Buy Now Hard Money

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The other night I received 3 emails from the same person, but through various sources – my website, and two networking sites – as well as a voice mail on my 800 number, all at about 1:30 in the morning.  (That would be 10:30PM Pacific time – and no, I wasn’t up working,  I was dead asleep.)

The caller had the last name of “Buys”, which made me think “scam”.  I won’t reveal her first name to try to protect her privacy in the event she is a victim.  According to her emails, she was from a state on the west coast.  (I lend money in Massachusetts and New Hampshire, and no where else).  She had had numerous phone conversations with two people at a company she found on the internet, and  had sent an advance deposit in the amount of $1200 to secure a loan from a company called “Hard Money Lender”.  This company had the same business address as mine in Tyngsboro, MA.  Including the suite number.  She sent the money to an address in Canada.  CANADA?!?!!??

Then, according to the emails,  they stopped returning her calls as soon as she sent the money.  She grew frantic.  She started researching.  ( Now, she starts researching – what happened to before she sent the $1200?)  Anyway, she found my website, by googling the address and hard money, I guess, and was asking for my help to get her money back.  Could I walk across the hall, or was I affiliated with them?  She said she hoped I could talk to them and help get her money back.  At this point I was sure it was a scam. 

But then I listened to the voice mail, and wasn’t so sure.  I returned her call, and explained that not only was there no other hard money company at my address, there was no other mortgage company at all.  I also explained that most of my customers know me through networking before they apply for a loan.  She said it was a personal loan.  (This gets better and better, since I don’t make personal loans.)  She had notified the Attorneys General in Massachusetts and in the state where she lived.  I said fine, if they call me I’ll be happy to tell them what I know, which is just about nothing.  She said I sounded legit (ya think?) and was simply hoping I could help her.  

I explained that I couldn’t, that anyone could scrape an address off of my website, and that I had no affiliates on the west coast or in Canada, and that my website is plastered with “Massachusetts and New Hampshire” and “First position mortgages only”.  She asked me “Aren’t you concerned that someone is using your address”?  Concerned, yes.  That’s a risk you take on the internet.  Anyone can say anything they want, or use any information they find for any purpose they want.  Can I do anything for her?  No. 

So what do you think?  Was she trying  to scam me, or simply desparately looking for any help she could get?

PS:  This is a good example of why self-employed people should not use their home address on their websites or marketing materials!!!

First the disclaimer – this is not legal advice, I am not an attorney, this story was told to me by the private lender involved. It is not verified, I can’t even reference the case, so consult your own attorney about your own deals!!!

The scenario: Private lender was approached to lend money to a company. The company owned a parcel of land in New Hampshire free and clear, and wished to borrow against it. The private lender agreed, and had the manager of the company sign an affidavit stating that this was a commercial purpose loan. The company intended to build on the parcel to for a new business location. The lender did not walk the entire 100 acre parcel, since it was winter and snowy.

The company wished to borrow the money for 3 years, however, the private lender agreed to a one year term only. The borrower agreed, the papers were drawn up, and the closing attorney (not a paralegal at a title company, but a real estate attorney) explained all the terms and conditions to the manager of the company at the closing table.  The loan closed.



One year later, the company couldn’t make payments, the loan went into default, and months later after working with the borrower,  the private lender initiated foreclosure.  The company sued the private lender to stop the foreclosure.  

In court, the manager of the company accused the private lender of changing the loan, saying it was a three year term, even though he signed a promissory note for one year.   In addition, the company representative said this was a residential loan, that the private lender was not licensed to do residential loans, and that the private lender should have known that the manager intended to build a house for his 85 year old grandmother on the property. The reason the private lender should have known this (according to the borrower) was that there was an old cabin far back on the property in the woods.   Are you kidding me?    The private lender had not walked the entire acreage because there was snow cover, and so never saw the cabin. 

Now when a private lender ends up in court, the judge is seldom sympathic to the lender.  Usually the other party is someone who feels wronged by the lender, and the judge is more sympathic to that party.  In this case, it was different.    The other party was a company, the company representative signed an affidavit stating that the loan was for commercial purposes.   The judge found for the private lender, and the foreclosure went forward.

Now, no one wants to go to foreclosure, not the company, and not the private lender.  But that is the unfortunate circumstance when a borrower defaults.   That is the private lender’s only remedy. 

Why am I telling you this story?  Am I expecting sympathy for the lender?  Not likely.  It is to illustrate why private lenders are not doing residential loans anymore since the advent of the SAFE act.  The SAFE act mandates licensing for residential mortgage lenders.  The licensing requirements are expensive and extreme for most private lenders, so they have stopped residential lending.  Sometimes borrowers try to get private lenders to bend the rules.   The above is a good example of why they won’t. 

So when you make an offer for a rehab property in disrepair that you intend to fix up and resell, this is a commercial transaction.  Now you know why we want you to take title in a company, and sign paperwork that you won’t ever live in the property.  We don’t want misunderstandings like the above.

