259: What is Hard Money and When Do You Need It?

SHOW NOTES FOR EPISODE 259: WHAT IS HARD MONEY AND WHEN DO YOU NEED IT?

Part of being a successful real estate investor is knowing loan products and financing techniques.  Your funding source can destroy a deal if you don’t select the right source to meet your profit goals.  In this podcast episode, real estate investor, hard money lender and CEO of DoHardMoney.com Ryan Wright shares the inside scoop on hard money and what it can do to help you succeed in real estate investing.

What You Will Learn

• The definition of hard money
• Why hard money lenders are not bankers
• 5 top selling US real estate markets
• What is one of the biggest challenges for real estate investors?
• How do hard money lenders estimate “after repair value?”
• Qualifications for hard money borrowers
• The most common mistakes of hard money borrowers
• How you can get a hard money loan for 100% of the ARV and 100% of rehab costs

About Our Guest

Ryan G. Wright

Ryan G. Wright is the CEO of DoHardMoney.com, a private hard money company that offers short-term funding for real estate investors.

Ryan began his career in real estate at age 21, working in the mortgage industry.  10 years ago, Ryan started investing in fix and flip properties. He saw that it was difficult to get funding quickly on these properties, much less from reputable and reliable sources. This need prompted the founding of Do Hard Money.com.

Ryan has been featured in numerous publications, including Fox Business, Realtor.com, Utah Career Guide, The Deseret News, The Salt Lake Tribune, Utah Business Magazine and Salt Lake Realtors. He was also been a featured guest on K Talk 630 AM: “The Voice of Utah.”  He has also published three books and been a featured speaker at numerous financial conferences.

Ryan holds a bachelor’s degree in marketing and management and was accepted into the prestigious MIT University Entrepreneurial Master program.  Other recognitions include the “Real Estate Rookie of the Year” from The Salt Lake Board of Realtors  and the State of Utah’s Young Entrepreneur award in 1996

In his free time, Ryan enjoys boating and running several triathlons, with the largest being a half iron man.

More About Ryan

• Ryan’s grandfather, who lived in Southern California and owned a heating and air conditioning company, started investing in houses over 50 plus years ago
• His grandfather would buy a house, fix it up and sell it.  Sometimes he’d move in to it while he was fixing it over the course of a couple of years
• Did this with several dozen properties.  Also had rental properties
• That extra money made it possible for his grandparents to live a better life and especially in their later years
• Ryan’s dad was a chiropractor and he also started investing in rental properties.  Bought a duplex here and there and other properties, would pay them off and buy another
• Ryan would do work on his dad’s places, cleaning up, painting, etc.
• His grandfather ended up moving from Southern California to Salt Lake City and would drive down and pick-up Ryan in the summers to work on his grandfather’s properties
• It was through that experience that he learned a lot about construction, electrical and more, so that too today, he’s less likely to be taken advantage of by contractors

Financial Transition

• Ryan doesn’t like to be referred to as a banker
• He doesn’t like bankers
• Most people in the hard money space come from the banking world
• He came into the hard money space from the investing world, as a real estate investor
• He got his real estate license
• Became a real estate investor
• Bought his first rental property, a duplex in Utah, with his wife,  in 2002
• Started wholesaling, flipping and still buying rental properties
• He would find a buyer, tell them they had to buy the property and then sell the property, so he made 2 commissions
• Even though he had his license, he didn’t have to work nights and weekends because he was coaching and doing the transactions for his investor clients
• One of his biggest challenges was money
• He’d find a good deal but then he had to find someone with cash to fund the deal
• He didn’t have bad credit but not the best either
• It would take months to find a good deal but then he had to scramble around trying to find an investor
• This is what prompted Ryan to get into the money space
• Expanded into Colorado and Texas and are now in 35 states
• He  had an older client who lived out of the U.S., who he helped sell properties as an agent.  Over time, he sold off all his properties and had accumulated over $3 million dollars that he now wanted to invest
• The biggest problem in investing today is reliable capital, so he recommended to his client that he use the funds to lend out to investors as hard money (or as he says, “anti-bank” business)
• Ryan oversaw the operation and it was a major “model shift” for his business, even though he continued to buy investment properties

 Definition of “Hard Money”

