Copyright © 2014 by Salvatore M. Buscemi · Dedicated to: My late father, Dr. Salvatore S. Buscemi, and my loving mother, Kathleen…both of whom raised my brother !omas and me to

Copyright © 2014 by Salvatore M. Buscemi

All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without prior written consent of the author, except as provided by the United States of America copyright law.

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D e d i c a t e d t o :

My late father, Dr. Salvatore S. Buscemi, and my loving mother, Kathleen…both of whom raised my brother Thomas and me to have

the confidence to pursue our dreams and to be the best we can be.

And my beautiful and loving wife, Tiffany Ann, whose patience and wise counsel has made this endeavor possible. I love you.

L e g a l D i s c l a i m e r

Th e publisher and the author make no representations or war-ranties with respect to the accuracy or completeness of the contents of this work and specifi cally disclaim all warranties, including without limitation warranties for a particular purpose. No warranty may be created or extended by sales or promotional materials. Th e advice and strategies contained herein may not be suitable for every situation.

Neither the publisher nor the author shall be liable for damages arising herefrom. Th e fact that an organization or website is referred to in this work as a citation and/or a potential source of further information does not mean that the author or the publisher endorses the information the organization or website may provide or recommendations it may make.

Further, readers should be aware that Internet websites listed in this work may have changed or disappeared between when this work was written and when it is read.

Before you read this book, please download your free

Hard Money Toolkit by going to www.HardMoneyToolKit.com

This toolkit has $937 worth of Excel models and helpful

infographics that I want to share with you at no cost!

C o n t e n t s

15 | Introduction: The Chase for Yield

19 | Chapter 1: Hard Money Lending Made Easy The SECOND Oldest Profession in The World

What Is Hard Money Lending To You?

The Competitive Nature of Money Lending

Who Borrows Money from Hard Money Lenders?

Your Ideal Hard Money Lending Scenario

What Is Your Hard Money Payoff?

31 | Chapter 2: Hard Money, Hard Lessons Learned Your Goal: Making the Yield

Where It All Goes Wrong for Lenders

Why So Many Hard Money Businesses Fail

How Underwriting Mistakes Can Cost You Dearly

Easy Hard Money Business Model? No Such Thing

The Business Models That Survive and Thrive

41 | Chapter 3: Underwriting: How to Assess Your

Potential Borrowers Accurate Underwriting Practices: Know Your Borrowers

Reducing Your Risk With Adequate Structures

Working With Liens: Common Types

Preparing Your Files and Credit Reports

The Rules of Property Lending Engagement

Broker Price Opinions: Three Roads to Success

55 | Chapter 4: Property Value and Working With

Escrow What You Need to Know About Escrow

Contracts, Vendors and Title Company Rules

Becoming a Cross-Collateralization Master

Accepting Property as Cross Collateral: The Steps

Negotiation Skills for Cross Collateralization

Working With Releases: Security Considerations

69 | Chapter 5: The Hard Money Lender Need-

To-Knows Avoiding the Hazards With Insurance

The Many Different Types of Insurance

Creating Your Loan Terms and Guidelines

Prepayment Penalties As Part of Your Loan

The Pros and Cons of Second Mortgage Lending

Second Mortgage Lending Rules

83 | Chapter 6: Dealing With Payments: Closings and

Defaults Closing Time: Your List of Disclosures

Your Closing Document Checklist Defined

How to Accurately Collect Payments

Managing Foreclosure Laws and Defaults

Learning to Avoid and Manage Defaulters

What Are the Legal Options for Foreclosure?

95 | Chapter 7: The Business End of Hard Money When a Borrower Files for Bankruptcy: Contingency Plans

Getting Your Loan Released From Bankruptcy

Security Improvements with Subordination

Organizing Your Office: Systems Within Systems

Becoming a Corporation for Business

Managing and Expanding Your Lending Business

109 | Chapter 8: Setting Up Your Own Mortgage Fund Portfolio Creation and Investor Relations

How To Build a Pitchbook for Fund Promotion

Creating Your Cover Page and Disclaimer

Your Overview and Opportunity Sections

Working With Your Investment Thesis

Your Special Sauce: The Competitive Edge

121 | Chapter 9: Dipping Your Toes Into The Mortgage

Pool Pitchbook Basics: Your Investment Philosophy

Track Record Etiquette and Approaching Your Investments

Your New Investment Process: First Calls to Funding

Working With Your Deal Flow

Your Transactional Lifecycle and Underwriting Criteria

Decision-Making: Your Investment Committee

133 | Chapter 10: A Closer Look at Fund Promotion Managing Risk and Instituting Legal Structures

Communicating With Your Investors

Fund Terms and Specific Service Providers

Creating Your Appendix and Building Case Studies

Putting Together a Management Biography

What You Need in Your Contact Area

145 | Chapter 11: Structuring Your Hard Money Fund The Key Ground Rules of Fund Structuring

Structuring Your Fund: The Basics

Working With Redemption and Share Prices

The Art of Leverage and Asset Level Fees

Payments, Expenses and Management Fees

Returns and Key Takeaways

157 | Chapter 12: Adopting the Fund Manager

Mindset Five Core Functions of a Great Fund Manager

Business Delineation: Parts of a Functional Whole

Become The Keeper of Your Investors Money

Focus on Strictly Enforced Governance

Build a Supportive Back Office

Running Through Your Key Takeaways

171 | Chapter 13: Successful Fund Management: The

Details Corporate Governance According To INREV

What is Good Governance?

Working With Operations and Control Procedures

Why Do You Need to Manage Your Fund Successfully?

Covering ALL Areas of Governance

When Good Governance Goes Bad

185 | Chapter 14: Your Hard Money Track Record What is a Hard Money Track Record?

Why Do You Need Proof of Your Lending Ability?

Who Will Request Proof of Competency?

Keeping Track of Your Track Record

The End Results to Aim For

Take Action With These Steps

197 | Chapter 15: Your Capital Raise Strategy Defined Five Capital-Raising Themes to Focus On

The Two Major Elements of Capital Raising Success

Just the Beginning: Launching Your Strategy

Working With Tools and a Written Plan

Short and Long Term Capital-Raising Tactics

Your Future as a Hard Money Lender

209 | Conclusion

211 | References

225 | About the Author

15

I n t r o d u c t i o n

The Chase for Yield

M any people have not realized that the second largest and most indirect consequence of the horrifi c events of September 11, 2001, has been the very low interest rates that have persisted

since that time.America, and the world for that matter, was reeling from

the popped dot.com bubble, and that awful attack on American soil—the fi rst since Pearl Harbor—shattered investor sentiment and confi dence. American innocence was lost.

To reinforce confi dence in the markets, Federal Reserve Chairman Alan Greenspan decided that the Fed would reinvigo-rate markets by dropping interest rates to zero. Th is would tell the market that the Fed would support them and help to restore investor confi dence.

