What the Experts Warn Against Before You Lend

David:
This is the BiggerPockets Podcast show 642.

Beth:
I think a lot of people say they have to have a specific structured mindset, and they got to be really goal oriented, and put out into the universe what they want. Oftentimes, for some people, they’re so over engineered in their goal setting, that they may not be… They might have blinders on to what kind of opportunity exists out there. I think, both Alex and I shared our stories about how we just happened upon private lending, and every aspect of real estate investing involves some chance encounter with someone with some opportunities.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with my good friend and amazing co-host Rob Abasolo, where we are interviewing two of the authors of BiggerPockets’ newest book called Lend2Live. We get into it with Alex and Beth, the authors of the book about private money lending, lots of things that you probably had no idea that go on behind the scenes, how to vet a private money lender to make sure that they’re the right one for you, what to look for, what questions you should ask, and how this whole thing works so that you can scale or supercharge your business.
Rob, what did you think about today’s show?

Rob:
This was a… The wheels turn very often for me on BiggerPockets, but today was a very special one, because I know this wasn’t… The intention for today’s video is to really talk about the world of private money lending, and how to vet your private money lenders. That’s honestly the largest part of this episode, but I was super interested in actually becoming a private money lender. I think this is a really cool avenue to diversify in, and so I really like learning a lot of the mechanics of that.

David:
I’ll spend your money. Happy to pay you interest on that. You just let me know, my man.

Rob:
Hey, a solid 20% for you, my friend, and you got it.

David:
All right. Today’s podcast is brought to you by Rob and Rob’s mustache. Let’s see which one of us becomes the best private money lender. Before we bring in the guests, we’re going to get to today’s quick dip, which is consider buying the book that we’re talking about today. You could get it at biggerpockets.com/store. It’s called Lend2Live. The idea is to invest passively so you can live actively, and today’s guests do a very good job of spelling out in detail how you can achieve the same for yourself. Biggerpockets.com/lend2live, two as in the number two, lend number two live.

Rob:
Well, I actually have a… I have a second quick tip for today. This is really important too. This is going to change a lot of real estate journeys just by listening to this tip. It’s to set a reminder on your phone to remind you to take out your trash every week, because I’ll tell you what, David, I forgot to take out my trash last week, and I am paying dearly for it with a trashcan full of maggots. It’s caused some divides in my household. I’ll be honest. It’s not been a pretty week for us, because we don’t have anywhere to put our trash.

David:
It’s funny that you say that because two weeks ago, for whatever reason, my credit card stopped making the automatic payment to the city where I live for both the water bill and the trash. Trash guys apparently have a chart or something that tells them, “Don’t pick up this person’s trash, because they didn’t pay their bill.” I was taking my trash out. The first time, I’m like, “Oh, they just missed it.” Then next week, it’s getting pretty full. They skip it again because now I’m not paying. It wasn’t until I saw that there was a letter that got sent saying, “We’re going to turn off your water.”
I’m like, “Oh, I don’t know why my credit card does that every once in a while,” but paid it. Now, they’re taking the trash, but it is a little stressful as you’re trying to figure out. It does fill up with maggots surprisingly fast.

Rob:
I walked in so defeated. My wife’s like, “What’s wrong?” I was like, “I forgot to take out the trash yesterday. Honey, this is the first time this has happened, but there’s maggots in there.” She was like, “Oh my.” The whole mustache is my redemption story to her, because she’s like, “Mustache or you’re sleeping in the doghouse tonight,” so here we are. Here we are.

David:
Very resourceful of you. All right, let’s bring in Alex and Beth. Alex and Beth, welcome to the BiggerPockets Podcast. I understand that you two are the newest authors in the stable of BiggerPockets publishing, so congratulations and welcome to the family. Alex, can you tell us a little bit about the book that you two wrote?

Alex:
Yes, absolutely. The book was really a… It started off a little bit as a passion project, because we kept getting asked, “What’s a good book to read? What’s some resources?” There just really wasn’t anything solid out there. I think we had just gotten asked one too many times, and we were like, “You know what, we’re just going to do it. We’re going to make something.” Because we had talked to so many new private lenders or new people wanting to use private money, that we’re like, “We got a good idea of what the common questions are.”
What are the common pitfalls? What don’t they know? What are they asking questions about? Then we put all of that as action items into the book.

David:
All right. Then Beth, in your opinion, who is this book best suited for?

Beth:
I think this book is best suited for anybody that wants to learn more about private money lending, whether you’re a borrower who just really wants to become more engaged, and build your acumen around private money so that you can raise capital better, trying to understand how to learn about private money from the point of view of the lender, but it’s also for people who just don’t really want to be an active investor. Maybe they don’t like flipping or wholesaling, and so they choose a more passive route to creating some cash flow by becoming the bank.

David:
I’m curious before we get too deep into this, as the market is shifting, how do you see the need for private lending movie? Do you think we’re going to see more people that say, “You know what, I don’t want to own the real estate. This is a little scarier now that values are actually going down again,” or do you think that people are going to be saying, “Hey, I need to borrow money. Who’s going to give me money,” or some combination of the two?

Beth:
I think it’s coming to more into light right now more than ever. I think we saw this in 2020 happening as well, where a lot of investors who might be a little bit more bearish are pausing on their projects, and waiting and seeing what will happen next. We see really understanding where your source of capital becoming more important, because the volatility in rates, the underwriting requirements, shifting, understanding where you can get capital very quickly and easily is making private money lenders become more and more important right now.

Alex:
I think it’s probably going to only increase the demand for private lending right now, because those people have nowhere to go. I literally ended up in private lending because a friend of mine, his hard money lender called him right when the world was shutting down with COVID. The hard money lender said, “Sorry, dude, you’re out of luck. We aren’t funding any more deals.” Fortunately, we just knew each other, and we said, “Okay, let’s make a go of it.”
That’s happening in a more increasing pace now, because some of these hard money lenders aren’t necessarily closing their doors to pause. They’re closing their doors for good.

