Hard money loans are an amazing opportunity for real estate investors to fund their deals, but sometimes they can be hard to understand. Hard money loans are not like traditional banking institutions, which means the loan terms typically are not as strict. However, they come with a new set of requirements. Join your hosts Jeff Rutkowski and JD Esajian while they discuss why they love hard money loans, what they entail, and how you can find and secure them.
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How to Find and Use Hard Money for Real Estate Deals
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Hard Money
Hey everyone, Jeff Rutkowski here and welcome as always to this week’s episode of the FortuneBuilders real estate investing show. I am here with the man, the myth, the legend. Yeah, they told me I use that to generically like, for everybody, but I purposely have not used it for over a month. Just for you.
Thank you, Jeff. Just it’s good to have you here man to be here. It’s always a better show when you’re in the mix. Thank you. So it’s definitely great to have you here. And you know, we’re gonna be getting into hard money today. JD, Yes. Hard money. Firm, rigid money. Yes.
Word of the Week
As dense as we were saying, so why don’t we just make hard money the Word of the Week this week? We’re gonna be unpacking it. So actually, we’re during the show, we’re gonna give you multiple definitions of hard money. So more than one more than one. Yeah. Diversity JD we’re all about diversity here. Not just one definition.
We’re gonna give you multiple ones we actually JD and actually before the show we learned some new definitions and will tell you that during the show. But in the context of real estate. Hard money is basically asset-based lending where there are lenders out there that want to lend money when it is backed by hard assets and to me, that’s what I think of real estate – a hard asset. Absolutely.
You’re not investing you know in the stock market you’re not you’re investing in something tangible so hard money lenders when they loan the money to us as investors they’re secure that that money that they loaned on the piece of real estate via lien we’re gonna back all of that, but just think hard money hard asset. I think that’s the simplest way of describing it, but let’s get into the show. So are you ready? I’m ready to go. All right, all right.
Well, first of all, man, what’s been going on in the world since we last talked? We had not this past weekend but the Super Bowl was the weekend game, right? It was. Was a really good game. Awesome halftime show. Oh, legendary. Sure. I mean, a really great halftime show. The game was great too. Fun to watch. Yeah. You know, I saw this meme on Facebook, and it was like, it basically said all 40-year-olds during the halftime show turned into gangsters. I don’t know about you, but the party I was at when Eminem came out was just like wow.
Oh, yeah. You know, just such an iconic song. Oh, it was fun to watch. And I mean, in my recent recollection, probably the best. I mean, Prince was awesome. I remember it was great. Yeah, Purple Rain, and then it started to rain and it started raining and you couldn’t draw that up any better. I know he could have come down to the wire and you know the team with the most points won at the end as I predicted.
Sound like your brother? Hey, um, you know, I don’t know everything. But I know that at the end of the game, the team that has the most points. Yeah, probably going to be the winner. Yeah, that’s profound, right. I mean, for those of you listening, watching, write that down. That’s a direct quote from JT.
There you go. There you go. So you enjoyed the halftime show. What type of music are you into? I know Yeah, I know. Led Zeppelin. You know some of the classic stuff you enjoy a lot of rock music. I like metal music a lot, but I also listen to, you know, hip hop and rap. Yeah, those artists I grew up on right Dr. Dre, Eminem after Snoop Dogg. Lamar was great too. And he was awesome. But you know, if I’m putting in music, I’m probably putting in like, either Metallica or Incubus or Led Zeppelin or choices, good choices. Sometimes I’ll pop in Police. I like to listen to some old-school stuff, too. So I like a diverse individual, Jeff, when it comes to music, and I would say life too. Yeah, there’s that word again.
How to Find Hard Money
But we got a good show. I mean, you know, we’ve talked about acquiring deals before on the show. Yeah, no, well, again, but you know, as well as I do that the number one or two question we get, you know, between how to find deals? If it’s not first or second is? Where do you find them? Yeah. Where do you get the money? How do you get more money? Because it can, you know, obviously, bottleneck your business growth if you don’t know how to 100%. So it’s a good, good, timely episode to talk about this and really break down.
Why the most advantageous, maybe not advantageous, but the most readily available source of capital and how to use it. Yeah, that real estate, that’s a great way of describing, I mean, I was blown away when I hooked up with you guys in ‘07 and just started learning this world of investing and how much capital is available in different types of capital? I say you know, specifically, you know, I mean, out before that, you know, my context was you buy a house, you go to a bank of America, you go to Wells Fargo, you got a traditional loan, right? And I remember actually finding one of the first deals I wanted to flip and walking into Milford bank, Connecticut, and, you know, and they basically laughed me out the door, because they don’t offer that type of financing. Right.
But you guys opened me up to this whole other world of asset-based finance, you know, which isn’t just specific to hard money, you know, you know, private money lenders, you know, things like that, but why don’t we just start there with that concept? And, you know, why is the idea of asset-based lending, you know, so important and so attractive to a brand new investor?
Yeah, well, I can speak from personal experience, when we started out as, as is the case, for a lot of people, you don’t have a strong financial portfolio at that point. Some people do, but for asset-based lending, like we’re talking about here, it’s driven significantly more by the asset that the lender is putting money against securing them right again.
