Buy Now Hard Money

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Browsing Posts tagged real estate investing

Part 6 of a series

I’m continuing a discussion of lending money to real estate investors. My company lends money exclusively to real estate investors in a specific geographic area. This allows us to be local to any property used to collateralize the loan, stay on top of legislative changes through our network of local attorneys and professionals, and to understand local trends, since all real estate is local.

How do you protect yourself from fraud or incompetence?  First of all, know who you are dealing with.  If you are lending directly to an investor, ASK AROUND!  It’s amazing to me how many people invest or lend with one real estate investor without getting references from other people who are in a position to know.  If you are going to put money into a deal, the people involved should be 100% transparent in their dealings.  Both from an ethical perspective and from a competency view.

  • Google them.  You can’t always find everything about them that way, but you might see a pattern one way or the other.  I once was approached by an investor for a loan, and when I googled him, it turned out he was a disbarred real estate attorney who had twice misappropriated escrowed funds.  Not someone I want to do business with.
  • Ask around.  Ask at local Real Estate Investor Associations.  Ask your network of attorneys and accountants.  Sometimes what they won’t say tells you a lot.  People are careful about giving bad references, but will usually give you enthusiastic recommendations if everything they know is positive.
  • Do your due diligence.  If you are investing with one person, you have to research the property ad market yourself.  If you are investing with a hard money company, the company does the due diligence.  Ask the company how much of that research on each deal is available for you to review.  If you are investing in a fund, the answer is probably none, because you aren’t investing in an individual deal, but if you are working with a company where you get to choose the deal your money goes to, you should be able to get information about the person and the deal.  
  • Go to each property yourself.  Each deal is different, and a property photo can be edited to not show the railroad tracks in the back and the auto junk yard next door. Pay attention to the neighborhood as you drive there, and leave the property in another direction.  
  • Trust your instincts.  I don’t want to get all fuzzy here, but if you get that uncomfortable little niggling doubt, then do more research to find out why.  You should reach the point at which your discomfort is resolved.

What happens if the borrower stops paying? Well, you are going to take the necessary steps to resolve the situation.  If you are working with a borrower directly, then you should talk with the borrower to get to the underlying problems and then determine the appropriate actions.    If you are working with a hard money company, the company will be the intermediary working with the borrower.  If you are in a pool, you won’t be involved at all, because you are not the lender, the pool is.  In a declining market, time is not on your side, but since this is a business transaction, you are not dealing with a homeowner, you are working with a businessperson.

How much of my portfolio should I allocate to lending?   I’m not a financial advisor, so you should speak to your own professional for personalized investing and allocation advice.  However, if you are a knowledgeable real estate investor yourself, you probably are comfortable with a large percentage in lending, because you have the expertise and resources to finish the project yourself.  In fact some lenders hope to take the property.  We don’t “loan to own” be be aware that some do.  If you have limited real estate investing experience, then limit your exposure by doing just one or two deals at a time.

These questions have partially addressed some of the risks in lending.  A much more detailed discussion is beyond the scope of an education blog post.  If you have interest and want to know more of the what if’s, then contact me.  It will help you decide if lending is for you.

Next post we will discuss the following questions:

•Should I form an entity to lend?

•Should I lend outside of my geographic area?

 •What about business loans instead of real estate loans?

Part 3 in a series

First, if you are considering investing funds in real estate without doing the actual leg work, there are many ways to consider handling that investment. But here are some things to consider before you take the plunge:

  • Am I comfortable investing in something where I won’t be there every day to see what’s happening?
  • Do I want to stay hands off, or am I dying to swing a hammer?
  • Do I want to keep my day job and grow my capital, or do I want to jump in with both feet and a blow torch and thaw out frozen pipes on a Saturday night?
  • Can I afford to quit my day job?
  • Do I simply want returns on my money, or would I rather peer down into that toilet bowl?

These questions sound slanted toward persuading someone to invest hands off. But the reality is that jumping in there is right for some, and not for others. Sometimes new investors don’t realize all the options out there, and they start into a project for which they are totally unsuited and unprepared. So this will start the discussion of hands-off investing methods.

My warped humor

Self-directed IRA’s are a great source of funds for hands-off investing, because these are funds you can’t access yet anyway. If you have a conventional IRA from a previous job, or a solo 401(k) from self-employment, you can use those funds to purchase or lend. I personally have a self-directed Solo 401(k), a self directed IRA and a self directed Roth IRA. If you google self directed IRA, you’ll get tons of information.