Rob:
Oh yeah. I just actually wanted to establish a baseline here, because we’re going to be talking about private money lenders, private money in general. Can we just start with a simple definition of what private money is and how it differs from traditional money?

Alex:
I think you just asked a loaded question there, Rob.

Rob:
Great. We’ve got one hour, so play it on me.

Alex:
The way we define private money is capital that someone directly has control over. There’s not strings attached. It’s the easiest way to think about it. I have a pool of capital potentially sitting in a bank account, retirement account, and I am the decision maker. I am underwriting the deals, and then I am moving those deals forward with clear to close. What is currently happening in our industry is hard money lenders are now trying to rebrand themselves as private lenders, direct correspondent lenders.
They have all these phrases that include the word private lender. I don’t want to sound like I’m making something bad out of hard money lenders. They’re just different, because their source of capital comes with strings attached. Either they’re a debt fund, and there’s legal obligations to their passive investor that says, “We won’t do this. We will do this. We will do this,” or maybe they have a warehouse line of credit with a bank somewhere. So again, they’ve sold the bank on this business model saying, “We’re going to check all these boxes,” or they’re selling the loans on the secondary market saying, “What is the secondary market buying?”
They have yet another person dictating what they can actually close on. All of those things, in a good environment, good market, bull market, not a problem. But now that we’re starting to hit that rocky road, like Beth mentioned earlier, knowing what your source of capital is when you’re talking to a lender is going to become vitally important for a lot, especially active investors, because they need to know that if they get that preapproval that it’s actually going to close, because otherwise, the preapproval is just a piece of paper with letter typed on it.

Rob:
That wasn’t so bad. I think that was a nice intro to the topic. Hard money lenders, there is a little bit of a, not necessarily, branding issue, but there are people who would consider that private money. It’s just really important to be clear on where the actual source of that money is, because it dictates some of the, I suppose, legalities around how that lending takes place. Is that correct?

Beth:
Well, it’s not just legality. It’s also how you are able to loan your money out. If you’re a truly private money lender like Alex and I lend out our own money, I can call the shots. It’s basically like a choose your own adventure. I can dictate the rates. I can dictate the terms. I can pick the partner or the borrower that I want, but when you’re a hard money lender or traditionally a hard money lender, maybe you pull capital together. Then you have a private placement memo, a PPM that dictates how and what you can lend on.
It’ll say maybe you can only do first. Maybe you can only do up to 80% loan to value, or an appraisal or a BPO is required, some sort of stipulations for the underwriting so that they can sell it out or to appease their capital investors, but true private money does not have those kind of stipulations, specifically if you’re not going to be backed by the institutional capital that Alex was speaking about. If you don’t sell out your loans, or you’re not going to get it funded by Wall Street, then you can do whatever you want.

David:
That’s a great point. You sort of… It’s much more a relationship-based business versus metrics and guidelines like you’re going to come into with hard money. Do you feel that that is more of a benefit to the person who’s lending money or the person borrowing money or both?

Alex:
I’m going to say it’s definitely both. Beth and I like to play this jockey versus the horse game, where which one do you bet on? Do you bet on the jockey? Do you bet on the horse? I tend to be more along the lines of the jockey, which would be the borrower. Beth is more along the lines of the horse. It’s not to say we’re ignoring the other one, but in Pareto’s principle, the 80/20, I’m going to look at the person 80%, maybe the property 20%, and Beth is probably going to be doing the opposite.

David:
This is really interesting. Can you guys explain that a little bit more? Beth, maybe let us know why you go down that direction. Then Alex, I’ll ask you the same question.

Beth:
Well, in very simple terms, I feel like properties don’t disappoint me, but people can, and so the most important thing for me in terms is especially scaling private money, because Alex and I both started out lending out our own money. Over time, you become really the most popular person in the room, because borrowers want to know who you are. People want to invest through you, because they hear about your great rates of return and so on and so forth being the bank. So, I like being able to have the ability to put a large equity buffer on any loan.
So if the market shifts, if a GC just goes dark, because that’s never happened on any project, then I can accommodate some of those variables that might not even be a borrower problem per se. It just helps protect me, and lets me sleep well at night. Relationships are important, but as you start to lend out more and more, you have to scale what you’re going to look at, because you can’t look at everything under the sun. You have to make the best decision you can with a very limited amount of information, so I choose the property.

David:
That’s a good point. Alex, what do you think? Why do you choose the person?

Alex:
I am definitely person, because I feel like no matter how good the deal is that if you have someone who can’t make timely decisions, doesn’t communicate, has a really crappy partner, choose a crappy partner, whatever that happens, it doesn’t matter if you hand them a deal on a silver platter. If they don’t have those fundamental skills in place, then nothing’s going to happen. I also base on the relationship, where do I feel this particular investor is going to do everything in their power to make me whole?
If this deal goes sideways, are they the type of person that’s going to make me whole? Because it might feel like everybody you know is involved in real estate, but it tends to be a pretty small circle. So if you burn one private lender, I guarantee you that you’re somewhere in the cage and underground is going to be found out that you burn one private lender, and then nobody’s going to lend to you again. That’s why I really base it on the relationship, because it’s like, “If this is a good deal, and I have faith you’re going to make me whole, then we’re good to go.”

David:
Beth, when you’re looking at the property, what are the key metrics that you are like, “This is what I need to see, that if I get this right, the deal’s probably going to be okay?”

Beth:
Well, as I mentioned before, equity buffers everything. From a lender point of view, we talk about it in terms of loan to value, whether that’s looking at it from a loan to purchase price or loan to as is value. We’re also looking at the loan to ARV, the after repair value, implementing formulas like the 70-30 rule, which you guys have explained it very well on biggerpockets.com. We want to be able to make sure that there’s enough profit margin that is going to make sure that our principal’s going to be returned, and that we can make some interests on it too.
But really, principle preservation is the primary objective for private lenders, and so that equity buffer, traditionally for my loans, I like to keep it around 65% to 70% loan to value. That feels pretty conservative compared to a lot of other lenders. But as a small private lender, I have a whole lot more to lose than some of these larger corporations, right? So, I want to keep a real nice equity buffer protection.

