Ep 7: The Benefits and Risks of Hard Money Lending

When you start your journey into real estate investing, one of the first components is financing. You need to learn how to access money.

Today we are talking about access to money that's outside of the traditional system.

Hard Money Lending usually comes from a private investor or investment group and it's tougher to get but there are some benefits.

Today we'll share stories about our history with hard money lenders, how much you need to put down, how the payments are calculated, what happens if you default, and the regulation behind hard money lending.

Do not enter this world of hard money lending until you understand the risks, which we will share through our personal stories on this episode.

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In This Episode….

:59 Why Tim has never opted for hard money

3:01 Bob's experience with hard money to finance his apartment complex

6:17 Bob's system behind considering hard money

6:59 What Bob wants to make, minimum, on any Flip project they pursue

9:17 Why is it called "hard money lending?"

11:01 Why hard money over other types of financing

11:40 Why a property won't qualify for bank financing

13:45 The one thing you must have to get hard money

14:20 Do hard money loans show up on your credit report?

15:15 How much money do you need to have down?

18:19 The interest rate you should expect on your first hard money deal

20:11 How do they calculate the payment

20:15 Leverage points with hard money lenders

28:07 What happens if I default on my hard loan?

30:38 If I do get forclosed on, will it go on my credit?

32:15 Are hard money lenders regulated?

34:00 Things to do today to start your first hard money loan

36:14 When hard money got stressful for BobQuotes

Full TranscripTim Murphy (00:00):

All right. We're back on the Value Driven Investor podcast. And today I'm excited because we're going to throw in some information about financing now. So far, we've been focused on a lot of different things and kind of getting started and we haven't really talked or dug deep into the nitty gritty of investing in real estate. And I will tell you this, one of the first things that you need to start learning about as you're designing your life and your plan to get into real estate investing, you need to learn about financing today. We're going to talk about the ins and outs of hard money lending with our buddy, Bob Gran. Now what I'll tell you is I've actually never done hard money lending, and you're probably asking yourself, well, why, why wouldn't you have done hard money lending? And the reason I haven't done hard money lending is because when I first started investing in real estate, I was investing with a couple of different people, a couple of different partners.

Tim Murphy (00:56):

And what we would do is we would do cash. But the thing is we were buying like 80,000, 90,000, a hundred thousand dollar houses, and we would have one or two partners and we had the, the means to do cash. So we would do cash, buy everything, cash. And then we would also re or get construction loans and stuff like that from, from lenders after we have the asset tied up. So I was always using banking and I could have used hard money, but the reason I didn't use hard money in my mind was that I felt like it was too risky because interest rates were higher because of a lot of different things, which we're gonna talk about today, but that was my perception. And that's why I think it's important that Bob comes on because Bob got started with hard money. That's how he did his first deal was with hard money. And still today he's using hard money financing. So Grindr, how you doing buddy? A man? How about you? Awesome, man. Awesome. Yeah, I'm glad, I'm glad we're talking about this today. I'm excited about this topic. The podcast has been killing it, man. And are you having fun with it?

Robert Grand (02:03):

Oh, I love it, man. Coming back every day. Well, not every day, but you know, as many times as possible, right?

Tim Murphy (02:11):

Yeah. Yeah. I'm really excited because you know, you are the pro and whenever I have questions about hard money, I'm always talking to you about hard money lending. I guess the first thing I want to start off with is, you know, from a benefit or a risk assessment standpoint, I mean, there's always pluses and minuses with everything, especially in financing. And you have to really be able to analyze and assess positives and negatives and especially your risk when you do financing. So can you share a story with us before we get into the details and all the questions that people probably have about a hard money and how it works, but can you share a story about when hard money really was

Robert Grand (02:54):

Good to you? Yeah, that's actually a, probably a great place to start. So you know, the apartment complex that we just bought this last year we, we have, you know, with, with any hard money lender, you want to develop a good relationship with them, right? So you can call them on the phone and do that. It's everything is a relationship based business and investing as well as real estate. So we had the opportunity at that apartment complex, but, you know, we're, we're going to be needing, you know, $700,000 to buy this thing. And it was a great deal at, you know, $35,000 per door. That's an amazing deal. Even if we put another $35,000 per door into it, we're still doing great. So we kicked it over to our hard money lender to see if we could make this project work.

Robert Grand (03:34):

Cause you know, I don't have $600,000 just sitting around to dump into it and then do the rehab on top of that. So speaking with them that when they initially came back with the numbers on it, you know, they threw us back their standard rates and terms and everything like that. Three points, 11% interest, you know, which over the whole life of it is, you know, a lot of money. And so, you know, we got on the phone and we're like, Hey, you know, we're not going to be able to do this project at those rates and terms and kind of working with them. We were able to get the rate down to about 8%, you know, on it because there's a big chunk of money that they're loaning us, right? So they're placing a good chunk of money, but we're vetted. We've used them a lot and we're, they know that we won't do a deal unless the numbers work.

