Listen to the podcast here:
Hard Money Lending Exposed with Robert Orfino
We’re going to continue money week. We’re going to expose on hard money lending. We’re going to break all that down about how hard money lending works. We’re going to talk a little bit about banks because banks are typically involved and private lenders. A lot of people don’t know that hard money lenders use a lot of private lenders. Let’s make a distinction here between hard money and private money. Hard money and private money is used to acquire and turn around an asset or improve an asset, whether operationally or rehabbing or reconditioning that asset. Then you’re going to refinance it into permanent financing or sell it. This is not your traditional Fannie Mae loan that you have on your single-family house that you live in. In fact, Fannie Mae would look at some of the houses we buy and they’d go, “You’ve got to bulldoze this. This is crazy. This is nothing.”
“This is uninhabitable. We cannot give you an appraisal.” That has happened many times.
We cannot give you an FHA appraisal because this thing is so distressed and we are in the business of making real estate great again.
That’s a real thing. There are FHA minimums on appraisals. It has to have certain things. There are about 26 different points and it has to be livable.
If you’re missing a cabinet door, it will not appraise.
I’ll tell you the big one on the takeout financing is people forget to put the oven in. They don’t put the range in and therefore it’s uninhabitable.
There’s not a $500 range. It is uninhabitable. One of the big challenges is “floor coverings.” It doesn’t have carpet, tile and that sort of thing. Stained concrete is coming out. That’s becoming an issue for those people. You use hard money or private money to acquire the asset, to rehabilitate that asset physically and operationally, then you go into long-term finance. The distinction we make between private money and hard money is that private money is individuals. Guys like you and I are lending money. In fact, Ginger posted on Facebook, “I’m looking for some private lenders.” I’m like, “We lend. You’ve got something in Amarillo?” She’s up in Amarillo. She’s like, “Not yet, but I just wanted to put it out there.” She got my email and phone number. I’m like, “Just give me a call and we’ll do something.” I’m a private lender. A hard money lender is someone who’s got a company like Jet. It’s this big organization that has staff, marketing people, sales people, loan people and underwriter people in the house. A hard money lender is typically lending some of their funds plus maybe a mix of private money and bank financing.
The way a hard money lender works is they are typically the guarantor in between a financial institution or a private equity or private lender and the borrower-investor. That’s the easiest way I can explain it. I’m going to say this and this is going to sound terrible. They’re the middleman in finance. It’s not a derogatory term. That’s just what they are. When you are participating in a hard money loan, there are a couple of people that are involved. Hard money lenders here in town can fall into one or three categories. They’re an aggregator of private money. They may use a mix of institutional money and private money to do the deal or in the third bucket, they’re just a broker. I’m totally saying just a broker because I’ve gotten burned by two of these guys.
It’s okay to work with a broker. First, for me, I want to know that you’re a broker. Where’s your money coming from? We have a good understanding that the hard money lender that we use most has a private equity investor. They have a guy or a fund. My buddy, Glenn, up in New Jersey for sure has got four or five old Wall Street guys that throw $1 million around like candy and he lends off of that. He’s in the middle guy and he has his own money in his family money. We know that he knows where every dollar comes from. He doesn’t need to talk to Lima, Sprout, Carrington or any of these other underwriters that fund a lot of the brokers out there. It’s okay to be a broker. We’re not down on that. We just want to know who your relationship is with because here’s what’s happening. A lot of you are getting a direct message from someone on Facebook that says, “Do you need a hard money loan?” You don’t know who they are, where they’re coming from. You think maybe they are fishing for your information, maybe they’re not. What happens is they’re just brokers. They’re out there and they’ve got a line back to Lima or Carrington and they’re brokering those deals. They’re trying to do it for a point or point and a half.
I get hit everyday on LinkedIn like, “We are Equity Private Group Trust LLC Lending.” I’m like, “There’s got to be a guru that’s running around the countryside that’s teaching people the broker buy.”
There is for sure. It’s $25,000.No one is obligated to give you money. Click To Tweet
It’s almost I can tell somebody is teaching something because I get hit all at once.
I got a friend in New Jersey and I’m not going to say his name because I’m not surewhat he does is 100% legal. He brokers, he’s an introduction guy. There are a lot of those guys, “I’ll introduce you to this guy, I’ll introduce you to that guy.” What he’s good at is, “Jason what’s your project? Name a project you have.”
“We’re doing a flip on a beach house.”
“I’ve got the guy for you.” Meaning, he knows of the seven or eight underwriters out there, which one to steer you to.