And indeed it did. Later that decade, holders of real assets enjoyed increased and acute asset valuation appreciation. Th e lower interest rates forced people to take risks by keeping their money in the global stock markets.

By far the biggest benefi ciary of these persistent low interest rates was housing, the lowest common denominator among real estate asset classes. In most markets across the United States, spe-cifi cally, new construction houses were being bid up to new and exciting levels.

M A K I N G T H E Y I E L D

16

Loose lending requirements, as a result of the private label mortgage securitization business, had created a new breed of real estate investor: the speculator.

Hotel ballrooms were booked up from coast-to-coast, selling new construction condos thousands of miles away from these willing buyers. People were buying sight unseen, and it didn’t matter. Because if they didn’t buy already, they would lose out on the 15 percent price increase on the next block of condos that was being sold.

With the lust for something that Wall Street couldn’t provide—cash-fl owing assets—investors were cashing out their 401(k)s and plowing money into these new construction rentals, with the assumption that the Realtors® and brokers selling these assets had an alignment of interests.

Unfortunately, it was the access to cheap and readily available debt in the form of subprime residential mortgage loans that drove up all values. A rising tide fl oats all boats, and as we saw in 2008, it will also leave the most liquid assets high and dry.

Th e catalysts for single-family residential housing apprecia-tion over time had been jobs and wages. Location was important as long as there was steady employment, and steady employment meant steady home appreciation.

If you had a loan, or wanted one, you would visit a small, local banker (think of George Bailey in the holiday classic It’s a Wonderful Life), but only if you already had a robust down payment. After all, more skin in the game meant it was consider-ably less likely that you would default. Th at is, until banks stopped being banks.

It’s all about the debt.

17

I N T R O D U C T I O N : T H E C H A S E F O R Y I E L D

Banks in the late ’80s became “moving companies”. Due to the securitization process, lenders of all shapes and sizes would originate a loan, and then immediately sell that loan off . Lending then became less of a “storage company business” where loans were held until maturity, and more of a fee-generating business for many lenders.

And with every investor the world over starved for yield, these loans would be sold off in packages called Residential Mortgage Backed Securitizations (RMBS).

Now, the only diff erence between a person buying a new-con-struction home in a Phoenix suburb with pristine credit, and his competitor with credit that wouldn’t qualify him for a Starbucks card, was a shady mortgage broker off ering a loan costing perhaps one to two percentage points more. Neither buyer needed to come to the closing table with any down payment money, and both borrowers might even have been able to take money out for their personal use after the closing.

Both would have risked nothing. Th e more debt that is available, the higher the likelihood prices will increase. Th is is true for all asset classes and has been illustrated often, even before the Great Depression of 1929.

Th is book will teach you how to look at housing as a high-velocity vehicle for creating wealth in a secured and insured asset class that is available to the masses. It will allow you to thought-fully and meaningfully understand how high rates of return are made by being a private lender, whether you’re using your own money (perhaps in a tax-advantaged account, such as a Self-Directed IRA) or pooling the money of others to lend out.

Housing today has become too hostile for anyone looking to become a landlord; prices go up and come down very quickly,


18

leaving you exposed to market and lending sentiments. Coupled with states having various pro-renter laws, the courts seem to side with those professional tenants who will squat longer than the average landlord can remain solvent. Legal advice in today’s society is, unfortunately, free for the poor.

However, lending out to specifi ed and qualifi ed types of rehabbers who are not owner–occupants is a plan to get you started generating strong, stable returns in an environment that remains uncertain.

I believe there really is no incentive for the Federal Reserve to raise interest rates for quite a while, perhaps for the next ten years or so at best; 20 years at worst. Th ere are simply too many debts and entitlements to pay for. Th e United States has become the largest debtor nation in the world, and thrives on the availability of cheap and easy-to-get debt. Th is has had profound impact on savers and pensioners, as their savings have been eroded over the past 12 years or so. For you reading this book, do you consider yourself smart enough to be able to learn how to generate higher yields, on demand, using time-proven strategies and systems?

Th is is a comprehensive book that describes the “fi rst-call-to-funding” aspects of how to make private loans with very little risk. It will give you a strong foundation, an unparalleled edge, and, for many, will allow you to grow your careers and become a mortgage pool Fund Manager. Money in the stock market has never been as unstable as it is now, and the savvy private lenders will make a very nice profession for themselves, providing a much-needed product to the 85 million baby boomers who can’t live on the interest of their hard-earned savings alone.

19

C h a p t e r 1

Hard Money Lending Made Easy

“If you want to know how rich you really are, find

out what would be left of you tomorrow if you

should lose every dollar you own tonight.”

—WILLIAM J. H. BOETCKER

T here are opportunities that exist in the world of money that the average person fails to see. Th e two things that all wealthy people have in common are as follows: Th ey know how to make fi nance work for

them, and they always invest in real estate. For many years now, real estate has been a little out of reach

for everyday Americans who want to do something more with their money. Hard money lending changes that and empowers you to become an expert fund manager who earns money from money.

THE SECOND OLDEST PROFESSION IN THE WORLD

I bet you were told to save your money for security, for interest, and so that one day when you retire, you have a “nest egg” that


20

you can fall back on. Imagine all the people who, like you, realized that 2 percent interest on their savings was doing more harm than good. Any clued-up investor these days knows that you have to make money work for you.

Many of these individuals are not experts on fi nance, so they placed their money in 401(k)s and tax-advantaged retirement savings to get a “little extra” out. What they do not know is that if they pool their money into an equity-based fund, it can result in consistent, higher-interest earnings that are much more benefi cial for their long-term bottom line.

Cash fl ow is something everyone needs, and few people have on hand. Th at is why the hard money lending business is thriving today and will continue to thrive in the future. You can choose to be the individual who ferrets around for “safe” invest-ments, or you can fl ip the switch and be the moneylender who earns money from other people’s money.

Being a moneylender is truly the second oldest profession in the world, after—well, you know. Short-term loan security using collateral has been around since Bronze Age Sumerians were writing in cuneiform on clay tablets.

Th e fi rst short-term loan rules were etched in 1750; they spoke about loans in the Bible, and such loans have a long tradition in the Catholic Church. From Italy to the rest of Europe and Japan, pawnshops and brokers were abundant. Th en, during the 18th century, a fi nancial crisis ensued and the poor had nowhere to turn, outside of pawn brokers.

J. P. Morgan got involved and entered the pawn business to win the hard-earned dollars of the poor. Th ey made traditional, everyday pawn lenders seem like absolute monsters. While doing this, they managed to steal the revenue streams from the under-

21

C H A P T E R 1 : H A R D M O N E Y L E N D I N G M A D E E A S Y

class, and suddenly age-old micro-lenders were shut out, doomed to be labeled vile, evil moneylenders forever.