“For someone who doesn’t have a ton of money in the bank, or they haven’t built up their balance sheet yet, the lender in this type of financing is going to look more at the asset.“
Now they are going to, as you know, they are going to look at your bank statements, your finances, but they’re going to weigh their decision more on the actual deal that you’re looking to borrow money against, which is great. I mean, a lot of people that I’ve met over the years sometimes have stifled or stopped themselves from getting ahead in real estate because they don’t have money sitting in the bank, or they can’t buy something cash, or they don’t know other sources of capital, and hard money is one of those things that will open up a lot of doors. So, you know, it comes down to whether the lender is going to look at the asset as it is primarily before, and as they’re looking at the bar at the same time.
True or false statement, JD: So you find a money-making deal, okay, the money will attract itself to that deal. I would say it’s absolutely true. Probably the least of your worries. Yes. And you know, I remember you guys always used to say that when I was getting started, I’m like, What the heck are these guys talking about? Like, I’m broke, right? I’m broke right now. Like, how am I going to attract money to you, but it’s exactly what you said.
I mean, hard money lenders will look at our personal finances. And I always use myself as an example when I’m talking especially to new investors, because six months out of bankruptcy, living at my dad’s house, getting a good deal under contract, I had three different hard money lenders almost, you know, debating, and really trying to give me better terms to loan the money. I remember sitting there at the time thinking I don’t even know if I can lend money to myself right now. I haven’t, you know, being in my early 20s. And we’re talking I don’t know, it’s like $350,000. You know, at the time, but you’re absolutely right, and then that should give new investors great confidence 100%. Because, you know, put yourself in the shoes of a hard money lender.
“Their job is to get money out against hard assets like real estate, so they’re looking for the investors like you and I or those of us that are listening and watching the show, to be able to secure that money.“
It’s because that’s how they make money. That’s how they turn capital and at the end of the day, if that lender is disciplined and lending money the right way doing their fundamentals, the worst-case scenario is they take the asset back, and in some cases probably can make more money than they would have on just the loan.
Yeah. So you know, it is a mindset shift because, like you just described, when we started out I didn’t have any experience yet. We haven’t done a bunch of deals. We haven’t done any deals. We don’t have a bunch of money in the bank. Who is going to lend us money? Yeah, but you’re right. When you know what you’re looking for, who the type of player that loans this kind of money, they’ll be lining up at your door for your next good deal. Yeah, they really will. I mean, you guys always said it. But what actually happened to me in reality, my mind was blown. Yeah. But yeah, the key point that you make is, I mean, they’re, that’s their business, they’re out there looking, you know, really for us.
Where to find Hard Money Lenders
So, why don’t we start by just helping the audience and just giving us some tips? Where do we find them? Yeah, you know, I mean, as you’re starting a real estate business or investing, we want to work? Okay. You know, to me, the most important thing is finding the deal. But we do want to work on getting some money lined up. Sure.
So somebody you know, what would your advice be for somebody looking up to set up those relationships? Yeah, well, the way that we started is good old-fashioned networking, going to places where those types of lenders may be looking for prospective customers. Yep. You know, whether it’s a real estate investment meetup or those kinds of events. I mean, you know, when we started out the internet wasn’t as robust as it is. Now you can go online and just Google or search for hard money. If you know other investors in your marketplace that are borrowing money you ask them to so you knock on every door, I mean, I would start with the internet, because that’s the lowest hanging fruit, your hard money lenders will advertise or have their website there, then start plugging into the investing community in your local market and talk to other investors.
And between those sources, if you’re consistent with them, you’re going to find a list of 2, 3, 4, 5 local lenders and there are national lenders as well. And I would also suggest that when you find what you consider to be a good hard money lender, you don’t stop there. You know you want to keep marketing for lenders, just like you market for deals just like you market for contractors. Yeah.
So part of your daily or weekly routine is to search for additional sources of capital. Agreed. I mean, I think if someone asked me the question, I’d say exactly the same thing. Connect with the local investor groups. The first hard money lender you referred me to is Sunrise Financial. Yeah, you hey, I don’t know. Are they still in business? I don’t even know. I’ve, you know, dealt with them. And so it’s been a long time for me too. But yeah, so your classic example where you started networking and asking your, in that case, us and we referred so that’s where you start? Yeah. Yeah, absolutely. Absolutely. So yeah, they’re out there looking for us. I mean, I always think, you know, finding, I mean, there’s national hard money lenders, as you just said, which are good, which are valuable.
Creative Strategies
I always recommend, also, in addition to that, finding somebody in your local market, because I learned, there are a lot more benefits, you know, to the relationship outside of just the money. Yes. You know, in an ideal world, I’m sure you do with a lot of students. Oh, that hard money is nice. But I already have cheaper capital. So I don’t need that relationship until you need it. Yeah, you have more deals than your other capital sources can fund. Yeah, exactly. And I think this is an important principle. I’m sure we’ve talked about it before on the show, but it’s always a good reminder that when it comes to capital, it’s not the cost that we really should be fixated on. It’s the availability for what you just said, maybe you got 5 million to work with at 7%. No points. That’s great. And then maybe that’ll get you 10 deals in your market. But what about when the 11th comes? So you want to be ready?