He’s got their products memorize.
He knows their products and he has an existing relationship. He’s been through the underwriting process before, that makes him valuable. As a broker, you pay him his point, you pay him the $500 application fees because he already has that relationship. What you don’t want, Jason, and how we got burned is going to a broker who takes our product and sends it out to people he does not have a relationship with.
That was the big issue like, “I’ve got a guy who can do this.” We were like, “Okay.” The broker was like, “We’re going to totally get this done.” Then we realized, “You don’t have a relationship with that lender.” “We read the book that said that they have a product.”
There are rate sheets everywhere. When you come to Money Coaching, I’ll show you a rate sheet.
If you go to Money Coaching with Rob, and it’s online, we’ll show you the rate sheets and how this works. This guy just read the product catalog and said, “We’ve got a loan for that.” You’re like, “How many of those have you closed?” He’s like, “None.” That’s the problem.
Do you know the underwriters first name?
Yeah. You call out there and they talk to you. Do you have their cell phone number? I’m not completely opposed to brokers. The first question I ask is, “How many deals have you done?” Another term you will hear is product. You will hear the loan people talk about product. What they mean is the loan type. That’s the layman’s translation. For example, if you’re doing a lot of fix and flip, let’s say $400,000 houses. They may put you into a different product because the bank has a different risk profile for that and they have a different risk tolerance for that type of loan. I’m always asking, “How many have you closed with that product? What are the overlays for that?”
I want everyone to understand real estate investors, new investors, old investors, there’s no bank, no hard money lender, no private lender, no lender is ever obligated to give you the loan. There are a lot of people who come off like, “They wouldn’t fund me.” They take it personally. It’s pretty cut and dry. This does not fit. We’ve got that response and now it stings.
We had a conference call with our business coach and he’s done a ton of commercial real estate and he’s like, “If it doesn’t fit in that box, it’s not getting done.” We’ll talk about marketing and metrics at some point. One of the things Jim Rohn used to say is, “You’ve got to track everything that you do. When you track it, it’s with a number.” We make this box so small a story doesn’t fit in the box. It’s like, “How many times did you work out this week?” “The dog did this, the cat did that, my wife did this.” That doesn’t fit in that box. It’s a number. It’s very simple.
No one is obligated to give you money, but some people come off and feel like, “This guy screwed me.”
I’ve heard that so many times like, “Jason, someone screwed me because they didn’t give me the money.” I said, “You know why they didn’t give you the money? Because it wasn’t a deal.” They save you. You’re just too stupid to know that. When Johnny called you and said, “This is probably a good deal.”
We’re like, “We’ll do it, but you’ve got to bring a little more money on the table.”
Three types of hard money lenders out there. Three different ways that they fund their deals, with private money, a mix of private money and bank financing and the third one is brokers. Those are the three worlds. Let’s talk about how most hard money lenders work. It’s that middle category. They use a mix of private money or their own money and bank financing.
Most of the times the bank financing make some use part of their own money. They’re going to come up with 90% of whatever that loan amount is and you’ve got to come up with the other 10%. Even the hard money people put skin in the game.
When you go to a bank, the way most banks work is they want skin in the game. When I started courting banks, “Jason, you’ve got to have skin in the game.” My skin in the game is the million dollars in equity. I’m like, “That’s not enough skin?” “No, you’ve got to put something in.” “You’re telling me if I buy this million dollar asset for a dollar, I’m going to have to put 20% down. I have to put $0.20 down?” They said yes.
That’s because you’re not Donald Trump yet. You don’t have 30 years of business development.
What they tell is, “It doesn’t have to be your $0.20, but we want to see some skin in the game.” I was like, “That’s fine.” The other thing I found out is everybody at a bank is a VP and they all want to go to lunch because being at the branch is so boring.
When you get them to lunch it’s like, “Here’s what I’m thinking about doing. I’m not sure how long I’m going to stay at Chase.”No one in the money business ever has enough money. Click To Tweet
They’re going to want to go to lunch. You figure out you’ve got to put 20% down. In bank parlance, this is known as the advanced rate. They will advance 80% of purchase and rehab. That doesn’t mean they’re going to give you the construction money. You’re still going to have to ask for construction draws. When you get down to working with a bank, they will always be 20% to 30% ahead of you.
They’re going to be 40% to 50% cheaper than hard money. That’s the reason though because it’s a risk.
