Matthew Cox | Inside True Crime Podcast - Flipping Houses With Hard Money | Ethan McCarron

Episode Date: August 8, 2024

Flipping Houses With Hard Money | Ethan McCarron

You want a big project because it will give you so many lessons. We'll take a really big risk because you have so much room to mess up. Hey, this is Matt Cox, and we're going to be talking about hard money today, and we have Ethan, and Ethan, you work for... Priority investor loans. Priority investor loans. Yep. not in Tampa, Florida.

And we're going to be talking about, I've gotten some comments where guys are saying, hey, you know, let's talk, or can you explain what hard money loans are? And I actually did a video, I think, explaining it like a year and a half ago, but people still ask. And so we're going to talk about basically investing and hard money loans and what a hard money loan is. And first we're going to just kind of start off with that. So check this out.

Thanks for having me. Yeah. A lot of people think that real estate investing is just, mystical, difficult thing to get into. And it's really not. It's quite simple, but one of the biggest barriers is money. People don't have money to start their own flips. And that's really where you would use a lender. And there are two types of lenders. So I'm going to go through basically the entirety of a real estate deal and how you get into it, but specifically focus on the money, since that's the biggest hurdle that most people have. So there are two different types of lenders.

You've got private money and hard money. And the only real difference is private money is people's money. So it would be like if I asked you, can I use your money to fund somebody else? Hard money is I would go to a bank. So I'm just buying my money from the bank. People don't really know the differences. For all intents and purposes, it doesn't matter. The money, the lender is going to be the same. They're still going to lend you at about the same rate. So if you're kind of confused about should I use private money, should I use hard money, don't get hung up on that. These loans, they're all going to be collateral-based loans. So good part about that means I'm not looking too deeply. into you as an investor. I'm really looking at the house. Now when you go to a bank,

it's going to take them 30 to 90 days, get you pre-approved for a loan. They want to know what you had for breakfast, what your credit score is. I mean, it's way, way too much information. You would use a hard money or a private money loan when you're trying to close quickly and maybe you don't meet the requirements for the traditional bank loan. So it's a useful product and it's a good way to leverage your cash. Instead of having to have everything out of pocket, you just pay your closing costs. You can pay a little bit down on the loan. There are a couple different ways, and I'll get into those, but it's a much easier barrier of entry than I have to have all of my cash here to purchase the house and finance it completely, or I have to go to a bank. And of course, you pay for it.

That's why the entire industry exists. So as far as the loan process goes, getting prequalified is going to be, should be super, super easy. Right. Completely dependent on the lender. For me personally, I actually have high requirements as far as hard money goes. So my product is you have to have a 620 credit score or higher. You're going to have to have two months of bank statements, seasoned liquidity, and that just means that the money's been sitting there for a while.

There are a whole lot of terms that make it sound complicated, but it's not. It's very simple. So I need to see the season liquidity. I need to see the tax returns. Now, a lot of people get worried about the tax returns. I didn't make very much money on my taxes. We don't care. We're looking for foreclosures or forbearances or bankruptcies

or anything that would say that you're not a good borrower. Nobody's really looking at how much money you made or how long you've been there. Don't worry about it. And the last thing that we're going to do is need an application. Now, that is for us, and like I'm saying, those are very high requirements. Most lenders, there are a large amount of lenders, they don't even care about you as a person. They just care about the deal that you find.

Yeah, they care about the actual property that they're going to lend the money on. Right. They're concerned they don't want you to be in bankruptcy. They don't want you to have like a huge tax lien to the IRS or something. But mostly they're just concerned about the property. You can have, because I've known guys that their credit score, which is horrible. No, absolutely. You know, 550 credit scores.

They've been laid on all kinds of stuff. They're buying a house that's going to be worth $200,000 once it's rehabbed. They're getting the house for $60,000. The hard money guys, like, I can't lose. Yep. And they lend them the money, even though this guy's got a $5.50 credit score. Yeah, yeah. So that's a perfect segue into what is a hard money loan actually do.

What happens is that I as the lender is I would take over that mortgage. I would own it. I get what's called a first position lien. So even though the house would be officially in your name under the title, I own it. If you don't make the payments, I can take it back from you, just like the bank. But I will only give you a certain percentage of that house, the completed value. So it's going to be the ARV, which is after repaired value. So you find a house that 60K, you're going to put 40,000 into it, and at the end of it, it's going to be 200,000. Well, now I can give you all of that money,

because I'm only lending 50% of what that ARV is. And so you got LTV, it's just loan to value. ARV is after repaired value. You'll get a whole bunch of terms thrown at you. It sounds complicating, but it's not. It's super simple. So even if you were a terrible borrower, I'm completely confident in giving you that money

because I am only giving you 50% of what the house is worth. And I know that if you don't make a payment, great, I will take it back, and now I have a property at 50% of its value. and that's how I keep myself protected. Do you guys have, do you guys foreclose on a lot of people or? So that's another really good question is the dark truth of lending is you stand to make the most money from taking people's houses. We don't, but that's because our qualifications are high.

That's part of, as I have really good borrowers, almost A paper borrowers and A paper is just determined to mean that you've got great liquidity and you're an awesome borrower. Basically, somebody at the bank would lend to. So the way that you keep your foreclosures low is by making sure that the deal is good and that your clients, your borrowers have really good in liquidity and payment history and credit. So I personally don't. I don't foreclose on many of my properties because my borrowers are great. There are lenders out there that don't do that research.

And they're just kind of hoping, hey, you know, maybe this guy's really, really bad. We're just using him to start taking back properties. So when you're looking for a lender, I would say there's a sweet spot. You don't necessarily have to go to someone that has all of my pre-requirements, but you also don't want to go to the guy that says, man, I don't care about anything. Just bring me the house, and if it's good, I'll lend to you. Right.

