Real Estate 034: Real Estate Hard Money Lenders

In previous blog posts, we have discussed various financing strategies such as conventional lending, private money, home equity line of credit, and seller financing. You may have also heard the term hard money lending (HML) from Real Estate meetups and forums. When compared to a private money lender, hard money lenders are individuals or group of individuals that lend their money based on the value and cash flow of the subject property and not the net worth, credit history, or liquidity of the individual borrower. 

Hard money lenders are typically more sophisticated and have industry experience. As these loans are being made based on the asset, there is inquiries and reviews performed on the property through an inspection, drive by, and/or walkthrough, as well as the business plan, such as the rehab bid and ARV projections through an appraisal, Comparative Market Analysis (CMA) or Broker's Price Opinion (BPOs).

The benefits of working with Hard Money Lenders is that they are professionals that understand the needs of the deal. In a hot market, speed is crucial, and some hard money lenders are able to close in 7-10 days from signing the purchase agreement. 

When interviewing various Hard Money Lenders, they will generally give you a fee sheet that include their sample terms as follows: 

• Amount Financed - Maximum purchase and/or rehab price

• Interest Rate - APR (yearly) interest terms on the deal (Recourse vs Non-Recourse)

• Origination Fee or Loan Points - Pre-paid interest where 1 point equals 1% interest of loan amount

• Closing Costs - Escrow Fees, Document Fees, Notary Fees

• Loan Term - Duration of the loan and any allowable extensions
  

Below is a sample pre-approval I received from my Hard Money Lender:

"Hello Bo, we have you pre-approved you at 90% of purchase price plus 90% of repairs, subject to appraisal requirements for a combined purchase price plus repair amount of up to $225,000.  Final approval is subject to review and approval of the property, budget, appraisal, and final funding source approval.  The interest rate is 10% fixed, interest only monthly payments, no prepayment penalty.  

There is a 2% origination fee for repairs under $50,000 and 2.25% origination fee for repairs exceeding $50,000 plus $385 processing fee and third party closing costs. (Higher pricing for loan amounts under $100,000). This loan term will be a six month loan with an automatic six month extension, so it can go up to 12 months in total.

The monthly extension fee beginning in month 7 is the loan amount times .0033 per month and is added on to the pay off at the end of the loan for any of the extension months used for months 7 through 12.  Attached is a preapproval letter for a purchase price up to $175,000, leaving $50,000 for rehab.  Please let me know if you have any questions or if you would like a letter that is property specific. Thanks!"

Based on my experience, I noted that the hard money lending process was as follows: 

Step 1  – Pre-approval. 

Step 2  – Place a deal under contract within the price range noted in the pre-approval.

Step 3  – Inform the HML of the subject property under contract and outline of estimated rehab costs (if any) along with ARV. 

Step 4  – Appraisal, CMA, BPO, or walkthrough of subject property.

Step 5  – Underwriting of deal and adjustments (if any) to purchase/rehab loan amount.

Step 6  – Final approval and closing.

Step 7  – HML puts the loan amount into escrow at the title company or the lender will schedule draws (varies from lender to lender) to be taken upon successful completion of the rehabs in various tranches. 

Step 8 – Complete rehab and obtain long term financing or sell to a buyer to pay off HML.

In conclusion, Hard Money Lenders are a great source of capital, especially for borrowers with experience, good deals and a need to close fast. 

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Real Estate 033: What is Driving for Dollars?

For investors who are just starting out, there are many great options to gain experience and get your feet wet with little to no money out of pocket. I recently attended a 3-day real estate investing bootcamp where they introduced various concepts from buy and hold, fix and flip, wholesaling to multifamily. One of the strategies mentioned during the bootcamp was "driving for dollars".

For those who are not familiar with the term, driving for dollars describes a method whereby investors drive around neighborhoods and look for properties that look distressed or vacant and contact the owner of the home to make an offer on the property. You may have seen these types of homes in your very own backyard. They may have broken/boarded up windows, tall grass, and no signs of tenants/homeowners. This is a very manual method of lead generation, and as you may have guessed, not the most scalable and time efficient method either.

Wholesalers typically may use lead generation software to identify non-owner occupied homes that are in foreclosure, financial distress, short sales, FSBO (For Sale By Owner) among others to conduct their direct mail campaign and qualify leads. However, sometimes people hire others to assist in their efforts. A subset of driving for dollars can be referred to as "bird dogging", where these individuals find the distressed properties during their drives, and send it to a wholesaler or investor willing to pay for that lead. 

Note: Please make sure you do your proper due diligence and check with local laws and regulation to ensure that what you are doing is allowable/legal. Varies by State.

Once you have found a lead, you now need to contact the seller to figure out their motivation and "qualify" that lead. Lead qualification can quickly be done with three questions:

1. Tell me about your property - Let the seller do the talking, and you will realize they may sometimes reveal much more than you sought. I have often encountered sellers disclose the amount of debt (e.g. line of credit, mortgage) remaining on the home, personal distress (e.g. death, divorce, or health issues), and other information that will help you understand the seller's motivation as well as strategies to purchase the property. For example, a seller looking to quickly move to another state may entertain a buyer taking over the property "subject to" the existing financing. On the other hand, a seller needing to pay off an existing debt may consider a full payment of the existing debt, and owner finance the remainder of the equity.