Banks don’t make a lot of money on a per deal basis. They make money on volume. That’s the only way the industry works. What they’re doing is they’re borrowing at Libor. I don’t want to get into LIBOR. There’s a whole lot of drama around LIBOR. Is it going to exist? They put that guy in jail because he was manipulating LIBOR markets. LIBOR is the rate they trade each other money. Typically, my lines of credit are 1.25 to 1.5 points above LIBOR. Let’s say LIBOR’s 3% at 1.5. I will borrow at 4.5%. Typically, they have a floor and a ceiling for LIBOR. If LIBOR drops to 2%, they’ll say, “My floor for LIBOR is 5%.” Your rate will never be lower than 5%.
To make it even more complicated is that some banks or some lenders will base their number off a prime, which is different than LIBOR and usually prime is higher than LIBOR.
It gets convoluted quickly. The hard money lender will borrow money from a bank, but they’ve got to come up with the 20% down. The next step they’ll do is they’ll go to a private money lender and that private money lender will then lend to the hard money lender to do the 20% down, so they don’t have any of their money in your deal. This sounds quite nefarious, but the reality is when you’re building a hard money lending company and there’s so much volume, you don’t have enough money. You’ve got to source different places.
No one in the money business ever has enough money.
That’s why you go to these institutional financiers. That’s how these money lenders work. People tell me all the time, “Jason, how do you know so much about the market?” What they don’t realize is a lot of my private money lenders are lending to me and all of the hard money lenders in town. I know a ton of stuff that’s going on behind the scenes. This guy’s having some challenges here. These deals are going bad over here or these are going well. I’ve got a good idea of what’s going on in the marketplace because we all use the same lenders. A lot of times we use the same banks too. A hard money lender when they go do your deal, they will borrow money from a private money lender and they will borrow some money from an institutional lender. They’ll put those funds together and they’ll lend you the money to go do the deal. The hard money lender stays in the middle.
Most hard money lenders borrow a little bit of institutional money from the banks, they borrow a little bit of private money, then they lend you that money. Once the loans are out, they just don’t put their hands up and walk away. They stay in the middle of the deal. Banks don’t want to get that dirty. I’ll never forget the first time I took a banker to three of my projects. He was a good old southern Baptist boy. I was like, “I found the right banker here in Texas.” I took him to the first project and we were doing punch list. He goes, “This is a nice house. In fact, this is nicer than the house I live in.” I’m like, “This is how we do them.” I took him to the second house. He’s like, “What happened here?” We were halfway done. He opend the door and he walked in and he’s behind me. I’m already down the hall. It sounds something like this, “Sweet Jesus.” I walked in and I was like, “Bob, what seems to be the problem?” He’s like, “This house is a mess. How much are you fixing this up for?” I took him to the third house. This one we had just bought and closed on a couple of days before. He goes, “This is unreal. Let’s just go to lunch.” That’s where I learned bankers don’t go out to the projects a lot of times. I was like, “You’re not a boots on the ground kind of guy.”
They don’t want to know how the meat is made.
He was like, “Don’t ever show me that again. That’s why we send the appraiser out there,” and they do what they call drive-by appraisals so that he doesn’t even go inside. He was like, “I don’t want to know. I know this is how much I can lend you. The loan committee signed off on it. Just go.” A lot of people put these lenders on this pedestal. They’re there to sell you money.
That’s a good thing to understand. Most of the people you deal with hard money are salespeople. You are not allowed, nor should you ever have a conversation with the underwriter. You’re not allowed to sit in that loan committee meeting. That’s not happening. It becomes a relationship. That’s why we keep talking about networking and going out and getting in front of these people, making the phone calls. It’s about relationships and staying in front of people.
Even the hard money lenders, because I’ve heard this before, “We met Joe Bob at a real estate event. All of a sudden, he comes out of the woodwork and he needs to close in five days.” It’s like, “Where have you been?” I equate a lot of this stuff to dating. The corollaries are so great. It’s like you’re texting a girl and say “We’re getting married five days from now.” She’s like, “I haven’t seen you in three years. I don’t even know what you look like anymore.” It’s very similar in that vein.
What happens is we keep coming back to the relationship because here’s a dirty little secret. Most of the rate sheets look identical. Everyone is going to get to the 2.5% or the 3%. There are always going to be junk fees even though I know I shouldn’t be paying $600 for an appraisal because Appraisal Nation costs $450, but that’s okay. These guys understand the marketplace. Why would you come to this market and offer five and fifteen if the going rate is three and ten? A lot of these hard money guys, they know the marketplace. They have to adjust and live to the marketplace. Some got teaser rates. Beware of the teaser rate. There are people that do the teaser two points and 7% for the first 60 days. No one gets a project done in 60 days. It jumps up and you have to look at the real numbers. There are three to four hard money lenders that have a relationship with us and we like them all. I talk a lot about Johnny because I talked to him probably the most, but for sure there are other people in this town. It’s about who you have the best relationship with and who you’ve developed a relationship with.