Like, you know, you've got a bunch of foreclosures and bankruptcies and that they don't care. That's a red flag. That would be something that I would look out for. And, you know, there are people that can make it work, but it's a business, right? Right. So everybody's going to try and make their profits. at one way or the other. I can say the foreclosures are a pain in the ass. Nobody really likes dealing with them. So most lenders don't, they do everything they can to not take back

a property. And we get into that a little bit later, but to answer your question, no. No, I think I've had maybe two foreclosures. I've known, because I've known a bunch of hard money guys. And I've asked a few of them, you know, I've asked a couple of them more, hey, do you guys, have you done a lot of foreclosures? And both of them who'd been in the business like 10 or 15 years. They were like, I've never had a poor clothes. And I'm like, are you serious? Yeah. And they're like, yeah, they're like, I'm like, nobody's ever not paid. They're like, oh, no, I've had people not pay. They said, but after like a month or so, I'll eventually get a hold of that person and say, listen, you know, I've been by the house. You're not working on it. You're not doing this. You know, like there's all these issues I can see. You're not, you haven't made a payment. And they've gone to them and said, look, here's what we're going to do.

You're going to sign the house over to me. You're going to, you're going to, you're going to quit claim to eat it or, or, quick claim deed to me. And whatever you're going through, if you, once you figure all that out and you get your life back on track in a year or so or whatever, if you want to come back and borrow from me again,

I will lend you. If you make me foreclose on you, I will blackball you. I will never lend to you again. I will put the judgment on your credit. I will, like I'll do everything I can do to make things bad for you

because you forced me to foreclose. And both of them said, look, you'd be sure. How many times they're like, look, man, here's what happened. They'll explain the situation and they'll say, you know, you're right. I'm just going to sign it over to you. Or sometimes they suddenly say, look, they explain the situation. Maybe they pulled themselves out of it.

I had a deal one time where I thought two houses were closing and neither deal fell, neither deal went through. And they closed, you know, a month or two later, but it's just a fell part like within two or three or three deals fell apart within a couple days. two deals fell apart within a couple days. So I, and I was like, oh my gosh, and I was in the middle of flipping this one property, I went to the hard money guy,

and I said, listen, here's my issue. You know, I thought I was going to get money from one of these two deals so I could keep doing the renovation. I didn't do it. It didn't happen. Now it looks like neither one's going to close for several weeks.

And the guy, and he said, how much do you need? And I went, well, what do you mean? I said, no, I'm just letting you know that he said, yeah, but you want to keep working on it, right? And I can see that you're almost done. what do you need? I was like, man, I need another 30 grand. I said, but I'm going to get it from and he was like, no, no, no. He said, look, I'll, here's what we're going to. I'll do an amendment

and to the mortgage. And we see, went in his office, wrote it up, gave me a check for 30 grand. I signed it. We had a notarized and he gave me 30 more grand right then. Yeah. Because I had a good relationship with him and I was very honest with him up front. Here's what's happening. He was like, no problem. And he could, he could see that I had bought, first of all, I'd already done several deals with him. That's key. Right. Yeah, I had a relationship with him.

And I was honest. I went straight to him. I didn't not make the payment. I didn't, I didn't, you know, I didn't spin him. I didn't lie to him. He totally trusted me. It's funny because he didn't even know my real name. But still, even as, even as in a stolen identity, I was still very honest with the guy.

Yeah, absolutely. Yeah. So, but yeah, I think, I think being honest with most of the guys, you know, because you're still, the great thing about a hard money guy is that, You're not dealing with this faceless institution that you can't call somebody up. At least they get to call you up and say, here's what's happening. Oh, right, right. You know, and you want to stay on top of your clients. You want to have good relationships with them, and they're going to have good relationships with you

because at the end of the day, you are the money. And so as a lender, I only have one stick, but it's a big fucking stick. I'm going to take your house back. And then all the money that you paid for it, I'm going to take all of that. You're not getting any of it back. So both the borrower and the lender are incentivized to have a really good relationship with each other and I mean there's no way that I'm going to know somebody has a stolen identity but as long as you're transparent and honest with me about it we're always going to want to work

with you because we don't want to go through a foreclosure not only does it make us look bad right but then also you're going to go tell all your friends like hey don't borrow money from these people they just want to take your house back their crooks and the only thing that you have in this entire industry is your relationship and your reputation so okay so give me a scenario from start to finish on how borrowing money from you and the other thing is like your guidelines are not the guidelines for everybody no no no we don't have to talk about the qualifications but I can run through like start to finish hey here's how you find a deal here's how you get the lender and right exactly exactly how does that happen yeah so first of all if somebody wants to be an investor

right somebody says hey I want to buy a house I want to fix it up and I want to sell it yeah and that's what they want to do what is the process I guess the best of way to start with that would be the way, how did I get into this? I was driving around. I'm just listening to podcasts. There's this podcast called Bigger Pockets, and they do nothing but put out podcasts on how to start real estate investing. It's pretty interesting. And so that's where I would start. Don't just say, oh, well, I think I can do this. Build yourself a little bit of an education. Let's pretend that you've already done that. And then you're going to want to reach out to I suggest reaching out to a lender first. You want to get prequalified so you know the type of house

that you can go find. So you call a lender and you run through his prequalification process. And I'd say, okay, great, Mr. Cox, you're pre-qualified. The next part is to go find a deal. And again, the pre-valification is going to. When you say a lender, you mean a hard-money lender? Or a private money lender or, yeah. But, yeah, hard money is what I would suggest using because usually they're going to be a little more, they're going to be a little more stringent with their rules, but it's all for your benefit.

We can come back to that. But you're going to get pre-qualified with a lender. They will tell you how much money you're pre-qualified to buy. And then that will give you, it'll narrow the field on the, deal that you're looking for so you're not you're only qualified for 500,000 you're not going to go buy a 14 million dollar multifamily project or you know if you can do 500,000 you're not going to look for a hundred thousand dollar flip either so get your prequalification then you're going to start go looking for a deal now the deal is the most important part in all of real estate and it's

trite but the saying is you really make your money when you buy the deal it's not when you sell it now how to find a deal is going to be important I work very closely with all of my clients, I kind of walk them through the process. I'm used to dealing with a lot of new investors. So I will give them the resources. The easiest way to do it is to find a wholesaler. So what a wholesaler does is a wholesaler finds tons of properties that are owned by distressed sellers. So these are people that are underwater on their mortgage, they're behind on their payments. Maybe there is a death in the family and the family doesn't want to deal with that house, problems with title, or all they're doing is they're finding houses and purchasing

them for less money than the house is actually worth. And then the wholesaler will make a little fee on it and he'll turn around and blast it out to a group of investors. So I tell all my investors, these are the wholesalers you want to sign up with. They'll send you deals to your inbox. For a limited time at McDonald's, enjoy the tasty breakfast trio. Your choice of chicken or sausage McMuffin or McGrittles with a hash brown and a small iced coffee for five bucks plus tax. Available until 11 a.m. at participating McDonald's restaurants. Fresh excludes flavored iced coffee and delivery.