2. What would you like to be the outcome? - This question will reveal what the seller has thought of in regards to terms and price. If you listen attentively, you may find the seller negotiate against themselves and give you more equity that you thought possible. Remember we are looking for sellers that need to sell, not want to sell. 

3. If we were to reach an agreement, how fast do you want to close? - This question will separate the tire kickers from the motivated sellers. If a seller response with "less than 30 days", this is a sign that they are willing to hear reasonable offers and proceed with the transaction. The last thing you want to be doing is deal with sellers who simply "want" to sell may throw out unreasonable terms or price that eventually waste your time.

Once you have qualified the lead and negotiated the deal, place it under contract and control the deal. Maintaining control of the deal is the most important part. Once you have a good deal in your hands, now you have the option to use various strategies such as wholesale, fix and flip, or buy and hold. Since you have performed your own lead generation efforts without a middle man, it is more than likely that there is extra equity in the deal. In conclusion, driving for dollars is a great way for people who are starting out to network with other investors by sending them leads, and or acquire their own property with little to no marketing costs upfront.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!

Real Estate 032: Bookkeeping Tips for Rental Properties

If you are like most real estate investors, you may find joy in the "hunt", finding deals, networking, and growing your portfolio. A few handful will admit that they enjoy the administrative tasks that come with being an entrepreneur. Now that the initial tax filing deadline of 4/15 has passed, I wanted to share some best practices when it comes to bookkeeping and maintaining good records of your deals.

As much as we focus on the numbers and return on our investment. Not many talk about the money that may potentially be left on the table because of bad and/or inaccurate record keeping. Real estate investors have a distinct tax advantage when it comes to buy and hold rentals, and missing out on deductions directly correlate to a reduction on your bottom line. Below are 4 tips on bookkeeping and maintaining good records.

1. Use cloud storage to maintain your records

Nowadays, there are so many tools to help us keep accountable. Software such as Box, G-Drive, Dropbox, and others allow entrepreneurs to stay organized. Most have free basic accounts with 10-15 GB of storage that should be more than enough to store things such as receipts, purchase agreements, inspection reports, appraisal reports, warranty deeds, lease agreements, financial statements, and much more.

Good record keeping will help you defend yourself during an IRS audit, reduce CPA fees/costs, and ensure that you take all the deductions and credits you are entitled to as a real estate investor.

2. Utilize a checklist 

Apps like Google Keep, Trello, and Evernote have made it really easy for investors to create systems and processes to make sure that their business runs like a well oiled machine. With 15 deals under my belt, I still do not feel like I am good enough to "wing it". As such, I use buyer scripts, and purchasing checklists when I am making offers and closing deals.

I personally found that Trello is fantastic at creating checklists and notes for me to ensure that I cover all my basis as well as stay productive by prioritizing my to-do list. Below is an example of my "Real Estate Kanban Trello Board" that I use whenever I am closing on a new rental property.

3. Prepare timely financial statements

In addition to learning about the basics of bookkeeping such as the balance sheet, profit and loss statements, and rent roll, its equally as important to make sure that these are prepared and reviewed timely. Many investors wait until the last minute before tax time, or update them every couple of months. By not staying on top of your income and expenses, you may be exposing yourself to increased losses. For example, you may have not realized that the utility bill on a vacant home has tripled in a couple months which may signal a leaky pipe not properly winterized.

Whether you are using an old fashioned excel spreadsheet, rental management software such as Quickbooks, Buildium or Stessa. As you grow your portfolio, you may want to consider outsourcing the bookkeeping function to a virtual assistant or CPA firm so that you can focus on the most important part of your business: marketing and raising capital. Regardless of which path you take, best practice is to review these transactions on a monthly basis.​

4. Use a separate bank account/credit card

During my first year of real estate investing, I made the costly mistake of using my personal checking account and credit card for rental property related income and expenses. I did not have an LLC at the time, so I did not want to deal with the hassle of owning multiple cards and accounts, and also figured I would take advantage of maximizing the spend on my travel reward cards.

I quickly found this to be a time consuming mistake when combined with the fact that I did not review my statements on a monthly basis. This lead me to review over 1,000 rows of transactions online with only a couple weeks until the tax filing deadline. Even after going through the final list twice, I still couldn’t shake off the feeling that I may have missed hundreds of dollars worth of potential deductions simply because I lumped them in as a personal expense.

I have since created a separate business checking, saving, and debit/credit cards to handle all income and expenses related to my rental business. Furthermore, I created a separate Personal Capital account that aggregates these transactions on one excel form to be used during the bookkeeping process.

As always, please make sure you do your due diligence and talk to your CPA/Attorney/Financial Adviser before making any investment decision.

Good luck!