Yeah, another way I just thought to track down potential hard money lenders is when in your local marketplace, if you see fixers going selling to you know, other investors, people you can track down and you can look at the records, right? You go to the tax assessor’s office or go to the recorder’s office, you can look at the paperwork or what’s recorded against that property. And you know, that name that has a loan against the property could be a potential hard money lender, that’s just another way to look at you. Let’s say you write an offer on a property, you don’t get it accepted. Someone else buys it. It’s a fixer. You’d go to the recorder’s office because it’s public record and you find out who recorded a loan against that product who financed that deal. And there’s a potential hard money lender that is brilliant, actually. Yeah, just out of that. Hmm, nice. Nice. Yeah.
So that’s another way to put into your bucket of ways that you find hard money lenders and I’ll reiterate again, what you just said is like, even if you’re sitting here listening and watching, saying, Oh, well, I’ve got great lenders right now. Yeah. It’s still a great time to look for other sources of capital. Yeah. 100% There is a lot of capital. We were a few weeks back maybe a little more than a month ago. Now. We’re at the Equity Street Investors Conference and a member, Jeff Rosenberg has $2 billion in assets under management. He was saying that we have about $1.5 trillion right now sitting on the sidelines waiting to get into real estate. Yeah, so they’re out there, there’s more money right now circulating our economy than any other time we’ve been alive. Yep. And I agree, we just need to learn how to get that funneling into our hands, we got to find the deals, though the deals are always the key piece there.
Borrowing Hard Money
So asset-based lending, yes, they’re going to check you out personally, like they did myself, you know, I just, you know, my story now on paper, I was a hot mess. So I was riskier than, you know, you’re, you know, somebody with perfect credit. So, they ding me with, you know, maybe a couple extra points or two, you know, high risk, a little more interest. But the bottom line was, I was still able to secure the loan.
So why don’t we run through in your mind, like typical terms investors would expect when dealing and unpacking points? And yeah, if you’re a risk and riskier borrower, like you were when you started out because you’d been through a bankruptcy, you know, some financial situations that led up to that point, the stars didn’t align for you right at that time. They’re going you a little differently and the asset a little differently. They’re going to probably want a little bit lower loan to value, there you go.
So they’re going to assess the value of the property with either a drive-by or full appraisal, you know, what’s the value of the property, and then they’re going to lend a certain percentage of that value. If you’re riskier because of your personal finances, the deals may be a little thinner. If you don’t enjoy profit potential, they’re gonna want to lower the amount of money that they’ll loan in relation to the value of the property, or that scale slides up if you’ve got more experience in your assets. If you’ve got more money in the bank, they might be willing to lend a higher loan to value.
Determining Values
So that’s the first thing they’re gonna assess the value, and then they’re going to determine within the deal, and you as a borrower how much money they’re going to lend in relation to the value of the property. Yeah, I think an important note just to drop in there, when they’re looking at loan to value, they’re, they’re looking at the after repair value. Yeah, like so, you know, after it’s fixed up, if it’s worth 200,000, maybe they have an 80% on that. So 160 would be there, correct? That’s a good question to ask, though. Because some lenders’ hard money lenders will lend off of the after repair value, which is what it’s worth when it’s done, or they might lend off of the actual current market value. So that’s bearish? Yep. So that’s a good question to ask, is, how do they lend loan devalues it off of the future value when it’s done? Or is it off of the current value?
Yeah, and that just, you know, when it comes to hard money lenders, I mean, JD and I are giving you our experience, and you know, people that we work with, but hard money lenders are all in business to loan money and to turn capital, but they all they set the rules that they’re comfortable with, right? So you know, when JD and I are giving you not necessarily is going to apply to everyone, but we’re giving you the questions you ask. So there will be a loan to value whether it’s off a future value, whether it’s existing, you know, some will cover rehab costs, some won’t. Yes, some will issue that money for rehab up front, some will draw schedules, you know, type of thing.
Points
Why don’t we start with points? Sure. So what is the point? How many are in today’s market? What should we expect when dealing with a hard money lender? So the point is 1% of the 1% of a number, right? So if I say that I’m charging you, Jeff, one point on the loan, right? Whatever I’m lending you on top of that loan, right, we’re gonna charge you one point. And that’s just the cost to do the deal, right, to get the money.
So if we look at points, I can tell you when we started out, the rate at that time was five points. I remember the sense just right off the bat, we were paying to the hard money lender, whether it was Sunrise Financial, some of the other lenders that are used, that’s changed because money has become more competitive. So I think when you’re looking at points for the money that you’re borrowing, you can be looking somewhere between (again every lender is different) as you just said, somewhere between maybe a half a point on up to maybe two points.
Yep, that would be what I’ve seen and what I’ve heard sort of the going rate is. Now that will vary depending on your financials, the deal, how good the deal is if it’s a thinner deal, so somewhere between half a point on up to two points. Yeah, I’ve seen to be sort of the going rate for points in a lot of marketplaces. Yeah. And just like we were talking about earlier, if you don’t have a lot of experience, if you kind of have a sketchy financial situation, you may get hit with some higher points. But on the flip side, you could be rewarded for experience. I actually was at breakfast with a hard money lender this morning and his thing is, you know, two-point 7.99% for a brand new investor. Okay, if you’ve done five deals over the last 12 months, then he drops it to a point. There you go. So your reward at one point 7.99% is kind of that half percent, that’s good. I haven’t seen that much myself.
