Hard Money blues....long

mobile home university
1

A subject not often discussed is some of the downsides to hard money borrowing. I talk to lots of folks on both forums and experienced investors are very aware of some of the pitfalls associated with this practice.

Anyone who knows me knows I am not shy about talking about sensitive issues and this isn’t a white paper on the hard money dynamic but I can share some personal info I have personally accrued over the last 4 years.

Hard money can open doors never available before. The flip side is it is a seductive partner that can leave you hurting without the discipline or means to repay in a timely manner.

My HM lender is Bruce, and a typical loan is structured with 5 points and 12

% interest(now 15%). Collateral is two lakefront free and clear properties appraised at 1.4M (600K+and 750K) this gives us a credit line of approx 700K (50% max LTV). We’ve never pulled this kind of cash, but we borrow 100- 160 several times per year. We can repay as we please with a point of balance minimum payment due each month…P&I due in full in one year.

In good times, this works well.Borrow 160K put up4 L/H packs sell two, put two in rental portfolio,rinse,repeat.foolproof, nobrainer, right? In a declining market it can get messy. The interst keeps ticking each month and what has happened in my business, the availability of this cash has made us lazy. Instead of working tirelessly to finish them up and get 'em sold (the way it is with personal money) there is procrastination…160K costs only 1600 per month, right? After 10 months we just paid 16K in interest.

Fortunes are made by the disciplined usage of HM. No one I know would have the assets they have without leverage. The problem we have is we haven’t been real smart the last few deals. To work well with hard money in my market these things must hsppen:

  1. A clear, concise plan on what the funds will be used on.

  2. A clear time line.

  3. Delegation of responsibilities. (who does what when)

  4. JOB COSTING!!

  5. No funds comingled.

6, Clearly defined exit stratagy.

We owe 23K on the remainder of our last HM loan of 160K and we will have that paid 6/1/08. We probably won’t borrow more without tightening up our business plan.

Some of the mistakes we made with this last batch of homes.

Funds were co mingled. LH money got mixed with retail purchase homes and month to month bill paying. Bad idea…Job costing was miserable, we lost receipts for two septics (3400) and over 4K in lumber, carpet,pergo. This skewed our profit number onall four homes. Took 5 months to get the first 2 sale ready (should take 5-6 weeks). Didn’t buy land at rock bottom prices…we had 160K inthe bank, why negotiate it to death? Stroke a check and move on (laziness). We will still make good money on these homes, but not the money we should have…and we both know it.

On a personal note, I’m not up at 7AM readt to hit it hard, get up at 8 or 9 go barefoot ski for an hour, be in the office by 10 or 11. Not good. That is the seductive part of this for me…have $in the bank, and if we run short, borrow some more. I reread DOW and this is EXACTLY what Lonnie warns about…it carried into my personal life…last month I had 16K in CC debt. Put 5400 on it and all gas, meals, etc. are cash this month.

I’m writing this to put this up for discussion, if it shows a weakness on my part I am OK with that. This is important stuff and I believe that a problem shared is halved.

What brought this up for me was Bruce commenting, " Greg,this is the longest you have ever kept a file open…I like it!" I don’t like making him rich(ER). He has over 7M out today.

Any comments? happened to you? Is this common? Thanks all!

Greg

2

Greg

This came at a very timley moment in our investing careers. We want to purchase a park at a tax sale auction. From auction till payment due is 14 days. Our bank, though willing to look at the deal will be too slow on the draw. I was considering trying to hard fund it. It may be a great deal (depending on the auction outcome) but without money in place I cannot risk the 13,000+ initial payment. I have no hard money contacts right now and the auction is next week. Guess I better get moving. Do I start at a household finance, beneficial finance office?

3

Greg, thank you for your candor. I don’t use HM, but I’ll be looking for waste in my operation with more dilligence.

4

even using bruce and securing the loanwith the same properties each time, it takes me 5-7 days to get funds. We always have Title Company wire funds…this saves 3 days waiting for check to clear. We can in a pinch get small money (under 50K) added on to a current Loan…we’ve done this once.

Bruce records a Mortgage and has a title policy on each loan every time. 14 days at this auction is short time. My last bank loan on a free and clear property took 20 bank days to close and fund.

Every month I see folks buy homes at auction, and be unable to fund in a timely manner…

hard Money lenders are at most Real Estate Investment clubs here in FL. They are eager to fund a good deal.