Of course, in this day and age, it is much easier to see through the lies. Money lending is, after all, at the very roots of modern forms of banking, and is the oldest kind of consumer credit there is. Th ere has never been a good reason for you not to go into hard money lending. Th is is your offi cial education on the business of private hard money lending—you will love it!

WHAT IS HARD MONEY LENDING TO YOU?

It is safe to say that hard money lending has a bad reputation, dating back to the 18th century when a giant smear campaign was launched against private lenders. Now the banks control every-thing, and we all know how well that has turned out for everyone. Hard money lending is not evil, it is not unethical, and it does not make you a monster. Got it? Good!

So . . . what is real estate hard money lending? Real estate hard money lending is a specifi c kind of lending

that is made based on the value of a specifi c piece of real estate. Th ese unique loans are generally not off ered by offi cial lending institutions. Instead, they are off ered by private, individual lenders who have a high net worth (HNW).

Hard money lending is straightforward—the HNW is in it for short-term, high-interest fi nances for larger-than-normal returns. Th e borrower is in it to get access to quick, reliable money. Interest rates are usually directly linked to the risk involved and the various circumstances that surround the loan in question. Easy!

Th e decisions that are made about the loan and the loan terms are focused on the value of the collateral much more than the


22

credit rating of the borrower. In this way, people with damaged credit ratings can gain access to fi nance if they need it. If you are grasping your chin and comparing hard money loans to micro-loans or “bridge” loans, you are not wrong!

Th e two are incredibly similar, with one basic diff erence. Most bridge loan companies will not lend money to someone who is in a distressed, dire situation. In other words, when individuals really need the money, they cannot get it from an offi cial banking institution.

Th is is why hard money loans are seen as “non-conforming”, which means that they are not bound by the rules required by mortgage lenders Fannie Mae or Freddie Mac. Any “diff erent” type of loan that does not conform to their set of rules is defi ned as a “non-conforming” loan. Alternative loans will contain varia-tions in loan amount, property types, and credit quality.

You do not actually need to have a license to become a hard money lender, as long as the property is non-owner-occupied. Chat with your real estate lawyer about this if you have to. If you are only going to loan to fi ve or so people every year, then getting a license may not be necessary—but that all depends on your eventual plan as a lender.

You ultimately determine the kind of hard money lender you want to be. You will decide how many loans to make, who to loan to, and how. Expecting to become involved in illicit practices because of money lending is ridiculous. A few unscrupulous people have reinforced the already dicey reputation that hard money lending has in the world.

If I told you that you could earn money simply by helping others to gain access to all-important cash when they need it, while

23


simultaneously managing multi-million-dollar funds for others and making great commission from it, you would love the idea.

SAL’S QUICK TIPHard money lending is just like any other

branch of finance, only smarter and more

accessible for you.

THE COMPETITIVE NATURE OF MONEY LENDING

At the same time, I am not here to tell you fake stories about roses, rainbows, and sunshine. Hard money lending is still a business, and any business has to deal with its various challenges. One of the largest in this particular niche is straightforward competition. When the market is up and capital is cheap, these loans are easy to get. Th is means that your competition will become fairly fi erce.

Let’s be honest—times are tough for a lot of people. Th e customers you are looking for will have serious problems with missed payments on their mortgage, even though they still retain some of their home equity. At this stage, they will decide to take on your loan and continue with their mortgage.

Th is type of desperation often leaves HNW moneylenders with ethical practices in a situation where you have to compete with better interest rates from other companies that will do anything to secure new borrower clients. It can be tempting to try and compete by compromising on your own business principles, but this would be a mistake. A huge one!


24

Compromising your own underwriting policies because you are not fi nding “enough” or decent “quality” borrowers is not recommended, especially when collateral prices are rising. Many other private lending institutions will compromise to snag business.

Th e reality is, however, that private lending businesses pop in and out of existence very quickly if they are not careful. Because anyone with some capital can start lending money to individuals, the industry can be a little messy at times. But here are the cold, hard facts:

• In down markets, the private moneylenders who

manage to stay disciplined and stick to their original

underwriting policies always tend to survive. The

lending companies often compamise and this is one

of the reasons they close and go bankrupt.

• There is actually more opportunity in down markets,

when capital is not as plentiful. You face less

competition, your borrowers are more willing to

comply, and you stand to make a lot of money if you

choose your borrowers correctly.

• In down markets, you will also get better terms on

the best deals that you choose. That means higher

interest rates and greater potential for profit. This is

a business after all—the business of making money

from money.

In other words, money lending can be a fast, quick, and total-disaster business—or it can be a well-planned, stable source of

25


income for you and your investors. Like in any business, it all depends on the individual making the decisions.

It is important that you understand the distinction between the “fast, careless, easy-to-sink” money lending business and the one I am talking to you about in this book. I have no designs on teaching you how to fail. In fact, it is incredibly important that you succeed, because you are now part of the Dandrew Media family.

WHO BORROWS MONEY FROM HARD MONEY LENDERS?

When an individual cannot secure a loan from a bank or indepen-dent fi nancial institution, they turn to hard money loans. Th is is also the reason why the interest rates are higher—there is much more risk. Th ese individuals usually have terrible credit ratings, due to being blacklisted and having multiple missed payments.

So . . . the “hard” in hard money lender refers to how hard it will be to pay off the loan? No! Th ere are soft and hard types of loans. “Soft loans” are very easy to get and have fl exible terms. Th ese are off ered to people who have great credit ratings, a full-time job, and cash fl ow. “Hard loans” are the opposite. Th ey are more diffi cult to secure, with fi xed terms.

Lots of diff erent kinds of people want to borrow money from hard money lenders like you. But nearly all of these people will lack a decent credit record, and they will have a long history of allowing loan accounts to get away from them. Th ese may be high-risk clients, but they will be off ering real estate, or asset equity, as collateral—so the risk is fairly stable.


26

Th en there is a whole industry of real estate investors who can become regular, stable lines of business for your new hard money lending company. Many real estate investors need access to quick cash, no questions asked. Th ey will buy a cheap home, fi x and repair it for resale, or to use as a newly refurbished rental property.

Th e investor usually buys the home with the hard money loan and uses that same loan to repair what is broken. Once the house has been refurbished, the investor will refi nance it with a bank or fi nancial institution, but not before paying back your short-term loan—with interest. New appraisals are performed, and the “after-repair” value signifi cantly increases the value of the property.

A fi nancial institution or permanent lender will underwrite the loan and pay off the initial fi nancing of the property, which allows your investor client to have a 30-year loan with favorable terms and enough cash fl ow from rental payments to keep the property in great condition. Everyone wins, and it is a great way to turn profi t as a real estate investor.

