"Hard money" lending - should I invest?

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joebruin77
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"Hard money" lending - should I invest?

Post by joebruin77 »

Hi, everyone,
A good friend of mine has been in the "hard money" lending business for the past few years. It sounds like it has been going very well for him. I approached him and asked him if it is possible for me to invest some money with him. Of course, I am very conservative and at first glance, was a bit skeptical. But the more I heard about his business model, the more legit and solid it sounded.

Basically, he and his company lend money to people who cannot get a traditional loan from the bank. He only gives secured loans based on properties that have no other loans on them (i.e. paid off). If there ever is a case where there is more than one loan, then his loan is always in "first position". The loans he gives are for 50% LTV ratio max. For every $10,000 I invest, I would get a certain generous percentage as a monthly return. The rate of return would be far better than anything else I can get right now on a consistent basis. The only other cost is a $15 monthly fee charged by the company that does the loan servicing.

If you were me, what other questions would you ask before making this decision? What do you see as the potential risks of such an investment opportunity?

I welcome any feedback or suggestions.

Thank you,
joebruin77
xerty24
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

What rate is your friend getting and/or offering to you?
No excuses, no regrets.
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joebruin77
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Re: "Hard money" lending - should I invest?

Post by joebruin77 »

xerty24 wrote:What rate is your friend getting and/or offering to you?
He charges 12% to the borrower. He would keep 4% and I would keep 8% minus the $15 a month fee charged by the servicer.
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bottlecap
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Re: "Hard money" lending - should I invest?

Post by bottlecap »

Joe:

Safe and high return does not make sense. That would make me nervous.

JT
k-slice
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Re: "Hard money" lending - should I invest?

Post by k-slice »

I would not do it.
I have a friend who "invested" $100K in such a scheme.
The operation was called Cedartree funding I believe.
Anyway, the operator is going to jail. My friend LOST the entire $100K.
Your results may vary.
I would not go near any "investment" that was not registered with the SEC.
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HardKnocker
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Re: "Hard money" lending - should I invest?

Post by HardKnocker »

If you have 1st position I'd give it a go with $10k and see how it goes. If it goes well, another $10k.

I wouldn't tie up too much in any one loan. You will have a loser now and again.

Be the bank!

And why not do this yourself without the middleman? There are people out there who want to borrow money. Write your own mortgages.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
xerty24
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

joebruin77 wrote:If you were me, what other questions would you ask before making this decision? What do you see as the potential risks of such an investment opportunity?
what exactly is your contract with him/his company? The company loan may have a 50% LTV home behind it, but that doesn't help you if he decides to stop paying you interest, keep it all for himself, and then skip town. Are you an equity investor in his company, a lender to his company, or the person who actually holds the lien on the property and just pays a 4% servicing fee to his company for arranging and managing everything? I think anything besides the latter has credit risk concerns, although how big those are depend on the details of your friend and his company.
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Re: "Hard money" lending - should I invest?

Post by pkcrafter »

I am very conservative and at first glance,
You better think about this. Nobody who would have to pay 12% for a loan can possibly be a good risk. These guys cannot find a loan anywhere else at a lower rate. 12% is MUCH higher than safe bonds, much higher than junk bonds, and even higher than expected stock returns. There's a reason for that. 12% in this environment? Your friend gets 4% because he is shedding off default potential to guys like you. This is not investing.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
dbr
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Re: "Hard money" lending - should I invest?

Post by dbr »

I wonder, if you are "very conservative" but feel the need to take this large risk for a better return, that it might make more sense to adjust your overall AA to a little more risky allocation with a little more expected return.

What is actually your motivation for wanting to do something that must inevitably involve more pain than reward?
Shnaka
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Re: "Hard money" lending - should I invest?

Post by Shnaka »

I came here to learn but thought perhaps my first post could be constructive on a topic I am familiar with.

Hard money lending is a private mortgage typically given to real estate investors for short term holding periods. Many have a one year balloon and are secured with a first trust deed. They have very high upfront points, 2-4% (your friend gets) and range from about 11-13% interest right now. The most popular use of hard money now is for fix and flip residential rehabs. Many hard money guys lend on an "after repair value" asset valuation that should be derived from a licensed appraiser. If you take proper steps their is a great return investing in hard money loans. To address your question you may want to do a few things before investing:

- Know who the actual lender is (in this case your friend)
- Ask is they are getting appraisals and if the person is licensed
- Insure the deed and note are recorded at the county recorders
- If possible drive the property the loan is going against
- Question the borrowers motive, (flipper/holder/homebuyer)
- Question the borrowers experience, especially if flipping

The main risk is default by the borrower in which you are covered by whatever mortgage laws are in that state. If the borrower defaults you foreclose (the servicer should be setup to do this, depends on the servicer), as any bank would, take the property back, finish the rehab, and resell the thing for what could likely be a significantly larger profit than an annualized 8% SO LONG AS the loan to value was low enough and you know how to work with contractors. Everything your friend told you in regards to return, LTV, etc is typical for hard money. Once I get my IRA to a level where I have enough capital to invest in hard money firsts it will be 100% allocated to doing so, of course, I work in real estate and am primarily a real estate investor.