Yeah, I think that’s gonna come into play when you have more experience and you’re maybe doing more volume, but you’re probably not going to start at half a point just like the lender you refer to, that you met with this morning. Yeah.
Interest
So then you also have, as you said, interest, and that’s an additional cost of the money that you’re borrowing. And so that usually is determined on an annual basis. Right? Yep, simple interest on an annual basis. And then one thing you want to ask the lender is, do they roll the cost of the money, the points in the interest into the loan? Are they going to require you to make, for example, monthly payments on the interest? Sure. That’s a very important thing to know, upfront.
Interest with regards to what I’ve seen to be going rates out there, you just mentioned that for that particular lender that you met with, they charge, you said 7.99%? Okay, so I was gonna say the rates that I’ve seen are somewhere between, you know, 6%, on the very low side, for someone that is experienced has strong financials on up to maybe 10, or 11%. I’ve seen it hover for most people, whether you’re starting out somewhere around that seven to 8% like you mentioned that lender shared this morning. So those are good rates to look at obtaining. And they’re not as low as a 30 year fixed loan.
But again, this is a different type of loan. Yeah, yeah, riskier. It’s an asset. It’s asset-based, more so than your financials. I mean, you are going to provide financial statements, etc. But they’re not going through a, you know, like a financial enema, like they do when you get a long-term fixed-rate, trust loan or a VA loan. Yeah, that was horrible. Yeah. But you can get, you know, what, on that VA loan that you just completed, what was the interest rate that you got for? 2.39? Yeah. So it’s worth a little, little bit of the financial audit that they make you go through? Yeah, low. Yeah. Right.
Loan Terms
So, you know, the terms aren’t as strict in terms of what they’re going to require seeing, but the rates are a little bit higher? Yeah. Yeah. So 100% 100%. So we have points as JD, you know, unpacked and you know, 1.1% of whatever you’re borrowing. So half-point to two points is common. 6%. Simple interest. And I know the first hard money loan that I did, I literally didn’t have the ability to make monthly payments. So that wasn’t an option. So that was a big question on my list. And a lot of hard money lenders will be okay with that, where they just aggregate what you would be paying more. Then when does the property close? They collect their points, they collect their interest or some take the points upfront. Exactly.
You know, that’s an important question to ask, as we’ve mentioned, is do they? Are they going to take their points upfront, which they probably will do most lenders? And are they going to require monthly extra interest payments, or they’re going to allow you to pay all that interest at the end of the loan, along with the principal when the property sells correctly. And that’s another big advantage. I think hard money lending is like you said, you didn’t have the ability to make those interests aim. And so that the lenders will look at that differently and allow you to still borrow the money, but they’re gonna get their interest on exactly what he sells. Exactly. Yeah. If I’d be five points 13 for the deal. We did the episode of Flip This House at our edge. Yeah, I think we may have used Sunrise on that deal. But I remember you being five points and 13.99%, and I just remember a call. He’s like, Are you freaking nuts? So you lost your mind?
And it goes back to again, the cost versus availability. I mean, we paid maybe, I don’t know 20 grand and points but somewhere right around there. I mean, we made a lot of money on that deal. So multiple six figures on that one transaction. Yeah. So that is a beautiful thing.
So we have the LTV, we have the monthly payments we have, we have the points we have the interest. You know, one thing I remember as a new investor that I actually really liked was when you approach these hard money lenders and you say hey, I got this great deal. The ARV is 250,000 grand in repairs, you know, I need this much money. Yeah, no hard money lenders gonna, you know, trust your numbers, or just take them at face value. They’re gonna be alright, that’s great.
They’re gonna do their own due diligence, which primarily consists of a future value appraisal, you know, basically confirming your ARV and then a contractor you know, reviewing the repair costs, verifying repair costs. Yeah, you’re estimating and I personally as a new investor, I kind of found that comforting in a way that you know, if they came back and basically said, we’re not loaning you the money because you tell us you said you could sell it for 200 We see it at 150 that is probably a deal. I shouldn’t be doing another set of eyes.
Yeah, exactly, something I missed. So that’s something that just expects when you link up with a hard money lender, after you build a relationship and you send that initial deal, they will be doing a future value appraisal, they will be sending a contractor or somebody that works for them to give them their estimate of repairs. And if the deal checks out with them, that probably means you got a good deal. Yeah, it can make you feel more confident.
Hard Money Lender Requirements
So I think that’s a good point to mention that it’s very important when you’re interviewing, looking for hard money lenders that you understand their process, what are they going to require upfront? Yeah, to get the loan, you know, approved or to start the approval process? And then also, what’s their typical timeframe, to approve and fund the loan, because that’s going, that’s going to be something that you need to know. So you can appropriately write your offer in terms of time frame and contingencies.