Th is is why you will not only fi nance cash-strapped individu-als, but also real estate investors who want to make the most out of their investment properties. After the refi nancing and permanent loan has been established once the refurbishments are done, the rental of that property will generate positive cash fl ow for the investor.

Establishing a name for yourself in the real estate fi eld is preferable, because it attracts more reliable, secure, and competent clients who will pay you back. Th is is essential for any hard money lending business. Th ese clients qualify for permanent loans fi rst, before contacting you to partner with them in their refurbishment strategies.

27


Th ey want to keep an open, happy relationship going with you, because they will use you all the time—as a source of quick, hassle-free fi nancing.

YOUR IDEAL HARD MONEY LENDING SCENARIO

So, people will be approaching you to fi nance projects that are too high risk for a traditional banking institution to fi nance. Th ey will also be coming to you if they are in fi nancial trouble and want to make sure that they do not lose their biggest assets, like their home, car, or any other equity that may be at risk.

In an ideal lending scenario, your client will be willing to agree to your terms, and they will easily cover your short-term payments until they are complete. Even better would be to build a successful client list of real estate investors who need quick cash often, always cover their loans, and come back for more each time.

I like to believe that if you choose your client properly, any loan can be an ideal hard money situation. It all depends on the infrastructure that you build into your company. Th e last thing you want to do is start changing your previously established terms, conditions, and penalties. Th ese are what will make any lending scenario worth your time in the long run.

You will want to target real estate investors for all of the reasons I have mentioned. A hard money lending business built on quality repeat clients will sustain you through the up and down markets. Th is mutually benefi cial relationship will allow both of you to grow fi nancially, which means bigger, better opportunities for fi nancing down the road.

Th e good news is that many permanent lenders in real estate are changing their guidelines and enforcing a mandatory


28

ownership period of more than 120 days of ownership (seasoning) before a property can be refi nanced. Th is means that all real estate investors will need to be prepared to pay your interest rates for that entire period.

As long as you build in certain contingencies, such as late-payment fees, missed-payment fees, and settlement-payment fees, there is no reason why you cannot earn additional money by targeting these real estate investors. Th ey want to know they can trust you, and you want to know that you can trust them! It is simple, really.

If any of your “cash-strapped” clients miss several payments, then you have their collateral to resell and claim back your money with interest. As you can see, even though the hard money lending niche is brimming with landmines, it is a highly lucrative, con-structive, and helpful sector to be in—no matter what the popular perception may be.

Th is book is about helping you establish the framework, strategies, and tools you will need to become an excellent hard money lender in the real estate sector. If you are tired of your job, or simply need a dynamic career doing something that can generate a lot of income, then this is the fi eld to consider. And you do not have to be a fi nance genius to do it!

WHAT IS YOUR HARD MONEY PAYOFF?

It is true that hard money lending was once considered an “alter-native” or “fringe” fi nancial investment fi eld, but that perception is changing. It is one of the oldest and best ways to make money—that has been proven. You can turn hard money lending into a dynamic career for yourself from scratch.

29


Becoming a hard money broker takes time, eff ort, and knowledge. I cannot impress on you enough how many people start out in this niche and then do all the wrong things. You may have even heard about people who “lost it all” trying to put together and manage a successful hard money business. It is an opportunity that requires a lot of planning and thought.

It is also one of the reasons that prompted me to write this book—the eventual payoff . Aside from collecting investors, managing large sums of money, and lending to those in need, you earn sizable “commissions” by brokering these exchanges. Your business literally becomes the business of earning money from money.

Th e rewards are immense and sustainable, giving you the quality of life that you have always wanted, without the headache of having to work for someone else. You do not have to start a small business with high expenses, become an entrepreneur with no plan, or any of the other dozens of things anyone can do if they decide that they need to move in a new direction.

I can promise you this—you are not going to get BS in this book. I have been there and done it, and I am living proof (along with many, many students) that these strategies will not only keep you afl oat, but they will also help you to become a prominent name in hard money fi nancing. When you are the one providing the money, there is unlimited earning potential.

I have known people who have simply operated on a small scale, earning lots of great commission and interest for their investors, and I have known people who have grown huge funds and now lend to hundreds, even thousands, of people every year. It all depends on how much you want to earn and what sort of lifestyle you would like to have.


30

My sole purpose is to walk you through becoming a competent hard money lender from now until you are success-ful. Th at means cutting through the BS, avoiding the potholes, and establishing rules and principles that will make you a highly reliable and attractive hard money lender to your target real estate clients.

At the end of the day, the payoff is a career that will never stop being viable, a lifestyle you can aff ord, money in your pocket, and endless opportunities to grow your own wealth. Th ese are the lessons you will look back on and recall one day. Th is is the beginning of your own fi nancing journey, and it begins by knowing what not to do.

31

C h a p t e r 2

Hard Money, Hard Lessons Learned

“A smart man makes a mistake, learns from it, and never

makes that mistake again. But a wise man finds a smart man

and learns from him how to avoid the mistake altogether.”

—ROY H. WILLIAMS

I n hard money lending, while the basic principles sound easy, the niche is littered with the dead dreams of people just like you who got it wrong. It is harsh but necessary to understand that truth. Knowing that mistakes are common

can help prevent you from making them. As we go into more detail about becoming a high-yield hard

money lender, you will have these mistakes placed fi rmly in your mind so that you can stop yourself from venturing into proven minefi elds in this fi nance niche.

YOUR GOAL: MAKING THE YIELD

Sometimes, new hard money lenders or “brokers” can become distracted with their businesses and forget that the goal is to make money. When you are in the fi nance fi eld, you are not in it to help


32

people—this is just a nice side eff ect. Making money from money is easier if you understand one basic principle: no one messes with your yield.

You have to make your yield every time without fail, or your business will fail. No compromises, no excuses, and defi nitely no delays. As you may already know, the fi nance niche is not known for soft, fl uff y, happy feelings of community, comfort, and calm. Th e opposite is true, because in this business, your money is your product.

If you start allowing your product to go haywire, slip between your fi ngers, or trail away until there is nothing left, you will fail. Th e end. Th en you have a lot of explaining to do to your invest-ment circle. Th at is not a conversation you ever want to take place, because it will leave you in deep, deep trouble.

SAL’S QUICK TIPWhen it comes to money, people do not have

a sense of humor. The world of hard money

lending may be fraught with danger, but it is also

common to receive high yields and total safety

for your money if you focus on your business

plan before stepping into practical lending.

Solid returns while effectively managing your

risk is your most important goal.

Next comes recruiting the right investors and sourcing the most compliant borrowers. Th e system is designed to allow you to

33

C H A P T E R 2 : H A R D M O N E Y , H A R D L E S S O N S L E A R N E D

grow your investors’ money at a much higher rate than any bank, annuity, or savings account. Plus, it serves an important function in real estate—helping investors turn high profi ts on rental properties.