Robert Grand (04:14):

So they really wanted in, on the deal. And that's the one thing about hard money lenders. They went on, they want in, on deals, they want it, they want to move their money, you know, so they're providing a service. And so that, that small apartment complex was probably pivotal for us and working with hard money because we wouldn't have been able to do that deal unless we had it and it wasn't in a condition where we could have even went and got commercial financing. And that's probably the most important thing with hard money lending is when people find properties that can't get commercial or conventional style financing, that's when they really come into play and you've got to make those numbers work. So that's, that's the story for me when it just like is amazing and this place will be into it probably for 800, 900,000. And in the end, my brother has it valued out at about 1.8, 1.9 million. If we were in sell it, we're going to keep it. But so it's a million dollar winner just using private money lending right there on a deal that I could not a purchase with anybody else.

Tim Murphy (05:06):

Well, and you know, we were talking before we air the podcast here you know, you have to have, you have to create an algorithm when you're making decisions. And I think that you explained that very well. And your story is that you have a very particular algorithm. Is it, is it in line with what I'm my algorithm, does it, does it fit with what my plan is or is outside the scope of my algorithm and my plan, because if it's outside the scope, I won't do it. And in your story, you said, your hard money lender understands that you live by that principle and you have a specific algorithm, and then you've proven it proven to them over time that that you're willing to stand behind that. And, and so in doing so, they are taking a bigger risk with you plus in doing so you've been able to negotiate off of 11% down to 8%. I mean, give us just a little insight on your thinking and this algorithm that you've put together to make good

Robert Grand (06:13):

Financing decisions. Yeah. that's, that's a great question. When you look at like a project or anything, you know, you, you have to know like, what's your minimum profit you want to make, right? So we're investors and a lot, I think a lot of real estate investors missed the point where they think if they make some money, that's good. Right? Well, and in the investing world, you want to make a set profit. How could you ever not have an algorithm to figure out how much money you want to make when you're trying to give a return to yourself? Right. Cause that's called investing. If you don't, you're not really an investor, you're just kind of shooting from the hip, throwing money out there, trying to make it work. And then you get money back and you're already ambling, it's called gambling. So and my brother's a financial analyst, so there's no way I was just going to be able to do that with him.

Robert Grand (06:55):

He's going to want to know the numbers. So, you know, for like a flip project, we are minimum and not trying to dive deep into the numbers so I can be quick, but we want to make a minimum of $75,000 per flip. Otherwise we don't feel like it's worth our time. We might have to put, you know, 35, 40 K into these smaller flips. We want to make 75,000 out. So basically kind of that and big picture perspective, like $1 in $2 out, it's kind of what we want. You know, if you kind of think about like that on the easy terms for people to understand, and there's a whole percentage calculation that goes along with that, but the same thing with this apartment complex, you know, that came out to be like, well, what cap rate would we want to sell it for? And the capitalization rate is the rate that another investor that's buying it as a long-term asset.

Robert Grand (07:34):

You know what they, the return, they would want it, they put all their money into it, right? So we're like if we provided a cap rate, you know, of this in the end, what's this word, okay. We would want that $1.8 million. So what do we have to do to get that? And then we kind of realized, okay, well that really, this could be the biggest swing of our lives. You know, if we can make this project work. Right. So understanding those principles and then saying, when a project doesn't meet that criteria, having the ability to say no to the project and pass it off or give it to somebody else that will say yes, because at the end of the day, you know, I'm not willing to risk my financial livelihood as well as my brother's financial livelihood and our family business. I'm making a bad decision that I could have just said no to, you know, and passed and moved on. I might not make as much money as some people in the world and I might not crush it. Like some of these other investors say they're doing, but I know that I'm not going to ever go out of business. And it comes basically back to the same thing. You know, Warren buffet has a set of principles, you know, that he abides by and look how successful he is. I mean, don't lose the money, don't lose the money. All right, man.

Tim Murphy (08:45):

Well, it's where the survival phase, obviously of the Value Driven Investor philosophy and you know, so that was kind of deep thinking, but I think it's great to start off with that, that deep thinking and big perspective and, and you know, most people aren't there right now. So let's go into just the, the nitty gritty, you know, details of, I don't know anything about finding hard money financing. So let's start off with like, why is it called

Robert Grand (09:12):

Hard money lending Bob? Yeah. so I'm sure it's called hard money lending because, you know, it's probably harder for properties to qualify for conventional lending. So they call it hard money lending. The rates are higher and it's just everything outside of the conventional world. Like, you know a standardized banking system, it's, it's designed for the regular people that are buying homes and putting, you know, 5, 10, 15, 20% down and you fit that mold. You make it on hard money lending you're you're outside of that spectrum people that don't have, you know, standard jobs, they're sole proprietors of their business, contractors, you know, people that just don't generate W2, wage income and then properties that just don't qualify or fit in that conventional world. You know? So yeah, that's probably why it's called hard money lending. I don't know exactly