So that’s a very important thing to know, upfront, what do they require? What’s their checklist of things that they need to see from you to start the approval process? And then how long will it take them to, you know, approve the loan and fund it so that you can use that when you’re writing offers and meeting? meet your obligations? Right, strong offers meet your obligations? Yeah, the closing time frame? Yeah, that’s key. You know, we did an episode not too long ago, where JD shared, you know, 2021. I’ve said this a few times: Ct homes, most profitable year in the company’s history, 121 deals.
You know, all of that. But, you actually gave tips, eight different things, and how you’re doing that. I encourage you if you haven’t seen that episode, show, you know, go check it out. But one of the things that you discovered is when you write offers you’re putting as a closing date nine to 90 days, sellers choice, that’s what we do. Yeah. And in the episode, he unpacks exactly why they’re doing that. But I bring that up to say, you know if you need to know how quickly you can do nine days I know, can you do 14, and that’s going to come from you identifying that relationship with the hard money lender, you walk through the process.
So they’re pre-approved, if you will, yeah, you know, and I think it’s also important, which is another reason just to go out there and search other hard money lenders, you know, add to your database, so you can get pre-approved with more and then use that timetable to write into your offers. But a lot of lenders’ ability to fund fast or to prove fast, will also be dependent on how organized we are as the investor.
So using things like a deal analyzer as we have within our curriculum, are you using a repair estimator that breaks down the repair costs? Are you organized in your own business? So when you go analyze a deal, you can package up that due diligence package and just fire it right off to the lender? Yeah, yeah, no, that’s huge. I mean, due diligence package, I mean, the tools that you just mentioned, do your comps comm package, right, we have a tool we use. It’s called the deal analyzer, but it analyzes the deal, also accounts for the repair costs, the comps, and then it basically aggregates all that data into an investment summary. Yes. And that investment summary is typically what you’ll put in front of the lenders. Yeah, and it is basically just a high level, everything they need to know about the deal. And when you walk in, especially if you’re new and you walk in, it just brings a higher level of credibility, you know, you’re not walking in there looking for them to guide you exactly what the heck you’re doing. They can do their job easier as the lender in asking, okay, I need a little more detail here, I need this or that, but you’ve given them the majority of what they need to see to start the approval process and your quick decision yet.
Pre Approval
And you know, another great benefit of hard money lenders is when we’ve talked a lot about on the show finding deals in many different ways off-market, on market, there’s pros and cons to both, but on market working with agents with CT Homes does a lot. Obviously, such an outstanding reputation here is, you know, agents are going to require proof of funds, so that’s something that we can acquire through our hard money lender, we want to position our offers as investors as cash offers. And through a proof of funds letter from a hard money lender, we’re able to do that.
Well, why do you talk around that for a minute? Yeah, so some sellers whether it’s you know, directly from the homeowner or working through agents will want to see your ability as the buyer to you know, actually get the deal done, whether it’s a pre-approval letter from a lender, hard money lender or you know, a statement from your bank account or savings account showing that you have the money there.
So when you should have already gotten pre-approved, if you will, from a hard money lender, like you just said, many will give a letter to you saying you know that your cash isn’t in your bank, but you’ve been approved for loans up to this amount. And so by having that it can substitute in and it can be your proof of funds letter to show the seller, the agent, etc, that you have the ability to buy the property.
So that is very valuable. And you know, there’s a lot of conversations I’ll have and you probably do as well boot camps and things, how do I write a competitive strong cash offer quick close if I’m still borrowing money, and I understand the question what to seller wants to know is the assurance that you’re actually going to close on the property and have the ability to do that. Whether someone has the cash sitting in the bank, or they’re borrowing money from some other place, as long as you can show the seller or the agent that you’re qualified, you have the ability to close. Give them that assurance, they function as the same thing.
So for the most part, and also
“I tell investors don’t not to write offers on properties, just because you don’t have a proof of funds letter yet. Let them ask you for that. Because some sellers don’t.”
And you’re talking yourself out of even writing an offer because I don’t have a proof of funds letter yet. And when they asked for one, then you provide one, which is another reason to get pre-approved with hard money lenders. Yeah, 100%. I mean, I’ve talked many times just about the off-market, you know, where you get directly with the seller. I think in the past 16 years, I’ve had two sellers ever ask me for proof of funds. So it’s definitely getting to off-market properties is something we really encourage. Yeah. And you know, you’re not going to need the proof of funds there as much on the market, a little bit of a different animal, probably, you know, so they’re gonna require you to ask for that. Yeah. And I found two, I remember in the early days, maybe, maybe like one out of every four offers with real estate agents, they would kick it back and say, Hey, this isn’t a cash offer, you’re getting a hard money loan. Yeah. And they would ask me to, you know, reposition my offer as financing. If you just do that, you know, if that’s what they ask, you can also write it in what we do in our offers, because we at ATMs borrow money to do our transaction. So when we write a cash offer, we substitute in a right in conjunction with that, you know, buyer, which is us, in this case, we read that the offer entertains the right to bring in a loan, as long as it doesn’t affect the closing time frame.