So you see, both lines break down if you are not performing as advertised. Your investors will lose their hard-earned money, and your borrowers will lose faith in you, default, or disappear without paying you. In the fi nance fi eld, you need to command respect, be accountable, and be incredibly responsible for the money you use to make more money.

WHERE IT ALL GOES WRONG FOR LENDERS

As I have mentioned, a comprehensive private lending system built to succeed will not allow you to misuse, lose out on, or mismanage money. Th at is why you are reading this book. In many ways, you need to change your mindset to understand what is really at stake here.

Being a hard money fi nancier is not easy. Th e principles are easy—the practice . . . not so much. It takes education, time, eff ort, and strategy to evolve into the type of lender that you should be. Would you trust yourself with your life savings? If not, you have a lot of work to do. In the torrid world of fi nance, fast cash, and high yields, all of the lessons are hard.

In my experience, it tends to go wrong for lenders right from the very beginning. Instead of thinking like lenders, they think like small-business owners—which is ludicrous, because small-business owners can think themselves into failure purely from the stress of having a lot of responsibility on their shoulders.


34

Hard money lenders are professional, clean, and accountable. Th ey conduct themselves with a type of business acumen that is not common in nearly all other niches. You want people to see you and know that you are a good investment. Th at is why you never see personal fi nancial advisors visiting their clients in shorts and sneakers.

It all goes wrong for lenders when they do not establish a good plan, model, or system to begin with, and then they try to change it or compromise on their set rules down the line. When people are no longer borrowing from you, and your investors are angry, just about any opportunity makes sense, right? No! In fi nance, there is no room for compromise.

You want to know what your decisions will be before you make them. Otherwise, personal sob stories and continuous changes in your business plan will disrupt and derail your yield. What is the fi rst rule of being a hard money lender? Do not mess with your yield! It is high yield or nothing, and that is how it has to be.

Th ere is too much on the line to be adding your personal feelings into your hard money lending business plan. You will have access to a large sum of money that does not belong to you. If you lose this money, it will be your own fault. Th is book and this advice will spare you the rampant embarrassment of ever getting to that point.

Luckily, there are still dozens of stupid mistakes that you can make, over and above messing with your yield. Th ese mistakes can be costly, not just in terms of money, staff , or clients—but also to the way your business functions, how many issues you have to solve, and how much new business you get based on reputation alone.

35


WHY SO MANY HARD MONEY BUSINESSES FAIL

What are those dozens of other mistakes? I cannot wait to explain them all to you. Check back here every now and then to make sure that you are not dipping your toes into these wells of despair.

• You end up relying on one exit strategy. All finance

businesses need a viable and competent exit strategy.

How do you close up shop and return all money/end

all loans if you have to? Do not put all of your notes

in one stack—just relying on subprime loans, for

example, is a poor excuse for an exit strategy.

• You leave your core business model to underwrite

high-risk projects with limited knowledge of the asset

or of the borrower’s strength. It may seem like a

good idea at the time, but it nearly always goes sour.

Moving into the development niche, for example, is

completely different. Stick to your own rules, as a

rule.

• Rely on a secondary market to pay premium pricing.

Your core business market should cover the income

you need to make to succeed. Adding secondary or

tertiary markets and then making it impossible to

succeed without them is a trap.

• Having no risk controls. You are now in the business

of high-risk money. Not having risk controls is like

getting into an airplane and expecting autopilot to

keep you safe all the time. At some point you will

crash and burn—expect it to happen.


36

• Having no policies or procedures for dealing with

borrowers. Building, or at least establishing, a

relationship with each borrower is an essential

process. So is knowing what to do if they deviate from

your agreements in any way. Both of you should know

the procedures before you lend them any money.

• Lending money to people in remote areas. These are

considered tertiary markets, and they should have no

place in a secure hard money lending model. The risk

is simply too high and it makes for bad business.

• Spend too much time servicing and managing

borrowers, rather than finding and funding deals. You

are not a loan babysitter; your job is to get out there

and find deals to fund or new borrowers to secure.

• Only lending on second mortgages. Do not do it. Just

say no.

• Increasing your concentration risk. If one borrower

has too many loans, that is a concentrated risk; so are

higher-priced homes, mobile homes, lending to real

estate investors in the same part of town, mansions,

and functionally obsolete or unsalable real estate.

Always investigate where your money is going.

• Breaking official rules, like lending to owner–

occupants and getting into trouble with HOEPA.

These RESPA usury violations will shut you down or

kill your income streams. Make sure you never, ever

do this.

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Th ese are the main reasons why so many hard money businesses fail—can you believe it? I hope not. I hope that these sound so ridiculous to you that you naturally steer clear of them. In any event, now you know what to avoid. Do not be caught in the same position as these past hard money lending businesses.

HOW UNDERWRITING MISTAKES CAN COST YOU DEARLY

Let’s move on to underwriting mistakes, because they can and will cost you a fortune if you let them. Oversights, under-preparation, and poorly managed overwriting will cause your hard money lending business to implode. Avoid these key mistakes at all times!

Make sure that these underwriting mistakes do not creep into your hard money lending business plan. You will be surprised how easily these little discrepancies can form, and before you know it—half of your borrowers are gone with your money.

EASY HARD MONEY BUSINESS MODEL? NO SUCH THING

So far, so good—you are well on your way to becoming a decent hard money lender. But do not pat yourself on the back just yet. You may know which major mistakes to avoid, but that does not mean you will not create mistakes all on your own.

Th ese mistakes are not the beginning and end of all mistakes. You still need to put together your hard money business model. And there is no such thing as an easy one. Th e moment anyone tells you there is, challenge it or leave the room. Th ey are lying to you.


38

A diffi cult model can be easy to implement, but this is fi nance. When it comes to making money from money, everything is a little harder, mainly because of the level of accountability that you have with your investors and the trust that you share with your borrowers.

I would suggest working with someone who has done this before and has a business model that is proven to work. Otherwise, focus on fi nding as many online resources as you can that will help you put together a quality hard money lending business model.

Th ere is a quote that I love, and I use it to explain to my students what this will be like. “If you want to make easy money, do something hard.” Putting together a great hard money business plan is hard. It requires detail, foresight, knowledge, and legal, fi nancial, and business acumen, not to mention front-end marketing and management.

I will walk you through putting a quality business plan together in this book, but (as you will discover) you will have to perform or create certain things on your own. Th at is why you should know that your hard money business plan should be read by a few other people. Best-case scenario, it should be read by a successful hard money lender.

