Hard Money Demystified

Mike: Hey, everyone. It’s Mike Hambright of FlipNerd.com. Welcome back for another exciting Expert Interview show, where I interview awesome guests from across the real estate investing industry to help you learn and inspire you. Today’s going to be very educational. I’m joined today by Chris Marroquin. He’s a hard money lender with Streamline Funding, which is a Texas-based hard money lender, actually very large and has a lot of history, been around for a long time.
Hard money gets a bad rap and it’s often surrounded by a lot of confusion as to what it is, probably because the word “hard” is in it. So it sounds like something you shouldn’t do, maybe. But Chris says it’s not all warranted, and I know for a fact that it’s not. So today we’re going to kind of clear the confusion. We’re going to talk about hard money. We’re going to talk about what some of the benefits are and really kind of share a different side of hard money than maybe what you’re familiar with.
Actually, it’s really funny. I saw an article, or it was an ad for “The Wizard of Oz”. This is like two days ago on Facebook. It was really funny. It was an ad for “The Wizard of Oz” and then it gave a description. It was like a TV ad that was coming up, and it basically said, “Woman comes to town, kills the first person she meets, hooks up with three odd characters and continues on a killing spree,” which is another way to describe “The Wizard of Oz”. So my point is it’s all perspective. Maybe hard money is different than what you think. Before we get started with Chris to talk about hard money today let’s take a moment, though, to recognize our featured sponsors.
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Hey, Chris. Welcome to the show.
Chris: Hey, man. Wow. What an analogy.
Mike: Isn’t that funny? I read that. Literally, I laughed. I think I was at a Starbucks. Literally, I don’t really laugh out loud in a public place. But that definitely did it for me.
Chris: Man, I totally get it because obviously I’m in part of that misconception.
Mike: Yeah. Well, hey, it’s going to be interesting to talk about hard money because I know that a lot of people, the first thing they associate with hard money is expensive rates. But there’s a lot of benefits to being able to fund your deals with hard money. Maybe not come out of pocket a lot and you kind of have a built-in partner to help walk you through your situation. There’s a lot of benefits to it as well that I know we’re going to talk about. But before we jump into that, why don’t you tell us your background and kind of how you got into where you are?
Chris: Yeah. Great. So you’ve had some very accomplished guests who have had years and years of real estate experience. I wish I could say that I had that all under my belt. Frankly, I don’t. What I have done though in the past, I’ve been with Streamline Funding for the past four years. I’ve done a lot since then and I’ve learned and learned quite a bit. But I was actually trying to do my kind of “live the dream.”
My dad was a dentist, grandpa’s an OBGYN, brother is in medical, sisters are all nurses or respiratory therapists. So I had a lot of pressure to follow in their footsteps and I did everything I could to do it except for actually do it. It’s funny. When I decided that I couldn’t go into dental school, I got wait-listed and I got tired of waiting, so it was perfect timing.
A friend of mine, he was like, “Hey, man. Come help me raise money for these real estate investments.” I was like, “Oh, that sounds awesome working with raising capital and doing that sort of thing. I could definitely do something like that.” Come to find out he really wanted me to learn about and work with real estate investors. So I had to spend quite a bit of time, as opposed to raising the money I’m actually supplying the demand for the money.
So he caught me off-guard a little bit but it all worked out, man. Luckily, the first three, four months all I did was soak it all in. I was reading blogs or looking at websites like FlipNerd, and really just trying to figure everything out, learn all the terms, and slowly but surely I started working hand-in-hand with investors. I was actually doing everything with them and that’s how I kind of figured everything out.
The company, though, Streamline Funding, has actually been around since 2002. We’ve got a lot of experience and we’ve seen it all, obviously. We’ve done single-family residential all the way to commercial. Of course, in the Great Recession we learned our lesson, especially with commercial. So that said, now we see kind of see ourselves as specialists in single-family residential investment real estate.