So we’ll write that into the offer, you know, whether it’s cash or borrowing money, as long as it doesn’t change the terms of our offers. So we’re getting the seller, telling the seller, look, we’re gonna close on this time frame that we’re offering, we might use cash, or we might use our own cash, or we might use someone else’s cash. Yeah, I’ve never done that before. So actually, in the contract in the like, where it says the type of financing, yeah, you’re checking cash. And then just adding that note, and then writing into the notes somewhere in the contract where there’s a note section, the seller or buyer entertains the right to introduce private financing, or in our case, bank financing, because we do borrow money from banks. And then we write in as well not to affect the terms of the closing terms of the contract. So it says telling the seller look, we’re going to bring money to close the transaction might come from a couple of different sources, but it’s not going to affect our, in this case, nine-day close or 90 Day close, whatever you choose. Excellent. That’s a great tip. That’s a great tip,
I want to get into security and what’s going to be the hard money lenders are going to be looking for us in order to actually, you know, give the loan. Before I jump into that though, we’re talking a lot about understanding how to raise hard money, capital, all that, which is important. But one of the reasons I don’t care how much money we raise is how good we are at it, none of it matters. Unless we’re able to find discounted properties true that we could get under contract, you know that that makes sense.
FortuneBuilders Training
So actually every week we have a brand new training that occurs every Thursday. And it’s very simple how to find and acquire real estate. And really what we get into there is exactly how CTW homes how then on Conrad Are you know able to consistently week after week, we’re in a 30,000 square foot commercial building and the lower level right above us is JDS office, you walk into that office any given time, there are 20 to 40 deals happening consistently as long as I can remember, you know, and so really this training is how to help investors, like yourself consistently find discounted properties, we get into even somewhat we call hidden markets, how to access, you know, niche, niche lists, you know, just give us some valuable data that’s out there. I actually am one of the trainers, I love to do that. We have a couple of other trainers that do a great job. But if you’re interested in finding deals and how to acquire them right below this video, YouTube channel, Facebook Live, click the link that says FortuneBuilders show.com Obviously we are listening through an audio platform just type that into your URL FortuneBuilders. show.com A lot of people ask if it’s amazing training. You’re right. A lot of people ask, you know, what do you find the deal first? Did you find the money? Oh, yeah, find it first. Yeah, find the deal. The reality is you’re always looking for both. You don’t have anything to find obviously until you find the property. So amongst other things, that’s where that class will really help if you know having other places, finding new places and to source deals.
Know What Your Signing
Yeah, that you have something to fund. Yeah, I know I’ve made this point already. But just to dig it a little deeper into your head JD you could only have million dollars to go buy a property or a motivated seller that you could get a property under which one you took a million dollars or a motivated seller. So you can take away one worry of finding deals or finding the money, what would you prioritize? Do I prioritize finding deals? Yeah, I would do it just because I, as I said earlier, if you, you know, you lock up a good deal, then you find the money, you could scramble to find the money. And if it’s a good deal, people are gonna start throwing it out. 100%.
Excellent. So, let’s fast forward to the point we found a deal. Yeah, we submitted it to a hard money lender, we agreed on the terms, the points, the interest, a loan to value, all of that the hard money lender does their due diligence. Well, there we go. So what, what, what documents? How do we actually get them to legally secure the property? Yeah, well, the lender will have their own protocols and paperwork. But in a general sense, what they’re going to require, are you to sign a promissory note, which is your as the borrower has promised to pay them back based off the terms that you know, have been agreed to yet on top of that, they’re going to secure a deed again, they’re going to record a deed against the property for the amount of money that you’re borrowing. Additionally, they’re also going to require before they fund the loan, that you have insurance in place, and that you add them to the insurance policy in the way that they need that done, certain wording, certain verbiage, a certain name that they need in there as an additional right, as an additional insured on the policy. So those are the three main ones. Now it’s not going to be three pieces of paper, there’s going to be a lot more paper than that. But yes, in essence, what those what that paperwork boils down to is they’re gonna record a deed against the property, they’re gonna have a promissory note that you’ll sign or, and then which are the terms of the deal, and then they’re gonna require you to add them on the insurance. Yeah, so those are the main things.
And that’s also good to know upfront, maybe get copies of it ahead of time as you’re getting pre-approved, just so you can understand what’s there, you know, that anytime you sign anything and know what you’re signing, what’s in there, what’s not in there, what you’re getting because you’re borrowing money, but some require a personal guarantee as well. That’s true with you. Now, it’s not just the asset or the property that secures the loan. It’s you also personally guaranteeing through your finances.
Paying the loan back many hard money lenders don’t require that. But some do, so that’s good to know. Upfront, too. Yeah. And I think I think we’d all prefer, you know, not to sign a personal guarantee. But you know, to me, I’ve signed one many times, I’m sure we had as well. And I mean, the bottom line is you don’t ever borrow money you don’t intend on paying back. Exactly. So yeah, if you have to sign it, it’s not the end of the world. I’m not going to offer it but that is good.
And that and that goes back to you know, what we opened the show with, the asset-based lending. So that mortgage deed that JD was just referring to gives them a lien position on the property, the main security, it’s their main security. And that’s what you mentioned at the beginning, where, if, you know, I fast forward to that deal I did when I was 27. If I were at risk, I was paper, the deal turned out great, but let’s just say it didn’t. And, you know, I, I screwed it up, and they were gonna step in, they would foreclose on the property, they will take the ownership, they would finish the project, and they would actually end up making more money on the deal because they make the interest plus what I owed, it was the frosting.