Keep in mind that while your business model should be set in stone, there is always room for annual improvement. I believe that a stagnant business model is inviting failure, so make sure that you add to it as often as you can. Take notes, record your experiences, or make a point of chatting with other industry professionals to learn new things.

Once your hard money lending business model is done, put it aside. Come back in a week and read through it again. What

39


did you leave out? Where can it be improved? Try and look at it through the eyes of your lawyer, accountant, and staff .

If you are going into business with someone else, run it by them and add their ideas. Whatever you do, change it at least three times before it becomes the fi nal version. Th is will be your road map to success and high yield, so it matters. It matters a lot.

THE BUSINESS MODELS THAT SURVIVE AND THRIVE

Th ere are four main types of hard money lending business models. If you are going to survive and thrive in this business, you will need to settle on one, because the rules change subtly for each of them. Pick the one that best suits your goals and ambitions.

#1: Straight Brokerage: If you are going to establish a straightforward brokerage fi rm, then your job will be to introduce borrowers to lenders and arrange the applications materials. Th e incentives are the ability to concurrently manage several loans at once for a decent broker fee, and the attractive 3–5 points on each loan.

Th at being said, there are some concerns that you may deal with if you choose this kind of direct-brokerage business model. Competition among brokerage fi rms is incredibly fi erce and, therefore, diffi cult. Borrowers often change brokers for as little as a half a point. You may also be held additionally liable by the loan company, if the loan goes bad or if any fraud is involved.

#2: Portfolio Lender: Become a hard money lender and keep short-term loans that do not run for longer than a maximum of six months. Your income will come from points collected during closing, basic interest collected during the life of the loan, and sometimes from backend points when the loan is retired. A short


40

portfolio duration allows the portfolio to double every seven years if coupons, fees, and points are invested.

Th e incentives of this business model are as follows: You have access to high-velocity capital; Every seven years, as I mentioned, your portfolio should double; and, you have a lot of leverage. Depending on the performance of your portfolio, you can leverage it in diff erent ways. For example, a “rediscount credit facility”.

Concerns for this type include the fact that you are respon-sible for expenses associated with foreclosures, servicing, manage-ment, loan sales, buy backs, defaults, capital costs, infrastructure, collateral security, and losses. Th ere is some portfolio risk if you hit on too many defaults, and slight geographical location risk.

#3: Single/Fractional Notes: Investors will fund loans via whole notes secured by real property. Th ey will own the whole note, and the borrower will pay them monthly mortgage payments collected by your service agent. Individuals with substantial retire-ment or investment capital are ideal for this model. Fractional notes are owned by two or more investors, and pro rata shares are divided monthly.

Your incentives are that you will receive points as a broker, and you will establish a track record as a reliable broker. If your investors are happy, you can get them to pledge assets for a re-discount facility. Concerns are that you are entirely responsible for everything. You will spend a lot of time raising money for borrowers and solving small problems.

#4: Mortgage Pools: Th ese are limited partnership interests in unique real estate investments. Your incentives are as follows: leverage of equity capital, small default impact, management fees, and prestige. Your concerns will be up-front costs, expensive capital, and bad track record potential.

41

C h a p t e r 3

Underwriting: How to Assess Your Potential Borrowers

“If you are in banking and lending, surprise

outcomes are likely to be negative for you.”

—NASSIM NICOLAS TALEB

O ne of my favorite quotes mentions that the best and only time to worry about a loan is before you make it. Th e rest should be down to exceedingly good underwriting practices by both you and

your hard money lending team. You need to understand that each borrower is a risk, and it

is your job to assess that risk and determine whether or not they are worthy of a loan by your company. Th e lending business is not about charity—if you would not give a $50 note to a potential borrower without investigation, then you should not loan them $50,000 without it, either.


42

ACCURATE UNDERWRITING PRACTICES: KNOW YOUR BORROWERS

In underwriting, you have two main concerns—staying in profi table business; and protecting your reputation, which is a long-term defense against loss of business. You need to become a veritable pillar of iron as a hard money lender, so that you cannot be strong-armed into making a deal that will not be good for you down the line.

Do not allow yourself to degenerate into the “company that loans money just to make fees”. Th ese companies tend to fail. Self-discipline just became your most important trait. Always under-stand that you are making the loan with the intent to ask for the keys, and that you want your borrower to default.

SAL’S QUICK TIPYou must learn to structure away the risk from

yourself and your investor’s money, to make

it more secure for all of you. You may believe

that hard money lending is a collateral-based

business, but most lenders have dismally

failed because of inadequately screening

their borrowers. If you do this, you may as well

surrender your business right now.

43

C H A P T E R 3 : U N D E R W R I T I N G : H O W T O A S S E S S Y O U R P O T E N T I A L B O R R O W E R S

Always make sure these areas are fully, thoroughly, and sys-tematically covered:

• Character and Attitude: Look at job patterns, number of jobs held, transient behavior, moving records, state line crossing, career record, and education level.

• Capacity: Look at how they will pay, if they have the means to pay, and all loan applicants (even co-guarantors) must have a check account for bank drafts.

• Cash and Credit Cards: Are they able to pay for their supplies and materials?

• Experience: Make sure your borrower has rehab property experience. Th is means they have the ability to gauge repairs, costs, manage contracts and repairs, and to sell fast.

• Education: Do your borrowers invest in themselves? Do they attend seminars, REIA meetings, or have access to mentors?

• Credit Quality: Common for borrowers to have poor or bad credit, so get them to bring a good credit co-borrower for guarantees.

REDUCING YOUR RISK WITH ADEQUATE STRUCTURES

If you are going to eff ectively structure away your risk, then you must consider the following:

• Product: Look for Single Family Residence, detached garage—it is your bread and butter housing—easy to


44

fi x, sell, and fi nance. Avoid condos, co-ops, and mobile homes.

• Size: Look for three bedrooms and two bathrooms, 1,500–2,500 SF; they are the most common and sell the best. One bathroom will not sell as well. Luxury homes sit on the market for ages, and buyers in that niche are very picky.

• Price Range: ARV plus or minus 20 percent of your market’s median home value, as these prices sell faster and are easiest to get fi nancing for. Th ere are special programs that are widely available for these housing products, as they appeal to the fi rst-time-buyer market. Focus on FHA and Down Payment Assistance programs.

• Age: Depends on your market, though newer homes are always better because they are easier to market and sell. In New England and the Midwest, some homes are more than 100 years old, which can lead to asbestos and lead concerns.

• Occupancy: Always look for vacant-only homes that are not condemned. You do not want to have to deal with evicting tenants or squatters, as these can cost a small fortune in legal fees. Legal advice is free for the poor, so you can end up in a legal battle over your own proprety.

• Repairs: Only for improving existing structures, which means no new construction, no tear downs, and no homes requiring remediation. It can be prohibitively expensive to build from the ground up these days, so avoid development deals. Ensure that your borrower understands that fi nishing a development is not rehab.