David:
Then how about you, Alex? What do you look for in the person?

Alex:
I would say I totally agree with everything Beth said, but in my evaluation of the person, since we were talking about books earlier, I don’t know if anybody’s ever read Extreme Ownership by Jocko. That is me. I want to see that in an individual. I want to have a conversation with them, and I want to see are they blaming past partners for poor performance? See, you got the book, David.

David:
Best book ever, such a good book.

Alex:
That is really me. I want to see someone who’s going to step up and take ownership of what they could have done better. Your last deal, you might have lost $10,000 doing your first flip, but I bet you learned a lot. If they’re saying it in front of me going, “This is my next flip. This is my second flip,” and they go, “This is what I screwed up on. I hired the wrong general contractor. I picked out the wrong flooring. I didn’t pull the permits.” But if they’re constantly saying, “Oh, the contractor was crappy. They didn’t do this. They didn’t do that.”
It’s just excuse after excuse after excuse. To me, that’s a red flag, because me as a lender, I’m basing on that person, that relationship, and so I want to see some ownership of what you’ve done. It doesn’t have to be… You don’t have to paint me rainbows and unicorns, but I just want an accurate representation of how you thought this deal went and why.

Rob:
It’s an accountability, right? Owning that accountability, I think, it… I mean, especially in a relationship, I think there’s probably a lot of trust that is built if you are held accountable, and you do take the ownership. So clearly, both of you have done this for a while. You guys are experts in the world of private money lending and everything like that. I have to imagine. It didn’t always start out this way, so can you tell us a little bit about how you got into this world?

Beth:
I’ll go first. I was set up on a date with my now husband. We talked casually about real estate. I grew up around real estate. My parents did it on the side as a hustle, flipping and owning rentals. He talked about getting into private money lending again. He hadn’t done it since before 2008. Truthfully, even though I knew a lot about real estate, I had never heard the term before. I’m pretty sure after that date, I went back home, and I Googled it just so I could understand it better.
I’m not going to lie. I think that a lot of private lenders just happen into this, because they have casual conversations over a glass of wine, which Matt and I did. Then it piqued my interest because how could you possibly become the bank? How could you actually invest in real estate without having to get your hands dirty, and build sweat equity? It piqued my interest, and he asked me to help him. I had a lot of marketing, and project, and program management background, so I got into it that way. Just all by chance.

Rob:
What about you, Alex?

Alex:
I’m laughing so hard, because my story is very similar. I went to a RIA meeting, a local RIA meeting. My spouse is active duty, so we were stationed in Florida at the time. Just Southern person. I’ve never met a stranger. This guy walks up and starts chatting. He’s like, “Have you ever thought about being a loan officer?” I’m like, “No. I’m in college to be a chemist. That wasn’t in the radar.” He goes, “Oh, so you must be good with numbers.” I’m like, “Yeah. I took calc three. We’re doing okay. My math has more letters than numbers in it these days, but I could do it.”
He explained a little bit about what the process was. This was 20 years ago. This is back before phones were smart. Everybody was faxing stuff. I was like, “Okay, cool. We’ll give this a go.” It actually turned out that he was a private lender, and he was also a hard money loan broker. So, this being Florida, everybody golfs. He was routinely out of the golf course, and I was the one running applications out to borrowers. I was taking phone calls. I was a person in the office accepting the checks when the mortgage payments were coming in.
I really got to see real estate from what I call the other side, because I’m going to these RIA meetings. I’m going to these landlord meetings, and you keep hearing the same recurring things. People are talking about contractors. People are talking about tenants not paying, but they were in this guy’s office every time on the first with their mortgage payment in hand. My guy’s out on the golf course, and I’m like, “I like this side better. I don’t have to deal with tenants. I’ll do that. I’ll go…” I don’t golf, but I’ll come up with something to take up my time.

Rob:
I guess it’s safe to say you’re a financial chemist now.

Alex:
That’s right.

Rob:
You’re working a number on that end, right? So I have a question here on the technicalities, because I’m still trying to wrap my head around hard money versus private money. I understand a little bit from the standpoint that you were saying hard money, they have different sources of income. They’re pulling it together, might be a fund. We’re not totally sure. So if me, Rob, if I want to go and lend $100,000 to people, am I a private money lender simply because it’s my own money that I’m lending out, or is there some other technicality that would make me a hard money lender in that instance?

Alex:
I would say that terms are a little nebulous. There’s not a clear cut definition. That’s why we say what we are considering private lenders. But in my opinion, in your scenario, you would be a private lender because it’s your own capital. You can hit the clear to close button and say, “Let’s do this deal. I like it. Here’s where we go.”

Beth:
Private money lenders are like a speakeasy. You don’t know where they exist. You’re not sure where the door is, but you know they’re out there, whereas hard money traditionally has a brick and mortar storefront. They actually operate it as an active business, where true private lenders are really doing this on the side mostly. That’s why you don’t know them. They’re not advertising. They don’t actively run a business around it, and so they’re a little bit more elusive.

Rob:
That actually helps quite a bit, because it sounds like the average person that has money stashed the way they could just be a private money lender. If they’re like, “I want to make X amount return on my money. I’m going to go find an investor to partner up with lend out money.” When you were starting out in this world, did you lend out your personal money just right out the gate, and fund people’s deals 100% of the time, or… Alex, you said that you were working with somebody, learning the ropes. Did you partner up with someone on your first private money deal to lend out the whole sum to an investor? I mean…

Alex:
I did not. We funded our first deal entirely from our own capital, but to give someone… I think, one of the misunderstandings of private money is everybody thinks you need to start with a million dollars. You can’t do anything in lending unless you have a million dollars. My first loan was actually about 32,000. The reason it was is because my particular borrower actually ended up taking the property subject too. The first lien was already in place. He paid the cash to the seller. The seller walked away. Then I actually came in in the second lien position, and paid for the renovations.
My very first loan on my own, not with a hard money broker that I used to work with, was actually in the second lien position. It was with another military member, again, falling back on that relationship. If he’s an active duty service member, he can’t get in financial trouble because then his clearance will be pulled. I was definitely hitting the relationship, I believe, button on that one.