Good Luck Don,

Greg

5

to post about a deal where a ton of money falls in your pocket and you look like a genius. it is hard to post about things that don’t turn out so hot.

But I have seen Lonnie, Ryan, Lyal and many others post about mistakes or mis judgements and I seem to learn more from these posts than the others.

We are a close community here and I always worry that some advice I give could actually harm a new investor. The lure of easy(hard) money made me lazy and wasteful…two traits I don’t like…at all. Maybe I am alone in this, but I really doubt it.

TJ and i are gonna go back to the way it used to be. 8AM show up. Our cash for l/h…maybe 3 per year. Better job costing, better communication, more attention to detail… I’ll post the results.

Good investing Shawn,

Greg

6

Greg,

Forgive my ignorance on the use of hard money, but could you not just get a line of credit with a bank using these lots to secure it? I know that banks are not crazy about loaning on undeveloped property, but at 50% Ltv I think it would be a good bet for them. Surely you can beat these hard money rates at the bank.

7

It don’t rain but it pours. We found out about this auction Monday, after returning from vacation. But we are in the middle of another park deal(cash deal) which will close before the auction. But it is a strange deal with us clearing the title ourselves after we close, taxes judgements etc. That will eat up most of our liquid funds. I am making it my mission this week to find some OPM (100,000). I still work full time, we have an 800+ fico and no consumer debt. Maybe we can rustle up some money. Wish us luck.

8

Don, why are you choosing to clear title yourself after the closing?

Knowing you there must be good reason to do so but it would seem very dangerous unless you know something the seller doesn’t know.

Can you elaborate?

Tony

9

You know us Tony, it isn’t a deal unless there is is problem. Anyways here goes. Seller is in rehab (no money). Offered to give him a check and pay back taxes, closing costs, transfer fees and certain named judgements up to a maximum. We have researched and know the outstanding balances. But We will not pay anything off until we have the property signed over to us. I will explain it in detail after we close.

10

have multiple mobiles on them and a conventional lender will not touch them. They are not OO and mobile refis here in florida are tough.

The last refi I did on a free and clear 6 acres with triplewide was appraised at 313K…I pulled 130K out and it took 7 weeks…and it cost 12.8K in closing costs…and there were stiff PPP. 5%,3%,1%. This was in 2004 and my payment is 1004 per month P&I. A hard money loan would have cost me 5 points or $6,500 in closing costs plus minimum payments of $1,300…and I have my money in 7 banking days…with no PPP.

I refi’d with Bank money to purchase multiple already in place rentals and have enjoyed 1.9K net cash flow after debt service for the past 3.5 years. This was a “buy and hold” purchase and I love these rentals…premier school district 1999 or newer doublewides. My PPP are past and I can accelerate payments if I want to. Properties are now worth over 200K even in our down market.

Used properly HM is another useful tool in the toolkit…used carelessly, it can hurt you…bad.

Re-reading DOW was a good thing for me, it seems every time I read that book another process is revealed to me to improve and tighten up my model and some of the lessons in the book are timeless.

Greg

11

Greg,

Thanks for posting this. We spend a lot of time telling what we did right but almost always clam up about the land mines we stepped on or times we just got lazy and took our eyes off the ball.

I’ve been a victim of “easy money syndrome” although mine was HELOC money. Pretty insidious when all you need to do when you want more money is to write a check. What an eye opener when you finally realize you’ve bumped against the max value. I remember the “HOLY SH!T!!” moment. How can I POSSIBLY have spent all the money??? Start digging into it and there’s way too much overhead (lot rent, utilities, repairs that took waaaaayyyyy too long … hourly guy doing the work of course…) that’s not returning anything… just gone! Poor time management, poor expense tracking etc. Worst part was I was in the middle of several projects. I actually had to break down and borrow money from my mother in law… gawd! (She’s really a nice lady).

I’ve made a LOT of progress getting back on track, paid off a ton of debt over the last year. Got the PM of my favorite park on the same page but I’m still so done with LD’s. Can’t abide the whims of new owners, their accountants etc.

Sorry so windy but this just struck a chord with me.

Thanks again,

Lyal

12

We often used hard money when rehabbing SFH in Florida. The last one we did, which made us a good profit, also gave us a hard money lesson, however.