45


• Timing: Avoid short-fuse deals. All deals must be under contract, and the borrower should always have assets under that contract. No shopping, and the closing must be seven days out. Deals with short fuses are almost always suspicious. Avoid them.

• Loan to Value: Th e lower the better, but stick to 55–60 percent max LTVs. Do not compete with subprime or anyone else, because you will lose. Always make the loan assuming that you will end up owning their asset. If the value of the asset falls by 10 percent, make sure that it does not aff ect your loan.

Guaranteeing that these structures are in place will make sure that you are covered when underwriting a new hard money loan applicant. It is essential that these rehabbers are strictly business, with proven track records (or at least some experience) and solid characters.

As a rule, if the deal or the borrower does not seem right to you—you are probably on to something. Th ere is a lot of fraud and underhanded practice in the property industry, so the “smell a rat” principle applies. If you smell one, then it must be close by.

Beware of the overly charming borrowers as well; they can talk a big game, but if the paperwork does not add up …

WORKING WITH LIENS: COMMON TYPES

Th ere are seven main types of liens I want to cover in this section. A lien is simply a form of security interest that is granted over a specifi c property, in order to “secure” the payment of an agreed upon debt. It will give you the legal right to sell the liened property if the loan is not repaid in the agreed-upon timeframe.


46

• Property Tax Lien: Th e lien itself is placed on the agreed-upon property by a municipality (county) as a result of unpaid property taxes. Th is is the most superior lien of the bunch and carries the most weight.

• IRS Tax Lien: Unpaid taxes will result in this lien being issued, but it is also one of the most misunderstood liens of them all. No court proceedings have to happen in order for the IRS to fi le this lien. All they have to do is record a single-page document with the county.

• Mechanics/Materialman’s Lien: Th is is the most common type of lien issued, and it is easily attached to property—for work completed but not paid for.

• HOA Association Lien: Homeowner Associations always charge fees to member residents—they come as dues or special assessments. If the homeowner does not make these payments, then the HOA can fi le for a lien and even foreclose on it.

• Divorce Lien: Th e parties of a divorce can fi le for this lien, or the court can create it as part of a divorce order. Th e note promises to pay one of the divorced couple. It can be in a one-time lump sum or a series of payments. Th is usually happens when a house is the primary asset in a marriage.

• Water Lien: Th is lien happens when water and sewerage costs have gone unpaid for too long—the municipality will issue a water lien for the property.

• Judgment Lien: When an individual is sued in court for not paying an agreed-upon debt, and the creditor or

47


lender wins a judgment, then this lien is then attached to their property.

In order to sell or refi nance property, you must have a clear title. A lien makes your house title unclear, which basically guarantees that any debt is paid. Th e alternative is that the house becomes the method of payment. Th is is the safest way to conduct loans with high-risk candidates. At the end of the day, if they do not pay—they lose their dominant asset.

PREPARING YOUR FILES AND CREDIT REPORTS

Let me say this once and never again—preparation is what makes a good hard money lending business run like clockwork. You need to be organized in order to adequately prepare your fi les and credit reports.

A disorganized fi le leads to two things—overlooking important details and misplacing vital documents. Both of these cause endless hassles and can result in huge headaches for your company and investors.

If you are going to sell your notes, then you will need organized fi les to use in negotiations with buyers to get you higher bids. No fi les means lower bids or—worse—no bids.

Here is how to keep your fi les organized forever:

• Invest in two-hole-punched legal-size folders with fi le clasps to match the hole punch.

• Print the client information out and tape it to the inside front cover of your fi le.

• Th e fi le should contain BPOs, notes, sales contracts, escrow agreements, UCC-1 Lien (if applicable), copies


48

of checks and subs, and a schedule of Principal and Interest.

• Make sure that you have the following from all borrowers: 1) A 1003 loan application completed and signed from each and every person; 2) Authorization to pull credit reports so that you can ask for these reports from your borrowers; 3) Pay stubs for each borrower, from the last 30 days; 4) Mortgage or rent statement; and 5) Title report on any cross-collateralized properties.

• Before close you will need the following: A copy of their valid license or state ID, a copy of a utility bill with the correct address and cell phone bill, business address, email address, phone numbers (all), title commitment with lender named as Mortgagee, and insurance binder.

Where credit reports are concerned, the only credit rating that matters is the one that you pull prior to closing. Th ese can vary, depending on the service that you use. Never use a credit report that a borrower produces for you, especially if it comes directly from Myfi co.com—these can and often are falsifi ed.

SAL’S QUICK TIPAlways read the entire credit report. The devil

is in the details here, and you want to know

who you are trusting with your money.

Th ere are a few things to watch out for when reviewing credit reports. Look for high credit scores with no depth to the actual

49


credit history, recent foreclosures, bankruptcies (dismissed do not count), IRS, Federal and State liens, delinquencies, and judgments. All of these are red fl ags and should be avoided, if possible.

It is normal to fi nd 30X2 or late payments on credit cards and revolving debt, hospital and other medical liens, late utility payments, and miscellaneous blemishes related to material items—these are average and acceptable in your new fi eld.

THE RULES OF PROPERTY LENDING ENGAGEMENT

Only ever lend to non-owner-occupied properties when: you can avoid dealing with HOEPA, more documentation is required on owner-occupied transactions, or more onerous foreclosure laws for owner-occupied properties (HOOPA, high-cost loans); As you expand, institutions will not give you leverage if you only lend to owner-occupied properties, and the current political climate dictates that you stay away from owner-occupied properties.

There are many pitfalls involved with lending auctions. You should be aware that your buyer is competing with groups of pro bidders and insiders. You are not allowed to inspect the property prior to auction—so your borrower is buying the property in the dark. Novices overlook important things like taxes, CMAs, and title.

Your borrower may overpay, because auctions are geared toward getting the most money in the least amount of time. Th e lack of representations or warranties can lead to disaster. Your cer-tifi cate of occupancy may not exist. Improved does not always mean “decent.” Th ere may be environmental and contamination problems to deal with!


50

SAL’S QUICK TIPAs a rule, do not lend on it if you do not want

to own it!

3URSHUW\� YDOXH� LV�PHDVXUHG� LQ� YDULRXV� ZD\V�� )LUVW�� ¿�QG� IRXU�similar properties in the area, within one mile of the house. Find out what they sold for and compare them!

Th is means factoring in bedroom number; bathroom number; total square footage (living area and total); any patios, decks, or porches; pool; type of construction; central heating; air conditioning; lot size; age of the house; condition of the property; car facilities; and “closed” or sold within similar timeframes.

SAL’S QUICK TIPNever accept listed comps or listed compari-

sons from the borrower; these can be and are

often faked or important things are omitted in

their favor.

