Tim Bell funding your deals 7

So now we want to talk about why I made the comment that a hard money lender is excited to foreclose on you. Okay, now the hard money lenders decision to loan you money is not based on you. It's not based on your credit. Although they will sometimes ask you for your credit report, different things like that. Their primary decision process in loaning you money is based on the numbers of your deal. They want to see the numbers. That's the thing that's most important to them is the numbers. So we're going to talk now and I'm going to show you a diagram now that demonstrates why a hard money lender why I made the comment that a hard money lender is excited to foreclose on you and also demonstrates why they are focused on the numbers rather than on you like that traditional long term lender is focused on you. Okay. All right, so hopefully you recognize this diagram. These are the numbers we've been using throughout our entire discussions here. The $200,000 ARV, 20,000 for general costs, 40,000 for profit and 30,000 for repairs, equaling a total of 110,000 that we can afford to pay for this property as a fix and flip investor. Okay, now I'm going to show you this formula from the hard money lender's perspective because their perspective is a little bit different than ours. They want to know how much profit you have in it and it's for a specific reason. And so let's go through this diagram. Now I'm going to show you again the perspective of the hard money lender. I'm going to show you how the hard money lender looks at this property from the if you pay standpoint, in other words, you meet the terms of your agreement with them, you pay them back as agreed. And also the you don't pay, in other words, they have the opportunity to foreclose. Okay, this is what your property, your transaction, your deal looks like to the hard money lender as you, as they go through and analyze the numbers. Okay, so let's go to the you pay column. Okay. All right, under the you pay column, how much money do we need to do this deal? Well, we need $110,000 to buy it, we need $30,000 to repair it, and we need 20,000 to hold it, carry it, close it. Okay, so that's about $160,000. Now they typically, hard money lenders typically going to charge you in our current marketplace somewhere around 12% interest. Now this will vary of course, but 12% is very normalish. For a hard money lender. In our current marketplaces, we make these recordings. Okay, that of course, will change, but that's very normalish now. Okay, so 12% of $160,000. That's 1% per month, simple annualized interest. 12% of $160,000. It's about 19,000 and some odd dollars. So we just rounded up to $20,000 just for easy figuring, just for an easy example here. So theoretically, we are going to pay about $20,000 in interest if we borrow that $160,000 for a year. Oh, but wait, we're not going to borrow it for a year for our fix and flip. We're not going to do our fix and flip for a year. Let's say we only borrow it for six months. That's a much more reasonable period of time for a fix and flip. Okay, so at that point, we're going to cut that interest in half, which means we'll pay about $10,000 or so in interest for the 160,000 borrowed from the hard money lender. Okay, so that's the interest. Now, the hard money lender is also going to require that we pay something called points. Now, one point is 1% of the loan amount. Why they call it points, I don't know. That's just what it's always been called. Again, 1% of the loan amount is 1 point. So let's say the lender is charging you 4 points on $100,000. That would be $4,000. Okay, so on our $160,000 loan, they're going to typically charge us 4 points. Well, 4% of 160,000 is what, about $6,400? Let's just round it up to a nice even 7,000 to make it easy figuring here, okay? Because there's going to be extra fees and things anyway. Okay, so basically, to do this loan, they're going to make $10,000 in interest, $7,000 in points. Now let's talk about what points actually cover if you ask a hard money lender. Well, wait a minute. What do those points pay for? Here's their standard line. Well, that's what it costs us to originate the loan. Okay, that's not true. It doesn't cost them that much. Doesn't cost them $7,000 to initiate that loan. How do they initiate the loan and process the loan? They have a secretary, receptionist, or processor. Type it into a computer. It doesn't cost them 7,000 to do that. If you press them a little bit and say, wait a Minute. Doesn't that really just represent extra profit for you? In most cases they'll admit that. Yeah. Actually you, it does end up being a lot of extra profit for us. Okay, that's fine. Even that's not the entire truth. Here's the truth. Your payment of points up front is to pay for your foreclosure in case they get to foreclose. You are prepaying so they will have money in the kitty to spend on the foreclosure if indeed they get to foreclose on you. It's kind of like going down to the hardware store, buying a length of rope and, and handing it to the hangman and saying, just in case you need to hang me, here's the rope. Okay, that's what it's for. Now I've never met a hard money lender that will admit that that's what it's for, but that is