Our lender, who we had done business with before, had a draw system. He would come check to see that you had done a certain percentage and then give you a check. What did NOT happen, and in retrospect should have, is that the funds, (which we were paying the hard money % on) should have also been in an escrow account… our lender wrote us checks on several different checking accounts on several banks, and toward the end was not showing up to check progress. When he did show up both of the last two times, he “forgot” his checkbook. At that point we had vendors to pay but had to chase him for our funds. We vowed to always include an escrow account for the funds coming to us in the future.

So, we bought the property at an excellent price, but it had both fire and hurricane damage - not something a traditional bank would finance. (We have financed some of our rehabs through banks, however.) We totally gutted the house. We had never received a hard money loan that was as much Money as this one was, but knew we had a winner on our hands. Our major mistake, as above, was with the HML. (He is definitely part of the local investment group - we have learned with this and other issues that the people inside the group are not always the best to deal with. They have their own agenda, and are not always the top people in their fields.)

There is definitely a purpose and a place for hard money borrowing and lending. In fact, Lonnie currently is involved in the lending aspect. The important thing with HML is to make sure they know what they are doing. It is not just the lender taking the risk; it is also the borrower. Quite frankly, we were extremely concerned when the checkbook did not show up. We realized that we were not protected. We stood to lose a whole lot because this was an area we did not consider - where the money was until it finally came to us.

13

when I was first starting out you were a real inspiration to me(as well as countless others).

Insidious is a perfect word to describe the “easy money syndrome”. Ultimately that money needs to be repaid with interest and the only way to make this money work for you efficiently is to pay attention to the nth degree. I do my best work when there is urgency involved. Sales, scheduling, permitting,inspections.

Using OPM has started putting me into the manana mode and I really don’t like it. We broke ground today on asingle L/H using all our own money. closed on the lot this morning, have permit pac ready for Monday morning, septic pump and certify tuesday morning, and a PO issued for a new 200 amp power pole to be installed thursday PM. We will move home on Fri and set up on Saturday. By the 16th we want rough power, sewer, water done and be rent ready by the 1st of June…ambitious but doable.

It is kinda wrong, but it gives me some relief to know I am not the only one out there that has gotten a bit lax using easy money. We won’t borrow more unless we can get back on efficient usage of these funds…this last set to was a wake up call for me and my partner.

Greg

14

The funds spigot is only as secure as the lender. Escrow makes sense from a borrowing standpoint, but from a lending standpoint I would want my funds accruing interest even when it was in an escrow account,is this what you mean? HML would deposit funds into an escrow account for your “draws” and you would be paying interest on these funds from deposit not from when you received your draws?

I like it.

I think I know the home you are describing, didn’t you make a TON of $$ on that SFR in your neighborhood?

Greg

15

not a lot of time, will give more later, but things are NOT all roses with me either.

Borderline in the dictionary now shows my smiling mug.

Frantic - same.

Have a memorial service to go to - just know that I am not staying away on purpose.

Will be back . . .

16

Greg, I do think you saw the property I am referring to, and yes, we made a really nice profit on it. Granite countertops, stainless steel appliances, porcelain tile, etc. are not something we are using these days!

In this case we paid interest on ALL the money from day one. Want to calculate how much this guy was making on money we did not have? That in itself was not a problem; we knew it going in. The problem came when he “forgot” his checkbook (not once, but twice!) We were paying interest on money he was still using elsewhere, apparently, and he had to get enough cash together to forward our draw. This is wrong any way you look at it, and why I believe an escrow account should have been created.

It is always clearer after an event happens on what should have been done in the first place! It was not something we had expected because we had done prior business with this man, but we should have made sure it was in the contract and we were covered. Sure, we could cover our bills from funds elsewhere, but then you are back to your original topic about mixing funds! Not only that, we developed a bad taste for doing other business with this particular individual.

Everyone entering a contract, whether borrower, lender, partner, seller, buyer needs to understand just what the contract means to them. Every item needs to be fully understood by each participant in a project. I think Karl has posted about the amount of money he has spent on lawyers to get his contracts the way he needs/wants them to be. I think many of us think we should be able to do it all after taking seminars, buying books, etc. and that we should not need to go to an outside person to assist us. We don’t value having people to back us up (team members, as some call them.)

17

Tony,

I always appreciate your input on the Forum. Are there any hard money lenders that you would recommend for the CA area? Do they loan on homes that are in parks that I don’t own? I have a number of LD’s in motion out here but the prices have used up most of my capital pretty quickly and I am searching for an alternative financing solution to the void of Institutional Financing.

Thanks,

Tim

18

Post Edited (04-14-11 21:54)