BTW the guys I know doing fix and flip rehabs that use hard money can afford the high rates and upfront points since their typical annualized return on any given deal can run from 10% to 300%. In 2009 a friend was consistently getting 70-120%. The competition has grown significantly so now getting much better than 20% is tough.
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Re: "Hard money" lending - should I invest?

Post by stoptothink »

joebruin77 wrote:Hi, everyone,
A good friend of mine has been in the "hard money" lending business for the past few years. It sounds like it has been going very well for him. I approached him and asked him if it is possible for me to invest some money with him. Of course, I am very conservative and at first glance, was a bit skeptical. But the more I heard about his business model, the more legit and solid it sounded.

Basically, he and his company lend money to people who cannot get a traditional loan from the bank. He only gives secured loans based on properties that have no other loans on them (i.e. paid off). If there ever is a case where there is more than one loan, then his loan is always in "first position". The loans he gives are for 50% LTV ratio max. For every $10,000 I invest, I would get a certain generous percentage as a monthly return. The rate of return would be far better than anything else I can get right now on a consistent basis. The only other cost is a $15 monthly fee charged by the company that does the loan servicing.

If you were me, what other questions would you ask before making this decision? What do you see as the potential risks of such an investment opportunity?

I welcome any feedback or suggestions.

Thank you,
joebruin77
Been there, done that...am about $150k less wealthy. The very good friend of mine who I went through had made 7 figures in hard money and "money factoring" in a matter of a few years, he is now broke and just was served with a $17m judgement that is forcing him to file bankruptcy. I had working relationships with a few other guys who made a killing in hard money during the real estate boom, all of them are hurting now. There are very good reasons why these entities can not pull a loan cheaper than 12%.

Make sure your buddy provides documentation of all the safeguards you mentioned before you invest a penny. I highly doubt he can.
xerty24
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

pkcrafter wrote:Nobody who would have to pay 12% for a loan can possibly be a good risk. These guys cannot find a loan anywhere else at a lower rate. 12% is MUCH higher than safe bonds, much higher than junk bonds, and even higher than expected stock returns. There's a reason for that.
sometimes the reason is risk, and sometimes its that the banks have irrationally curtailed certain types of lending for political or non-economic reasons in the wake of the RE bust. There are good risks out there and 200% collateral goes a long way, assuming you can find them. No guarantee this guy or his friend can, but it's possible just like finding the $20 bill lying on the street that the economists don't believe in.
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mikep
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Re: "Hard money" lending - should I invest?

Post by mikep »

If he can get 12% why does he need your money and not just use his?
There's another thread here on lending club where people get 9-10%.. that looks more diversified than this earning 8% - $15/mo.
xerty24
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

mikep wrote:If he can get 12% why does he need your money and not just use his?
There's another thread here on lending club where people get 9-10%.. that looks more diversified than this earning 8% - $15/mo.
I thought lending club and such were all unsecured loans. Those are lots more risky.
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Abe
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Re: "Hard money" lending - should I invest?

Post by Abe »

joebruin77 wrote: Basically, he and his company lend money to people who cannot get a traditional loan from the bank. He only gives secured loans based on properties that have no other loans on them (i.e. paid off). If there ever is a case where there is more than one loan, then his loan is always in "first position". The loans he gives are for 50% LTV ratio max. joebruin77
I have made hard money loans for a long time. In my experience, people who cannot get a traditional loan from a bank do not have any or very little equity in their home. I don't know where your friend finds people in distress who are in a position to give him a first mortgage for 50% of the value of their home. If they already have a loan on their home it will be a first mortgage. If you make a loan to them secured by the home, it will be a second mortgage unless you can get the first mortgage holder to subordinate their mortgage, which they are not inclined to do. This does not sound right to me. I would not do it.
Slow and steady wins the race.
ResNullius
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Re: "Hard money" lending - should I invest?