Rob:
Cool. Beth, what about you? What was your first deal like?

Beth:
It was very similar. It was basically… Matt, my boyfriend at the time, had a little bit of his own money. He actually had two investors, a golf friend and another school dad that wanted to invest because he was always talking about private lending. Then I had a legacy 401k from an old employer, and rolled that over into a solo 401k, and started lending it out that way. It was also about 60 grand. It was on a legal 502 cannabis grow operation in Seattle, but it was in second position.
The loan to value on that building was less than 40%, so it was a really safe opportunity for me to really get my feet wet and understand the whole process end to end with my own capital.

Rob:
Cool. This is really… I’m actually really… I’m super intrigued by this, specifically because I actually now am starting to understand. This is not really anything I would’ve considered, to be honest, previous to now. I think I’m understanding a really big benefit is that it… Is a lot of this money that you’re lending out oftentimes short-term debt? Is it something that you can get repaid? Can you find deals that are usually three months long or six months long, or are you typically targeting something that’s a 30-year amortization?

Beth:
Always short term.

Alex:
Yep. Always short term most of the time. There are some individuals that they don’t want that churn. They don’t want to continue to underwrite deals, so maybe they’ll do a five-year loan because they just want the capital deployed. They just want the cash flow. They don’t necessarily want the whole figuring out the documents, and doing the due diligence and underwriting. But I would say the vast majority of private lenders are going to be a year or under as far as loan terms.

Rob:
That was interesting to me, because I am in this situation where I do have capital, but I always have to keep it. I want to not stashed away for a certain reason, right? My position, I have to keep a lot of money available for taxes, right? Taxes are coming… Well, taxes, I filed an extension, but in October, that tax bill’s going to be due, and so I know I cannot spend that money. However, if I were to work out an arrangement where I can lend it for, let’s say, six months, a couple months ago, I could have planned for this.
I could have been making money on my money that I have to pay uncle Sam, or I have other projects that take me anywhere from six to 12 months to permit, like different glamp sites or tiny house village, for example. I know I got to keep that saved for an instance whenever I’m actually going to break ground out there, but I can’t use that money because I know I have to section it off for that. I’m starting to understand that aspect of it, but for someone getting started out in this whole world, I got it.
It seems scary. It seems scary to just be like, “All right, you need 200K. I got it.” Let’s say even $36,000. If you’re first starting out, $36,000 is a lot. What protections do you have as a private money lender if any?

Beth:
What we offer our private lenders because… Just a little bit about my background, as we grew, and friends of friends heard what I was doing, they would ask if we would lend out their money, and so it just grew organically. Now, it’s that we lend out quite a few different people’s capital. The way that we can safeguard it is by helping them underwrite it for them. Of course, we’ll do due diligence on the property itself, but we’ll add things in like a title policy for the lender. We’ll order insurance binder on behalf of the lender as the mortgagee.
There are quite a few safeguards that you can do in addition to that equity buffer that makes the lending scenario really safe, really short term, and really secure.

Alex:
I would definitely add to that, that for me, private lending is one of the few things where someone else is going to pay to cover my butt, and I can go into the deal and know exactly how much I’m going to make, because we’ve already dictated the terms. We’ve said, “I’m going to get 10% annualized. I’m going to get two points upfront.” It’s one of the few ways that I’ve ever found an investing period where I’m protected. I don’t have to pay for the protection, and I already know how much I’m going to be making out of the deal.

Rob:
Right, because I think one of the things that you hear very often is with the hard money lender, they say, “Oh yeah, the house is collateral,” but we don’t really ever talk about the opposite side. We’re like, “Okay. Well, if I mess up, the lender will get my house as collateral.” But now when we’re talking about, “Hey, I could actually be the lender if I’m getting the house “as collateral” in that instance.” Now, I’m like, “Is it a headache? Is it a headache to really go through that process, or do all the different failsafe that you were talking about really, I don’t know, make this process easier?”
I’m curious. Since, Beth, you were saying that, that was what was coming through my mind.

Beth:
I mean, I deal more in volume now, so I’m kind of like a hybrid. I call myself a private money matchmaker, because people know us. I have a brand presence in my market, but I’m still dealing with truly private individual capital. We’re a little bit in the middle on that. We do more volume now that we’re growing in our private money, and letting out other people’s capital, but we try to safeguard it again through that equity buffer, and by being able to put the rates and terms against the overall risk tolerance of our clients, right?
So if you want to have a lower risk, then maybe we get you into a lower loan to value. Then maybe your interest rate’s a little bit lower on that too, but we have some that will take on a much higher risk. So, if it does get into a situation where it ends up defaulting, it’s not really a bad scenario. I mean, we have less than a 4% default rate year over year, and we’ve never had a principle loss, thank goodness, because we’re putting in some added protection with that equity buffer, right?
Even if you lend $150,000, and the property’s worth 200, well, if I have to charge default interest, and I have to engage an attorney to help force a sale or force them to make payment, I’m still going to be covered overall. It’s a little bit hassle logistically, because you have to go through that foreclosure process. Alex says… I can let her speak to it, but she calls that the nuclear option. There are plenty of ways to mitigate that risk, and to prevent that default from becoming really scary for a lender. I’ll let her touch on that a little bit.