Book club on Monday. Gym on Tuesday. Date night on Wednesday. Out on the town on Thursday. Quiet night in on Friday. It's good to have a routine. And it's good for your eyes too. Because with regular comprehensive eye exams at Specsavers,

you'll know just how healthy they are. Visit specksavers.caver's.ca to book your next eye exam. Eye exams provided by independent optometrists. Every day, and then I'll teach them how to run the numbers through it. So you're going to want to be part of investing as the investor. I always thought it was so much more involved than it is. But as an investor, all you need is money, which is why you'd come to somebody like me. Your only job is to learn how to look for a deal.

That's really all the work that you have to do. You can choose to be more involved in it if you want, but you're looking for that deal. So you're running numbers, you're running numbers. Let's say that you find a deal. And I'm going to stick to these numbers that we talked about earlier. They're simple. They're easy. So you find a deal for $60,000.

You know that if you put $40,000 into that house, it should be worth $200,000 afterwards. And I'll walk through how to get those numbers. But let's just say that you have that deal. You turn around, you call your lender and you say, hey, Ethan, I'm pre-approved. I've got this deal. What's my next step?

I want it. What's my next step? So I would tell you, okay, Matt, put in an offer on the house, right? The asking price is 60K. The wholesaler is going to usually ask for EM or EMD as earnest money down. Just think of it as a deposit. You're putting down a deposit, which says no other borrower or potential investor can take this property. This is now belonging to Matthew Cox until title is cleared or he closes on it.

It's like an option period on the house. Right, right. So you put that money down. it's non-refundable. This is the first risk that you as an investor are going to make. The only time that money could come back to you is if the wholesaler didn't do a job well in clearing the title. If the title is not clear, you will get that money back. But if the title is clear and for some reason you decide you don't want to do that deal, that money's gone. And usually it's, I mean, I've seen them as low as 250 bucks all the way up to 7,500. So it's going to be

independent on the, or rather dependent on the wholesaler and what the specific project is. But if the deal is good, I'm going to tell you, like, hey, go put down your earnest money. So you put down the earnest money, and then you get an assignment contract. You would then email that to me, and I would start doing all the background work, all the paperwork. So I'm going to order, for me specifically, I need an appraisal. Lots of hard money lenders don't need appraisals. The reason that we do it is because it really protects the borrower. Now, in an appraisal, let's see, you need an appraisal and a survey to get title insurance on,

on a property a specific level of title insurance things like you want to make sure that there are no easements on the property you want to make sure that there are no encroachments and to get into those terms real quick and let's say that the property is on a lot right and a lot is just a broken out piece of land that a subdivision is divided into who knows how long ago when it was developed let's say that for some reason your neighbors have been building into your property a lot A survey will say, okay, well, this property line is now on your lot. Or even worst case scenario, the property that you bought is built on the neighbor's lot. Normally not a problem in a cash sale, but lenders almost always traditional lenders,

like someone who's going to go buy the house, they require a survey. And if my property is on my neighbor's property, no one's going to sell to me. They can't sell that house because what if the neighbor comes in and says no? you get that survey and the neighbor says hey man you've got like four feet of your house the entire east side of your house is four feet over into my property line i want you to tear it all down it's a really big problem so a lot of lenders don't require it i would always suggest getting one just because you don't want to go through the hassle of rehabbing an entire house and then put it up on the market you get a potential buyer come in and their their lender needs a survey the survey comes back

you've got encroachments and man all right well now you're in trouble and you've done all this work and you're under a loan and nobody's going to sell it. So I would order the survey. I would order the appraisal, and you're just hanging out waiting. In the meantime, while you're waiting, I would definitely suggest that you start talking to some general contractors. There are a whole bunch of resources. Facebook is probably one of the best as far as groups for investors.

You say, hey, look, I'm looking for a contractor. You can get on Craigslist, you can go to Google. It really doesn't matter. Contractors are everywhere. You're going to start walking them through the house. They'll put bids together for this is how much I think I can finish it with. And of course, you're trying to minimize your rehab budget because it's going to become important later. Right.

And then, let's say that the appraisal comes back in and we hit 200. Okay, excellent. That means that my total loan amount is going to be 50% of what that ARV is. Because, yeah, if you buy it for 60 and you're putting 40 into it, you get 100% or 100,000 is a total amount. if the value is 200,000, that's 50%. So I'll give you 100% of that cost. And it can get confusing, but cost is going to be the purchase price and the rehab amount altogether. Right.

So when you hear people talk about, okay, well, how much loan to cost are you going to cover, how much loan to value, or all you really need to know is, is my file 100% covered? In this instance, it would be. If it had come back at 100,000, well, it wouldn't. be at all right well now they could you that you could still do it but they would have to come they'd have to come out of pocket so I lend specifically me I lend 70% of the ARV you'll have up to 70 up to 70% correct so in this example let's say that the ARV was 100,000 well your total cost is 100,000 so of course that's a bad deal my responsibility to my investors and this is just the way

that I work again all lenders are going to be different but my responsibility to you would say hey Matt this is a bad deal you're going to lose money on it and we'll walk you away from but let's just say for the sake argument I'm not a good guy I'm just trying to get my loans out and I'm like sweet yeah let's move forward if I'm only lending 70% of that ARV and the ARV is 100,000 I'm only going to give you $70,000 for it so what that means is that I'll cover the purchase price you don't have to pay any money on that purchase of the house but I'm only going to give you 10,000 out of the 40,000 that you need to repair that house so you're going to be coming 30,000 out of pocket on the on the construction draw So what happens is I'd take that $10,000 and I'd put it into an escrow account. Escrow is another word that's real estate. The bank account. It's just a bank. You're going to stick it in a bank account.