Tim Murphy (10:07):

One of the ways that I would define it. You know, just to keep it short and sweet is that hard money is really a private investor could be a single person that has a significant amount of cash if we want to invest, or it can be a group of people who come together, pool their cash together, and then they start giving out loans. And then the fact is, is that it's relationship driven, you know, it's, it's track record driven. Now I will tell you this though, there's plenty of hard money lenders that will lend to anybody because they're lending on the asset more than they're lending on the individual. So hard money lending is probably because, you know what, they're lending on the hard asset, more than they're lending on the individual, like a conventional loan or even commercial financing. So that was a great explanation. Let's go to the next one. Why use hard money lending over other types of financing? What

Robert Grand (11:01):

Do you think about, well, number one reason is your property or project doesn't qualify for other types of financing. Not everybody can jump into the commercial world like you did Tim, which is great. You know, or, you know, you don't have say like a home equity line of credit that you can make something happen with. You know? So if it doesn't qualify for regular financing in the conventional world and you don't have some sort of cash to do it, hard money lending is probably going to be your option. You know? So that's,

Tim Murphy (11:29):

Well, bill, a couple of things like, okay, why won't a property qualify for conventional financing or commercial bank financing. Let's go through a couple of different things. Like what would be the first three things that come off the top of your head, why a property wouldn't qualify for those types of financing and why you'd want

Robert Grand (11:46):

To use hard money. Yeah. So probably the number one thing it's Y you know, is property condition. So property condition, foundation, roof, you know, just dilapidated rundown, near tear down condition, right? Nobody's going to lend on that commercial bay or conventional banks don't lend on that, you know, FHA VA, they're not gonna lend on that. They're gonna have too many requirements at the end of the day for you to get a loan on that. So and, and probably the second reason is probably for speed of acquisition, right? So hard money is really fast. The conventional world takes, you know, what, 30, 60 days to get a loan done. And you've got to provide all this credit and all this information and go through all this process, put money down. And if you do that, then maybe you don't have money to rehab it. Right. So then you're kind of stuck. So I would say probably the two biggest or condition of property and you need to close on it. Right.

Tim Murphy (12:36):

And I would agree with you. And I think that leads the third one that I'll bring up, I think, leads into our next big topic, which w how does hard money, a hard money loan work. And I think the first question that people will want to know is, you know, do I have to qualify for it? And so that would be another reason why you wouldn't want to be using a conventional loan, or, you know, even in commercial, on the commercial side, you have to qualify. You have to yes, it's a lot more relationship driven on a commercial side, but you still have to qualify with the bank and you have to meet regulations. And th th th and all these different things they have to do to make their board and their investors happy. So you have to qualify as an individual, but with hard money, you don't necessarily have to qualify it as an individual. Would you agree, Bob?

Robert Grand (13:21):

Yeah, I would say, I mean, there's probably a loose qualification. They want to make sure you aren't going to go bankrupt tomorrow. Right. So they may check into your finances a little bit, but yeah, it's, it's not nearly, you know, at the level that you would on the, on the regular side of real estate, when you're buying through conventional process, the number one thing

Tim Murphy (13:38):

You really have to have when you're doing hard money that they're going, they won't do a deal with you is if you don't have the down payment that they want, if you don't have the down payment, they will just say, you're wasting your time and get lost. Now, if you have the down payment, then yes. Like Bob said, they're going to go a little deeper into, okay, well, give me a little bit more of your history, but again, they're not, it's going to be nothing like getting bank financing, because again, they, they borrow the money based on the asset. You know, your numbers is the deal gonna work exactly how, like, do harden. Okay. Let's go into this. Do hard money loans show up on your credit report. That's a question.

Robert Grand (14:20):

No, no, no. And that's kind of the weird thing, you know, like a lot of people have that, you know, that, or I should say, actually, let me go back. You know, when I'm applying or transitioning a property from hard money lending to bank financing, you know, kind of the standard world, they're always kind of, that's a weird thing for them. They're like, well, I don't see this loan on your credit for it. I'm like, well, it's a hard money loan. They're like, it's not. And they're like, what? You know? And they're like, then the next question is how many more of those loans do you have? Right. So they get kind of like the conventional weird world gets kind of weird about that. You're like, like just this one, you know, cause it's kind of a strange process for them. Cause it's two sides of banking, two different worlds, you know, that they don't really intermixed very well. So, but yeah, no, it does not show up on your credit report.

Tim Murphy (15:05):

Okay. Let's go into how much money do you need to have down now, obviously you and your story in the beginning, you know, it's flexible, but let's start with like the, from the context of I'm a brand new investor and I don't, I ha I don't have any experience and I want to use a hard money loan on my first deal. Let's go from there. And so how much money would I need to think or estimate?