Post by ResNullius »

Beware of being too greedy. When something seems too good to be true.... I have a close personal friend who found out two months ago that one of his best friends had taken him for almost half a million in a ponzi scheme. It turns out that they same guy also took close to $50M from others. The good news is that the FBI and Secret Service, along with the US Attonrey, are about to indict the guy and his son. The bad news is that my friend is totally out of luck in terms of getting even a cent back. The crook was his next door neighbor for 25 years, their kids played together, and the crook was a major mover and shaker in the town for decades, at least before he and his son became crooks. Beware, even you best friend can rob you blind.
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joebruin77
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Re: "Hard money" lending - should I invest?

Post by joebruin77 »

hi everyone,
just wanted to say thank you to all of you who took the time to post a reply. i will strongly consider all of your excellent points and words of wisdom.

thanks again,
joebruin77
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HardKnocker
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Re: "Hard money" lending - should I invest?

Post by HardKnocker »

This could be a 1st mortgage so that the borrower can purchase a home. That's how it get's first position.

They put down 1/2 and you provide the rest. For some reason (poor credit) they cannot go to a bank.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
fredd
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Re: "Hard money" lending - should I invest?

Post by fredd »

I am investing in a company called Redwood Mortgage. It is an LLC. They invest mainly in the greater San Francisco/ northern CA area. Been around since 1978. The current portfolio has approx 25 properties with a LTV less than 50%. While they use outside appraisers, all properties are viewed by a Redwood employee before a loan is written. Average loans are in the 9-9.5% range to people who can't qualify for conventional loans. The distribution to investors is 6.5% annualized.

fredd
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Abe
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Re: "Hard money" lending - should I invest?

Post by Abe »

HardKnocker wrote:This could be a 1st mortgage so that the borrower can purchase a home. That's how it get's first position.

They put down 1/2 and you provide the rest. For some reason (poor credit) they cannot go to a bank.
In my experience, if they cannot go to a bank, they cannot put down 1/2 the down payment. I've never even found one that could come up with anything, much less half the purchase price.
Slow and steady wins the race.
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Re: "Hard money" lending - should I invest?

Post by psteinx »

Wow this thing is SCREAMING *DANGER DANGER DANGER*

Abe and/or others are probably right, that anyone willing to pay 12% on a first loan is unlikely to come up with a 50% downpayment or to have 100% equity in something to begin with.

My guess is that there are flippers out there who find a rundown property for, say, $40K, and claim that with another $40K to fix it up, they can flip it for $160K. Voila, loan the flipper $80K and the loan is only 50% LTV!

Except it isn't...

The loan (in my example) is not 50% of the value, but 200% of the purchase price of the property. The lender HOPES that the flipper can productively employ the other $40K in good repairs and improvements and dramatically raise the value of the property, but there are no guarantees. And any kind of appraisal based on what a property MIGHT be worth after a promised fixup (that may or may not be completed competently or at all) is unlikely to be particularly precise.

Furthermore, the friend taking 1/3 of the interest payment as a sort of finder's fee seems pretty excessive.

Also, even if you dabbled in this in a small way (with say $10K to start) and experienced success, that's no guarantee that you could then safely step up to larger loans. A $10K "starter" loan is likely to be on a single property. Let's say (for discussion) that any given loan that this guy does has a 70% chance of success, and a 30% chance of failure with a relatively low recovery rate. Well, a single $10K loan would have a 70% chance of working, but you wouldn't necessarily realize that you'd gotten lucky as you stepped up to a larger loan that would have a high chance of blowing up on you.
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

Abe and psteinx - I think you're just arguing from incredulity, i.e. you can't imagine such people exist. That doesn't mean that if OP or his friend can find people willing to pay high rates with good collateral that they shouldn't lend to them. Of course you make sure the house appraises to your satisfaction, but if it does and has a clean title, why not?

One example would be people who strategically defaulted on their last mortgage and have been living rent free for the past two years. Now they finally get foreclosed on and kicked out and they've saved enough cash for 50% down but no one will lend them the other half. On one hand, you know they'll default if it's in their interest, but on the other hand, high interest and lots of collateral goes a long way.
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stoptothink
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Re: "Hard money" lending - should I invest?

Post by stoptothink »

xerty24 wrote:Abe and psteinx - I think you're just arguing from incredulity, i.e. you can't imagine such people exist. That doesn't mean that if OP or his friend can find people willing to pay high rates with good collateral that they shouldn't lend to them. Of course you make sure the house appraises to your satisfaction, but if it does and has a clean title, why not?

One example would be people who strategically defaulted on their last mortgage and have been living rent free for the past two years. Now they finally get foreclosed on and kicked out and they've saved enough cash for 50% down but no one will lend them the other half. On one hand, you know they'll default if it's in their interest, but on the other hand, high interest and lots of collateral goes a long way.
These situations absolutely exist. There is money to be made, as long as you accept that the risk can be pretty substantial.
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Re: "Hard money" lending - should I invest?