what it's for. Okay, you're prepaying for your own foreclosure. Okay, great. So they're going to make $10,000 in interest. They're going to make $7,000 in points. This is again, if you pay, if you perform, if you do as agreed in the agreement that you have with them and you pay them back all their money on time, they, they're going to make about $17,000. That's not bad. $17,000 for $160,000 loan over a six month period. That's pretty good. Okay, now let's go over to the you don't pay column. Okay, now let's say that you don't pay for whatever reason, you don't pay the payments, you don't pay them back. At the end of the process, everything goes to heck in a handbasket and you don't pay. They then get to foreclose. Now they have $7,000 in points of your money right up front. They already have that. And so they're going to use some of that money to foreclose on you. Now they typically have an attorney on retainer because they're accustomed to foreclosing. So they can get that done fairly cheaply. Let's say they get it done for about $3,000. Okay, maybe a little bit more, maybe a little bit less, but let's call it $3,000. Well, if you put $7,000 into it originally and they pay out $3,000 for you to, for your foreclosure, then basically you are going to pay that. They're going to pay the 3,000 for foreclosure. They still have $4,000 left because you've paid them 7 to start, right? Okay, so they got $4,000 of your money left. Now, since they foreclosed, they own the property at this point. Okay. Now if they go ahead and they do the fix and flip and all the numbers in your, in your formula work, they can repair it for 30, they can hold it, carry it, close it for 20, and they can resell it for 200. They're going to make the $40,000 profit that you had built into the formula for you. Why? Because it's now their property. So they have $4,000 left over from points and they now have the $40,000 profit from the fix and flip. Wow, really? Yeah. $44,000. That's almost three times what they would have made if you had paid. This is why I say they're excited to foreclose on you. They're up nights praying that you default. Okay, but wait, it gets worse. Remember, a hard money lender typically will not loan you all the money you need. They typically will loan you 80% of the money you need in our current environment, which means you're going to have to come up with a 20% down payment. 20% of $160,000 is $32,000. You put that down payment in when they originated that loan. When you bought the property, not only did you put the $7,000 in points in, but you also put the $32,000 in down payment in there. So you got $39,000 in that. Who gets that $32,000 down payment? Well, by virtue of the fact that they own the property now, it's their money. So now when they got to foreclose, they make $76,000. Yeah. Which would you rather make, $17,000 or $76,000? That's a no brainer. That's easy, right? This is why I say the hard money lender is excited to foreclose on you. They want to foreclose on you. Why? Because they make a lot more money if they get to foreclose. Okay? Now the reason I showed you this is not to scare you or to excessively concern you about working with hard money lenders. There's nothing wrong with working with hard money lenders. It may not be your best choice, but it is a good choice. Now, the reason I show you this is to demonstrate how focused the hard money lender is on your formula and on the numbers in your deal. Not so much on you. Okay? Remember these folks over here, they're all focused on you. Bank of America, Wells Fargo, the long term owner, occupied lenders, they're all focused on you, okay? They want to know that you're a good credit risk. They want to know the property's pretty and all that. Hard money lenders are not focused on you, they're focused on your deal. And here is why. Because if your deal is adequate, they're either going to make a lot of money if you pay or they're going to make a lot of money if you don't pay. Either way they win. And therein lies the reason why hard money lenders are excited to foreclose on you. Again, I wanted to show you this not to scare you or concern you excessively, but to demonstrate that with a hard money lender it's all about the numbers. If they like the numbers, they're going to loan you the money. If they don't like the numbers, they're not going to loan you the money. It's really pretty simple, pretty cut and dried with a hard money lender. Now I wanted to go over the characteristics of the hard money lenders so that you can understand kind of how they work and those types of things. This is part of the supplemental information that's available to you on the website. Again, here are basic concepts or basic ideas about how they work. First, they are licensed statewide, okay? So that means the hard money lender on the west side of your state can loan money to somebody on the east side, on the north side, the south side, etc. Etc. Okay? They can loan it within state because they're all licensed statewide. Okay? They are short term lenders. So they're typically going to loan you money somewhere between six and 12 months maximum. They typically do not like to go over the 12 months. They most often prefer six months because they don't want to be