Alex:
I also wanted to bring in another angle from this is that title insurance and hazard insurance are not going to necessarily protect you from a loan default. Title insurance is making sure that the buyer actually has clear title to the property, that there’s no other liens, for example, if you’re in a first lien position. There’s lots of things to protect against other than just the borrower defaulting. Because if you don’t have lender’s title insurance, and it turns out this was a fraudulent sale, wholesaler did something. They forged grandma’s signature, and now the cousin’s coming back and saying, “Hey, this property was never actually legally sold.”
Your lien gets washed away if you don’t have lender’s title insurance in place. I don’t want listeners to think that the only thing that could go wrong is foreclosure. There’s lots of things. The property could burn down the day before it’s supposed to go out on MLS. So if they don’t have adequate hazard insurance that covered the property at its ARV value, they just went with the cheapest thing they could find, and they got coverage just for the amount that it was in as is condition. Then you’re in a similar situation.
When I say protect yourself, and I’m not necessarily negating default, because there are other risks to a loan process other than just the borrower defaulting.

David:
In each of your businesses… We’ll start with you Beth, and then I’ll ask you, Alex. How often is a default something that actually happens? Do you have the numbers of like a percentage or maybe even just a rough idea of how often you have to foreclose and sell properties?

Beth:
Well, like I said, our default rate is less than 4%. We’re really proud of that. Some lenders are much higher than that. For our volume, we’re still considered relatively small. Since 2020, when COVID hit, you would think that there’s more. I’ve actually only had three. Two of them actually went to auction. We were able to recover all of the principle, all of the interest, late fees, default interest as well as legal fees that were incurred associated with having to take it to auction.
Prior to that, I only had a handful in eight years, originating hundreds and millions of loans. It just doesn’t happen very often so long as you put those precautions in place while you’re originating it, and not taking care of it afterwards.

Alex:
I would say for me, I haven’t had anything necessarily default to the point where the loan… We had to go to foreclosure. I’ve had a borrower that was… Basically, the loan needed to go a little longer because of the supply chain problems during COVID. This guy ordered windows the day he closed. He showed me the invoice. It took four months for windows to show up. They had a contract on the property contract on MLS, and said, “Hey, we’re good to go. We’re just literally waiting on windows to be installed,” so we had to extend the loan.
He was very upfront and very communicative about it, so it really wasn’t a problem. It’s just nothing we could do. We can only get windows so quickly, especially during the early parts of COVID. I think, again, going back to what most people would consider the nuclear option of foreclosure, yes, technically, his loan was in default. We had reached the end of the six-month term, but because he was open with communication, he was always very forefront like, “Hey, this is what I’ve done. I knew this is going to be a problem.”
At that point, we elected to modify the loan, and just extend it for a couple more months until, “If the windows could be installed, we could close escrow and get repaid.” That’s why I called the nuclear option foreclosure.

David:
That’s what I wanted to point out, because I think a lot of people hear this, and they’re thinking like, “If I go one day past what we agreed on, they’re foreclosing right away.” But you two are both saying, “No, I take pride in the fact that I don’t have to do that very often. We don’t want to have to foreclose.” I’m sure it also was nice when you can get repeat business. You get the same people coming back. You build a relationship. They know how you work. You know how they work.
So on that note, when someone’s vetting the private money lender that they’re going to borrow money from, what are some things that they should look for? I’ll start with you this time, alex.

Alex:
For me, I’m going to say the first thing above all, never, ever, ever send them any money. There is no private lender, a legitimate private lender. They are not going to request thousands and thousands of dollars upfront. They’re not going to request some $5,000 as an application fee, whatever their BS they’re trying to sell you. If you take away anything from this episode, please do not send a “private money lender” thousands of dollars upfront. That’s a no.
There’s a couple different industry associations that are not necessarily compulsory to be a member of, but if they are a member, that does show that they legitimately care about the ethics, best practices in lending. One of them is the American Association of Private Lenders. You can go on their website. You can search for the person’s name or company. If they are a member, it will pop up. Another is lenders are sometimes required to have what’s called an NMLS number. Anybody… Again, it’s a licensing thing. You don’t necessarily need to be licensed, so they might not have that.
Not having that doesn’t necessarily, again, exclude them. But another thing that you could do, most private lenders tend to be very hyper local. They’re going to either lend where they live, or they’re going to lend in a very small market if they’re a distant investor. You could ask them, “Have you closed any loans in this area?” They go, “Sure.” Then you can ask what’s the name that you closed under? You can actually search public records for past deeds of trust or mortgages depending on the state you’re in, and see what they have funded. How long was it?
You can see when it was paid off. You could see how much it was. There’s a lot of information on public records that a potential active investor go and say, “I just want to see a couple other deals that you funded. What’s that information?”

Beth:
I would add in that, I think, performance is more important than rates and terms. Especially when you’re dealing with truly private lenders, a lot of them, as I mentioned before, they don’t really do this every single day. It’s not their active day job, and so you really want to make sure that a private lender understands the nature of your business, that understands the project, and isn’t going to hamper in any way. When you’re dealing with novice lenders, there can be a tendency for them to maybe stall or not meet your immediate needs, especially if you put maybe some money on a draw and you want to see performance.
From an investor’s standpoint, I would caution about shopping just rates and terms, and really making sure that the private lender can truly perform the way that you need them to, as you would, if you were going to a traditional hard money lender.

Rob:
When you’re vetting the performance, what if it’s a new relationship? If you’ve never met this lender before, if you haven’t really worked with them, obviously, you’re going to interview them a bit, talk to them about their process and their experience and everything. But on your very first deal with the private money lender, is there a little bit of a leap of faith with that, because you don’t have the historical knowledge of what their performance is?

Beth:
There really is. I mean, I think that the best way to raise private capital, like I mentioned before, is to understand what private money lending is from the point of view of the lender. Especially as you’re trying to draw novice capital into your network, into the fold, the more that you can really educate them on how to safely and secure their private investment in you, in your project is a good way to be able to get them to buy into what you’re doing, and to gain that confidence.
So even though you’re going to try and ask questions to understand their level of competence as a private lender, if you’re talking with somebody that’s completely new, then they don’t really have a history, right? But you might want to gauge their overall conversation, those nonverbal cues, like do they ask a lot of questions? Do they maybe come off as a little needy? Are they getting really into the weeds? Which there’s a balance to that, right? You want to be able to give them just enough information, but you don’t want them to be maybe overly nitpicky about things.
If I’m an investor trying to seek private capital, I just don’t want someone that I feel is going to not trust me, and end up meddling, and maybe stifling my project. I want to make sure that they feel confident in me and in my project so that they can leave me alone, and let me go do what I do best.