Right. Right. That's all it means. It's just hanging out there until you need it. And the way that you get it is you pay up front. A lot of people don't know this. They think, okay, well, I got $10,000. Give it to me and I'll go work on the deal.

It's not like that. I'm not giving you a check of $10,000 to hope that out of the goodness of your heart, you're going to go work on this deal with that $10K. So I would cover it and you walk out of the closing Then you're going to have to pay your contractor up front And let's say that you do $10,000 of demo work And framing a drywall I'm just making it all up

So you pay your contractor up front that 10K And then you would turn in a construction draw to me So you're drawing down the money out of escrow Yeah, out of the 40,000 of work that needs to be done Sure You just did 10 you have 10 set aside Yes. So you turn it. It's basically like a receipt. You turn it into me and say, Ethan, I did $10,000 of work. I want to get my money back now. I say, okay, great. So we look at

your draw request. We send out a third party inspector. And this is something else that I would strongly advise is always have a third party inspector come out. Some lenders have their own appraisers. Some lenders have their own construction companies. Some lenders have their own inspectors. The problem with that is that you can, it very easily opens you up to accusations of fraud like hey you know my my construction inspector wants me to put more money out because the higher the more expensive your deal the more interest you're paying to me and I'll cover all the money part of it in a second but you want a third party inspector you always want to have it done it also helps with the house you know when you're selling it you're like hey look here all the inspection

reports that I had that this work was actually done I'm not just selling you something that I didn't just make this up so the inspector goes out he takes a bunch of pictures he takes some notes he says yes, this work was actually done. He brings back the inspection report to me. And I say, okay, great, it all checks out. I'm going to wire you that $10,000. And so that's how draw processes work. Hey, I hope you're enjoying the video. And if you're interested in buying a painting from me, my contact information is in the description box. Back to the video. You're going to give him $10,000. There's $40,000 where the work needs to be done. There's $10,000. You're going to give him the $10,000 up front? No, no, no. If he's $10,000, go it. He's done $10,000.

in work, 40,000 needs to be done. Correct. He only has 10,000 in escrow. He comes and says, look, 10,000 has been done. Yeah, I'm about to explain that. Your guy agrees, you're right. He did do $10,000 of work. You're saying you're going to give him $10,000 or you're going to give him $2,500.

Yeah, so I actually wouldn't give him anything. This is always going to be lender-specific as well. But you have to think about it. This is kind of frustrating and annoying, but this is how the banks work. I'm buying my money from the bank. So let's pretend you're the bank, and I'm the lender. and I'm coming to you and I say, hey, Matt, I want to buy a million dollars that I can then turn around and sell.

You're going to say, okay, and I've got restrictions. I mean, do you want to talk about the rules for buying it or not really? No, I don't want to get too specific. Okay, so. It's already overly complicated. Go ahead. Okay. I'm trying to make it as simple as possible.

But, yeah, basically, you are not going to allow me to borrow your money until the investor has put their own money in the deal. So for this example where you have to do $30,000 of work yourself because I can only give you 10 out of the 40 that you need, the bank's going to want you to do that $30,000 first. Oh, before you give them the remaining 10. Right, but that's specific to me.

Yeah. So, you know, some lenders, they will do the 25 out of the 10 or they'll do, you know, it's completely specific to the banks that you're purchasing lines from. But most banks want the investor to have more skin in the game. and they don't want to give them just because the risk as the bank is, you know,

what if I give you 10K and then you just don't finish the house? Right. So that's how the construction draws work. And then at the end of it. But let's go back to the original scenario where the ARV wasn't 100,000. It did come back at 200,000. Right. So you bought the house for 60.

It needs 40,000 in work. The house was valued at after the repair value was 200,000. So they come to you with the first. $10,000 of money that's been completed. It has been inspected. Your inspector said, yes, all that work was done. How much are you going to give them? I'll give them the whole 10K.

Okay. So if I'm covering 100% of the loan, I'm also covering 100% of rehab cost, which means every draw repair that you sent, or every draw request that you send in, I'm going to give you 100% of that money. So if you turned in a request, I mean, there's no limit on the amount of draw requests that you want to do. I mean, if you wanted to do one every week, you could.

I wouldn't advise it, but it depends on how much cash reserve you have and how quickly you need that money back. Because remember, you have to pay these guys up front. Yeah. So, yeah, if I'm covering 100% of it, I'll give you every single dime every single time. Okay. All right. So now they've got, they've renovated the property.

They got their 60 purchase, $40,000 in repairs. It's completely done. The house is appraising at $200,000. It's completely done. The carpet's in, the tile. The kitchen looks great. It's got the new roof on, new stucco. It's beautiful.

He puts it on the market and he sells it. Right? Or he puts it on the market and then he's waiting to sell. Hoping to sell it. Hoping to sell it. During this whole time, he's been making payments to you every month. This has been a four-month process. Generally, yeah.

Yeah. Yeah, so the money of it is, it's interesting. It's an interest-only payment. So with a typical bank loan, you know, you're paying principal and interest, this is interest only. And I don't charge interest on construction escrow, which means in this original example, the 60, the 40, and the 200, I'm only charging you interest on that 60,000. And then as you turn in draw requests, and let's say you take 10,000 out, now I'm charging you interest on 70,000. Let's say you take another 10,000 out. Now I'm charging you interest on 80 and on and on.

But basically that money in construction escrow, you're not getting charged for. for it until you draw it out so yes it's interest only payments and the interest amount grows as you draw down that construction escrow and that's how I make my money right well what about payments are they making payments that's it yeah it's every month and the interest goes up by the amount that you draw down okay so you're saying so if he borrowed a basically borrowed a hundred thousand dollars so it's and it's let's say it's 12% interest so the first month is instead of being a thousand dollars a month. The first month is 600. Right. Next month, he took a $10,000 draw. So the next month is now $700.