Robert Grand (15:30):

So, you know, every hard money lender is obviously different. They all come up with whatever program they want. It's an unwritten world. There's no real rules or regulations into it. So, but probably the most common that I've seen is, you know, they'll want to loan you on the whole project, right? Include your construction costs into it. That's another great thing about it. And they'll want about 10% down of the whole project. So if you're buying it for a hundred thousand dollars, you need to put a hundred thousand dollars of rehab money into it. Right. And it's going to be worth, say three 50. You know, you, you want to have that $200,000. You need that 10%. That's, that's what they would be looking for.

Tim Murphy (16:07):

I'm not going to ask for 20 or 30% down. No. And that's interesting,

Robert Grand (16:12):

You haven't asked that, right. You have a $200,000 asset, it's worth three 50. And if they give you the construction money, it's built into it and you've rehabbed it almost all the way. You're always making that project better for them. So it's getting closer to the value that they need and then

Tim Murphy (16:27):

Improving their collateral, right?

Robert Grand (16:29):

Yes. You're making it better. So then in the end, even if you got a 75% of the way and went broke, right, they still have something that they can go put a little bit more money in and they still are going to say, get a hundred thousand dollars of equity. If that, if that property were 200, it was going to sell for three 50 and say, you spent all the money, you know, and, and burned it up. And it's now you have 200 into it and they need to finish it with another 25 or 30, you know, they're still gonna make a huge swing on that. So that's the win for them?

Tim Murphy (16:57):

Well, that's really interesting Bob, because, you know, part of this podcast is the smash myths. And I was doing a little research on the internet before we actually did this podcast. And I mean, I saw some, you know, content out there on the internet that said, oh, you might need 20 or 30% down on hard money, but you've done. I mean, just throw a number out there. How many hard money?

Robert Grand (17:22):

12, 13 at least. Yeah.

Tim Murphy (17:25):

So, and I've never once had anybody say, oh, I need 20 or 30% down. So that's a myth. I I've never heard 20 or 30% down either. So I'm glad that we busted that. No,

Robert Grand (17:35):

That's crazy. If they ever asked, I would just be like, you're not the right money lender for me. Right. So there's no way I would do that. Another common processes they'll pay for acquisition and you pay for rehab. Right. So if the acquisition is a hundred thousand, it was hundred thousand rehab, they would say, I'll cover you on the purchase and you cover your rehab costs. Right. So then they're still in the same position. Right. So that's another common one. And so you could effectively give zero down for the property and you save all your money to rehab it, you know? So yeah. But it's never, I would say never, I would never pay more than 10%.

Tim Murphy (18:07):

Yeah. So if you're out there and you're looking for a hard money lender and that hard money lender is over 10% keep shopping, right.

Robert Grand (18:12):

Yeah. Yeah. Okay.

Tim Murphy (18:14):

Let's go on to the next one. Grando, let's go on to what is the going interest rate that you should expect to pay on your first deal

Robert Grand (18:24):

On your first deal, your, you could pay upwards of three points and 12%. I mean, that's very, very common and you have to think about what they're trying to achieve. They're trying to achieve a high rate of return for their investors or for themselves, right? So with that, the blended rate, if you pay, you know, two to three points and 12%, and you could be paying 16, 17, 18% for your property, you know, the actual percentage rate, the true, a actual percentage rate. So that, that's how that could be. So, but you know, once you get kind of moving with it, you can get it down to 10% and two points, maybe three points, you know, just everything's kind of relationship and project based.

Tim Murphy (18:59):

Now, do they do interest only? Or is it a principal interest?

Robert Grand (19:05):

It's interest only everything's interest only. So the whole, and there's also the other thing to think about is some of them have like timeframes that you have to hold the loan for a very commonly, they want at least six months, you know? So when you're working on a project, if you close it before six months, you're still paying them six months of interest. So, so you can negotiate that. So every step along the way you negotiate it. So if I were doing my first deal, if they said, okay, you got to pay me 12%, three points. I don't know you. I'm like, okay, that's great. And hold it for six months. I'd be like, eh, you know, that's gonna eat up a lot of money and lots of time. I just project done in three months. How about we do four? So with the closing time frame, with real estate fees, I know it might be four months, you know, so, and if I'm competent in that, so you can negotiate that aspect of it down too. So I would say if you're doing your first deal, you would say, I'm good with 12 percentage points. I'm good with, you know, two to three points and a four month minimum commitment.

Tim Murphy (20:00):

Perfect. All right. Well now obviously we have the interest rate figured out. We have our downstroke figured out now, how do they calculate the payment?

