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Anybody done some "hard Money" lending?
Old 03-24-2017, 11:24 PM   #1
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Anybody done some "hard Money" lending?

So in construction contractors will look to traditional lending first. Banks and such. Then they will look to hard money lending. During the Great recession there was 25-30% rates out there.

I was chatting w/a new contractor and they asked me about finding hard money. Typically Realtors will know investors or a group of investors. And this is where i steered her.

But I was thinking she only wants $50k. And I'm thinking about a few hundred thousand in MM accounts. I'm too risk averse but it's tempting

What's the worst that can happen? (LOL)
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Old 03-24-2017, 11:56 PM   #2
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What's the worst that can happen? (LOL)
You lose $50,000
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Old 03-25-2017, 12:10 AM   #3
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We do hard money lending. Mostly we loan on properties that are already built and the flipper has a deal lined up at such a great price that even if the deal goes bad and we have to foreclose we come out ok. That said, we learned that loans that were too small were a bad deal - the cost to foreclose is the same on a $30k loan as on a $100k loan. If you loan at a 70% loan to value rate then the $30 property is worth less than $43k. If it costs you $15K to foreclose then you have a $43K property you have $45K in. oops. Add the fact that the lawyer wants his money up front , that it make take a year or more to foreclose; to say nothing of how long it will take to sell the foreclosed property, and the stress of the whole foreclosure process.... So we now own a property near the Oregon coast we pay taxes on and maintain.

Then there was the lending company that we funded that evaporated with our funds.

Then there was the second mortgage we did on a condo that the borrower never made a payment on - so after giving him a bunch of bucks we had to try and insure it after he let the insurance lapse and then pay large sums to push a foreclosure so our second wasn't extinguished if the holder of the first foreclosed.

We did do a real substantial loan on a new construction - it is all built and it just sat on the market with a $815k price tag. It was taken off the market a month ago. We are still getting our monthly interest only payments. We trust our borrower and have a long relationship with him, so fingers are crossed.

We've enjoyed making the loans; but we enjoy being landlords as well, so maybe it takes a certain masochistic streak..
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Old 03-25-2017, 12:34 AM   #4
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Thanks Calmoki. Like I say it's tempting. But the rate is high for a reason. New builder, new property, new product on the market, no/little track record.....

$50k @ 30% is a bunch of $$$

But like you say it costs a lot to follow through

I know another contractor that has built his own funding source through vendors & friends. Less cost than hard money. Last time I talked to him he was trying to work the buy & hold strategy instead of buy & sell. Which would require a longer investment time frame
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Old 03-25-2017, 03:24 AM   #5
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Dunno about hard money, but we carried a second mortgage on a property we sold 15 years ago. Owner wanted to re-fi (after 2 years) and asked us to attach the second to the new loan (which would have watered down our leverage). Said no, unless they paid off half. SMART MOVE. He bailed less than a year later (bankruptcy). Our lower position made it unprofitable to foreclose, so we walked away.

Lesson learned-no more seconds. Might consider a first, under right circumstances, but it would have to be a nice rate to compensate for the risk.

Have loaned to family twice. One paid, one did not. At least the "did not" never asked for money again. Kind of like insurance-loan a little, and they go away.....
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Old 03-25-2017, 09:08 AM   #6
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Thanks Calmoki. Like I say it's tempting. But the rate is high for a reason. New builder, new property, new product on the market, no/little track record.....

$50k @ 30% is a bunch of $$$

But like you say it costs a lot to follow through

I know another contractor that has built his own funding source through vendors & friends. Less cost than hard money. Last time I talked to him he was trying to work the buy & hold strategy instead of buy & sell. Which would require a longer investment time frame
30% ? I wouldn't touch it. We are in the 11-12% range, which is probably low, but our borrowers have long association. 30% sounds like a loan to someone with no experience, no tools, no skin in the game... I look for loan security - do I get a first on the property I'm lending on? Construction loans are scary - do you really want to end up with a lot with a 1/2 built house and a bunch of unpaid contractors if things go bad?

Our flippers hold some of their places - the norm is they keep our loan for just over 6 months, during which time they spruce up and upgrade the property, then re-finance for a better interest rate and to reap the increase in equity.

Hard money loans are normally short duration, which means you may pull money out of the MM and get it back 4 months later.
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Old 03-25-2017, 09:27 AM   #7
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Concentrated risk is concentrated risk.

If you want concentrated risk, buy specific high yield debt. Or go into the P2P lending market. Or by options. Or perhaps stocks on high risk positions (Sears anyone?).

Or go big buy options on bonds of a company in a high risk position.

Far more transactional and easier to get away from if it goes bad.
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Old 03-31-2017, 09:37 AM   #8
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Hard money lending has worked out very well for us. We do it through a brokerage firm that has been in this business for decades. Lender rates are 9.75% (were 11% when we started but dropped due to low rate environment). Assuming you have a first trust deed, worst case is you have to foreclose on a partly finished property and then finish it or dispose of it at a deep discount. We have about 20% of our overall portfolio in this and it has averaged a little above 8% annually. We have never had a loss on a loan, nor have we ever had anything worse than one month's late payment, accompanied by a hefty late fee. Our broker selects his borrowers carefully and personally inspects the properties before extending a loan. I would only do this through an experienced broker; would never do this on my own as I don't have the background to find good borrowers.
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