Mike: Awesome. Awesome. You can just tell your dad, “Hey, I’m not rehabbing mouths but I’m helping rehab neighborhoods. So there you go.”
Chris: Yeah. He still, I think, scratches his head a little bit whenever I tell him what I’m doing. But even he gets it. It just took him a little while.
Mike: Yeah. Awesome. Well, I know, like we talked about a little bit up front, we’re going to talk about hard money today. We have a lot of people that listen to the show, so there’s people on here that have used it before, and there’s probably a lot of people that haven’t. But maybe we can kind of start by just talking about what hard money is and who in the heck branded it hard money. So talk a little bit about what it is.
Chris: Before we talk about what it is, who branded it? I don’t know, but I’d like to talk to him. I have a couple of choice words for him. Because I think actually what happened was, it’s actually evolved quite a bit since it was branded hard money. I think it may have been branded in the ’50s. Since I’ve been here, a statistic that will I think surprise a lot of people is our company, we’re looking at less than 3% default. We’ve originated, man, hundreds of loans since I’ve been with the company. So we do a really good job of kind of vetting the properties.
So what is hard money? It is high-interest. I’ll go ahead and get that out of the way because it’s also high-leverage. So we are taking most of the risk, which is why you’ll pay a higher interest rate than you would with, say, a conventional bank. But it’s asset-based lending. What does that mean? It does mean that we focus primarily on the asset itself and the feasibility of the project more than the borrower.
But with the borrower what we’re looking for is experience and credibility. Credit is looked at. It’s not a nonstarter, though, for us. Everyone who’s been in the real estate game long enough probably has had poor credit at some time or another. But you can build that up pretty quickly, and even faster with a company like ourselves, because performance goes . . .
Mike: What’s interesting is a lot of real estate investors, after you’ve been self-employed for a long time . . . I mean I’m sure I have impeccable credit. But the thing is once you become self-employed you’re kind of off the grid in a lot of ways. It’s hard to kind of build your credit up because you don’t have the same employment information and all the stuff that’s out there. Talk a little bit about the leverage piece.
Because I think that’s probably one of the bigger benefits is that there’s a lot of folks that can get much better rates typically if you can get into a community bank. Some of these things are not easy, by the way, which I know personally. But after I had got into some community banks and things like that, I was able to borrow at much better rates than traditional hard money. But they’re still typically doing 20% of purchase price down.
So I’m having to come out of pocket for 20% every time, which I was fortunate to be able to do through most of my real estate investing career. But some people aren’t and even if you can there’s definitely an argument to be made to, well if that limits the number of deals you’re able to do you’d be far better off borrowing more and paying a little bit higher rate. Right?
Chris: Right. So the leverage piece is big. I mean, that really is what it’s all about. It’s not only for the people . . . Your nest egg can only take you so far and you have to have something for an emergency. So 20% down can be a lot, especially if you’re doing a lot of deals like you said. For leverage we do fix-and-flips and do construction. Both are highly leveraged. Fix-and-flips, we’ll go up to 97.5% on your first loan.
Mike: Wow.
Chris: So 100% financing, it’s one of those deals, some people do it. For us, with our company, you do have to earn that privilege and you can, and people have and they do. It’s kind of like a fisherman’s story. The 100% financing, it happens probably less often than you think. They’re hard to find because [inaudible 00:11:00] has to support the 100% loan to cost financing.
Mike: Right.
Chris: But walking in the door, someone with a great deal can put as little as 2.5% down versus 20%, especially when you get into the larger loan amounts. Right now we’re averaging about a $400,000 loan amount per loan. You’re looking at quite a bit of additional money that you can use for your project or for other projects, or for everything else in life.
Mike: Right. I know some other benefits that . . . I’m making this easy for you, man. I’m actually telling you the benefits of it.
Chris: That’s great.
Mike: Why don’t you talk a little bit about . . . I know that some of the other benefits are speed, one, to get approved and two, to get a deal done. Because traditional lenders if you’re working with a bank of any sort, you might be able to get better rates if you put more money down, but speed is not one of the benefits of working with a traditional kind of banking institution, if you will.
