she found an old house that she is going to move on to the second lot. And boom, we go from flip, number one, one house flip to two house flips on her very first deal. Amazing. I think that's such an awesome story. Totally inspiring. And yes, it can happen. We're in one of the hottest markets in the country. So if we're finding deals here, you can find deals there. All right, you've got to be creative. Sometimes. She could have just said Oh, screw it. I don't want to even try to figure this out. It's a house on two lots. There's an encroachment. I don't know how to navigate that. No, that's too hard. I want to slam dunk. I want a super easy cosmetic flip for my first one. Okay, well, beggars can't be choosers. And instead, what she did was she put on her CEO cap, right? Because if you've got a business, you're the CEO of your business. And she figured out a way to make this deal work. And it's going to be a great first deal for her. And she's learning tons. All right, I'm so excited about this deal, just to be a part of her amazing journey. And this first flip is going to be really exciting. I know that story is going to inspire a lot of you. So I thought it would be really important to share that. And also give her a shout out because she's making things happen.

Unknown Speaker  03:44
Alright, so let's get into today's episode. So I get so many questions about hard money lenders, and some of you guys are just making it be something so scary. And it's just not it's just the name hard money is scaring you. Okay? Just call it financing. All right, just call it financing. It happens to be financing for fix and flippers, okay. So what you are doing is you are borrowing other people's money in order to flip a house and make a profit. All right? It doesn't matter that they're called hard money lenders, right? And they're even shifting to call themselves private money lenders because they know that that has a negative connotation. get past that, all right, because it's really important financing that you can use in your business to make a profit and minimize your risk. All right, so let me answer a few questions that I've received recently, around hard money loans, alright. So what is a hard money loan? Typically is a loan that is asset based meaning the lender is qualifying the asset, the house you are buying more so than they are qualifying the borrower. I have been doing this since 2008. I've never shown tax returns, I've never shown income. I've never shown bank statements. I've never had my credit pool. Okay. Yes, that is entirely possible. And I have students doing the same thing. So hard money should be asset based. All right, that is the whole point. Okay. So they're qualifying the property, not so much the borrower? Great. Question number two, what are some typical points and interest rates that I can expect, Debbie?

Unknown Speaker  05:50
All right, cool. So

Unknown Speaker  05:53
typically, you're going to see anywhere from one to five points. That's a pretty broad range, what you'll usually see is around three, maybe a little bit higher for beginners, and then it will drop down as you get more experience.

Unknown Speaker  06:13
And now some of you are thinking,

Unknown Speaker  06:14
all right, what's the point, Debbie? So a point is one percentage of the amount borrowed. So if I borrow $100,000, one point, or 1%, of that hundred thousand dollars is $1,000. Okay, if it's four points that they charge, that would be $4,000. All right, now that we covered points, let's talk about interest rate. So I've seen anywhere from 8%, up to 15%. Now, it's commonly around 11 to 12%, for the loans I'm getting, because, again, I'm not doing a downpayment, I'm not doing I'm not showing credit, I'm not showing income, I'm not doing any of that. This is purely asset based. And it's typically around 11 to 12%, which that is fine, because it ends up being about 3%. Okay, if you missed the video on my Facebook page, please go watch it, I break down what that means and how what that looks like. Because people automatically freak out at 12% interest, you're not holding the property for 12 months, hopefully, it should be three to four months maximum. Okay, that means it's three to 4% that I'm paying to make a really great profit on the back end. Okay, so go watch that video. I don't want to get too far into that here. So the range again, eight to 15%, typically around 11 to 12% is normal for a true asset based loan. Okay. Now, am I going to have to make payments along the way? So the answer there is typically Yes. Typically, you're making interest only payments along the way. Not all the time. Some lenders don't do that some lenders collect on the back end. All of these lenders do things differently. Okay, so that's a question you need to ask two terms that are commonly interchanged by various lenders, our LTV, which is loan to value and LTC which is loan to cost this is a question you need to specifically ask the lender because like I said they use these terms interchangeably and they are not interchangeable terms. One means one thing and the other means something entirely different. So LTV is based on the after repair value or the ARV. Okay, so if they say that they loan 70% of the loan to value, then that means that they'll lend 70% of what the house will be worth afterward. Okay, the ARV. So if the house is going to be worth $100,000, if they'll do a 70% LTV loan, they will lend you $70,000.