A few ways to invest in real estate without the day to day management issues:

  • Be the credit partner: you put up your signature and good credit history, and sign on a mortgage, so that the other partner can buy the property using your good credit.  In return for this you get a piece of the ownership, and a mortgage in your name, but usually don’t work on the day to day property management or rehab.  The downside to this is that you are risking your credit score and are on the hook for the mortgage should the property values plummet further.  And an unfinished rehab should your partner be unable to finish the project will leave you…..well you get it.  You’d be better off if you had some day to day knowledge of the management or the project and could step in if the unforseen happened.
  • Be the money partner: you put up your money to fund the deal, either the entire purchase and rehab, or the downpayment money for a conventional or hard money loan.  You are typically an equity partner, meaning you get a piece of the ownership of the deal, but don’t have to manage the purchase, the rehab, the rental or the sale of the property.  Before we go any further, please check out an article I wrote about protecting your capital when investing in real estate.  Sometimes when you are a money partner, you hold a mortgage in second position, so you should understand the ramifications of this.
  • Hire a property manager: you can hire a manager for property that you hold for rental income. Bear in mind that if you participate in a large property, you will almost always have a property manager, sometimes onsite.  But for single family and small multi’s, the cost to hire a manager is high, cuts into your cash flow, and is no guarantee of a trouble-free investment.
  • Lend the money: There are pros and cons to this strategy as well, and the next couple of posts will go into more detail on exactly this.  You can be the first to get paid, and sometimes participate in the profit in the deal at the same time.

Part 2 in a series

If you are starting out in investing, chances are you want to invest hands on. You probably want to either invest full time, or simply add to the family finances with a deal or two a year.  Deciding the type of investing that works for you, and how much time and money you should invest, are important decisions.

Choosing a direction and focusing will make a big difference in how successful you are.  One thing you should consider is the skill set needed for various niches in the investing world.

If you are an experienced investor, you know more about what you are doing and how much time and financial resources you should allocate to real estate.

But if you are just starting out, make sure you are not cashing in your kid’s college fund the first week.  Allocate a portion of your capital to real estate investing to stay diversified.  As you become more experienced and you have invested in a few successful deals, then you can increase the allocation to real estate.

If you prefer hands-on investing, then consider what niche you prefer.  Here are a few examples:

Buy and hold Multi-family investing:

Requires some cash for a downpayment, and thick skin.  Buy some books to learn about calculating cashflow BEFORE you start looking at properties.  Learn some property management skills BEFORE you buy your first multi.  It’s amazing how many people buy a multi without having any real understanding of how the numbers will play out, or what a landlord should and shouldn’t do.  For example, in Massachusetts a landlord can hold first months rent, last months rent, and a one month security deposit.  But in New Hampshire, the max is first months rent and a one month security deposit.  No pet deposits, either.  You need to know these things or they can trip you up.

Wholesaling:

Requires the ability to keep going no matter how many times you hear “no”.  You must contact a boatload of homeowners to find one who will sell you their house at a price low enough for profit.  Finding sellers is a numbers game.  Requires no cash except what you spend for marketing to homeowners.  If you can find good deals, you’ll have no trouble selling them to your local real estate investors who want to rehab.  Spend some money on a marketing course, and attend your local REIA’s to build your buyer’s list.

Rehabbing:

Make sure you can either do the work yourself (properly) or you are good at managing contractors.  Paying retail for contracting will kill your profit, or you’ll be bidding so low on a property that lots of people will outbid you.  Rehabbing requires the ability to find deals, the ability to evaluate how much you should pay, the ability to manage the rehab, the ability to market the house for sale and evaluate the price you should be listing at.  The last two can be handled by a real estate agent, but you must know the end value before you can make your offer.  If you don’t have the funds to buy cash, you’ll need hard money or a money partner, because banks won’t lend on properties in serious disrepair.

I’m getting a little long here, so I’ll discuss hands-off investing tomorrow.

The Massachusetts Supreme Court recently upheld a decision in the controversial Ibanez case.  To oversimply, many lending institutions assigned mortgages to other entities without the assignment paperwork having been created and recorded.  These new entities initiated foreclosure proceedings.  The assignments would then be subsequently created and recorded.  This was common practice for many instititutions, and it continued for some time until challenged in court in the Ibanez case in Springfield in March 2009.

The Supreme court decision simply confirms the previous ruling, and is not really new information.  Some lenders will now need to initiate foreclosure proceedings all over again, running up costs substantially.  And this brings us to the $64,000 question:

What if you bought that house that was foreclosed improperly?  And then put a lot of money into it?  Do you own it?  What if you bought it, rehabbed it, and resold it?  Who owns it?

If you as a real estate investor bought owners title insurance at the time, you should be covered, at least financially.  The situation may generate additional headaches, but they won’t be insurmountable.  The title insurance should take care of most of the problems.  Certainly if you used a hard money lender, they bought lenders title insurance.

But if you didn’t?  What a mess!!!  This ruling doesn’t cover only those properties being foreclosed going forward, there is no clear guideline for how far this could go backwards in time.

So another lesson learned:  Real estate investors should alway buy owners title insurance.  It may seem expensive, and just one more cost to your deal, but compared to paying for a house that the court says you don’t own, it’s a drop in the proverbial bucket.

Below is a link to the ruling.  And for those of you are going to respond and tell me that my explanation up above lacks detail and is not 100% accurate because I left out the minutiae, yes, you’re correct.  But it was to illustrate a point.  There are lots of sites available tearing apart the details of the Ibanez ruling.

http://www.scribd.com/doc/46471786/Ibanez-Case