Post by pkcrafter »

fredd wrote:I am investing in a company called Redwood Mortgage. It is an LLC. They invest mainly in the greater San Francisco/ northern CA area. Been around since 1978. The current portfolio has approx 25 properties with a LTV less than 50%. While they use outside appraisers, all properties are viewed by a Redwood employee before a loan is written. Average loans are in the 9-9.5% range to people who can't qualify for conventional loans. The distribution to investors is 6.5% annualized.

fredd
fredd, is Redwood Mortgage associated with Redwood CU?


Paul
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Spirit Rider
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Re: "Hard money" lending - should I invest?

Post by Spirit Rider »

Google "Agape World Ponzi Scheme" for another "hard money" lending company promising great returns.
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Re: "Hard money" lending - should I invest?

Post by ilmartello »

Run, forest, run.
xerty24
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

Spirit Rider wrote:Google "Agape World Ponzi Scheme" for another "hard money" lending company promising great returns.
That's pretty close to saying "don't invest in stocks because Madoff claimed to invest in stocks but was really a Ponzi. Your broker could be too!"

As for Agape World, if a nutty name, a MLM/pyramid structure, and guaranteed 14% weren't enough for you, maybe the criminal fraud record of the founder might have been a tip. Plus the top hit on Google back then was this one warning the whole thing was a scam:

http://www.fatwallet.com/forums/arcmess ... did=780511

Some things are really obvious frauds. Where are the red flags here for OP?
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Post by HomerJ »

xerty24 wrote:Where are the red flags here for OP?
Is the OP going to be part of the business, appraising houses and borrowers? Or he is just going to "invest" money with his friend, trusting that his friend's stories about how good the business has been doing over the past few years is true?

OP, you going to demand to look at the books? Check out the history of the actual properties listed in the books, and make sure they were real?

Or you going to just going to give this friend money because he talks a good game, and your brain lit up when he said something like "low-risk 8% return"
What do you see as the potential risks of such an investment opportunity?
The real and potential risk is that you lose 100% of everything you invest...
fredd
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Post by fredd »

Redwood CU? What do you mean?

fredd
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joebruin77
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Re: "Hard money" lending - should I invest?

Post by joebruin77 »

rrosenkoetter wrote:
xerty24 wrote:Where are the red flags here for OP?
Is the OP going to be part of the business, appraising houses and borrowers? Or he is just going to "invest" money with his friend, trusting that his friend's stories about how good the business has been doing over the past few years is true?

I am not going to be part of the business by doing the actual appraisals or running checks on the borrowers. However, I am given copies of the appraisals and lots of information about the borrowers. Granted, I cannot independently corroborate all info provided to me, but so far what I have looked up independently is consistent with what I have been told.

OP, you going to demand to look at the books? Check out the history of the actual properties listed in the books, and make sure they were real?
Yes, I have obtained this information. I have copies of the deeds of trust, copies of the promissory notes, and copies of the proof of insurance, among other docs.

Or you going to just going to give this friend money because he talks a good game, and your brain lit up when he said something like "low-risk 8% return"
Of course, the possibility of high returns is very appealing. But I am not going to blindly give him my money. That is one of the reasons why I put up my original post.
What do you see as the potential risks of such an investment opportunity?
The real and potential risk is that you lose 100% of everything you invest...
Even though my sense is that the odds of that are small, I realize that I cannot be 100% sure of that not happening. So I am only investing a relatively small amount of my available assets.

BTW, I searched the internet high and low for any scam alerts or bad reviews about either my friend's business or the loan servicing company he uses and there was not a single mention of anything negative.

Thanks!
joebruin77
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Re: "Hard money" lending - should I invest?

Post by HardKnocker »

As some have already stated, I can also envision a possible scenario here where the property in question is purchased significantly under appraised value so that equity is "created" resulting in a 50% down situation.

The trick is then selling it to someone for the appraised value or greater.

I'd rather see the OP run an ad offering $10,000 for loan to someone himself. More control. Be the bank!
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mak
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Re: "Hard money" lending - should I invest?