Robert Grand (20:10):

So they, they calculate the payment interest only off the total amount borrowed, right? So if you borrow 200,000 and a hundred thousand of it includes construction costs, and they're holding it in an escrow account to pay you out in lump sums in a construction draw, you're still paying on that money. So that's your incentive to get moving quick, you know, cause you have the money sitting there. You want to move quick on that money and get it done as fast as possible. So it becomes the best deal in the world, really, when you can move fast and get a project done inside of three or four months, you know, on a project that you couldn't have even have done, you know, when without, without hard money. So

Tim Murphy (20:45):

Do they have like in financing they have an amateurization schedule or an amortization. So the AMA tries it over like 30 years, I mean yeah. Spread

Robert Grand (20:55):

Out. Yeah. So it, it, it would be, it would be interest only payments, you know, amortized over 30 years, that's the standard. And that's what I mean, if it were anything else that would be very odd. So I'd be, I would consider that a red flag if they're like amortized over 10 years. And so they make this, you know, it's just, you want your payment to be the least amount possible, you know, and as you're going, so interest only is a really great way of doing that, you know, and then it just pay, you pay that payment monthly back to them. Or some people hold the payments, you know, and they just roll it all in at the end. It just kind of depends again, you know, on, on the thing. But I would say if it's your first deal, you know, again, you're going to pay that, you know, 12%, three points, four months minimum, and you're going to pay a monthly payment to them for the interest.

Tim Murphy (21:37):

So let's say you're in the middle of a project and somebody walks up another hard money lender and says, Hey, so how are you guys financing this project? And maybe you're just kind of, yeah. And maybe you're just kind of 25% into it. And you still got, you know, there's 60, 90 days, whatever it might be on the project. And the lender comes up and says, you know, how do you guys have financing? Oh yeah, I got the hard money loan on this. Well, Hey, why don't you guys get out of that? And I'll beat those terms and you come with me. So can you refinance out of another loan, like a hard money loan whenever you want? Or how does that work?

Robert Grand (22:11):

Yeah. Yeah. I wouldn't say whenever you want, you know, because you, you have that minimum commitment to the first lender, right? So if you lock into them at 4, 6, 8, 12 months, you're paying them that interest. So there is no point in leaving before that timeframe, but you know, we have a project right now. We have just a really cheap house that we had, and we don't really care about making a bunch of money on it. You know, we paid like one 30 for this place or one 20, fixed it up. It's kind of a rental. We had it with hard money lender, a right. And we paid a little bit higher rate. But then at the end of the year, we're like, we might mow this place down and build some, you know, like a quad or something there. So we didn't want to shift it over to conventional financing.

Robert Grand (22:49):

Cause that kind of takes away from our kind of control of like what we could do if we were trying to move that project quickly to something else. So we just called up hard lender B and said, Hey, you know, we have another project that we're done with, it's got 150,000 equity in it. Would you carry this for another year for us? We'll sign a 12 minute, 12 month commitment with you, but we want to pay, you know, 9.5 on the rate, you know? And so, and the hard money lender B is like, you've got a done project.

Tim Murphy (23:17):

If you want me to just free money, free interest for a year. You'll you'll do

Robert Grand (23:22):

That. That the answer is yes. When do you want to close next week? You know, it's like, so those are, and it's all kind of in your strategy, you know, and investing because I'm not quite sure what I want to do at that property yet. Right. It could go one to 10 different ways. So I don't care about making the 250 300 bucks a month. I could get a positive equity keeping as a rental. I just want it to break even or go a little bit more. Cause I'm thinking like we're waiting for some regulation to change, so it could make a better property, you know, kind of episode it. So you're kind of just strategizing and that's, what's another good thing for them. You can kind of shift that way, but we had to kind of wait out like the six month timeframe that we had with the other one before, you know, so we waited that out and then we're like, okay, let's move it to this person. And then

Tim Murphy (24:03):

Let's go back here though. Cause you see, so technically you are locked in with them because you have a contract for a certain duration of time. Now you can refinance out, but you still owe them the interest that they're due within that contract period, you would refinance and then stack that on top of what you would owe that other lender, right?

Robert Grand (24:25):

Yeah, yeah, exactly. That's exactly

Tim Murphy (24:27):

What you are paying a penalty. Like, because now you're going to be paying two lenders, a fee on that property. It's not like you get to just stop in the middle of wherever you're at with that lender and say, Hey, sorry, I'm not going to pay all that goodbye. And then the new lender, you're going to be paying two lenders

Robert Grand (24:43):

On at one time. Yeah. I mean,

Tim Murphy (24:47):

I wouldn't say there is a penalty for, for doing that then if you if you decided to refinance and get out, but nobody can tell you, you can't do it. That's really what you're saying. I can't

Robert Grand (24:56):

Hold you to. Yeah. You could always refinance out, you know, so, but you just

Tim Murphy (25:01):

So you know my metrics, because your last little story, there was like a great transition to my next question, which was, how do you leverage a hard money lender to your benefit when growing your relationships and you just set it right there. You're like, well, I can leverage, you know, a against B because I have an asset, I have a strategy and I don't like where I'm at with AA. So I'm going to go over to B. I mean, are there any other ways in your mind that you've been able to leverage hard money lenders, whether it's one against the other, whether it's, you know, like you did with the first story that you shared with us on the apartment where you're like, Hey, I've given you a track record. Now I want to leverage my track record to get a better rate. I mean, are there any other leverage points that you've found using hard money?