Nobody wants the guy who shops my rate. We had our banker in California, he gets annoyed. It’s like, “I give you a good rate.” Then they take my LOI and run around. They give it to Wade, they give it to Shawn, they give it to Johnny and they give it to all these guys and they’re like, “Can you beat this?” The rate sheets are all the same. We can tweak it. I’ll take a shave on my commission by coming down half a point. What people don’t understand is you’ve just ruined a relationship over $150,000 house, the half point is $750. For $800 you just blew a relationship. You start building that relationship. It’s always good to stay with a couple, but for sure you’re going to dance mostly with the people that you have the best relationship with.
Let me explain what relationship is. People think relationship is like, “We went to a seminar together and we held hands and we did the fire walk and now we’re buddies.” That’s not what a relationship is. A relationship in business is trading commerce. We’ve done business together. That’s what a relationship is. You’re never in a relationship until you get “married.” We’re married to this deal. If the deal goes well, everybody’s happy and everybody makes money. Now, we’ve established a relationship. A lot of people think it’s, “I’ve got a relationship because I hang out with my favorite hard money lenders and I drink his free beer so now we’re buddies.” You all are buddies but you’re not business relationship yet.
I’ll tell you another secret. They all talk to each other.
You mean the competitors talk to each other?
Yes, they know each other.
You’re going to tell me they probably get to dinner at least once a quarter. I thought they didn’t talk to each other.
They talk to each other and they have a bit of an association, which is not uncommon. It’s like the Ford dealer and the GM dealer, they talk to each other. They go to breakfast once a month.
It’s all must be weird and I don’t know this for sure, but if I were a hard money lender, I’d almost have a list of people not to do business with. People that are not good to do business with. One of those meetings I would share that list and my experiences with other investments. One might do that to make sure you weed out bad investors in this business.
We talked about building that relationship and if you’re shopping for a half point, that’s the worst thing you can do. What I will tell you is where the rubber meets the road is with the terms. The rates are all roughly the same. It’s the terms. Who has a PG involved? Who wants to land in your name versus your LLC? What’s the recourse on it? There are all these other little deals like is it a twelve-month loan? Is it a six-month loan? What happens at six months in one day? There are all these things you’ve got to read. We have a buddy up in New Jersey. He’s a hard money lender, Glen Gallucci, and he runs the smoothest hard money terms ever. He’s clearly the most expensive. He starts at 3% and 13%. That market is 2% and 12%. If you get to 2% and 11%, you’re doing well in that market but that market’s 2%, 2.5% and 12%. That’s the market.You’re going to dance mostly with the people that you have the best relationship with. Click To Tweet
Lending is different by state. When you get out of certain states, you’re like, “I thought this is how it worked?” I got an education on that when I was in Seattle. I’m like, “You can’t do this.” They said, “No, nobody does that.” I’m like, “Because it’s probably not legal in the state.” Keep that in mind. We start talking about Texas versus New Jersey. It’s going to be a little bit different simply because the state laws only allowed them to do certain things.
California is 1% and 9%, but they pile on some junk fees. Even 1% and 7.99% is found in Southern California because there are not enough deals. They got to put the money out there cheap. I love the way Glen does it because he’s exactly what you need, but he’s so expensive, so it’s not what you need. Relatively speaking, I was shocked because I was a California guy when I first met him. I’m like, “I’m at 2% and 9.5%. Where are you at?” He’s like, “I’m at 3% and 13%.” I’m like, “Tell me why?” What Glen does is he backloads all the fees. There are no monthly payments, but he’s very clever because New Jersey is a judicial state for foreclosures. What he does is he puts the property in a trust. He’s the executor of the trust. You are the beneficiary of the trust at closing, at the sale. All he has to do if the deal goes bad is write himself a letter and you are no longer the beneficiary. For him, he’s covered. Once you covered the downside, what else is left? That’s a pretty smart way. His terms are backloaded. His fees are backloaded. He doesn’t have a whole bunch of junk fees on it. When you look at it, it’s 3% and 13%. I think where I’m at is 2% and 12% if I want to do a Jersey flip. No fees and there’s no PG.
It’s almost like a partnership with a hard money lender.