Post by mak »

There were many companies doing exactly this in 2005 all over the SW US. Almost every one is BK, and investors lost ALL of their capital. I'm involved personally in 2 loans, and lost 100% on both. The borrowers defaulted. The lenders of course foreclosed (not easy to do, because there are many lenders pooled in each loan and they have to agree). They found the financial statements of the borrower provided at loan origination were fantasy, assets claimed did not exist in some cases, were obscenely overvalued in others. Appraisals were all done by MAI certified appraisers, third party. All were fraudulent. Case in point:
$6MM appraisal, 20ac land parcel being subdivided to buildable lots
$3MM loan, 50% LTV
Default 2008, also defaulted on paying property tax.
50 lenders pooled.
In 2010 the lenders had organized and contributed enough money to pay for foreclosure. After taking title, lenders listed property for sale on realtor advice for $275K. Yes that is $275K for the same parcel appraisal originally said would be worth $6MM when complete. Delinquent taxes were $150K, fees of sale, would leave maybe $100K to split up among the 50 lenders.
One year later, no offers. Property seized by county for 4 years unpaid taxes and penalties. (Lenders could not raise money among themselves to pay tax, no one agreed. It turned out this was a good thing, paying tax would have been good money after bad, see below.)
County treasurer offered parcel for sale in public auction tax sale April 2012. Minimum bid was taxes and penalties owed, at this time $175K. The auction was well attended. Not a single bidder emerged who was willing to pay that amount. Parcel now stays owed by county to be offered yearly in tax sale until some future date perhaps years from now when someone might want to buy it.
Lenders lost their entire capital, plus their foreclosure costs.

These deals are rife with fraud. The appraisal is fake. Financials can be fake. If an individual house, the numbers are rigged to make it look far better than it is. If all goes well with the speculator's plans (the guy borrowing at 12% IS a speculator, taking big risks with OPM) then you get paid. If things blow up, sorry, YOU lost your money, not HIM.

Oh, and he signed a personal guarantee! He's on the hook for this personally too, so you can sue, right? Guess what? a) it costs a lot of money to do this b)the guy probably has stashed away lots of the borrowed funds you will never find, c) he is a professional debtor and knows how to live well with million dollar judgments against him, d) all the lenders have to agree to a plan of action if they choose to hire an attorney ($20K to get started...) and no one will agree and no one will pay their share of the costs, e) if you do decide to sue, borrower will be using your funds that he still has in his pocket to fund defense of the suit and take it for years in the court, f) if you get a judgment you will NEVER collect.

The best thing you could do is to BORROW very large sums of money from your friend and offer to pay 12% plus fees plus a bonus to him. Take that money and speculate with it. If things work out pay the loan back, then plan to borrow even more on the next deal. Always squirrel away as much of the borrowed money as you can, offshore, in shell corps, etc. THEN, when things blow up shrug and tell your friend you can't pay back. Sorry. You live happily ever after, lots of suckers stupid enough to lend you money lose. A perfect game. You should be BORROWING at these high rates, not lending. Much more profitable.

PS your friend is in it for the huge loan origination fees, and walks away when things blow up because none of his money is at risk.
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Abe
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Re: "Hard money" lending - should I invest?

Post by Abe »

stoptothink wrote:
xerty24 wrote:Abe and psteinx - I think you're just arguing from incredulity, i.e. you can't imagine such people exist. That doesn't mean that if OP or his friend can find people willing to pay high rates with good collateral that they shouldn't lend to them. Of course you make sure the house appraises to your satisfaction, but if it does and has a clean title, why not?

One example would be people who strategically defaulted on their last mortgage and have been living rent free for the past two years. Now they finally get foreclosed on and kicked out and they've saved enough cash for 50% down but no one will lend them the other half. On one hand, you know they'll default if it's in their interest, but on the other hand, high interest and lots of collateral goes a long way.
These situations absolutely exist. There is money to be made, as long as you accept that the risk can be pretty substantial.
stoptothink, I have been buying existing mortgages and making hard money loans secured by houses and even used mobile homes for over 35 years. I have seen just about everything. I have done some deals that I imagine most bogleheads would not touch with a ten foot pole. So, I speak from experience, and this deal the OP is thinking about doing smells real bad to me. I would never give my money to a "friend who has been making hard money loans", or anyone else and expect them to look out for my best interest. It won't happen. I have seen too many "opportunitys" like this one where the silent investor loses their money. In addition to that, as I stated previously, I have never run across anyone who would be willing to to pay 12% interest and pay 50% down in my entire life. I'm not saying it's impossible, anythings possible, but I have never seen it. Even if the OP did this, the return is much low. The lowest return I ever received on deals that were less risky than this was 14%. Just my opinion. I'm just trying to keep the OP from getting burned. He can do what he wants. Makes no difference to me.
Slow and steady wins the race.
xerty24
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Re: "Hard money" lending - should I invest?

Post by xerty24 »

Abe - thanks for sharing your experienced perspective.
No excuses, no regrets.
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