Robert Grand (25:45):

Yeah. There was a deal recently that we found that was a good deal and our heart, the heart first hard money lender. We sent it to called us up and said, oh my God, my daughter needs to live in that area. You know, she's going through a divorce. We, I don't know what it would take, but if you guys could figure out a way to make this property work for me like this, and I go, I said, you know what, we'll sit down and figure out the number that we could just kick it right over to you and we'll sell it to you. I go as a favor and you just have to hook us up when we need a really good favor down the road, you know, we need good rates, good terms. And we'll just say you owe us one. Right? So now, I mean, that's just kind of like one of those situations we could have made 125,000 on this property.

Robert Grand (26:29):

If we had a flipped it, we made 50,000 just selling it to her. Right. So it was a really good win for us. We weren't disappointed, you know? But that also causes us to have an amazing relationship with the person. And, and, and at the end of the day, I mean everything and private money, you can go to national, you know, hard money lenders, excuse me, and attempt to use them. But when you don't have that relationship, you're just a number in the game. But on the local level, which is what I would recommend anybody getting started with hard money to do is to connect with local hard money lenders. You'll build that relationship with them. And it's a give and take either way. So it's like, I could probably get any deal. I want funded. Even if, if, even if I want to go outside my margins of safety, right.

Robert Grand (27:08):

My algorithm, if I, one time said I wanted to do it, but I won't. But if I wanted to, I could probably do that because of what I did right there. So that's just another, and I said, you gotta help me out. Like actually in another example of that is I was selling a deal that came up a little bit closer to the margins of where at the end of the timeframe that we had with the loan, I was going to have to go over and I was going to have to pay another point and she waved the point. She goes, you know what? You've, you've done such good things for me. Like, don't even worry about that point that you're going to have to pay a closing. I was like,

Tim Murphy (27:37):

You know what? You just nailed it, man. That's one of the major principles, if not the number one principle of the Value Driven Investor is start by giving, you know what I mean? We always look at it that way. Like, you know what? Yeah. I can make money here. But if I give to the relationship, the relationship will give back tenfold. And so that's an awesome example

Robert Grand (27:57):

Of that. That's so true, man. So

Tim Murphy (27:59):

True. Okay. Let's go to another question. I think, you know, we'll help people. What happens if I default on my hard money

Robert Grand (28:08):

Loan? So most of the time when you go into default, you screwed up this project six ways from Sunday your, your first options deed in lieu of foreclosure. And that's what they're going to want you to do because that's going to save a huge timeframe. At least in my state with the process, it could take, you know, six months to do a foreclosure, you know, in the state of Oregon. So from start to finish. So they ask you for a deed in lieu of foreclosure. And so that way, a lot of times they'll say, look, we're not going to come after you just sign us the property back so we can take care of this problem and get it off our books. And that's the safest thing to do. You're never going to get along with them again. You know, you're out, you're not, you're not working with them anymore because they're not going to take the risk on you.

Robert Grand (28:48):

But so that would be the safest thing. The next thing, if you default, you always have the right to cure, right? If you can come back, maybe find another partner to come in and help you out. Maybe renegotiate the loan with them, even say, look, I've misunderstood. These, the construction costs here, I screwed this up. Can you reload? And can we work at the numbers still work? Right? So if it's a good deal, they, their goal is not to own a property, right? They want to get the interest of the property. They want to be in, get the interest, be out, you know, that's, that's kind of their goal. So if, if they have to hold a property, it's just like a bank holding a property. It's the worst case scenario because now they have to be involved in it. A lot of PR hard money lenders used to be house rehabbers, flippers investors, and they've transitioned to that phase of their life. So yeah,

Tim Murphy (29:32):

Yeah, no, that's well said, well said. So, I mean, there's not a ton of risk when it comes to defaulting because the bank, this is sophisticated investing. You know, these guys are needed lenders. This is not, you know, the market that conventional you're in a different world. They they understand what their risks are and that's why they're borrowing money at the rates that they are. But they also understand that if they work with you, they don't have to go through the pain of rehabbing that property. So if you're defaulting, don't just give up and throw the keys on garbage and walk away. If you're defaulting, your first move is to call and try to renegotiate and try to work something out and keep moving forward with that property, because that's what they want you to do. Even if they have to give you a discount to keep moving forward, but they will draw a line in the sand where it's not worth it and they will take the property back. And like Bob said, deed in lieu of foreclosure, do not go through the foreclosure process. And Bob, the other thing I want to throw out there, the question, I think people are probably asking themselves, well, if I do get foreclosed on by them, or I give up the house indeed of lieu of foreclosure, because it's a hard money loan.