It’s clean up there. At some point you realized, “I’m just working for this person.” Anytime he can just write himself a letter, “I’m out.”
Everybody works for somebody. It’s like, “I’m an entrepreneur. I’m a CEO.” No, you work for your employees.
There’s nothing worse than hiring a new employee and getting more work, but Glen’s got a clean little set of terms. That’s very interesting, versus we have the banker. They have draws and inspection fees and all this other stuff. What they do here in Texas is similar but not. Some of them are in the LLC. Look at your term sheet because if it goes bad, they take the LLC. This is why I’m always doing one property per LLC, especially in flips, but if you’ve got three other properties, all those are assets to the LLC. Those are collateral. You have to be understanding the terms. It doesn’t make it bad. You’ve got to know what you’re going into. It’s all there. There’s a thing called the loan doc. It’s all in there. Probably my wife is the only person who reads every single line.
Mike sent me a text and he’s like, “What about this, this and this?” He sent me a screenshot and I said, “Who’s the attorney that’s writing this up?” He told me and I said, “I know that guy. He’s very good.” He was asking me some other questions. It was so funny because in the back of my mind, I’m like, “It’s been a while since I’ve read one.” I know Catherine’s reading them.
She’ll push closing because she hasn’t read it. She’s like, “No, we’re not closing while I have not had a chance to read the documents.” I’m freaking out. I’m like, “What do you mean? Why aren’t we pushing closing?” She’s like, “I haven’t read it. I’m too tired, I’m out of energy and I’m going to have to get up tomorrow morning and read it. Once I’ve read it, then we can close.”
Everyone just says, “Catherine’s not ready, so we’re not going to go close.”
For me, DocuSign is a video game. You just hit the button, you’re done and you’re like, “I won.”
I’m glad I’m at least reading those because sometimes I’ll read through it and I’m like, “I wonder if Rob’s read this.” I’ll just assume it’s a big no for you.
No, but I always make sure they send it to her first. She’ll be like, “Are you certain that you want to cover the closing costs on this one?” I’m like, “Did I say that? Yes, I said that.”
It was funny when we were running that house buying company, we had a standard set up like this is what we agreed to. Anything outside of that, I needed a text a message. Closing costs, we typically pay for it but other stuff, I needed a text message. When you’re buying five to ten houses a month, you’re just signing stuff as fast as humanly possible. We had double closes. We were buying someone’s house, we would have ten to twenty a month and then you got amendments. I’m just signing as fast as possible.
On our wholesale deals, we made a decision, no double closes. It’s either you accept our fees or you don’t.
I tell them to pounce in, who cares? We’ll just buy them. That’s the thing. I’ll just buy it. I don’t care if I buy this thing or not. One of the things I look for in a lender is are they experienced? Not at lending, but are they real estate investors? There a lot of these lenders out there, they’re good people but they’ve never bought more than five or six single-family houses. Here’s why I like lenders like that. One of the reasons I like to deal with lenders who are also real estate investors is if something starts to go wrong on your deal, the first person I call is the lender. I don’t call them to say I’m going to miss a payment. I call them to say something is goofed up on this deal and I need some help. They will have resources that other lenders will not have.
At one point in time, way back in the day, I was doing a flip. This was before I was a full-time investor. I was having some problems with a contractor and I called Sean and Blake up there at Capital Concepts and they said, “Funny story, we do too.” We started comparing notes with all the other lenders in town. Borrowers are getting screwed. We all got wrapped up in this dragnet of this loser GC. It’s good to reach out to your lender who understands your business. They’re the first call to say, “Something’s not right here.” That’s what I look for. All the points and fees, all that stuff is pretty much the same. Terms are important, then what resources do they have? Do they have the experience to help me in my business and develop a relationship?
We’re doing a class online. You can watch it from anywhere in the world. It’s called Money Coaching. We’re going to talk a lot about what we’ve talked about here and we’re going to break it down. We’re going to talk about building your profile before you go to the lenders. Making sure it’s nice and clean and you’re telling the right story. There are five points that you have to work on before you go to that. We’ll be talking about that. It’s $97. It’s for six hours. If you are interested in going, just go ahead and text me at (281) 401-9008. We’ll get 20 to 25 people and it will be great. We’ll help some people out. If you’re looking to figure this stuff out, come join us for Money Coaching.
That class is online and you’re doing it live. This isn’t like Rob presses play on the webinar and then he plays golf.
It’s not starting in 60 minutes like every other Clickfunnel out there.
He can take your questions and it will be a fantastic event. We’ll see you, guys. Thanks.