Exactly. And then the next month is $800 if he took another draw. Or if he took two draws, then it's $900. Or if you took all three in one month, then it's $1,000. And he's going to keep paying $1,000 until that house sells. Every month until it sells. Correct. Yes. Yeah. So to get a little bit more into the specifics of the actual product, most hard money loans for residential properties are six months. and most hard money lenders don't have a problem with you finishing the property early and getting out from it because keep in mind I'm leveraged if I the faster you pay me my money back the quicker my risk is then reduced and great we can all go on to our next project

so it's a six month turn let's say for some reason your house doesn't isn't completed at the end of six months or maybe it's been on the market at the end of five and a half months but it's going to take a couple weeks for it to close and now you're pushing into that seventh month again most lenders do have a modification a modification just means I'm going to change the terms of the loan so like in that example when you were talking about right yeah right yeah so if you need to change anything with it okay great I'll extend it by a month or six months or right it's really long bendy twizzlers candy keeps the fun going keep the fun going

Twizzlers Keep the fun going Not going Not going No no definitely not No bank of America They're going to say no Yeah

So that's You are You're going to be paying Those interest-only payments to me Every month until you sell the house And once you sell the house This is going to be a little convoluted But to keep it simple

There's money coming into that house A big portion of that money goes to paying off the amount that you purchased the house for my loan amount plus all of the money that you've paid me that interest and then you keep the balance so in this example let's say that at 12% it's a thousand dollars a month for $100,000 just to make this really really easy so for six months if you've spent $100,000 $60 on the purchase 40 on the rehab and then $6,000 because that's 1% for six months so $106,000 would be taken out of your purchase price.

I guess their purchase price, the buyer's purchase price, right? So they're buying it for $200,000 minus $106,000, and that's going to be $94,000 left over that goes to you as profit. That's the way it works. Now, those numbers are never going to actually happen that way. Oh, I mean, they might, but if you get a deal that good, you better close on it today. But that's how I make my money. That's how you make your money.

and it's that's how hard money works there are several other technical terms about you know I'm not only taking that 6% I can get more into the money or we can go in a different direction if you have more question yeah well I mean you're getting you're saying 6% you're you're basically it's it's 12% simple interest it's it's six payments it's $6,000 correct plus every time the inspector went out you had to pay the inspector yeah the guys the guys I know like one they didn't use an appraiser they went out They knew the area. They looked and they said, how much do you think of this thing you're going to get for this?

And I go, ah, 160, 150, 150, and they go, yeah, I could see that because they knew the area. Sure. And they, and then they would lend the money, you know, let's say the, I was purchasing it for, let's say, let's say, 90,000. So they'd lend the, they'd lend, and I needed, I was going to rehab it. And they had 30,000 to rehab. So it was going to be a total loan of 120, house was going to sell at 160. Then they would say, they'd lend me the whole. thing you know they had a relationship with them so they would lend me the 120 they'd hold 30 so the

90,000 went to purchase the property and then every time I called them up and said hey I need you to come out I put the roof on I I put in the kitchen and they stuccoed I need $10,000 they would come out and they'd say okay so this is what this is 10,000 I'd be like yeah and they'd say okay they'd write a check for $9,750 right then they'd write themselves a check for $250 absolutely They'd give me a check, and I'd be like, well, it was $10,000. Right, right, where'd that come from? But I charge $250 every time you call me out. You can call me out every three days if you want.

Like, they don't care how many times they go. But it's going to be $2.50 every time. Right. So the day of the closing, like they also would charge like two or three percent. It's the origination. So, yeah. Right. So it would be, so what they ended up making after six months was they make, because,

Because it's, they lent, they wouldn't do what you were doing. The escrow, they hit me on the whole thing, even if they're holding the escrow. Yeah, that's, that's rough. Right. So I'm paying, so on $120,000 alone, I'm paying at 12% interest, simple interest, I'm paying $1,200 every single month. Yep. So in six months, I would have paid six months worth of payments at $1,200.

So they make those payments. They would also make, if they came out four times at $250, they made an extra $1,000 there. Plus the day of closing, they charge. me on origination let's say 2% yeah that's $1,200 or twice that's $2,400 so I mean they're really like at the end absolutely you think oh they're making oh they're making 12% interest no there's no no there's so much more because they're lending that money twice and they're doing that twice it ends up being like 24% yeah you know oh it's a good model to have yeah it's it's way higher than uh than 24% because plus it's all those those draw payment those

draw fees and it's the two or three percent that they charged up front it ends up being like 26 28 percent interest hey sorry for interrupting the video but want to let you guys know that if you join my patreon at the top tier every single month you get a different painting and the contact information for my patreon page is in the description back to the video yeah so the draw the draw is the one thing that i would say is not don't worry about that um for me i'm 125 dollars for a draw but that's because most of my inspectors are $75 to $100. So I'm only making, you know, $50 to $25 as the company, as my service charge or whatever you want to call it.

The draw fee really isn't that expensive. That mostly just goes to pay for the inspector to come out. Because remember, he's not employed by us. We have to actually call him and schedule him. But the origination is the next part that I want to get into. Points and origination, they're synonymous. They're basically the same thing. Yeah, you just have a different name.

Yeah, just think of it. If you're new to it, just think of it as a, percentage of your loan. That's the easiest way to think about it. So if it's a $100,000 loan and someone's charging three points, you're going to pay $3,000 to me and I will turn around and give you a check for, well, I guess in this case it would be $60,000 plus $40 in escrow. But basically you're buying $100,000 loan for me for $3,000.

So that is another way that I make money. And that's usually upfront. It's always called origination, right, at the start of the loan, yeah. And then there's some people will defer it. I mean, we can get into all the specifics of that if you want, but a deferment would just mean that, hey, I'm doing one of these points. Like, instead of three points up front, I'll do two points up front, and then you'll pay me that last point at the end of the loan. It's also called maturity, and I never understood that. But that's the terminology can be, that's one of the biggest hurdles is people are like, I don't understand these words.

And it's such a simple concept. It's like we use these code words so that people can't break into our industry. but it's not difficult at all. So I'd make my money up front on origination. I'd make my interest-only payment money. And then maybe $50, $60 here on a draw, but that's not that big a deal. So what if the guy wants to do the work himself?

Yeah, you're more than welcome to. So you don't have to have like a, like if he puts a new roof on, you don't have to have the, you're not saying, you just want to show up and see that the new roof's on. You're not going to say. Hey, I want to see that the city inspected the roof. No.