Unknown Speaker  09:23

Unknown Speaker  09:24
now, LTC is different. Okay. Remember, LTV is based off of what it will be worth once the repairs are made. lt C is based off the cost. So it's loan to cost meaning the acquisition price or the purchase price of the property, the cost of it. All right. So if it's 70% loan to cost, then if the property is going to be worth $100,000. That doesn't matter if you're paying 50 For the property, they're lending you up to 70% of that 50,000. So they're only going to lend 35,000. So you're looking for LTV lenders. Okay. If you didn't pick that up, you definitely want LTV loans, all right, loans that are based off of the after repair value versus the cost of the property. All right, another question that I get is, will they take a second lien position? Meaning, let's say you already have an existing loan on the property, but you need some money to renovate that property? Can you go to a hard money lender and get a loan for that renovation amount, if that means that they're going to be in the second lien position? No. hard money lenders will not take a second lien position if they are not in the first position as well. Alright, so in the past, I've had it happen, where I have a loan with a particular lender, and I end up deciding later on. Yeah, man, I want to borrow some of that rehab money too well, because they already had a loan in the first position, they were willing to give me a second mortgage, a second loan on that property, and take that second position on that loan amount. All right, but only because they already had first lien position. All right, next question. The last two are really big questions. And I think if people understand this more, they will feel safer, using hard money or even considering hard money, like making the phone calls, right? So the first one is, what happens if I default on the loan? Let's say worst case scenario, right? Because that's where your brain goes in your brain has to understand what's the worst thing that can happen. But don't let it get sucked into a rabbit hole of Oh, my God, it's going to happen? No, but it's good to know worst case scenario, right? All right, worst case scenario, you stopped paying, and you can't afford payments anymore, and everything has gone to crap, and you're screwed. Okay? So what happens then is they take back the property, that's it, because you're working with lenders, and you're getting a non recourse loan, non recourse means they cannot seek the borrower for further compensation, the borrower is not personally liable. So even if they take that house back, and the value of it does not cover the full value of the loan amount that you defaulted on, they cannot come after you. That's it, they just take the collateral, that's it. Okay. Nothing more. So worst case scenario is they take the house back. Okay, you go home with your tail between your legs, and be bummed for a little bit, and then get back out there and try again. Alright, and then finally, how do I protect myself? And trust that that hard money lender, or that private money lender, whatever that lender is legit? totally valid concern. Right? Absolutely valid concern? Heck, I have it for traditional lenders for crying out loud. So I would also have it for some rando on the internet who says they lend money? This is how you protect yourself. You never, ever, ever send money to anybody. The only entity that handles all of the money for any transaction is the title company, or the closing company

Unknown Speaker  14:17
or the closing attorney, whatever you use in your state, the only entity that handles the money, any money, all money related to a transaction is the closing company. That is it. Don't wire money to anybody. Don't go meet somebody and write them a check. No, no, no. All money for any transaction needs to be handled through the title company, period. And that's how you protect yourself. That's it. It is as simple as that. All right, you guys I really do want you to embrace the notion of using other people's money. For a win win, you get to make a profit and they get to make a little money, guess what you make more than they do. Okay? embrace it. It minimizes your risk and it gets you in the game. And this is a really fun game to be in. Alright, that is it for today's episode. I hope that you have an amazing rest of your day. Thank you for spending some time with me. It means a lot to me. It really does. Now, go out there flip houses like a girl. Leave people in places better than you find them and make it a great day. Bye y'all.