Hard Money Q&A with Investor Craig Fuhr

This is part 2 of a two post series on hard money. In the first part I had a Q&A with Hard Money Lender, Jeff Hensel. In this post I wanted to get the other side of the coin and have an active investor’s take on hard money. For this I welcome Craig Fuhr.

I’ve know Craig for probably as long as I’ve been investing. Excellent guy and even better investor. He had some great things to say about Hard Money below and I think you’ll learn a lot.

On a side note, watch this video of Craig taken back in 2009. Hilarity ensues about 1:45 in. Trust me it’s funny! (Craig..it was hard to find, but I found it!)

When I received an email from Scott entitled, “Does you have any hard money questions,” I was immediately struck by two things..

1. I wondered if he really meant to write, “Does you have any…,” and if he did, I thought, “Now that’s one hell of a good trick to get me to open an email.”

2. I thought, “Wow – I can really add to the conversation here, because I’ve been flipping houses now for almost 11 years – and I now work with one of the largest hard money lenders in the country.”

You can read more about me, and my crazy rehab projects at CraigFuhr.com but just know that I’ve flipped well over 100 houses and to finance those deals, I’ve used several methods for funding. I am also now working with one of the largest private lenders in the country.

Without further adieu, here are my answers to your great questions:

Terms for hard money vary across the United States. Why? Well – because they can. If you’re looking for money in Florida, New York, or San Diego , you will find the interest rates and points are generally lower than say, North Carolina, Mississippi or Ohio. I have found that there are just more lenders in those areas.

There are no “typical” terms nationwide – so its best to get a feel for hard money rates in your particular market by speaking with several lenders. You will also find that terms are negotiable, especially if you have experience, are bringing more money to the deal, can bring the lender volume, or if you’ve done a few deals with the lender.

Remember – this is a relationship business. Try to build relationships with your lenders before asking them to negotiate their terms.

I’m assuming by “Based on,” you mean – “What is the loan approval” based on? You will find there are two types of hard money lenders:

1. Those who say they could care less about you as a borrower and who swear they lend based solely on the deal

2. Those who lend based on your overall financial picture plus the merits of the deal.

When your GrandPappy told you to be weary of all things that seem to good to be true…he was really meant “All things,” including hard money.

You’ve got ask yourself, “If a lender is willing to lend based solely on the deal, without a care for the financial stability of the borrower – how long will that lender be in business? Or, how much of the deal will that lender be willing to finance?

Every business succeeds based on adhering to certain critical success factors. I’ve often said to my students that they must master the 4M’s of Real Estate Investing. They are; “Motivation, Mentoring Marketing and Money.” Miss any one of these 4 critical success factors, and you are destined for a world of trouble.

In the world of banking, perhaps the most critical success factor is “risk mitigation.” Lenders are constantly evaluating borrowers and deals for their respective levels of risk.

Suppose you are a stranger to the lender. He doesn’t know you. He must mitigate his future risk by knowing your past history. But, you’ve found the “one in a million,” lender who says, “Hey man…we don’t really care about your history as a borrower, man….we just care about the dealio.”

You’re thinking, “Yes! I’ve hit the jackpot with this guy! He could care less that I just filed for bankruptcy and that I owe $30,000 in child support.”

Trust me when I tell you, this lender will:

1. Be singing a whole different tune when you submit your first deal for evaluation.
2. end you a much smaller percentage of the deal than other full-doc lenders.
3. Will soon be out of business.

I’ve seen it too many times. One of the three will happen. So avoid the frustration and do business only with full-doc lenders who understand your business.

Hard money rates and terms are usually based on an annual interest rate plus some percentage of loan in origination fees. These origination fees are often referred to as points. Here’s a real life example:

You get 1212 Maple under contract and the deal looks like this:

You call a hard money guy, get pre-approved, then submit the deal. In 24 hours he send you back a written loan commitment for the following:

In addition to title fees, state and local fees, and the 10% you need as a down payment, you would also pay the points at the closing table. In this case the points would be computed as: $140,000 * 4% = $5600

You would only give up a portion if the equity in the deal if your lender was also your partner.

See my answer to Question 2, above. These types of lenders are out there, but I’m not sure it benefits you to work with them. In the example above, the lender is lending 90% of the purchase price and 100% of the rehab. Asset based lenders often lend far less, and you pay more for the money.

These deals don’t come without risk and rightfully so, lenders want to be paid above average returns for taking on the risk. Lenders charge points mainly because they can, but also because they have to.

Most lenders are not lending their own money. I work for a company that has $1 billion dollars to lend. Yes, you read that correctly. The guy who owns the company is pretty damn rich, but he ain’t that rich! The larger regional lenders in the country have scaled by establishing relationships with Wall Street hedge funds. The lender is obviously not getting that money free of charge so he has to add a spread to what he’s paying for the money to make it worth his time, effort and cost.

What about local “hobbyist” (as I call them) lenders? Very few lenders have more than $1 million dollars of their own money to lend. Instead they grow their pool of money to lend by soliciting their network of high-net-worth college buddies, or business colleagues. Most have less than $5 million to lend – and can only make the business profitable by charging points above the rate for which they are borrowing the money.

If you want to pay less, find your own money. It’s just that simple.

But ask yourself, how much is that hard money really costing you? How much are you really paying for a consistent, reliable and endless source funds? How much is it worth for you to make one phone call for money that will be delivered to your attorney’s escrow account within 5 days?

I’ve done the math – and let me tell you, paying 12% and 4 points doesn’t hurt that much – especially given all of the upsides.