I want to see. Okay, cool. Yeah, it's super simple. It's not like, again, we're not an actual bank. All we care is that the house is being done. So if the house is completed and if you're doing it yourself, let's say that in your construction budget, you said that it was $20,000 for a roof. Right. But you do the roof yourself and it only cost you 12,000.

Right. In materials and you and your buddies went out on the weekend and you got experience and you did a good job and it doesn't leak. I'm going to give you that full $20,000. It's $20,000 on a roof. Exactly. So what you do with that extra $8,000 is really up to you, but I advise my clients, hey, look, go ahead and make those interest-only payments to us out of that difference.

That way you have, you know, pay ahead for the next couple months so that you don't have to worry about it. Right. Or, you know, if you want to go, I don't know. Yeah. Well, I mean, you know, like, it's funny because flipping houses sounds so you watch the programs on TV. And they look so, so glamorous. Yeah, it's not like that.

And it really, it, it really sucks because you end up being, and I always, this is whenever guys talk to me about, I'm like, you end up being your labor, you're a contractor. Like, you're now, unless you're doing the work yourself, it really sucks. If you're managing the guys, it also sucks. Because now you're like a site manager for a construction company that you don't own. And you can't really fire the guys. and you know every time you fire someone it's start the whole process starts over yeah it's brutal right and it costs you money because now it's that much further before you're finished with

the house and you can put it on the market and try and sell it and so and so the other thing is is that let's say it takes four months or four months to complete it another two months to end up getting the contract getting a getting whoever's going to buy it they have to get a loan and that ends up selling so let's say five months to six months to sell it so you know everybody thinks it's great well how are you going to survive during that six months unless you're going to keep your regular job working 40 hours a week right you're going to do this you know after hours and on the weekends that's fine that's possible but the only real way to make money flipping houses is to do it so that it's worth it is to be doing four or five of them in a time all the time like you've got to be doing like five or six of these

things all the time so that every month it seems like something one's closing that's if you don't have a job what that's what I'm saying full time yeah okay Yeah, yeah. If you do it full-time, it's worth it because it's my full-time job. I'm always doing like six or seven of them or five or six of them. And so one every month is closing. The problem is when somebody says, I'm going to do one. Well, I mean, if you're like a bookkeeper and you're trying to do one and it's not in your industry, it's horrible.

It's just a horrible experience because you get off work at five, you got to go meet the guys. The guys know that you don't really, especially if you have no experience in contracting. Right. You don't have any experience in contracting. Now you're really at a disadvantage because you've got a drywaller telling you, oh, no, no, you can't do that. You've got to do this. And he's bullshitting you. Or the roofer is like, no, no, that's the way it's supposed to go.

Trust me, I'm a roofer. You're a bookkeeper. You don't know what you're talking about. And you're like, I really don't know. It doesn't quite look right. I don't know. Like, unless you're hiring professional guys and professional guys are expensive. They are.

So I'm going to push back on you on that. I actually don't agree with that. I think that because I deal with new investors all the time. And they have regular nine to fives. And they're just looking for something as passive income. These are people that have been, you know, they've been doing exactly what the American dream teaches you to do. Look, I'm putting 20% of this paycheck away.

I finally have enough to invest. Where do I want to put it? They're considering market options. You know, what are they heard about real estate investing? What I coach my people to do is hire a project manager or a general contractor. And basically what they do is they manage all of the individual contractors. So they are going to hire the plumbers. They're going to hire the drywall and the framers.

the painters, the roofers, and they will fire people accordingly and bring in new people accordingly. Now, it's more expensive. Yeah. It'll cut into your profit, but it also gives you more time away so that you can go continue to maintain that job. And what I suggest people do, and this is how my clients typically work with me, is we'll do a fairly large project to get started because you were right, TV gives everybody this false expectation. The reality is you're lucky if you're making 15 to 30K profit on a flip.

That's a really good flip. It's not normal. Most people are making, you know, eight to 12, and that's a decent flip, and that's why they do so many at a time. But to get to that point, you want to find a really big project. This is just my personal advice. I'm not a financial advisor. None of you all sue me if you go do this and it goes wrong. But the whole point that I make is we want to find something with a ton of profit, like this example that we're talking about, $60,000 to purchase, $400,000 profit.

And, you know, realistically, it's probably. it doesn't exist yeah that that that deal seldomly it seldomly yeah yeah so and it's really about 80,000 in profit once you have carry cost closing cost and all the other stuff but still 80k profit is really good but why do you want that if you're if you're originator or if you're uh your loan man if i'm good at my job i'm going to tell you yeah the math says you're going to make 80,000 but listen to me matt you're not and here's why this is your first project you have no idea what you're doing you're going to hit complications there are going to be things that going to go wrong the reason you want a project a big project and usually this is the way it works is that the

larger houses once they're flipped they're going to have more profit in it so it's a much bigger project here's how i tell everybody to go about it you can do five or six small houses you know you're buying it for like 40k and you're putting five into it and selling it for 60 whatever you're making 5 000 it's not that big a deal or you could do one really big project if i'm doing a five bedroom four and a half bathroom, 18,000 square foot lot, 90, I don't know, whatever, you can make it up, but you want a big project because it will give you so many lessons. I mean, you run into, okay, well, the electrical is wrong, or maybe the piping man. We had this one guy who, he bought a really big house for this exact reason, first flip ever,

and the house had been abandoned for like five years. Well, guess what? All of the plumbing under the house had rotted away completely. nobody you can't tell that when you're walking through a house right so he's going through and he's repairing the you know he's pulling up the tile and putting down new tile and guess what the plumber finds hey i just pulled up a whole huge section of pipe like why what's going on so then you have to rip all the floor up look at all the pipes the entire thing had to be replumbed that's a really expensive lesson if you're doing that on a project where you only have five or six thousand dollars

a profit yeah you're in real trouble now you're super underwater on the project if you're doing that on a project where you have $80,000 of profit. Okay, well, guess what? Now you only have $60,000 of profit, but you're still making money and you've learned for your next one. Well, I'm going to get this inspected and I'm going to do this on my walkthrough. So that's why I advise people, take a really big risk because you have so much room to mess up. That's exactly what I did with mine. So my first personal flipping, the reason that I took this job was so I could be an investor, right? I didn't have the cash to go put into it. I was like, man, how do I start flipping houses? So I took this job.

