experience w/ hard money/loan sharks?

[ael62]

My husband and I are currently renting in a small New England city, in a historical neighborhood just blocks from downtown. Our rent is $850/month.

Our long-term goal is to buy a multi-family fixer-upper in our same neighborhood, and live in one half while renting out the other, until we can save enough to buy a single family.

Trouble is, it looks like the dream opportunity just came available... only it's about a year or so ahead of schedule. Here's the info:

Multi-family house (2 units, both 2 bedrooms)
Built in 1910 (definitely will need a lot of work, we're not sure of the extent yet)
Estimated value at $160,000
Listed for $89,000
Annual taxes are $3900
Available to investors only
On our same street (so we already know and love the neighborhood)

Here's where we stand:
Husband owns his own landscaping/asphalt maintenance company - in the early stages and growing, but no consistent income yet
Husband has construction skills, so he would be able to do a lot of the rehab himself (now is the perfect time as his work is dying down for the season)
I work in property management at an apartment complex, so I could handle the management/rental side of it

I earn 33k/year + $400-1200 monthly commissions
We have total of $25,000 in accessible roth-ira funds (contributions) that we could drain if necessary
Only have $3000 in cash savings

We have friends in the real estate investment world that got started by working with loan-sharks. We're considering going this route, as we would not qualify as "investors" to purchase the property any other way. We would get the money from a loan-shark, make the necessary repairs, then approach banks for a mortgage so we can pay off the loan.

We're still just day-dreaming and toying with the idea. Any thoughts or experience with this sort of thing?

[DoubleDown]

N.O.

Please tell us you are joking and not seriously entertaining borrowing money from a loan shark to make this happen.

This is NOT a dream opportunity, and you are nowhere ready if you cannot come up with the down payment responsibly and your husband does not yet have an established business or consistent income.  "Investors Only" probably means the seller wants all cash and/or there are serious problems with the property, particularly given its asking price relative to its supposed value. And where will the money to fix up this 100+ year old house come from? Materials aren't free even if your husbands labor hours are.

There will be other deals down the road, trust me. There is always a deal to be found, this is no once-in-a-lifetime opportunity, and you'd have to be mad to even consider borrowing money from a loan shark for any reason whatsoever.

Wait until you have a good portion of the down payment saved (MINIMUM 20%, although you should really have more like 50% for an investment property). You are doing great on your housing costs -- keep it that way, continue to save, then you can keep your eye out for that next deal.

[Another Reader]

There is a difference between a hard money lender and a loan shark.  Loan sharks are to be avoided at all costs.

Hard money lenders will charge several points and a high interest rate, usually 12 percent and up.  These loans can be a necessary business cost if you want to flip a property.  They are not for a new investor.  You will be charged a premium for that lack of experience if anyone will take the risk.  With no experience, you should not borrow hard money anyway.  You don't have any experience renovating houses nor do you have a solid exit strategy.  What happens if you can't get a mortgage when the reno is complete?

Skip this one unless you can get traditional income property financing.  Houses are like buses, if you miss one, another will be along shortly.

[gooki]

Do you have family who would be willing to lend you the money at say 5% interest?

[arebelspy]

Don't confuse hard money with loan sharks.

In either case though, hard money is good for a property you will be able to pay off (i.e. sell) or refinance quickly.  That is, flips, not long term buy and holds.

If your friends got their start before 3 years or so ago, the credit markets were way looser, i.e. much easier for them to refi.

Refinancing right now is quite restrictive.

What will you do if you can't qualify for a refi, and you're stuck paying 12-15% for a long time?  Lose lots of money.

It's generally really bad idea.. save up for a down payment and do a traditional loan.

[kudy]

I really have no idea if this is feasible, but I've heard of a construction loan working in situations like this.

[liquidbanana]

I have no idea if this is feasible or not either, but FHA does loans for multi family dwellings and loans to do renovations with down payments starting at 3.5%. At least that's what the HUD website says.