David:
That’s a good point. I was just thinking about this. There’s oftentimes where I’m working with a professional in any space. It could be a lender. It could be a license broker. It could be a real estate agent, where you will have a question, and you will ask that email, text, whatever. Some of them take two to three days to get back to you. I’ve particularly noticed this with attorneys. I recently was looking for someone to draw me up an operating agreement. I sent four different attorneys an email, and I got random spread answers over the next seven days.
I’m like, “Good God, why is it so hard?” For something that they probably have a template for that they can just edit, but then there’s the people who immediately respond back to you, set expectations, ask questions to see what you’re looking for to see if they would be a good fit. I’ve just, over the years of doing this, have learned, pay attention to those ones. The response rate they have and the decisiveness and the confidence that they have gives me a good feeling if I want to work with them as opposed to what I think the amateur mistake is, which is just to say, “What’s your rate? What’s your terms?”
Almost every time you do that, you end up finding the best price ever at Walmart, and then you get Walmart quality, and then you complain about real estate investing as a whole, because you had the really bad experience. Do you two have a similar way of looking at this where you try to respond very quickly, and you’re looking for clients to do the same? What’s your advice regarding when they don’t know anyone at all? They’re not coming via a referral, or maybe they just heard about one of you through the grapevine.
What specifically do you think you can give our listeners as really good tips to look for in that communication?

Alex:
I would say the first thing is ask them what they’re willing to lend on, and so just a very simple question, because for example, they might only lend on fix and flips. They might only lend on something you’re going to bur. It just really depends. I’d ask them what they are comfortable lending on. They might not be comfortable doing a renovation down to the studs as their first loan, for example. They just might want something like a paint and carpet cosmetic rehab as their first loan, so if you can paint them a picture or have them paint you a picture if you’re the active investor on what they’re willing to lend on.
Is it single family homes in their local market that are only needing paint and carpet rehab, versus a major renovation of a multi-family? That’s two very different projects. I think if you lead with that, you’re already trying to narrow down whether or not they’re a fit for you, and you’re a fit for them.

Beth:
I would add on to that. How much money do you have to lend if… Making sure that they understand that if there’s going to be project overruns or, God forbid, we have another shelter in place, and timelines get elongated. Do they have enough extra capital to potentially infuse into your project to help you get across the finish line? Because one of the problems about potentially working with some novice private lenders that may not understand projects and real estate investments in general is that they may not have additional capital, or they may not want to.
Then from an investor’s standpoint, you’re stuck having to go out and raise capital or refinance your entire loan elsewhere just to get across the finish line. That’s probably what you don’t want to do is, again, it’s trying to do your due diligence as a borrower and as a lender before that loan closes, and not having to have so many issues after when it’s in service.

Rob:
Is it a fair game to ask that, or is that a… I’m always nervous to ask for referrals when it feels like I’m interrogating them a little bit. That’s totally fair game. No private money lenders really are going to take offense to that question of, “How much money do you really have in case I need it?” I feel like that is a possibly a red flag for me to ask simply because it sounds like maybe I will need it.

Alex:
Well, a softer way, in my opinion, to ask something like that is, “Hey, the properties I’m generally looking at, my purchase price is around 200,000. Would that be a loan that you could fund?” Then they just say yes or no, so you could come up with tell them about, and that also indicates to them that you’ve thought about your business model, that you know the numbers of your real estate business. So if you come afford and say, “Hey, my usual purchase price is somewhere between 200,000 and 300,000. Is that something you can work with even for one or two loans?”
They can either declare yes or no, and then that way, know what you would consider sensitive information has been relayed.

David:
What do you think about closing quickly? How much should a borrower value how quickly that you can get funds for the deal that they’re doing?

Alex:
I think that really is going to be very, very important moving forward, because there’s going to be as the market’s correcting potentially in some places, potentially all places, being able to close quickly, get things renovated quickly, get it back on the market quickly is going to be paramount. Because even though real estate tends to be a slower moving asset valuation, it’s still moving. Understanding that it’s moving and potentially it’s moving downwards, going back to best point about having that healthy equity buffer, that right now is of utmost importance, because potentially, your equity buffer could be going down quarter by quarter the longer this project goes.

Beth:
Now, being able to perform and get to close is extremely important, so I think borrowers really need to understand and pick, right? It’s all about managing trade-offs. Do you want quality? Do you want speed, or do you want it to be cheap? To your point, people don’t come to me expecting Walmart prices. I’m going to be priced a little bit higher than some of your national hard money lenders out there that have access to really stupid low cost of capital. But, I’m also going to provide them a value add that these national lenders can’t.
I can do hyper local in-house valuations, and do it really quickly. I can provide full service from end to end, have access to a key decision maker, the owner. It’s a lot different. I think that borrowers really need to understand based on the project, based on their individual needs what’s going to be the most important for you. Is it going to be speed? Is it going to be quality? Do you need it to be cheap, because your margins are tight? It’s up to the borrower to figure that out first, and then go find and right fit the lender that they need to match that.

Alex:
I would say on top of that, Beth and I both have people in our networks that an established borrower can literally text information to that private lender, and say, “Hey, look. I got this deal. I just got this contract. I need to close next week. That’s why I got the contract, because I had a quick close and no contingencies. Can we do this?” We have private lenders in our network, and maybe 20, 30 minutes worth of underwriting. Like she mentioned, these quick valuation processes, they can go, “Sure. Just let me know where to wire the capital.” That speaks to, again, having that relationship with someone.
If you’ve completed a private loan with somebody, you’ve done well. You’ve communicated. A lot of times, the active investor, at least in my case, is going to come back and call dibs on that money, because they’re like, “Hey, don’t lend that out anywhere. I got deal number two in the work.” So as soon as that closes, we’re closing on something else. It ends up being a little bit of just a recycling program if anything. It’s less work on me as a lender to work with the same borrower over and over and over again as long as the metrics aren’t changing. It becomes less work for both of us as the active investor and the lender.