Robert Grand (30:44):

No, no. I mean, they could, if, if for some reason there were some like judgment or something else, but it wasn't on your credit to begin with. So it's not going to be on your credit for at least that portion of it, that foreclosure would not be on your credit. I mean, I'm with you, Tim. I would never ever let it go to foreclosure. I'd sell it to another investor. I would renegotiate with them to that, to the last possible moment, sell it to another investor partner with another investor. And it would

Tim Murphy (31:14):

Done, I mean, I tell people so often in when they're flipping a house or remodeling a house or, you know, anything transformational with real estate, your biggest risk is right when you start demoing, because right, when you start downloading, you are in the limbo and you can't do anything with that property. When that property is demoed, there is no use. Nobody really wants it. But then when the property is finished, it comes out of limbo and it is a valuable asset if you've done everything right. But in between buying the property as is and going into demo and then finishing the rehab demo period is limbo. And you got to get the asset out of limbo before anybody wants to play the game anymore with you. And that's got the hassle readmission. That's your biggest risk is when you're flipping a property was when you're in that demo. And you're in that remodel phase. So you always have to be very cautious about that. Bob, let's go on to the next one. Our hard money lenders regularly.

Robert Grand (32:20):

I mean, I guess there's a, I would say widely know, you know, I could start loaning tomorrow and say I'm a hard money lender. Probably the ones you should be using on a local level, they at least have a loan, origination license, you know, or a mortgage license. So that way they can do that and they do that for their own investors. Right. So, so they can charge points and do things like legitimately. Yeah.

Tim Murphy (32:42):

And I would say that, you know, they're not really regulated, like regulated as far as the ways that they can borrow, but they are regulated as fact it, or in the fact that they are a lending institution, they are lending money. So there are regulations within your state about how to be a lender, whatever kind of lender you are. And if you break those regulations, then you know, you can get in trouble legally. There's also some department or financial services that oversee different types of lending. So they are somewhat regulated that, you know, it is for the lack of a better word, it's kind of like the black market lending. It's not your conventional, what

Robert Grand (33:29):

Everybody's used to. Right. It's alternative for sure. That's for sure. It's alternative and can be great in the right situations.

Tim Murphy (33:38):

All right. Pop, you know, I think we've nailed a lot. Is there anything else that you think people should know about? You know, again, we're, we're coming from the context of, this is going to be your first deal. You're looking at Hardman hard money, lending financing. I mean, Bob, is there anything that we missed that they should know about as an, as a new hard money lender borrower?

Robert Grand (33:58):

Well, you know, I think probably not necessarily missed, but just, just realizing, you know, that you should definitely set your parameters of what you want to operate within. Start connecting with a hard money lender locally and having a conversation before your first deal ever even happens. Right. You know, you could have some experience, you know, in the industry, but you're trying to step into it, just start making those connections with them and understand you can go talk to two or three of them. You want to build those relationships, man. And that's, that's what it truly is all about. At the end of the day, cause anybody could walk in off the street, they might loan them money, but you know, they're going to be very cautious. But if you built a relationship and went to them and said, Hey, and then ran a couple of scenarios by them to try to fit your mold, that's, that's going to be, that's going to give them confidence that you're doing your homework.

Robert Grand (34:44):

You know? So if you're a brand new person that's getting into flipping and you're going to go, I'm going to go flip a house next week and use hard money lending and you go and find a deal. You don't really know your numbers and you go walk into a hard money lender. They're going to eat you up. You're going to look like a fool. They're going to ask you so many questions. You know, that you won't know the answers to, and they might loan you money 15%. Cause you don't really know and three points and you know, and you know, it's just kinda like you're such a high risk to them cause you're just not educated and you don't know it. So it's, it's, it's these types of processes. That is why we're doing this right here, that you got to go through to understand, you know, what they need to hear and what you need to know to be able to make it work in the hard money world.

Tim Murphy (35:27):

Bob let's end off. I want to end off with a story. So can you give us a little bit story? You know what, I, I'm a big believer that you know, our podcast, you and I have talked about this a lot. It's about trust. Like we want people to trust us. We want to be mentors to those out there that are getting started in the survival phase. So I can't just, we can't just sit here and say everything's rosy. I mean, obviously your story was a very fantastic story. Everybody would love to be in that position on that apartment building, but let's talk about something where hard money, you know, got it, got stressful or put a little pressure on you or, or maybe something went wrong. Give us a story, a Bob green story, using hard money financing that maybe isn't as rosy as everybody as the stories that we just told.