• The hard money business has an unjustified bad, sleazy reputation to some people outside of the industry
• The origins of hard money
  • It’s called hard money because the hard money lender lends based upon the “hard assets” (the property)
  • It’s also based on ARV – the After Repair Value of the property
  • A “soft money lender” lends primarily based upon the “soft assets” like the borrowers credit, income, debt-to-income ratio, etc.
  • The hard money lender is not so concerned about the soft assets
  • The big concern for hard money lenders is whether the property is worth the amount they are lending out based upon its value

Hard Money Products

• There are various hard money loan products
  • Some require formal appraisals, some don’t and just require “evaluations”
  • An “evaluation” is where they will send out two independent appraisers or real estate brokers who do independent evaluations and send reports that they compare
    • They tend to be more conservative on value because they are lending based on the hard asset of the property
    • They recommend finding comps in the area and to base their evaluation on the lowest comps
  • He has “take out” deals where he can finance deals for 5 years that are lower interest rates that short term loans, where you don’t have the high borrower qualifications
  • Various Loan Products
    • Main loan product – 6-8 month term, with option to do extensions – mostly for flippers
    • Another – 1 year
    • Longer term products – 2-5 years – where investors do a buy, renovate and rent, lease option/rent-to-own
    • Can fund up to 100% of the property value and cover 100% of the rehab (up to $250K combined loan amount)
      • If you can get the purchase/rehab cost to 70% of ARV, no deposit is required
    • Have done what they call “flash cash” deals (more for wholesaler deal transfers) where it is a very short term loan but they don’t do that many today
    • Most people do a 5-6 month loan, get rehab done, do the re-financing or get it sold
  • Interest rates
    • Ranging from as high as 18% and 6.5 points to 10-12% and 2 to 3 points
    • Borrowers with good credit, experience and can put money down gets better rates
    • When they present the rate to you, you have the option to work with them to reduce the rate, depending on what you want to do and put into the loan

What Can Private Money Finance?

• He lends on:
  • Single family properties up to a fourplex – but mostly single family
  • It can’t be your primarily residence (you can’t live in it)
  • Only investment properties
  • Deals where people run out of money on a rehab, and need to borrow to finish rehab
  • Sometimes people are in another hard money loan that they need to get out of
  • They will lend generally on 70% of the ARV (after repair value) of the property

Hard Money Loan Qualifications

• Qualifications for hard money loan borrowers
  • There are some hedge fund-based products that require high borrower qualifications that may be lower interest rates
  • Typical qualifications for most deals
    • No background problems
      • Criminal record (excluding 10 year old DUIs)
      • Current issues like:
        • Judgments
        • Collections
        • Foreclosures
        • Bankruptcy
    • FICO score over 500

Prime Hard Money Users

• A fix and flipper who is buying a property, fixing it up and reselling it, where most banks won’t want to lend on that type of deal
• People who want to buy a distressed property (that banks usually won’t touch), fix it up, and then re-finance the property, once it’s fixed up and the banks are now interested in financing it.
• Hard money funds the purchase and rehab costs

Loan Valuation

• Since the loan is based on ARV, they get licensed contractors involved in the valuation process
• They have project managers that review the rehab details from the contractor
• They show the borrower the “full scope” of work they need done to the property by licensed contractors to achieve the ARV they seek
• Before they do values, they have a worksheet they send to borrowers to complete
  • Go line item by line item on a detailed spreadsheet
  • Go room-by-room, item by item, with the details of the work to be done and the costs
• The completed spreadsheet is then sent to the appraisers/evaluators to come up with a valuation
• Once the valuations come back, the project managers get involved (project managers are trained and licensed) who access databases on material and labor costs
• The project managers then get with the contractor and discuss the details of his estimates, refine the numbers, get with the loan processors and close
• Ryan’s company holds the funds for the rehab and releases the funds after inspectors see and verify the work has been done and then forwards the funds to the contractor

Biggest Hard Money Borrower Mistakes

• Number One Mistake – Overvaluing the property
• Second Biggest Mistake – Underestimating repair costs

Biggest Hard Money Borrower Successes

• Generally investors who are patient
• Don’t try to make a bad deal work
• Spend a lot of time in marketing and sales
• Use technology, systems to find the right properties
• Don’t go after properties on the MLS
• Find people/properties that have equity and motivation (divorce, HOA, equity lien) and do aggressive marketing with skip tracing, direct marketing, door-to-door marketing, etc. looking for off-market properties
• People who look at their investing as a business

What Happens if You Can’t Sell a House at the Estimated ARV?