[arebelspy]

There are definitely more traditional bank type loans that include repair costs, but AFAIK they're all for owner occupied, not investment. Sounds like that could work for the OP's situation.

[Nords]

Built in 1910 (definitely will need a lot of work, we're not sure of the extent yet)
Estimated value at $160,000
Listed for $89,000
Annual taxes are $3900

It seem that the only numbers you can verify against an independent source are the listing price and the taxes. 

The $160K number is just trying to entice you into spending your money.  It's way too early for you to be brainstorming fundraising ideas until you can put a number on the "definitely will need a lot of work" part.  And even then you'll want to double the time while perhaps adding 50% to the budget.

Available to investors only

What exactly does that phrase mean?  In my skeptical perception, is this a euphemism for "uninhabitable"?

[ael62]

Ok that was definitely the punch in the face I needed to snap me back to reality. Thanks for all the replies. Yes, my friend did get their start over 5 years ago... I stupidly didn't take that into account. I'm not positive what "investors only" means.... I assumes it meant cash only at the very least. I  like the idea of a construction/rehab loan.. I may still take a look inside just to satisfy my curiosity.... But if I can't get a conventional loan I'll steer clear of this one.

[CuencaSolo]

On the topic of hard money lenders, many are fed-up former landlords who just want to get their 14% interest.  These are the ones who will ask tough questions about your fixer-upper experience and the sources of your budget numbers.

There are meaner people out there, too.  Robert Ringer (Winning Through Intimidation) had a story about working for a predator doing a block refinancing for several apartment buildings.  As he and his boss settled into their airline seats after closing the loan, Ringer said, "He seems like a nice guy; I hope he'll be able to eke out this loan without going into default."  His boss gently explained, "If you had read the loan agreement, as the borrower certainly didn't, you'd know that he went into default the minute he signed.  I didn't just make a high-interest loan; I bought his property for about 30% off, with a few formalities like foreclosing."

[marty998]

Available to investors only

What exactly does that phrase mean?  In my skeptical perception, is this a euphemism for "uninhabitable"?

Probably means the seller wants to stay and rent the place back from you.

[arebelspy]

Available to investors only

What exactly does that phrase mean?  In my skeptical perception, is this a euphemism for "uninhabitable"?

Probably means the seller wants to stay and rent the place back from you.

Most of my experiences with that phrase tend towards Nords' experience.

Usually has some repair or appraisal issues that means a traditional buyer won't be able to qualify it with a lender for a loan, so it must be purchased by cash (and then repaired with cash), thus "investors only."

Especially in today's market, where the owner doesn't dictate something like renting it back, because it's a distressed property (REO already foreclosed, going through short sale process, etc.)

[Another Reader]

Available to investors only usually means the property cannot be financed and therefore only cash offers can be considered or the property is subject to a lease and cannot currently be owner occupied.

[Skyn_Flynt]

I've bought and renovated several properties, but never resorted to hard money. The repairs would fit onto credit cards and the side cash I had by living frugally to begin with. In a couple of cases I paid cash for the properties and took out small equity lines (30% LTV) to do the repairs. "Normal" mortgage lenders are not so hard to obtain financing from when you leave a fat dose of equity in the property, and their rates are much better.

If you really need to meet hard money lenders though, just hang around your county courthouse when trustee sales (foreclosures) go up for auction. The other investors there are often willing to lend money if they are not finding acquisitions to bid on, or they know people and can refer you.

[calmloki]

We've made and/or funded hard money loans.  We've also foreclosed on one place, started foreclosure on another, and did cash for keys on a third when we lent too much on too small a loan - wasn't cost effective to foreclose.  We don't loan to people trying to live in the house because we don't want to throw people into the street.  We have lent money to people and enabled them to avoid foreclosure for some period of time.  After going through borrowers not paying us and having to deal with and pay lawyers large sums to save our investment I gotta say - 12% interest is cheap for the stress and we're charging 10.  Need to sharpen my teeth for the loan shark appellation.  About as happy with that term as slumlord.