Gap Funding
Yeah, it’s also good to maybe you’re gonna bring it up to talk about how, after the loans are funded, how, how would a draw process work?
Yeah, someone’s borrowing construction money, rehab money. Talk a little bit about that, too, which you may be getting to, but I think it’s just good. We touched on that before we wrap up the show.
Yeah, I think so too. And, you know, I mean, just going back to the LTV, right loan to value, right, there were very few hard money lenders, there was a time where it was a little more common. I haven’t seen many today, but well, very few will find 100% of what you need to do the total transaction, you don’t want to have some skin in the game. They want you to have some skin in the game. But the good news is it doesn’t have to be your skin. Yeah, right. I mean, I would say probably the best case, you can correct me if you’re seeing something different, but maybe 80% of the deal with you. We could get covered by hard money. Yeah, maybe up to 80% in some cases. But that’s about it for most of us, that’s where we’re going to find the maximum loan to value that we’re going to be able to borrow. Yeah, so that may cover, I mean, we’re going to need to bring some more money to the table.
So you know, again, but it doesn’t have to be our skin. So it could be private money. Maybe let’s just keep numbers simple. You need 100 grand to do a deal. A hard money lender covers 80 grand, we need to raise 20 private money lenders credit cards, yep. You know, lines, lines of credit. I mean, so many different ways. We use credit cards on some of our first deals for that. Yeah, that amount of money that we needed to put down on the deal. Yeah. And you often refer that here to as gap get funding right, like, I better I have a 20% gap. I need to fill that with for people to understand if they haven’t heard of before that yeah, that is what that difference is it’s that gap funding. Yeah, exactly. Exactly.
Draw Schedules
But yeah, let’s get to the Draw schedule because that’s so that’s important. So, say we have a hard money lender. They’re covering 80% of our acquisition and 100% of the rehab. Okay, we have $80,000 rehab, we need to do, yeah? Right. So, there are some hard money lenders that when you close the loan, they’ll just give you that 80 grand, it goes in your business bank account. Easy peasy. Right? Very few, very few. But there are some, but what you’ll find more typical is they want to do a draw schedule. You complete this amount of work, we issue that. So talk through your thoughts on that.
Yeah, so if you’re borrowing money for the rehab in the construction like Jeff mentioned, most of the time, they’re going to release that money over a series of draws. So before the loan is funded, you will have laid out the construction schedule, you know, in a general sense, or as accurately as you can at that point, what’s going to get done when, and then the lender will apply different amounts of money that they’ll release at that time.
Time Frames
So what happens is, once you start the construction, right, week one is done. Then you say hey, Mr. Mrs. Bank, I’m ready for my first draw on the construction loan, right, they will send the bank will send some or the lender will send someone out to verify that the work has been done, as you said it has and then once that gets verified, then they release the money to cover that amount in the form of a draw. And that’s generally how a draw schedule works. It’s very important to know upfront what that timing looks like. Does the lender do that quickly? Does the lender not do that quickly? Important? Yeah. Because if you don’t know that, and you’re promising a contractor that at the end of the week, when they finish, these things are going to get paid. But in actuality, that’s going to take five to 14 days. Yeah. It could be a big issue. Yeah.
So you want to know that going in, and then you’re gonna set your relationship with the contractor and your ability to pay them against, as so it correlates with that draw schedule? Yeah, that’s huge. I mean, if you’re fortunate though, you’re using the payment schedule, you’re setting this up ahead of time with your contractor, you’re setting up the draws for the contractor, right? So week one, you know, they do the roof, windows, whatever, you know, but like JD said, if you’re working with hard money on a draw schedule, you want to line up your contractors’ payment schedule with that draw schedule, and bring them in alignment, because then they know okay, well, if this gets done by Friday, I’m getting paid. And a lot of ways that takes the pressure off us as the investor because now it’s not us dictating the draw schedule, it’s the lender. So you can kind of use that when you’re negotiating with the contractor. So you know, to set up that draw schedule, like you just said.
The other thing that’s good to remind ourselves of, or if you haven’t heard this, for me, a lot of lenders will only have a certain amount of draws that they’ll release over a given time period, for example, you know, it’s usually not weekly, they’ll have like one draw or two draws that you’re able to pull on, and let’s say a 30 day period. So that’s going to be some of the details of the draw schedule that you want to find out ahead of time. Is there a minimum or a maximum amount of times you can pull on that money over the course of a month as an example?
Yeah, no, that’s good that as we said, every hard money lender, I mean, they’re going to create and dictate the rules for further business and how they run but, but most of them will do a draw schedule, and the key is getting the contractor aligned with that, because then also to city inspections may be required, and the contractor will coordinate those to get done at certain times leading up to the payments being released.
So hey, what did we miss JD, so we went through the asset-based lending concept, the common terms, the security, the draw, schedule, any other thoughts you want to share, and those are the those the main things,
Selling Property
I think we’ll just we’ll kind of finish up with what it looks like when we go to sell the property and just kind of book in what happens when the loan gets paid back. So normally, we know when we borrow the money, at the front end, we buy the property that loan will happen and get funded through either escrow or attorneys, obviously, depending on how you’re closing, and then that same thing happens on the back end when you go to sell a property. So the lender from who you borrowed the money will issue a demand statement, which is basically them telling the escrow or the attorney how much money that they have due back. So it’s a payoff demand. If you do, it’s basically what it’s called.
