Hard money lending is one of the three options we use to find money to flip houses. See below for the other two.
What is Hard Money Lending?
Private money (hard money) lending is a way to borrow private money without using traditional lenders. These lenders do not rely on the creditworthiness of the borrower. Instead, they consider the value of the property as sufficient collateral. The loans are short term (1-2 years) and must be repaid in three possible ways: refinance, sale of the property, or foreclosure.
Hard money lending has a bad reputation. This reputation is caused by predatory lending practices in the industry. This is the equivalent of the payday loan industry for real estate. To be fair, they are gambling on the highest risk borrowers. They are the last resort for borrowers with no other option. The terms are legal. The lenders are licensed. They just stack the deck to the legal limit so that they can’t possibly lose. We consider these terms predatory because they are preying on the inexperienced.
They require a big down payment (10-30%). They charge the borrowers the highest interest rates allowed by law (10% or higher). Worse yet, they charge a hefty fee upfront (4-5% points) to get the loan that isn’t included in the repayment. That’s a HIGH ROI for the lender and a really bad deal for the borrower! And…if the borrower can’t perform, then the lender takes the house. The borrower will not be refunded the down payment or any money invested on the remodel.
Still, this industry exists based on demand. The borrower wants a loan and nobody else is willing to lend the money. While hard money might be expensive, it may be the only way to get started. Which is worse, expensive financing or no financing at all? Besides, a great deal can still be a winner even with this expensive financing.
However, it is unlikely for two reasons. First, the inexperienced flipper is not likely to know the difference between a good or bad deal. He/She is also not likely to execute flawlessly on the very first project. Second, the competition would likely steal the deal. The competition does not have to make such a high rate of return to be profitable.
The inexperienced flipper will have to hustle to find the right opportunity, contract with a good contractor that can start immediately, then decisively operate to close quickly. This is possible. Please, please, please prepare yourself for the challenge ahead of time. Purchase the House Flipping Business Kit and then spend the time necessary to understand the process well. You are an underdog in a very big game!
Where are Hard Money Lenders?
The good news is that these guys are everywhere! They are not hard to find at all. Here is an example. We made an Instagram account and put out a post with one picture, split before and after of a project house we worked. The caption read “Another recently finished flip house project. What do you think?” We included the hashtag #houseflipping. There was no mention or request for money or lending. Within a day we had more than 10 “followers” that had direct messaged us with hard money offers.
One of these messages began “If our bots are working properly…” ??? After some research, we found that means they have trained a computer program (bot, short for robot) to hunt us down! It reminds us of the nature channel where you see thousands of hungry piranha together. How did our post get targeted specifically? It could not have! They are simply playing a numbers game. We were probably just one of thousands and thousands that received that message that day.
We recommend that you stay local. There are many hard money lenders everywhere! You don’t have to use companies from the internet. You want lenders from your own social network.
Someone local can help you to quickly build your network. A local private money lender probably knows other house flippers (his clients), real estate agents that can find properties, and contractors capable of doing the work. Someone from another state, found on the internet, will not have local contacts to help you grow your network.
Personal connections create social accountability. Social accountability will promote fair treatment in your future business dealings. You are less likely to treat each other poorly if your friends might hear about it.
Here are two possible ways to meet hard money lenders in your social network.
Find Hard Money Lenders on Facebook
Did you ever think Facebook could help you in any real-life situation? This may be the first one! Create a post that says something like this:
Does anyone personally know a real estate hard money lender? If not, could you please share this message out for me to your friends? That will help me propagate this out to find the right person in our network. Just use the Share button below. Thanks. I really appreciate this!
I am looking for a hard money lender in our network who is interested in lending for a project in the [area] area of [city]. Could you please friend me if you are interested? I would like to meet with you soon.
Thanks again guys. [Your name and Facebook account here]
Accept the friend requests from the potential lenders when they arrive. After you have become friends, you will be able to view their friends. Facebook will show you all of the mutual friends you have with them. Without getting into how Facebook works, let’s just say it can be a valuable resource for you in networking.
Find Hard Money Lenders at a Real Estate Investors Club (REIC)
You should get a free account on BiggerPockets to research your local Real Estate Investment Clubs (REIC). This is very easy on BiggerPockets, because it is designed to network real estate investors! Find out when and where the REIC meetings are and start attending. Most clubs meet at least once a month. Become a member of a club. These people will help you. That is why the REIC exists!
Next, you have to network. Tell people in the REIC your situation. You will be able to find hard money investors there. Interview several of them. Ask them for references. Talk to the references. Ask the references about them and ask who else they may know. You are trying to find someone that knows people that you know. If you can’t find someone like that, then choose someone that is well regarded within the REIC with references that speak highly of him or her. This person should have a long history in the community. That community will create the social accountability.
Alternatives to Private Money Lending
There are two other options we use to find money to flip houses.