The scenario: Private lender was approached to lend money to a company. The company owned a parcel of land in New Hampshire free and clear, and wished to borrow against it. The private lender agreed, and had the manager of the company sign an affidavit stating that this was a commercial purpose loan. The company intended to build on the parcel to for a new business location. The lender did not walk the entire 100 acre parcel, since it was winter and snowy.

The company wished to borrow the money for 3 years, however, the private lender agreed to a one year term only. The borrower agreed, the papers were drawn up, and the closing attorney (not a paralegal at a title company, but a real estate attorney) explained all the terms and conditions to the manager of the company at the closing table.  The loan closed.

One year later, the company couldn’t make payments, the loan went into default, and months later after working with the borrower,  the private lender initiated foreclosure.  The company sued the private lender to stop the foreclosure.  

In court, the manager of the company accused the private lender of changing the loan, saying it was a three year term, even though he signed a promissory note for one year.   In addition, the company representative said this was a residential loan, that the private lender was not licensed to do residential loans, and that the private lender should have known that the manager intended to build a house for his 85 year old grandmother on the property. The reason the private lender should have known this (according to the borrower) was that there was an old cabin far back on the property in the woods.   Are you kidding me?    The private lender had not walked the entire acreage because there was snow cover, and so never saw the cabin. 

Now when a private lender ends up in court, the judge is seldom sympathic to the lender.  Usually the other party is someone who feels wronged by the lender, and the judge is more sympathic to that party.  In this case, it was different.    The other party was a company, the company representative signed an affidavit stating that the loan was for commercial purposes.   The judge found for the private lender, and the foreclosure went forward.

Now, no one wants to go to foreclosure, not the company, and not the private lender.  But that is the unfortunate circumstance when a borrower defaults.   That is the private lender’s only remedy. 

Why am I telling you this story?  Am I expecting sympathy for the lender?  Not likely.  It is to illustrate why private lenders are not doing residential loans anymore since the advent of the SAFE act.  The SAFE act mandates licensing for residential mortgage lenders.  The licensing requirements are expensive and extreme for most private lenders, so they have stopped residential lending.  Sometimes borrowers try to get private lenders to bend the rules.   The above is a good example of why they won’t. 

So when you make an offer for a rehab property in disrepair that you intend to fix up and resell, this is a commercial transaction.  Now you know why we want you to take title in a company, and sign paperwork that you won’t ever live in the property.  We don’t want misunderstandings like the above.

“I would be happy to give Ann an A++ reference.  I have been lending through Ann for several years now and she has always been outstanding.  She’s meticulously organized, really stays on top of all the issues, knows the real estate business in and out, and is very forthright and reliable.   The private lending business isn’t for everyone, but if you’re looking to enter the arena, working with Ann is definitely a great place for you.  Without reservation, I can highly recommend her.“

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Here is mine  QES2WVHM73CA – your mileage will vary

I’ll let you know how it works out.

“My partner and I have formed a seasoned team to acquire and deliver real estate projects to completion.  We have been working with several principals interested in liquidating their holdings.  And as such, we are positioned to secure these projects for development.”

Translation:  We found some deals.

“What we require is the capital funding to make that happen.  I have some capital at my disposal, however, I am not in a position to qualify for any financing.  My partner does not have the financial capacity either, but does bring over 50 years of development experience to the table.  We strongly believe we can deliver one or many of the projects we are currently working on.”

Translation:  We don’t have enough cash or credit, but need to borrow the money anyway.

“We welcome the opportunity to provide you with some additional details on the acquisition and build-out of one or two select deals we have in the queue.  We believe that we can make several of these work even with the prospect of using hard money financing.  We look forward to hearing how you may assist us.”

Translation:  Can we talk?  So I can figure out of you are too expensive for the deal to work?

The borrower in question is accustomed to working in the commercial funding world, where presentation is paramount.  In hard money lending, we tend to cut to the chase.  Feel free to do the same when you call us. 

Borrower:  Hi, I’m looking for funding for a great deal I just found in Methuen, Ma.  I want to make an offer, but I have to line up a hard money loan first before I submit the offer, because I took some hits on my credit during a divorce.   I’m willing to offer a percentage of the profit as well, because I don’t have any cash and I’ve been told that can be a problem.

Lender:  Ok, great, tell me about the property.

Borrower:  It’s a bank owned property in disrepair,  listed on MLS for $179,000.  It needs $80,000 in rehab, and will be worth $325,000 when it’s done.  Closing, financing and carrying costs will be $35,000.  My maximum offer will be 160,000.  It’s a 3 bedroom 1 bath single family home in a decent neighborhood, which we will improve with a new kitchen, an additional bath, and various repairs.

Lender:  (thinking: ”he doesn’t have it under contract, just hopes he can get it for that price”)  ”Sounds like a good project if it happens.  So, if you don’t have much cash, do you have any at all?  We have a new program that requires very little cash.”

Borrower:  “Well, I have about $2,000 total.”

Lender:  (thinking “that’s pretty much zero skin in the game”) “Ok, what’s your background in managing major rehab projects?”

Borrower:  “I have never done any rehabbing, but my sister’s boyfriend’s neighbor is a part time contractor and he said he could do it for $80 ,000 no problem.”

Lender:  (thinking “Oh-oh.  That’s a project that might take WAY too long and go WAY over budget”)   “Hmm….What is your exit strategy?”

Borrower:  “My girlfriend is getting her real estate license next month and will list it for sale for me for only 2 percent commission.”

Lender: (thinking: “boy, those buyer agents are going to jump all over that 1% co-broke, it will stay on the market for months.”)  “Alright, let me make sure I understand:  You found a property on MLS and you want to make an offer.  You are short on cash, and have no experience in construction, construction management or marketing the property for sale.  You recognize that you don’t have the money or experience, and so you’re willing to give up part of the profit in the deal.  Does that sound about right?”

Borrower:  “Well, yes, I guess that’s right.”

Do you think we can fund this project? Well, $2,000 is too little even for our new 100% financing program, and there isn’t a deal yet.  He has no signed offer or P&S.

You see where I’m going with this, don’t you?  The caller brings no cash, no credit, no contracting experience and no marketing experience to the table.  In fact, he’s not even bringing the deal into the mix, because he doesn’t have it under contract and it’s on MLS for anyone to purchase.  

So here is what I suggest:

• First, sit down and make a list of what resources you bring to the table,whether they are money or skills.
• If you don’t have cash, credit or experience, then finding a great deal will go a long way.  Wholesaling means finding deals for resale to a rehabber.  Most of the time, these deals are not on the MLS, you need to market for sellers just like a real estate agent would.  There are courses available to help with marketing, or you can work with an experienced wholesaler.  Offering your services for free could go a long way toward convincing an experienced wholesaler to help you learn.
• Save up your cash.  And yes, I know it’s not that easy to do.  If it were, you’d already have the cash.
• Get your real estate license so that you get training from an experienced broker.  You’ll learn how to find and market properties for sale.
• Look for partners who have the skills and resources that you lack, and focus on your deal-finding skills.  It’s the most important part of the business.

He originated the idea of the show, and had an oral contract with A&E for half of the profits.  A&E evidently didn’t pay him, and he sued and won in court.   A&E appealed, and Davis won again in a federal appeals court recently.

Kudos to you Richard.  You are a little wacky, but an inspiration to us all.