Now I'm learning all about it. My first deal, I bought for $3.95. It has an ARV of $630,000. That's a huge spread, but it needed $80,000 of work. That's still a really big spread at the end of it. After all my carry costs and closing costs and on and on and on, it was supposed to be about $86,000 in profit. Well, guess what?

Yesterday, I got a call about it. It's going $40,000 over the rehab budget. Why? So I just went from 80,000 in rehab to 120,000 in rehab. My loan's not covering that. I'm paying all of that out of pocket that extra 40K. And you're not making that profit now. No, I'm not.

So now my 80 profit is dropping down to 40. But the reason that I chose something so large is because I know these things happen. And what had happened is there was a huge problem with the foundation that wasn't readily available until we got in and we started ripping up some of the flooring. And those are the things that are going to happen to you, right? so that's how I advise my new investors to get started once you have done several of those and you have a little bit more experience then I'm totally on board with what you're talking about do multiple at a time you don't need to make massive you're you're not hunting whales yeah

you're fishing for shrimp you can eat just as well off a whole school of shrimp as you can off of one whale yeah but it's much less risk I was just say well you're you're you're you're not really pushing back what you're saying is I have a solution because really if if that person didn't hire the site, the full, the contractor, you know, a general contractor or a site manager and had to do it himself. I mean, now he's getting off work at 5.5.30. He's driving over there. He's trying to meet this guy. It's a pain. Like, that's what I'm saying is it's a horrible. It's horrible because you're like, I don't know what I'm doing. But you're right. If you're, you've got enough of a profit, you can hire that guy and pay, you end up paying 10 or $20,000 more. Yep. But you're right. Now you're just getting phone calls and swinging by there on the weekend.

Absolutely. Which is the way to do it. And I advise, but I advise, like, if it's your first project, go there as much as you can. You can still go after work and get caught up. Be like, hey, what happened today? And you don't want to be a pain. Well, you're always going to do something yourself. Right, yeah.

Like, here's a problem is that every time I've done one, it's like, you know, guys are like, well, you don't ever have to do anything. I'm like, well, first of all, the first, most of them, I do something. I end up doing something. You know, sometimes it's just painting the inside of the house. I try and do something myself. But the other problem Or the other thing is Or maybe it's laying the tile

Laying tile Maybe it's laying hardwood floors But even if you said You know what I'm not going to do anything this time You're still doing something You're still picking up cans You're still trimming some trees One time I had to pick up glass

I ended up getting It was me My wife at the time Her father Her mother Her sister and her brother-in-law we all went over to the house and had to pick up shards of glass out of the front yard because before up when when I bought it windows had been knocked out and they changed windows and they piled the windows up in the front yard and just left them well they left them and people had broken them out so we they took away the frames but there's shards of glass everywhere so what you know and everybody's complaining of about it and then I have to get a section 8 inspection because I was renting it out well

section 8 first thing they said was and there's glass all I don't know if you've noticed this but I see glass everywhere like I can't give you I can't say this is this house is okay they're going to be kids here I was like fuck so literally either I spend five or six hours trying to do this myself or we basically made a line and we're picking shards of glass out of the front yard for about an hour we did it all the way to the house all the way back all the way to the house all the bit like you can't hire somebody to do that you basically have to do it yourself you know like where do you look that guy up you know like so it's like oh glass remover from front yard yeah so you're always doing something maybe it's cleaning the windows maybe

so you have to understand at some point you're probably going to get a little dirty you're probably going to do something and you're going to want to you probably want to yeah yeah because it's kind of fun you know sometimes if you if you're doing it because you're just excited about it it's cool to paint a bedroom or back. Yeah, it's your first project. Yeah, it's your little baby. You're like, hey, I'm learning something new. Yeah.

And there's nothing wrong with that. Like, yeah, I would say the more involved you can be, you should be, but don't feel like you have to be. Right. If you're just doing it as a passive thing, I mean, you could hire somebody to pick up glass. I mean, I don't know where you would find them, but you could. You're probably fine.

Labor's or something. Yeah, yeah. But it's really up to what I always ask people when they're first starting to invest with me is what is your dream. What do you want? Because there's some millions of ways to make. money and at least hundreds of thousands of those are in real estate investment there are different styles of real estate investment I mean if you

just want a whole bunch of money that you can go burn and party with yeah I'm gonna put you into some flips if you want to build long-term wealth and you don't mind not getting that money back for some few years maybe even a couple decades I'll say okay well we're gonna do some multi-families or we're gonna do some buy-and-holds and so what I'm getting after is it's gonna depend on the style of investor that you are and how much you want to be involved in that project right but I always encourage you no matter what style you are, go out and get your hands a little bit dirty so that as you move forward,

you get all that experience, you start to learn, and then you won't make those mistakes anymore. Yeah, yeah, it's definitely learning curve. I mean, you know, I think about arguing with contractors and guys not doing jobs or guys paying them, and then you get out, you look and like they're, it's so, how many times guys are almost finished with a project, like you, I can see they're putting the last the windows. They got three of them up and it's almost done. Yeah, yeah, yeah. You know, we're putting these in right now. We're going to do this. We're cleaning everything up and

we'll have all that done. We'll be out of here in about an hour, hour and a half. And you go and write me the check because I need to drop the check off. I've got to pay my guy. Yeah, yeah, no problem. And you write a check for $7,000. Here it is. And you get in your car and you leave. And then two days later, you come back and you find out that basically what it looks like as soon as you gave them the check, they dropped everything left. Well, if you want to start talking about contractors, I've got a bunch of it. I got a bunch of it. advice on how to work that. I mean, I don't know if you want to get into it, but we can.

Oh, I know what I did. I just stopped paying anybody anything until they were done. Or I pay them half and they'd be like, oh, we're almost done. Right. Half, yeah. And when you're done, you'll pay the other half. I mean, I became this just complete, not really an asshole, but I was an asshole about it. Because the guys will try and push you around.