Rob:
Awesome. Is there anything that we’re missing here? I mean, I don’t really deal with a lot of private money lenders. What else can I ask here to properly vet my private money lender?

Beth:
One thing I would ask is are you… Because some people put themselves out there as private money lending, or they say that they’re a direct lender, but they really, in fact, aren’t. They might actually be a broker. Brokers are great for certain scenarios. Maybe have a really complex project. Maybe it’s a large commercial deal or some issues with a sponsor or something like that. That might require a broker to really get creative and have access to a wide network of financing, but most deals don’t necessarily need to be that way. So when you work with a broker, you can just add additional costs.
Not to mention you don’t get access to the key decision maker, the actual underwriter. When you’re working with truly private money, the person lending out those funds, if you talk to Alex, or you talk to me, we’re lending out our own capital. We’re doing our own underwriting. We’re doing our own property valuations, so you know that we’re going to… What we say, our word is our bond, and we’re going to get to close, and we’re going to fund that deal. We won’t change at midstream. I would ask whether or not they’re a direct lender or broker, because it can make a difference, not only in terms of cost, but in performance as well.

Alex:
Oh, absolutely. I think if anybody’s coming forward in the forums or on a Facebook group or LinkedIn or something, and they’re like, “Hey, I’m a lender.” I see it all the time. Somebody will post somewhere that, “Hey, I need a lender. I need a private lender in Pennsylvania.” Then they’ll just go, and it’ll just be comment, comment, comment, comment like, “Hey, here’s our rates and term sheet. Here’s our link. Here’s our application.” A lot of private lenders that we are talking about, they might not be that formalized. They’re not likely to have a rates and term sheet, for example.
That’s usually hallmarks for something that’s going to be a hard money lender or even a broker. That’s not to say every private lender acts that way, but the vast majority of private lenders that are in our space, they’re not going to have a formalized rate and term sheet. They may have an application online. That’s pretty simple to do these days. They might have a website, but if you start seeing things where rates and terms, and they have fax numbers, and they have phone numbers, and they have… It’s probably not the decision maker. You’re probably not talking to the person who can hit the clear to close button.

David:
All right. That is fantastic, ladies. This has been incredibly informative. I think that quite a few people are going to be taking notes on this episode. You two are both very good at what you do. I can see why we tapped you to write the book here at BiggerPockets on this topic. I’m going to move us on to the last segment of our show. This is the world famous…

Speaker 5:
Famous Four.

David:
This segment of the show, we ask the same four questions to every guest, but this is going to be a remix, so you guys are going to get slightly different versions of those questions. Question number one, what is your favorite real estate book? Beth, we’ll start with you.

Beth:
My favorite is Cashflow Quadrant. While it’s not specifically real estate, it’s all about investments, and it just really resonated with me.

Alex:
I would say mine is it’s not, again, directly real estate. It’s actually Psycho-Cybernetics by Dr. Maxwell Maltz. The reason I say that is because all the decisions you make in your life, including investing in real estate, come from home base, come from foundation. So if you don’t have those personal beliefs in place, or you have a crap ton of limiting beliefs that are directing your life that you don’t even know are there, that’s going to affect your real estate investing. For me, it’s all about the person, so that’s my favorite book.

Rob:
Question number two, favorite lending or finance book.

Alex:
Oh, is it too catchy to say it’s ours?

Rob:
No.

Alex:
We’ve read all the private lending books on the market, and they’re not that wonderful. I would say for me that it was actually… I’ll tell you what got me started in this whole thing. Years ago in high school, I read Robert Allen’s Note Buying book that he had back in a bright blue cover with white lettering. I actually got sent to the detention in high school for reading this book during class. I think that really opened my eyes to the other side of real estate investing.

Beth:
I would say our book too. I wouldn’t say that the other books weren’t necessarily not wonderful, but as I was building up our private lending business, I was really at a loss for how to locate best practices or how to really understand the entire loan life cycle from getting a loan, finding, and funding it, and making it safe and secure. There wasn’t a whole lot of tactical information. There was a lot of conceptual information, and so I think our book just takes it one step further and helps make it actionable for a lot of really the layperson that just wants to learn more about it and how to get into it and do it safely.

Rob:
Question number three, cool tips when you’re getting started. Do you have any tips for the people that are looking to get into this world?

Alex:
My number one tip is when you’re talking to other people, don’t ask them about the technical details. You can find that on YouTube. Instead, ask them if they would choose this method of investing again and why, or what didn’t they like, or what have they tried before from their personal standpoint, because you can learn how to flip a house. There’s books about it. There’s YouTube videos about it, but the opportunity to get to talk to an actual flipper and be like, “Dude, what is this really like?”
Ask their personal experiences, because I think you’re going to learn far more doing that than coming to people and saying, “Teach me all you know about flipping,” because that’s available out there. That’s online. That’s in books. The personal experiences are not.

Beth:
I would say just be open. Network, of course, but I think a lot of people say they have to have a specific structured mindset, and they got to be really goal oriented, and put out into the universe what they want. Oftentimes, for some people, they’re so overengineered in their goal setting that they might have blinders on to what kind of opportunity exists out there. I think, both Alex and I shared our stories about how we just happened upon private lending, and every aspect of real estate investing involves some chance encounter with someone with some opportunity. So, just be open minded, and get out there, and start mixing and mingling because you never know what you’re going to find.