Watch out for hard money lenders who are not well-capitalized. I call these guys “Hobbyists.” They are often highly targeted on the areas where they’ll lend. Most are so targeted, they won’t even cover the entire state in which they’ll lend. In terms of capital, these hobbyists have $1 – $5 million. So, when they’re tapped out – you’re toast!

Hobbyists are usually guys who have struck it rich as lawyers, doctors, or from some other high-paying profession. They love to lend, so long as your business doesn’t get in the way of their golf-game or vacation time. I’ve spoken with hundreds of frustrated investors who’ve lost deals because they were dealing with hobbyist lenders. The problem is, hobbysist have great looking websites and fancy offices too – so to arm yourself against these guys, you have to know the right questions to ask when interviewing them.

When your interviewing a prospective HML, be sure to ask:

1. Are you strictly an asset-based lender or do you require full-docs to for me to get approved? As I said, you should always deal with full-doc lenders when possible. Full-doc HML’s will have more money to lend, and will generally be more reliable./li>
2. When I have a deal, whom do I submit it to for a loan commitment?
3. How long does it take for you all to reply with a written loan commitment?
4. How do you evaluate potential deals? Do you visually inspect each deal? Do you require a licensed appraisal? How long does that take, and how much does it cost?
5. Is there any time of year where you would say you are less likely to lend?
6. On average, how much capital do you have available to lend?

What are your terms?

1. What interest rate do you charge, and what are the points?
2. What percentage of the purchase price will you lend?
3. What percentage of the rehab will you lend?
4. What is the max LTV that you’ll lend up to?
5. What other charges are associated with your loan? (These are also referred to as “junk fees”) Ask them to be very specific. Ask, “What other fees will I see on the HUD-1 from your company?”

If you want to pay less, find your own money. It’s just that simple.

But ask yourself, how much is that hard money really costing you? How much are you really paying for a consistent, reliable and endless source funds? How much is it worth for you to make one phone call for money that will be delivered to your attorney’s escrow account within 5 days?

I’ve done the math – and let me tell you, paying 12% and 4 points doesn’t hurt that much – especially given all of the upsides.

I think I’ve already answered much of this in other questions, especially Question 6, above. Ask the lender how the length of the loan is determined? The lender I work for determines the length of the loan based on the amount of rehab. So, if you were doing less than $50,000, the loan term would be 6 month. If you were doing $50,000 – $100,000 of work, the loan term would be 8-10 months, and if you’re deal required over $100,000 in rehab, the loan term would be 12 months.

You should also ask how much the lender charges for extensions. 1% or 1 point per month of the loan amount is pretty standard. In other words – it’s not good to have to extend.

Other than that, I think you’re just looking for a pretty simple, and reliable arrangement; one where you can feel confident that the HML understands your business, and wants to see you succeed. You want an HML who thinks like an investor rather than a banker. You want an HML who is not afraid to say, “No,” to your deals, not because he doesn’t like you, but rather because he’s trying to protect you from making a bad investment.

That’s the kind of HML you should work with.

I am not aware of any HML’s (of significant size) who do deal partnering with their borrowers. Whenever you get into a relationship where you are splitting some percentage of the profit with the lender, that relationship goes from being just a simple commercial mortgage to a joint venture.

There are a few major lenders however (including the company I work for) who will lend 90% of the purchase price, plus 100% of the rehab. This means you’d only have to come to the table with, the 10% down payment, the closing costs, and the points the lender is charging.

If that’s still not feasible, you should probably think about finding a partner who could put up that amount for some percentage of the deal.

That’s the kind of HML you should work with.

Strangely enough, I’ve never been a “creative” guy in terms of investment financing. I have found that deals that require, “creative” financing are mostly deals that I should not be in to begin with.

I’ll leave all that creative stuff up to the “gurus” selling the next latest greatest course. For me, I’m just going to keep on looking for houses that I can steal for pennies on the dollar and that are super-easy for my HML to evaluate and finance.

You should always pay less for Private Money that you’ve sourced from a family member, friend, or friend of a friend. Second, you will always make out better if a potential private lender solicits you for your business than if you solicit them for their money!

I have never tried to sell a potential private lender on the benefits of investing with me. Luckily, they’ve always come to me first. You’ll truly be in the driver’s seat if you can create even just a few of these relationships.

That said, Private Money lenders can be quirky. They tend to be more emotional.

I have a lender who hasn’t told his wife that’s he’s using the equity in their home to lend on my real estate deals. I have another lender who at times loves real estate and hates Wall Street, than in an instant changes to loving Wall Street and hating real estate. That’s always a fun conversation when I call with a deal.

Another lender of mine can’t decide if he wants to be just a lender making a set interest rate, or a partner who has equity in the deal. He fights with this because he sees how much I’m making on deals, and the greed in him tells him that he should be getting more.

The best HML’s are all business. The are consistent, fast, and very reliable. HML’s HAVE to lend money, whereas Private Lenders just want to lend money. Meaning, Private Lenders could stop wanting to lend in a heartbeat. The best HML’s are investors too, and they understand your business sometimes better than you do.

Much of what Craig and Jeff said about Hard Money was similar. I thought that was a good thing because it verified the information. I enjoyed hearing how an experienced investor views hard money as well. Craig gave me a better understanding on what to look for and expect when dealing with a Hard Money Lender.

While the topic of hard money is not the type of topic I usually talk about on my blog, I’m glad to have Craig and Jeff as guest authors. Hard money is definitely one of those things that real estate investors should at least have an understanding of.

Craig is associated with and works with Dominion Financial Services based in Baltimore, Maryland. To get more information about Dominion and hard money jump on over to their website at http://dominionprivatelending.com.