It’s not often anyone takes the time to write a glowing review.  Especially in the hard money business.    So when it happened, I just had to share, because it made my day.  The writer prefers to remain anonymous, which of course I respect, but will speak with individuals considering New Hampshire hard money investing and Massachusetts hard money investing if they want to verify that this is real and I’m not just making it up.A++ 

“I would be happy to give Ann an A++ reference.  I have been lending through Ann for several years now and she has always been outstanding.  She’s meticulously organized, really stays on top of all the issues, knows the real estate business in and out, and is very forthright and reliable.   The private lending business isn’t for everyone, but if you’re looking to enter the arena, working with Ann is definitely a great place for you.  Without reservation, I can highly recommend her.

When a real estate investor buys a distressed property with the intention of rehabbing and reselling to an end buyer, those investors are frequently not agents, but they often work with agents to purchase the property.  They also get CMA’s from those agents to evaluate the end value of the property after rehab.  The end value is the beginning point of evaluating the rehab budget and how much they can afford to pay for the property. 

Their offers are not usually based on the list price, they are, and should be, based on the end price, working backwards toward the offer price.  Starting from the end price, they will work backwards taking into account the cost of

  • Rehab budget w permits
  • Contingency for unknowns
  • Finance costs
  • Two sets of closing costs
  • Carrying costs including taxes, insurance, utilities, HOA dues, grass cutting, snow plowing, trash removal, etc
  • Let’s not forget entrepreneur’s profit

If they call me for funding, the first thing I look at is end value, called the ARV, or after repaired value.  Often the investor supplies me with the CMA provided by their real estate agent.  This CMA is done for the purpose of estimating ARV.  I look at sold comps in the immediate area of the property in question, in the same size range and hopefully the same style/age.  In New England, there is frequently a huge variety of properties in the same area, so exact comps are admittedly difficult.

But time after time, I find that the agent totally ignored properties close to the subject property that are viable comps.    Included in the CMA are properties that support the end price they want to convey, but may be in a completely different part of town.  They may be larger, have more bedrooms, have more bathrooms, have more garages.  That’s ok if the agent adjusts for those additional features.  But skipping over the houses that sold for much less than the target price is not presenting an accurate picture of the neighborhood.  Perhaps they are in dated condition, perhaps they are bank owned or short sales.  But they can’t be ignored if they are truly comparable in location, size and relative condition.   

What’s really distressing is when a very close comp in size, amenities, condition and location is not included in a CMA because it doesn’t support the after-repaired price the agent wants to present.   The agent considers it to be an anomaly, and so leaves it out.  The investor-buyer relies on that CMA to work backwards toward the offer. 

What happens as a result? 

  • The agent gets their commission on the original purchase.  The borrower then tries to get funding for the deal, and the hard money lender looking at the deal values the ARV much lower than the borrower does.  He won’t lend on the property, and the borrower loses his deposit. 
  • Or, alternatively, the borrower closes with his own or private money, rehabs the property, and then it doesn’t sell because his selling price is too high. 
  • Or let’s say he does a beautiful job on the rehab, gets it under contract to an end buyer, but the end buyer can’t get financing because it won’t appraise for the selling price.  I guarantee the appraiser saw those lower comps, and appraisers are very conservative these days.

In any case, the investor/buyer is in trouble.  This seems pretty short sighted to me, because that investor won’t be back to buy another one. 

I lend to real estate investors exclusively, we don’t lend to homeowners, so the focus of my business is pretty narrow.  But those investors resell to homeowners, so the end after repaired value is a critical component.  I always pull my own comps when I evaluate a property.  And I encourage my borrowers to ask their agent to pull ALL sold properties in a small radius in the same square footage range within the past 3-4 months.  The borrower can then go through and see all sold properties and get a good perspective on the neighborhood.

A real estate investor is reponsible for creating a finished product with the end value that will sell.  It’s his money on the line.  The agent doesn’t have their own capital at risk, so the final value he/she comes up should always be subject to the investor’s analysis and judgement.

When you, as a real estate investor or rehabber, take out a construction or rehab loan, you are probably going to come across the phrase:  Draws taken in arrears of construction.A rrears

I think this needs some elaboration, because I think this is one of those phrases that says a lot in a few words.  Borrowers may not understand all the implications and how it will effect their transaction.  Sort of like “Time is of the essence.”  Sounds innocuous enough, but has a huge impact if you don’t get it.

First, let’s outline a scenario.  You are buying a property in disrepair to fix up and resell to an end buyer.  You borrow from a bank (unlikely these days) or a hard money lender (more likely these days) the funds to acquire and fix up the property.  You probably had to put down a significant downpayment towards the purchase, and then you received the rest of the purchase money at closing, with the repair funds held for future disbursement.  They are usually disbursed “in arrears of construction”. 