David:
I have seen this happen so many times what you just said there, Beth, with the overengineering. I’ve done it myself starting different businesses. I’ve seen other people that come into these businesses, and they’re starting their own little mini business working on one of my teams, where the human brain wants to know exactly what is going to happen. Give me the blueprints of the house. I want to know every angle, every piece of what exactly where it’s going to go. You don’t want to move until you know that.
The reality is you take a couple steps and go, “I’m going in that direction, but it’s not actually going to be the path I thought. It’s going to be this way.” Then you take a couple steps down that road, and you go, “Whoa, I didn’t even see this thing from where I started. That’s way better. Let me go in that direction.” You’re constantly pivoting. You do have the overall idea of what you want to accomplish, but you’ve got to hold it with the loose hand. The insistence that real estate investing or wealth building is going to work the same way following blueprints or a chemical engineer would do their job is a fallacy, and so many people get frustrated.
I just love that you brought that up as people getting in their own way by looking for that. Thank you for mentioning it. Last question from me. Alex, in your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Alex:
It’s going to be having an abundance mindset. You have to be able to walk in and go, “How can I add value to someone else in this room?” Because you’re going to automatically attract other people that also have that same mindset, because people want to invest with people they know, like, and trust. So if you walk into the room going, “What can I add?” You’re going to attract those other people that are, “What can I add?” Then potentially, you’re going to find business partners like Beth and I have managed to find each other.
You’re going to find deals that way, because someone’s going to be like, “Hey, this person really helped me out with referring me to a good insurance agent. Hey, let me come back to this person,” because you’re top of mind because you left them with a good feeling like, “They really added some value to my life. They gave me a referral,” whatever that is. I would definitely say walk into the room with what you can add.

David:
Preach it, sister. That is so, so good. What the world look like if everyone had that, because everyone ask the question of, “What’s in it for me? What can they do for me?” In fact, Rob has been going through a breakthrough in this area of his life, because he’s now growing out his mustache as a way to try to add more values to the world around him.

Rob:
It’s true. It’s not working, but I’m going to keep growing it out, and hopefully… It’s adding value to my marriage. My wife likes my mustache. It’s actually her request. She’s got a thing for Tom Selleck. I’m like, “Well, I guess you can call me Juan Selleck. I don’t…”

David:
It was inspired by Top Gun, right? She’s like [crosstalk 00:51:38] Miles Teller.

Alex:
Oh my God.

Rob:
[crosstalk 00:51:44].

Beth:
Happy wife. Happy life.

Rob:
That’s right. I’m a Millas Teller. That’s how you say Miles in Spanish.

David:
That’s very funny. Beth, if you still remember the question to you. If not, I could restate it, because we took that out on a tangent.

Beth:
I think I remember it. I think that perseverance is really important. When you become a private money lender or when you go into real estate investing in general, you’re a business owner. You’re an entrepreneur, so you really have to stick through it because you’re going to build up. You’re going to get knocked down, and you have to have a survivor mentality so that you can keep plowing forward even in the biggest times of trial. If you don’t have that in you, you’re probably not going to make it.

David:
Rob, keep that in mind. Just stick with the mustache. It will keep coming in. It’s going to get stronger. It’s going to get better. You’re bringing more value.

Rob:
Well, noted. It’s on my vision board.

David:
Thank you for that, Beth. He really needed this. Before we started recording today, we had a 25-minute conversation of just Rob wondering if he should stick with it, or if he should throw in the towel.

Rob:
Right. I was tapping myself in the mirror all morning saying, “You can do this, man. You got this.”

Beth:
My husband says, Rob, no one likes a quitter, so keep going for it.

Rob:
That’s right.

David:
Well, thank you very much, ladies. If you don’t mind, tell us where can people find the book to buy it, and then how can they each get ahold of you?

Alex:
The book is available on BiggerPockets’ website as the ebook and the paperback book. There will be an audible version, I think, available on Amazon for those that like to listen on the go. You can reach us. We have a pretty easy email address. It’s [email protected], the number two in there, .com, so [email protected]

David:
Then where can people get ahold of you, Beth?

Beth:
Likewise. You can reach me out at my company. It’s Flynn Family Lending. We’re based in Washington state. You can also reach me at [email protected]

David:
All right. Rob, where can people get a hold of you?

Rob:
Oh, you can find me on the YouTube over at the Robuilt channel, R-O-B-U-I-L-T, and on Instagram as well, Robuilt, R-O-B-U-I-L-T. Not really changing the spelling, except on TikTok where I’m Robuilto.

David:
You really shot yourself in the foot with that, because now, people are building fake accounts saying Robuilto on Instagram, and it’s just confusing.

Rob:
Oh, I know. It’s so frustrating. I just didn’t think… Listen, I didn’t think this was going to be my life. I realized all these things. The mustache grew, and then the spam accounts came out. I don’t know. What am I supposed to do?

David:
Maybe we need to get your mustache its own page. That’s probably what we need, your mustache, Brandon’s beard.

Rob:
That would honestly solve-

David:
I don’t know what my trademark would be. I’m a pretty boring guy.

Rob:
You got mutton chops a little bit when you grow them out.

David:
I don’t know if you could have a page for mutton chops, or if they’d qualify.

Rob:
Why not?

David:
All right. Well, thank you very much, ladies. This has been fantastic. If you guys would like a copy of the book, go to biggerpockets.com/store. You can find it there. Leave a review. Let us know what you think. Anything you guys want to leave us with before we get you out of here?

Alex:
I would say just realize that private money lending can be something that anybody can do. Like I said, you don’t need to start with millions of dollars. You can start with a very low amount or even none of your own money. Just do brokering. It’s not as high a hurdle as most people make it out to be.

Beth:
To add onto what Alex says, it allows you to invest passively so you can live actively.

David:
If anyone would like to get into the lending business, hit me up because we are hiring brokers for my company. I think that if you love real estate, this is something I’d tell people all the time. It’s not work a full-time job or become a full-time investor. There is a huge spectrum of stuff that you can do in between that you two are a great example of, where you’re working in real estate. You can also own some real estate. You make money from real estate, and you don’t have to sit in that three-hour commute that is draining your soul with the hopes of, “If I just buy enough property, I can finally get out of it.” There’s a lot of stuff in between.
Thank you for sharing and painting a picture for us of exactly how that worked for each of you. Wonderful stories, had a great time. Thank you very much. This is David Greene for Rob Juan Selleck Abasolo signing off.