• Successful real estate investors are just good problem solvers
• Every problem and every deal is different
• His company is usually pretty good at estimating property value, within 1.5 % (median) of the actual sell price
• Had one lady in Texas who refused to lower the offering price of the home and his company had to take possession of the property, ended up lowering the price, selling and still making money on the deal

The Newbies

• Ryan loves working with the first timers
• His company has a lot of online resources, software and tools for newbies
• Loves to see them close their first deal and succeed
• It’s hard to find the first deal for most but it’s wonderful to see them succeed

Succeeding in Today’s Economy

• He was lending before, during and after the crash of 2008
• Real estate is mostly a series of localized markets – some areas are suffering while others are booming
• There will always be opportunities
• If the properties are easier to finding in a market, they are usually harder to sell
• If the properties are harder to find, they will be easier to sell
• His advice: stay under the local sub-FHA price range because the majority of buyers are buying with an FHA loan

Advice for Old Dawg’s Looking at Real Estate Investing

• Don’t quit your day job yet
• You have 3 jobs to do:
  • Put food on the table – Take care of this with your W-2 income
  • Accumulate cash for your “investment bucket”
  • Make long term investments – Ryan’s long term investments are his rental properties.  He wants to pay off those mortgages as soon as possible
• If you have no real estate investing experience, start with wholesaling
  • Can find properties, put them under contract, sell it and make a quick $5-10,000
  • If you find a property, his company has buyers
• After you do a few wholesale deals, then do a retail deal (rehab and sell or fix ‘n flip) to make even more money
• Take the retail deal money and pay cash for a rental property or do a down payment and finance it with a low interest 30-year mortgage
• He believes the best situation is to have paid-off rental properties

What’s Ahead for His Business

• Is turning 40 next month
• Excited about new technology they are utilizing
  • Have developed multiple software platforms that customers are using for:
    • Finding properties
    • Valuing properties
    • Analyzing deals (red light green light)
    • Hoping this will help clients get to the next level faster
• Excited about helping people with their first deals and helping them create successful financial futures

5 Top Selling Real Estate Markets

• Chicago
• Atlanta
• Ohio
• North Carolina
• New Jersey

Rap-It-Up

• Favorite real estate book: Rich Dad Poor Dad by Robert Kiyosaki
• Favorite business book: The Master-Key to Riches by Napoleon Hill
• Most valuable web site for success (other than your own): Google Suite
• Favorite app: Last Pass (stores all your passwords)
• Favorite quote: (a Poem)
  • It Couldn’t be Done by Edward Albert Guest
  • Somebody said that it couldn’t be done,
    But he with a chuckle replied
    That “maybe it couldn’t,” but he would be one
    Who wouldn’t say so till he’d tried.
    So he buckled right in with the trace of a grin
    On his face. If he worried he hid it.
    He started to sing as he tackled the thing
    That couldn’t be done, and he did it.Somebody scoffed: “Oh, you’ll never do that;
    At least no one ever has done it”;
    But he took off his coat and he took off his hat,
    And the first thing we knew he’d begun it.
    With a lift of his chin and a bit of a grin,
    Without any doubting or quiddit,
    He started to sing as he tackled the thing
    That couldn’t be done, and he did it.There are thousands to tell you it cannot be done,
    There are thousands to prophesy failure;
    There are thousands to point out to you one by one,
    The dangers that wait to assail you.
    But just buckle in with a bit of a grin,
    Just take off your coat and go to it;
    Just start in to sing as you tackle the thing
    That “cannot be done,” and you’ll do it.
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business?  First, get a job.  Then he would buy a qualified/targeted local list of properties that have equity, where the owners are going through either divorce, vacancy, bankruptcy and involuntary liens and go knock on their doors with the hope of wholesaling or flipping the property and or with the hope of joint venturing with someone and selling it retail.

How to Reach Ryan

• DoHardMoney.com

Get Ryan’s Book, “How to Get More Money Than You Can Ever Handle!” for FREE!

• To get Ryan’s Fee Book:  DoHardMoney.com/Old-Dawg

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