Chris: Right. Yeah. That can be tough, man, especially in a market like we’re in currently. People just want to get paid . . . “Cash is king,” right? You’ve heard that before. It’s ease of use, speed. Like you said, we can close a deal in seven business days. We do require appraisals and I’m getting into kind of how an online transaction works. But it’s actually a good thing because it’s not you saying it’s good or me saying it’s good. It’s an unbiased third-party opinion.
Mike: Right.
Chris: The perk is there it’s another set of eyes. The money is flexible. We can do a lot of things that a conventional bank or even a family member would be completely freaked out by. The guys who made this company are actually investors and they get it. So what we’re looking for is just a deal that makes sense. If it is going to be profitable and it’s a safe loan, we will absolutely fund it.
Then, one of the perks that I don’t think people really understand until they’re actually working with us is the network that we have, being that if anyone understands it’s you. But I don’t know if the audience really understands that real estate is extremely heavy with networking. It’s hand-in-hand. Who do you know? What kind of connections can you make? How quickly can you make them? Because everything is on a pretty tight window. If something goes wrong do you have a backup? That’s [inaudible 00:13:43] . . .
Mike: Talk about that. Are you saying the network you provide to those that you lend to? Is that what you’re saying? There’s the relationships that you have for, maybe contractors and stuff, is that what you’re referring to?
Chris: Absolutely. Yeah. We’ve got a network of vendors, contractors, other investors. Someone has a deal . . . I’m sure you’ve had deals that you know it’s a deal but it just doesn’t quite fit your niche or your box.
Mike: Yeah.
Chris: You can wholesale it to someone else within our network, and that’s something a lot of wholesalers do. They’ll send me deals directly and say, “Hey, man, this to your qualified buyers,” and of course we’ve got a ton of qualified buyers in every market, and they love it. Of course, we get the financing, but that’s all we’re doing is making the love connection. It even goes for insurance and for anything you can imagine real estate-related, good realtors in certain ZIP codes, mentors, agents. It’s everything. It’s kind of all-encompassing. But we definitely do our best to make connections with everyone within our network.
Mike: Yeah, that’s great. It’s funny that you say that because that’s a big part of what we baked into FlipNerd, was we know that finding contractors and even lenders, and all those things is a challenge. It’s funny because even veteran people, even when we were rehabbing five, six, seven, eight houses at any one time, I always had one go-to guy. It was pretty often that if something happened to that person, I didn’t really have a backup, in some key areas. In some areas, no problem. Another roofer, probably no problem. Another glass guy that does glass repair it’s like, “I don’t have a backup for him.”
But it’s funny. Then when you need those people you’re in a pickle and I’ve always told everybody the best way to find a contractor or anybody that you work with is through a word-of-mouth referral from somebody else that you trust. So that’s definitely very powerful.
Chris: I absolutely agree. We’ve kind of built our network and our database knowing that.
Mike: Yeah. That’s great. So talk about outside of just the benefits of the network, of how a hard money lender can benefit the person that you’re lending too. For example, that second set of eyes, I know you said you were getting an appraisal, but I know it’s pretty often that real estate investors . . . I’m not saying that it doesn’t mean that it’s not a good deal. But just to have somebody to bounce ideas off of, just to say, “Hey, here’s what we’re thinking about doing. We’re thinking about not taking out this wall,” or, “adding on,” or something.
I know you’re primarily in the Central Texas market where you can almost do no wrong these days, and in the Austin area and things like that. So there’s a lot more scraping lots and building on and adding square footage because the cost per square footage is going up pretty rapidly. But it’s good to talk to somebody else about those and really kind of have a partner, if you will. So talk about that a little bit.
Chris: Yeah, man. It’s like you’re stuck in the box and you want the deal so bad.
Mike: Right.