Well, so they will. So here's the thing with the contractor is that usually, if I'm contracting, right, I'm going to require money up front to get another project started because I have to go buy materials and then I'm going to want my material cost and my labor cost and like I want to see a show good faith. So if I'm almost finished with your project and there's not a whole lot more that you're going to pay me but I'm starting another one and this client's going to pay me a lot more, yeah, why would I come to your house?

I'm going to go start on that one. So the way that I've always dealt with that is exactly what you're talking about. Yeah, keep, hold back. Talk to the contract and be like, look, man, I'm going to pay you when it's finished. Not all of it. You have to give them some, but I'm going to really give you at least 50. You try and keep as much as you can towards the end, so they're incentivized to stay. Now that's immediately going to cause friction, but the easiest way to diffuse that is be a really, really good, I guess, employer, right?

Because these are your contract employees. So what you're doing is you're going to want to pay them before you show up. And what I mean by that is you're going to get the rehab. Like I've given you the draw, right? I've reimbursed you for everything. You know the work was done. So when on your way over there, go ahead and send them a Zelle. or pay them and however electronically you want to do it and then when you show up there and you're walking

kind of through and they're like have you done this have you done this have you done this and they say yeah okay we've done it all and then before he can even ask you for payment just already have it there because when he turns to ask you and says hey you know can you pay us for this you say oh no it's already done oh man they're gonna they're gonna love you because contractors aren't used to that they're not used to people actually taking care of them they're used to that friction of like, hey, I'm not going to pay you until the work's all done. And even if he gets a job, another job that's much more expensive, he's probably going to come work for you. And you know why? Because you pay him. You pay him. That guy, maybe it takes him 30, 40 days to get his

invoices paid. But you, you pay up front on time and you never have problems with it. That's how you really keep contractors on your side. Now it is true. It opens you up to the risk of, hey, maybe they don't finish it or maybe they're being a little sloppy with it. But you have to remember these guys are getting paid by the week, sometimes by the month, but they need to put food on their table consistently, and they know that you're going to be a good source of consistent income for you or for them, right? So they're going to do better work for you than a guy's, you know, again.

But you're not suggesting you ever pay it all up front? No, no, I'm talking about that 50%. Yeah, you always, okay. Yeah, that 50% you pay it before you go there because you know what you're going to ask them. Like I'm like, hey, man, I want you to come install this sink or some plumbing for me or something, whatever. and I'm coming to meet you to tell you about it. You and I've already talked about it.

I already know what your price is. Before I even walk through that door, I have already zeled you, you're 50% so that when you're sitting here and you're talking about it and then you say, hey, how am I going to get paid? I'm like, oh, man, it's already done. It's already taken care of.

That's going to go a long way with you and me and you're going to be like, I want to keep working with Ethan. He pays me. Yeah, I would never do that. But anyway, I hear you. It's worked for me. So, like, I've literally got to the point

where it was like there were almost things done. Honestly, it's like 99% of the job was done. Right. And I've got to the point where it was like, okay, well, you know, hey, can you pay us? Well, and I'd write him a check. And I'd hold back like 400 bucks. And they'd be like, 400 bucks, bro. I'm almost done.

I'm going to finish that tomorrow. That's going to take me 30 minutes. Yeah, I know. Good. You'll get a check tomorrow. But if you don't show up, I have to hire someone else to finish it. And he's not going to charge me 50 bucks. He's going to charge me to come out to do the estimate, to get the stuff, to do this.

It's going to end up being three or 400. Right. And also, by the way, this isn't my fault. This is your fault. You said you'd be done by Friday. And you're not. Yeah. And you're not. Yeah. So I don't have to pay you at all. Oh, absolutely true. You know, and they're like, well, but you know, if you really mess somebody up, they're going to put a mechanics lien on your property and then you, yeah, they can be in trouble. But yeah, that's, yeah, none of that matters. And I'm not telling you, go ahead and pay them before they get the work done. I'm saying that 50% pay them before they get started. Pay them, pay them before they can. Pay them before they can. ask you for it. That's the point that really matters. Give it to them before they can ask you because if they know that they don't have to ask you for money, oh man, they're going to do a good job and they're going to keep coming back to you. Now the other 50% keep. You must have some great guys in Houston. In Houston. No, we got horrible guys. Yeah, yeah, no, we got horrible guys too. But the whole point of that is they need to eat. And so you're saving that other 50%. If I owe you $4,000 and I'm holding $2,000 of it, that's a lot of money for someone that's getting paid,

especially on a weekly. I mean, it's a lot of money for anybody. Somebody kept $2,000. of my 4,000, I'd be pissed. And I'd be really motivated, go finish it up. Yeah, I was going to say, let's just finish this. Yeah, yeah, yeah, yeah. All right, well, I mean, you got anything else? What are we doing? Anything else? And you're out of Houston?

Yeah, yeah, and I only lend in Texas. But this is mostly just for anybody who's interested in getting started and covered a whole lot of points. Hard money is, it sounds complicated. It's not. This whole industry is really simple. It's just all barred by these complicated terms, seemingly complicated terms. And your lender is, you have higher standards than most hard money. Most hard money guys are just kind of local guys.

They have a credit line. They might have a few hundred thousand in their own money. They might have a hundred thousand or half a million dollar credit line. You know what I'm saying? Like that's the most hard money lenders are like that. Yours is more of an almost an institutional type of. Right. Yeah.

And I'm not going to be typical. I mean, most of the lenders are not going to care anything about you really. And they don't take that personally. They just care about the house. But you're also, what's the maximum you guys lend up to, though, too? Yeah, so for us it's about $5 million, maybe $6 million for a single project. Yeah, I was going to say, the average guy in, like, Tampa, or a typical hard money lender, like they might, the most, they'll lend is maybe a couple hundred thousand.

Right, you know, like they're residential only, you could do commercial also. Yeah. You know, they'll usually, it's like, they only have a couple million, they're accessible to a million or two. you know you guys have you know a massive amount so you're a much more sophisticated lender than the average hard yeah yeah yeah but and like like i was saying you're going to want to do your research find out what lender's going to work best for you um that's that's all i got all right all right so wrap it up all right so hey i appreciate you guys watching if you like the video do me a favor and hit the like button uh hit the subscribe button hit the bell so you get notified of videos like

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