So that’s something that the lender will generate, that gets to the closing agent, or the escrow depending on you know, how you’re closing properties. And then in your closing statement, that’ll get prorated and taken out. So when you close on the property, you know, you’re not getting that money and paying the lender back, right. It’s getting paid directly through the rest of the process. And then typically, they’re getting paid first, and one thing we didn’t mention is I’d say, you know, give me your opinion, but 99% of hard money lenders out there are only going to loan in the first position. That’s very true. And we haven’t talked about that yet.
First Position
So you’re right. The first position is where a hard money lender is going to get is going to be they’re not going to let you bring uncle Joe’s money in the first position. And they’re in the second position. Yeah, basically, because anything behind the first position is a riskier proposition for a lender. Yeah, you’re right, they’re going to be in the first position on the recorded paperwork. And that’s 99.9% of the time. Yeah, they’re gonna require 100%. And then you close the deal. They get paid first and then you get your first deal on the books there and then they’re gonna be on you to get that money out. They’re working again, when’s the next deal coming in? And that’s the good thing, right? You turn someone’s money around, make their money, and they’re gonna be asking you Hey, Jeff, yes, the next opportunity you have for us to lend some money on Yeah, 100%. But like I said, even if you’re listening to the show, and you have some private money lined up, some lines of credit, whatever, you know, I don’t want to pay higher interest rates, still develop those relationships. I remember when, when I was exclusively wholesaling, you guys taught me this is, you know, hard money, lenders have a database of investors. And I would bring my wholesale deals to them and ask them, Hey, can you put this on your list? And they would do it for free? Yeah. Because if somebody on their list bought it from me, that’s a chance for them to lend money. So they tend to be very well connected in the investor community. You know, so there’s a lot of benefits that could come from just knowing them and working with them outside, you know, of the money.
New Definitions
Oh, so I said at the beginning of the show, we actually learned some new definitions. You know, it was funny, we’ve been doing this for you know, you longer than me, but maybe 15, 16 years, and right before the camera you and I were like, What is hard money? Like, where did it originate? My mind went to like the hard asset type of thing. So we actually did a little Google search, and we might need to debate Google. But one right here says hard money loans are essentially a type of asset-based financing, in which the borrower acquires the funds that are secured by real property. So far, I agree with that. But then it goes on here. It says it’s called a “hard money loan” because it’s harder to acquire and payback than some of its soft money counterparts. Yeah, I’m not sure I agree with that on the real estate side, I would not agree with that. Maybe gold, silver, or something like that. I mean, that definition may apply. But I think it’s easier to acquire in a lot of ways for the reasons we talked about because it’s based on the asset. And, frankly, from my standpoint, as a borrower, it’s actually easier to pay back as well. Oh, easily. I mean, I guess if you could find the deals, to me that the money is the easiest part. We also learned that hard money is if you contribute directly to a political candidate. That’s a hard money donation, but if you contribute just to the political party, that’s a soft-money donation. So hey, we’ve learned more than we knew before. I’ve never heard that.
Summary
The bottom line is, as investors, we love hard money, we want to develop relationships, we want to get it in place. And again, it’s not the cost of the capital that’s important. It’s the availability. So it goes back to would you rather have a little bit of something or 100% of nothing, right? Well, that’s what it comes down to. And I don’t care how big you are, how long you’ve been doing this, once you know how to, acquire assets.
That’s why this training, I’m so excited about this new training we do because it’s really dialed in on how to find assets. And it’s kind of like when you research a new car, I know you’re a car guy, you buy a lot of cars, right? And did you ever notice like you research a car, you’re designing it online, checking out, then you drive around town, and all of a sudden you feel like it’s all you see? The same thing. Once you understand how to acquire real estate, like I don’t care if you go on vacation, you just quickly identify stuff. So you want to have as much capital – as many different types – available at all times.
But uh, man Great having you with us again, JD any parting words? No, I would just reiterate what we’ve said a few times. It’s not the cost of capital. It’s the availability. Now listen, you’re watching you already have great sources of capital. Congratulations, but there are always others out there. And you know, it’s never a bad time to find more capital. Never a bad time. Never, never a bad time. Because that next deal comes up. You know, if you got the capital, boom, it’s there. You’re off and running. Let’s go. Let’s go. So if you listen to today’s show, your homework is to find a hard money lender, find a local one, find a national one, pick up the phone, understand what their terms are, get that proof of funds going. And if you currently have a hard money lender in place, find another one. Find another one. And let’s get out there. Let’s find some deals.
And thank you so much for being on today’s show. Continue to share us with you know, friends, and family members. You know, we want to reach as many people in this country with financial education just because we understand the power that has to change lives. So we appreciate you doing that. Continue to interact with us on social media. Let us know: What do you want to hear more of or maybe guests you want us to bring in? We’d be happy to do that. But we will see you next week. Same time, same channel. FortuneBuilders real estate investing show. Take care.