So you close on the loan, and the next day you call your lender and the conversation goes something like this:

You:  “I need a construction draw to purchase materials and start the rehab.” 

Lender: “Sorry, your draws are in arrears, as outlined in the commitment and loan docs.”  (Lender is thinking “Did you actually read anything I sent you?”)

You:  “What do you mean?  How can I start the project without money?”  (You are thinking “Boy, I should have expected this loan shark to screw me over.”)

Now you are both in a bad position:  You have a project you can’t start, and the lender has a borrower who can’t deliver as promised. 

Construction inspectionSo here is what you need to know:  “In arrears of construction” is exactly the opposite of “in advance of construction” – it happens after that portion of the construction is complete.  Usually you will do a part of the job, then get reimbursed for that part of the construction after it happens.  Then you do the next part of the job, and get reimbursed for that next part of the construction after it happens.  The final draw is usually disbursed after the certificate of occupancy is issued, or whatever formality you get from the building inspector in your area.  You will need to supply lien waivers from your subcontractors and copies of invoices/receipts and sometimes photos.  Usually a lender will inspect at each draw, or sometimes send an inspector. 

This is not particular to hard money lenders, this is a process that happens everywhere in construction, both residential and commercial, if there is a construction loan involved. 

Occasionally, if you paid actual cash for the property, the first draw can be disbursed when the construction loan is closed, because there is enough equity, and “skin in the game” to give the lender security for that first draw.  But your second draw will be made after you have done the first part of the construction, and then some more, to bring you to where the lender is reimbursing you for construction already done, not advancing you funds to buy materials and labor before it happens.

And usually these draws are taken by line item.  For example, if you have allocated $10,000 to electrical, and only the rough-in is complete, you will only be disbursed a portion of that $10,000.  And so on for each line item.

I’ve created a spreadsheet that is free to download.  It is a very simple draw spreadsheet, nothing elaborate, that will help you understand and present your construction draws.  You input budget items and the dollars allocated for each item.  Then as you request a draw, you input the amount of that item that is complete, and the spreadsheet shows the total of each draw request and the balance you have left to draw for that item.  You can send this spreadsheet to the lender with your draw request, and it makes you look professional, and gives you both a common reference.  Here is the link, you may share it with anyone you wish.  Download and use at your

Hard Money Myth #3

Hard money is too expensive.

The reality:

Hard money is likely going to be more expensive than that advertized by traditional lenders, i.e. a bank.  However, bank financing may not be an option, for any of the following reasons:

1.  A quick funding date may be impossible for a bank to meet.

2.  A rental property may have just recently been leased and is not adequately seasoned.

3.  The property condition may preclude bank financing and the borrower intends to rehab and resell quickly.

4.   The borrower is self-employed and has difficulty documenting his income.

Hard money is not the expensive option if it is the only option.

Finally, hard money is not too expensive if a borrower can use the funds to take advantage of a deep discount off the property purchase price for a fast close or to buy out a partner who needs quick cash.

The cost of borrowed capital is only one of the factors to consider.   Liquidity, speed and other factors play into the equation.  An equity partner will almost certainly be more expensive than borrowing hard money.  And the quicker you exit a project, the less expensive the hard money, where an equity partner will typically take the same percentage regardless of the time frame.

Hard Money Myth #2

Borrowers are desperate, in trouble and without options.

The reality:

Most hard money borrowers are solid, successful businesses that have circumstances or opportunities that do not fit well into the rigid structure of institutional lending.  They choose the hard money route because

1.  The property they are buying doesn’t fit into conventional lending standards, or

2. The conventional lender will take too long for the opportunity in question, or

3. the hard money lenders are flexible in structuring transactions.

In our case, since we lend hard money only to investors and companies on properties in NH and MA, and not to homeowners, almost all our borrowers are savvy business people, who look at hard money as a tool in their belt.

Hard Money Myth #1:

Hard lenders are a bunch of disreputable loan sharks trying to prey on the unwary.

The reality:

Most hard money lenders are simply business people – not predatory lenders.  Most principals in hard money lending organizations are successful businessmen or women with backgrounds in law, accounting, banking, real estate development or real estate investment.  They provide a needed service.  Most are lending their own money along side money entrusted to them by friends, relatives and close associates.  Making loans is their business, and a bad reputation is counter productive to that effort.  Referrals are the life blood of the business as most are small organizations with a limited advertising budget.  That is not to say there are not unscrupulous people in the business, as in any business.  However, their numbers are small and dwindling as a result of technology.  A quick Google search will often expose the bad apples. 

Ask around for references, either among other real estate investors you do business with, or real estate agents, mortgage brokers and real estate attorneys.  Your local REIA will provide a wealth of information about who’s who in your local area.  In Massachusetts and New Hampshire, there are a limited number of local hard money lenders, so it’s not difficult to get information on any of us.