Chris: You really do need that perspective and I think we offer that. I try to. I do everything I can to give that kind of perspective. But we do everything from vetting the budget, so kind of going through the motion of a transaction. You get it under contract. We have a team that looks at the contract. That’s the very first thing we do. We look at the property, check historic, check flood plain, and we’re going to let you know if it . . . Have you ever had that mistake? Have you ever purchased a historic home and not really known until the 12th hour?
Mike: I’ve done some stuff in historical areas, which I don’t like to do. I mean, it’s a nightmare, especially if . . . yeah.
Chris: Yeah. It can be a total nightmare. So we’ve definitely flagged that before. Flood zone is another thing and that can be sneaky, and that will affect your buyers pool. Even in the budget, sometimes we have contractors who are filling out these budgets. Other times we have investors out-of-state filling out these budgets sight unseen.
So we actually inspect the property. We’ll send someone out there to look at it and if we see something that has not been allocated within the budget we’ll say, “Did you know that there’s mold in the bathroom?” Sure enough that probably saved them some money. But even past the budget, we have kind of specialists and I’d like to think that we’re a specialist with funding your investment real estate deals. It depends on who you are, but we’ve got a closing team that’s looking at all of the legal stuff. We’ve got a construction team that’s looking at all the budget.
We have an appraiser, an unbiased opinion looking at the value of the home. That’s one of the biggest pieces that some investors love and some hate, is the appraisal. Frankly, they’ve been right and they’ve been wrong. I’ll happily say they’ve been right more than they’ve been wrong, the appraisers that is. But these guys, it is they’re job to look at what you’re doing and find the most comparable houses as in being as close as possible with the improvements that you’re making.
After repair value is a beast. That is a very tough thing to predict. Predicting what someone will pay for the property six months down the road after you’ve put in $100,000 in the property, very difficult. But every neighborhood, every road, every ZIP code has its nuances. So many things can change the value of a property that you may not have seen. It certainly doesn’t hurt to have someone tell you, “Here’s what I think.” If nothing else it’s just perspective.
So that’s the appraisal, and then finally a survey, making sure the title is good. We’ll work with anything that pops up on the title commitment. But we’ve caught deed restrictions at the last moment for written in cursive in the 1800s. Right before closing we realized that someone who was trying to build two units actually couldn’t without the permission of X% of the entire neighborhood.
Mike: Wow.
Chris: That’s just another one of those things that we didn’t close the loan but the guy certainly didn’t get into a pickle with the city, which can be tough.
Mike: Yeah, absolutely. Absolutely. So what makes a good hard money lender? I mean, there’s a lot of people that are . . . I’d say, even right now as we sit here kind of almost going into 2016 . . . So I’ve been through a couple cycles now. When I started a lot of the lenders went away. They just kind of got wiped out. Or went away because the risk or whatever it was, but a lot of the money that was backing them, money wasn’t as prevalent to get.
Now, it feels like we’re at the other end of the pendulum swing where everybody and their brother is a lender again all of a sudden. So there’s a lot of money out there, but it’s not all the same. I mean, it’s the same in that it has the same purchasing power. But in terms of who’s behind it, their ability to be there with you over dozens of deals or hundreds of deals, or however many deals you do versus just a one-off transaction, there’s a lot of things that make lenders different.
But what would you say separates a good hard money lender? Let’s say we’re talking to the people that are listening to this that want to do more rehabs, want to build their rehab business, and then want to work with a hard money lender. How should they look at people differently?
Chris: That’s a great question, man.
Mike: I only ask good questions, Chris. I’ve been doing this for a long time. I’m a professional. I ask good questions, my friend. I’m kidding.
Chris: So to answer it, I believe that you should look at your lender whether it’s a hard money lender or any lender as another part of your team, just like you would look at the guy who does the repairs on your home, or the agent that you choose that lists your home. You want it to be someone who, hopefully you like them because you’re going to be going through a lot with them. We communicate constantly with our borrowers.