involved in that. You know that 17 month meth rehab story that I told you about? They don't want to be involved in that. Okay? So they want a shorter one because they realize that a fix and flip gets pretty long in the tooth after three, four, five, six months. And they don't, they don't want to run that risk because they realize that their risk increases if you're going to be in that deal that long. So typically they want to loan you the money six months to spend. Start with, they will typically extend out to 12 months, but they're often very reluctant to extend beyond 12 months. Okay. Now they're okay with non owner occupied properties. Again that's their niche. They're okay with Nasty, run down, beat up, ugly and stinky again. That's their niche. That's what they focus on. They're okay with that, unlike the folks over here. Okay. They're typically in our current marketplace going to charge you somewhere between 7 and 16% interest, usually simple annualized interest. That's usually how it's calculated. Okay. Now they also are going to charge you somewhere between two and six points up front. Again, you have to come up with that money. That's money that you prepay for your foreclosure. And it ends up being extra profit to them if they don't foreclose. Okay, There will be additional fees. Okay, this is a somewhat expensive loan in terms of additional fees. They have overhead that they need to amortize and we. And they're going to ask you to help amortize that overhead. They have buildings and they have computers and they have secretaries and they have little leather couches and palm trees and telephones and all that stuff that it takes to run a business. And as a consequence, they're going to pass some of those doing business costs onto you through the form of additional fees. So there will be additional fees. Typically they're going to require a 20% down payment. Now that's the bad news. The good news is they don't care where that 20% down payment comes from. You can beg, borrow or steal it, okay? With a traditional lender like these folks over here, bank of America, US Bank, Wells Fargo, all those folks, they do not want your down payment to be borrowed. They want it to come out of your back pocket or they want it to be aged and seasoned money you've saved. Essentially, these folks, the hard money lenders, they don't care. You can borrow that money. That money can appear in the lien stack as a second lien, a third lien, a fourth lien, a 17th lien, a 23rd lien, they don't care as long as they're in first lien position. You can see the next item on our list here is that they insist on first lien position, period. They will not give you a subordinate or they will not allow you to give them a subordinate lien position. They have to be in first lien position. They may or may not require monthly payments. Remember, an important concept with hard money lenders is to ask them very, very specifically about the terms. Make sure that you know what the terms are. Many people that I've talked to have gone into a relationship with a hard money lender, assuming they know what the terms are and Then later on, they're surprised by something that happened that reflected different terms than what they thought they were getting from the hard money lender. So again, with a hard money lender, never assume, always ask. Make sure you're very clear on the terms, okay? Some require monthly payments, most do, some don't. Again, ask approval is based largely on the deal. Now, hopefully the diagram that we just went through helped you to understand that very clearly. They don't care that much about you. What they care about is the numbers in your deal. Because if they get to foreclose, they want to make sure that they're covered and that they make a whole bunch more money if they have to go through the trouble of foreclosing, as we've already demonstrated, okay? Follow their checklist, fill out their forms, jump through their hoops. Okay? They have forms, they have stuff you got to give them. They there's a big long checklist of things you have to give them, okay? Every hard money lender has that checklist. Ask them for the checklist so that you can make sure you're not missing anything in terms of the information that they need. Okay? Again, they're professional lenders. Imagine this. Imagine you walk into the bank and you say, I'd like to borrow some money, please. Does the banker say, or the teller say, oh, okay. They open a drawer and start handing you $100 bills? No, that's not how it works. You got to fill out the application, you got to jump through the hoops. It's the same way with a hard money lender. They have certain things they're going to need you to do in order to loan you the money. So be aware of that, okay? The last thing secured by a lien position only. No partnership agreement. Understand that. They will only give you a lien position. They won't allow you to create a partnership with them. They don't want to be your partner. So don't even ask. They won't even do that. And then as we've adequately demonstrated with our diagram, and they're excited to foreclose on you if you don't perform, okay? That's the way they are. So that's basically hard money lenders in a nutshell. That's how they work.