Gold, silver, real estate... how about hard money lending?

bcc423

bcc423

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Dec 16, 2008
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Does anyone know anything about hard money lending?

I know a guy who runs a small fund doing hard money lending at 50% loan to value ratio. 50% seems like a safe bet. And he offers 12% annual return, which is pretty good. I'm thinking about investing with his firm.

After considering various options, this seems like the best way to invest for at least the next 2-3 years.

I think being a lender might even be better than outright buying real estate.

If someone defaults on the loan, I basically get their property for 60% of the market value. 50% lost principal + 10% in litigation and other costs.

60% of the market value in this already shitty market seems like a real bargain.

And if the borrowers don't default, then I get 12% back.

Additionally, the possibility of a default is really low. If a borrower can't repay the loan, it would make sense for the him/her to sell the property for anything above 50% of the market value (plus my interest) and pay me back, rather than lose everything.

So unless the real estate prices crash by 50% while I'm lending, this seems pretty much a safe bet.

Am I missing something? Any experiences?
 


Yeah, I've looked at that site in the past.
Don't they offer unsecured debt?

The main appeal of hard money is the fact that even if the borrower defaults, I still make profit. With Lending Club, I think there is a real possibility of losing money. Or maybe I'm missing something?

Does anyone have any actual experience lending hard money?

The more I study this topic, the more I'm inclined to think that's the way to go.
 
In another life I was a real estate investor ... mostly rehabs and flips. I used a lot of short-term hard money to get deals done. Being a hard money lender can certainly be a great way to go. It's really no different than buying any other secured note. All those Russ Dalby infomercials you see on TV ... it's all the same shit. The whole purpose of that program is to get tons of sheeple to go out there and find notes that the investors can buy - which is the hardest part of the whole thing.

I'd be careful lending to local RE investors. There are some real shitheads out there that will try to scam you left and right with fake appraisals and all that shit. You really need to know the ins and outs of the business to make sure you don't get screwed. I'd also be leary of investing in a hard money "fund" ... the hard money guys I know generally don't solicit for new investors. Is this someone you know well??
 
Prosper?
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I'm not really looking for "where" -- finding the borrowers isn't a problem. That part is taken care of. I'm more interested in knowing what others think about the concept of hard money. To me, it seems a bit too good to be true.
If the borrower pays back, you make a return much higher than what you can get with conventional investment opportunities. And if he doesn't, then you get his former property for way below market value.

There has to be a catch somewhere. I'm just not seeing it.
 
Is this someone you know well??
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Yep, I used to work for this guy 10 years ago. So I'm sure about his ethics. I called him about this. He didn't call me.

Aside from an outright scam by the brokers, is there something else I need to watch out?

I understand the fake appraisals. But if the due diligence is done right, what are some other aspects that can get me burned?
 
In my particular situation, I'm more worried about the ethics of borrowers, not the brokers. Is there some way for a borrower to screw me out of both money and property? Assuming the contracts are drafted properly.
 
You mentioned in an earlier thread that you weren't comfortable with real estate investing due to your lack of knowledge in the area. Most hard money lenders have graduated to that from real estate investing. To know one is to know the other.

Just my 2 cents.
 
not sure what you are trying to say but only 12%? find a trustworthy guy in India and deposit your money in any Indian bank with a return of 9% interest a year fixed. 9% annual returns fixed without any tension and if you want to make it 9.25% annual then invest money up to 3 years.

Although not sure how hard is for you to find a guy and arrange things but lately lots of FII's are investing in Indian markets.
 
It's hard work doing due diligence. Srsly. Like a full time job.
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Yeah, I got that part. I won't be doing it though. All management is left for that other person. I'll keep doing what I do now: making monies on the interwebs :)

You mentioned in an earlier thread that you weren't comfortable with real estate investing due to your lack of knowledge in the area.
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Yep, that's exactly why I don't want to actually own any real estate. The appeal of hard money vs. plain real estate investment is that with hard money I either get a good return or I get the property for the price that's low even for today's market.

So in effect, if the borrower fails to repay, it's as if I found a great bargain of a property.

The whole thing is going to be managed by someone I know well and trust.
That guy is a licensed realtor with access to a lot of potential borrowers with property.
Additionally, he knows the local market well.

I wouldn't want to get into hard money on my own because I wouldn't be able to appraise a house properly, not to mention dealing with contracts, permits, possible litigation, etc.

Those crazy-low LTVs in the hard money market leave some serious safety margin for error. At least, that's what it looks like to me. And this is the main appeal.
 
bcc423 said:
Those crazy-low LTVs in the hard money market leave some serious safety margin for error. At least, that's what it looks like to me. And this is the main appeal.
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Just make sure you know what you're getting into. Those hard money deals are usually subordinate to a first lien which instantly becomes your responsibility upon the default of your lien.

That's why so many people that get into that area are already versed in being a landlord since you can quickly become one by no choice of yours.
 
not sure what you are trying to say but only 12%? find a trustworthy guy in India and deposit your money in any Indian bank with a return of 9% interest a year fixed. 9% annual returns fixed without any tension and if you want to make it 9.25% annual then invest money up to 3 years.
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I'll take the 12%, thank you :)
 
Those hard money deals are usually subordinate to a first lien which instantly becomes your responsibility upon the default of your lien.
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Can you elaborate on that?

From talking to the guy, I'm getting that we will make sure to always have the first "pick" (forgot the term) of the assets in case the borrower declares bankruptcy. Also, there will be title insurance and other protections to make sure someone doesn't pull property from underneath of us.

Also, no construction loans, and no loans for primary residences.
 
bcc423 said:
Can you elaborate on that?

From talking to the guy, I'm getting that we will make sure to always have the first "pick" (forgot the term) of the assets in case the borrower declares bankruptcy. Also, there will be title insurance and other protections to make sure someone doesn't pull property from underneath of us.

Also, no construction loans, and no loans for primary residences.
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Most of the lenders I have experience working with were covering the second on a home.

For example, on a $100k house a buyer may only qualify for conventional financing of 60% of the purchase price so they go to the secondary market (you) for the rest. Now they owe $60k at 5% to a bank who owns first position and $40k at 12% to you in second position. If the buyer isn't paying you, they aren't likely to be making payments on the first. If the bank starts foreclosure proceedings on the property, it will wipe yours out and you get nothing. If you foreclose first, you quickly need to bring #1 current at risk of losing your investment. That places you in a position where you must come up with all of the back payments owed to the bank to bring it current and take over the property. Not to mention unpaid property taxes which supersede all other liens (the two you now are responsible for).

I've obviously over-simplified the issue in this example but you get the idea.
 
For example, on a $100k house a buyer may only qualify for conventional financing of 60% of the purchase price so they go to the secondary market (you) for the rest. Now they owe $60k at 5% to a bank who owns first position and $40k at 12% to you in second position.
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That's something to think about. But I believe we are addressing this scenario by only approving loans at 50% LTV based on actual equity.

The way I see it, if I'm lending $40k, then the borrower must already own at least $80k equity in the property. Otherwise, no loan.

In any case thanks for the tip. I'll stress this point with the guy once again, just to make sure.

Why not primary residences?
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He mentioned something about possibility of additional delays in foreclosure/bankruptcy if it's a primary residence. (Maybe something to do with consumer protection laws.) But the main reason is because he already works mainly with investment residential property and commercial property, so I want to make sure we use his established model as much as possible.
 
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