Robert Grand (36:13):

Yeah. You know, in the real estate market we're in, right. You know, it's easier for people just to sell their house on the market. So it makes deals harder and harder to come by. So it makes you want to push that limit as to what you can do on a deal. And one of the deals that, you know, last year that we really wanted to do, but we couldn't get our hard money lender to budge. And we're walking through that process of like trying to figure out how to make this whole thing work together. And it, it ultimately at the end of it, you know, came down to being so risky for us. And that with one shift in the market that deal would have probably ended up costing us money, you know? And, and that's the thing that a lot of people, you know, miss everyone wants to jump in and do these deals, but like that one deal specifically it would've been an awesome house.

Robert Grand (37:01):

And I was like one of those projects where I was like, ah, emotionally, want to jump into this because I think it's a cool house. I leveled homes. And I loved the bungalow styles and making them look time period specific. And so I was like, this one, I was like, well, I'd do it. If I could just do that. And you know, the numbers are tight and they saw the numbers are tight. So that was a signal from them that I should have been receiving, but I kept kind of pushing it, this and that. And you know, at the end of the day in the final look at the numbers and how everything was, it's like the deal just didn't make sense with, you know, hard money lending. I would have had to figure out some sort of other lending to be able to do it.

Robert Grand (37:34):

And it's kind of a heartbreaker because you do get emotionally involved in some of that stuff. But if I would have taken that deal and say one or two things would have went wrong inside the house, I would have probably been paying somebody to buy this house. Right. You know, and, and that's just because it wasn't a bad market, but it was just me trying to make the deal fit. Right. And you're trying to make it fit. And sometimes you get into that mold and that's, that's probably like the one time, like in the last year. And, and ultimately you end up passing on so many deals because of that right there and sticking to those guns. And so I haven't really put myself in a spot where I've lost money. I mean, it can always happen, but, but that story right there where it was the closest I've ever been, they would've done the deal because they knew me.

Robert Grand (38:17):

They knew I could do it, but they were even like, you know, letting me know like, oh, it's just going to be tight. If it goes, you know, one way. And they were even asking for more than 10% down, right. Well, you're going to have to bring X down to the table to make this one happen, which was another red flag looking back that they knew my numbers were not up. And I was too emotionally involved in this deal. And I'm sure, you know, if I would have done it, I would have lost money because it was an old

Tim Murphy (38:42):

Well, Bob, you know, and that's, that's again, you, you stick to your guns on your algorithm and, and the algorithm, I'm going to say this a million times, the algorithm is unemotional and it keeps you away from, or gets, at least opens your eyes to you becoming emotional. And the other thing about that, you know, that's a great story because the other thing about that, your lender is not your enemy. Your lender is your partner and your lender is not, they're taking the risk with you. And they're going to assess the risk with you. And if you see these red flags coming up from them and things are getting like, well, why aren't you charging more interest? Why are you asking me for more money? What, whoa. And they're like, you know, bud, you're taking on more risk. We borrow you money. And we up our fees, we up everything with the risk that we think we're taking, you know, you want to take all that risk. And you're like, oh wait, all these red flags are coming together. That's part of my algorithm. Am I making a good decision? Because if, if you don't figure out how to think through that and become unemotional, you will lose money,

Robert Grand (39:50):

Right? Grando a hundred percent, you will totally lose money. It's different. It's like, it's your own residence. Say if it's your own house you're living in, you want to make that different than what you'd make a flip, you know? And so like you can be emotionally involved in your primary residence.

Tim Murphy (40:05):

All right, man. Well, this was an awesome episode, bro. Yeah. It's always fun to just sit down with you and, and talk shop. But what I want people to know is that you know, VDI we're in the infancy of getting things started. And we do have like Bob grant has significant relationships with lenders across the country. They borrow across the country. So if you're interested in getting a name or a number of somebody that grand uses again, I don't use a lot of hard money, so I don't have someone to recommend, but that's why we got Bob Graham because he's got people that he can recommend. If you're interested in looking into that, we also in the future are going to put together a, a hard money course on how to look at hard money lending, the different steps and the process of hard money lending, how to like basically everything we went over today, except it's going to go even deeper into hard money lending. So once we have that available, if you want to go to our website, Value Driven Investor.com, you can sign up, give us your email, and then we'll keep you in the loop through email when we have any course that we're going to send out. But obviously in this episode, the hard money financing course. So anyways, it's been awesome. We are so thankful that you guys are listening to our podcast and we're signing off. Thanks. Grando see you buddy. Have a great day.

Tim Murphy (41:28):

Thanks for listening to the Value Driven Investor podcast, where we lead by giving for more information about our community and what's new visit Value Driven Investor.com. The value-driven investor podcast was produced by Digital Legend Media in Minneapolis. Build the or legend Digital Legend Media.com.

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