But you’ve also got to trust them because there’s going to be hard times. There’s going to be times where something goes wrong inevitably. Then, they’ve got to be dependable. So you mentioned you’ve seen the cycle and so have we as a company. Personally, I haven’t. I kind of came into it as it was an increase in market. It wasn’t what it is now. It was slow.
But it definitely helps to have someone behind you who has been through a downturn, who has seen what happens when loans go bad and when properties start coming back left and right because the market adjusts or something catastrophic happens. No one wants to talk about it or even mention it, but real estate is cyclical and inevitably something will happen and change.
Hopefully, you’re working with the right lender who’s going to do everything they can to enable you to complete the project and get out of there, however it is, refinance, sell, whatever your exit strategy may be.
Mike: Yeah. I assume part of it too is stuff that you tend to not think about until you need it, like repair draws, being able to kind of do that efficiently. Because, man, there’s nothing worse than . . . I haven’t fortunately had to deal with this much myself because I had access to the right type of capital that was very flexible. But contractors are pretty much hand-to-mouth type of group and it’s hard to build a relationship with a contractor if they need to get paid and you can’t pay them.
Chris: Definitely.
Mike: Any horror stories there?
Chris: Yes. So what you want to do, and I think this is probably advice that you’ve heard before, you and your audience, you want to define the process for your contractors. You want to set expectations early on, especially when you’re working with a lender. No lender, to my knowledge, is pre-funding your real estate draws, your construction draws. So backing up for just a moment, funds are released as work is completed.
So you’re going to be out-of-pocket for a little while. That’s kind of what you’re eluding to. It sounds like something that you’ve had problems with in the past or something that you could definitely see going wrong with less sophisticated lenders is waiting on that money, having the work done but not being able to pay your subs.
It definitely is a problem. But if you set the expectations right and you understand the process, you can definitely plan for that. Something that we are very proud of is our turnaround time. Like I said, we have a full-time staff. You’re not calling me to get your draw, and I’m not trying to juggle four things. I’m focusing on your next acquisition and structuring your loan with you.
We have a whole other department that works hand-in-hand with you on your budget, on your draws, and on your inspection. We do our best to get it out in three to five business days, and it can definitely be shorter. It tends not to be longer. Something bad would have to happen for it to be longer. But most of our guys, after you do it once they understand the process and it’s very simple.
Mike: Yeah. I think you’re right. That’s one of the things that we’ve always done, and again we’re using different types of lending often, but our contractors get paid quickly and on time. I think that helps build those relationships. But even if it takes a little bit longer because of your repair draw system, you just need to understand what that process is and know that your lender is not going to put you in a pickle.
Because it’s hard to be successful in this business if your contractors are unhappy or walking off the job, or waiting for payments, or even if they can’t buy materials because they haven’t been paid yet. I mean, none of those things do anything other than cause a bunch of inefficiency in your business.
Chris: Right. Yeah. Staying on schedule is huge, especially in a high-leverage, high-interest loan. Right?
Mike: Absolutely.
Chris: So we’re with you on that. The sooner you get those repairs done the sooner we can sell and move on to the next one.
Mike: Yeah. Chris, awesome. Well, thanks for sharing your insights with us today. Can you share how folks, if they’re interested in Streamline, I know you lend throughout Texas primarily, where they would go to learn more?
Chris: Sure. The easiest way to get to us is the website, www.StreamlineFunding.com. But kind of a cool thing that we do is we actually network in every major market every month. So you can find us at our networking events, which you’ll see in our website at StreamlineFunding.com, and aside from that you can just give us a call.
Mike: Awesome. We’ll add a link for Streamline down below the video here for those that are interested. So Chris thanks for spending time with us today. I definitely appreciate you sharing your experience and your knowledge with us.
Chris: Hey, man, thank you for having me, and thanks for putting all this together for us. I speak for everyone when I say we appreciate it.
Mike: Awesome. Awesome. Well, I appreciate your appreciation. Alright, my friend. Have a great day.
Chris: You too.
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