Broker Price Opinions (BPOs) are a factual assessment of real estate value based on in-depth analysis. BPOs are most often performed by licensed professionals or a qualifi ed real estate agent from a reputable company. Many factors are considered in a BPO, including regional area, neighborhood data, site improvements, and sales data.

51


Typical buyer programs are also evaluated in the area. I would suggest always using a BPO to help you, as a hard money lender, to determine the correct value of a home. Do not confuse BPOs with appraisers. Appraisers work for the investor or bank, and they conduct simple assessments to estimate home value.

Many factors aff ect the BPO, including property location (not area, but where the house is located on the street or piece of land), and the brokers often spend time in a neighborhood to see how it is for the lender. Th ings like a high rate of non-owner occupants can aff ect the house value, but there are other mitigat-ing factors.

• In a BPO, expect to see square footage, home age, amenities, location in subdivision, property condition, and terms. All of these aff ect the eventual value of the home.

BROKER PRICE OPINIONS: THREE ROADS TO SUCCESS

Now you have a clear understanding of BPOs and why you need them for each and every borrower who crosses your threshold. Th e next step is to understand what these BPOs take into consider-ation when settling on their fi nal evaluation.

There are three main approaches to effective BPOs:

1. Cost approach

2. Income-Capitalization Approach

3. Sales-Comparison Approach


52

When a buyer looks at bulk asset trades, all they want to see is the Sales-Comparison Approach. Th ere are tips, tricks, and traps in this area that you need to know about.

• Foreclosures and tax deed sales should always be taken into account when doing comparisons in your chosen home neighborhood.

• Your sellers will always say that these do not, and should not, count. But count they do! If a trade occurs, you have had a willing seller and a willing buyer come together, execute, and “make a market”.

As a hard money lender, you will fi nd that broker price opinions are less expensive than appraisers, and their opinions tend to produce a better idea of the fair market value of the home in question. Th e broker will then create a comprehensive report for you, outlining these crucial details of your property collateral.

Based on these assessments and your own research (which should be detailed), you should be able to uncover a realistic price for the home. Based on this price, you will be able to commit to a certain amount of money to loan to your borrower.

Remember, credit scores do not mean much in this fi eld; it is the value of the property that really matters. Check to see if there have been any crime-related incidents or foreclosures in the area lately as well, as these can indicate a change in the quality of a reasonably good neighborhood. When you do not live there, this can be tough to spot!

Once you have assessed the value of the borrower’s collateral, paperwork will be signed and the loan will happen. Th e borrower will then understand that if they do not comply with the terms of

53


your loan, then you are legally allowed to move on the sale of their property collateral.

SAL’S QUICK TIPWhile it is always great to see a loan through to

completion, sometimes being able to accept a

property that can be sold for more in return is

an even better way to make money. You are not

taking anything away from your borrowers—

they accept your money according to what the

property is actually worth, based on fact.

If they should default on your loan for too long, the opportunity then becomes yours. Finance is about personal responsibility. If your borrower cannot accept that (and it should be your job to drive it home), then they should not be taking a loan with you.

55

C h a p t e r 4

Property Value and Working with Escrow

“Investing money is the process of committing resources

in a strategic way to accomplish a specific objective.”

—ALAN GOTTHARDT

W hen working with Escrow amounts, you need to consider the impact that this money will have on your borrower. Often there is a “sticker shock” that occurs during the deal,

which can hamper its progress. It is your job as the hard money lender to reduce the impact

of this process, while hurrying along the deal until it is closed and sealed. To do this, you need to know how to handle the repair money placed in escrow.

WHAT YOU NEED TO KNOW ABOUT ESCROW

“Repairs” money is the cash that you are lending your borrower so that they can aff ord to make the necessary changes to their chosen property, in order to rapidly improve its value. In order to get this


56

transfer of money done correctly, you need to consider a few strat-egies that will prevent the inevitable “sticker shock” that occurs.

Sticker shock is when your borrower sees the funds they have borrowed, and they become worried about the amount that they have committed to. To reduce this, make sure that a preliminary HUD-1 is provided some 48 hours before closing.

It will outline the required funds that the borrower might be required to bring to the closing table. If you, as the money-lender, decide to include any closing costs into the loan balance, then make sure that there are enough funds left over for repairs.

Your borrower must understand that the remaining money in escrow is supposed to be used for repairs only. For example, if some $2,000 is needed for closing costs and $10,000 is needed to complete the home repairs, you have to make sure your borrower understands that a total of $12,000 is required at escrow.

Th is means making it clear that the $10,000 repairs money must be used to get the house into a salable condition. If you cut the repair budget by 20 percent (because of the $2,000 in closing fees), that compromises the value of your collateral.

It sends a poor message to your borrower and is not what they agreed to. To prevent this from going bad, you can also sign an affi davit with your borrower before releasing the escrow funds for repairs. Alternatively, you can make a provision in your escrow agreement that all contractors should be bonded and insured.

• Have your borrower fill out a sources and uses form

to detail the work needed and costs estimated (and

time needed) to complete the work.

57

C H A P T E R 4 : P R O P E R T Y V A L U E A N D W O R K I N G W I T H E S C R O W

• An escrow agreement is a binding contract that

details specific milestones at which funds can be

released to the borrower.

• It is acceptable to release 10–20 percent of the total

amount of repairs at closing, but this should be

detailed in the agreement.

• Do not release funds that are out of pre-agreed-

upon schedules of disbursements. It will compromise

the boundaries of the borrower-lender relationship.

CONTRACTS, VENDORS, AND TITLE COMPANY RULES

Most escrow agreements need to be prepared by the closing agent of a large title company, preferably a well-known one. It adds credibility to your transaction. Th ere are some lessons that you should learn about contractors and vendors now, before they turn around to snap at your heels.

SAL’S QUICK TIPOne of the core rules of repairs is that “you

get what you pay for”. If you try to do things

on the cheap, expect cheap work and poor

finishes.


58

In my career, I have found that there are really three main types of contractors. For your best interests, I would target the second kind, as it keeps the process neat and simple.

• Th e fi rst kind of contractor talks a big game, telling you he is capable and can “do it all”. Very often, these guys are cheaper, but they are not licensed. Do not use them!

• Th e second kind is a skilled worker who has an experienced crew. Th ey are fully licensed and do good work that they are proud to do. Th ese guys are great.

• Th e fi nal kind are the “big guys”—the contractors that spend a lot on advertising. Th ey have fancy trucks and large crews. Th ey are usually great to use but are much more expensive than the second type, though they work well.

When working with title companies you should always, always use a nationally known, top three or four title company. Th ere are a host of very good reasons why you have to aim for the top. Almost like clockwork, on the day of closing—the escrow professional that handles your fi le will not be in the offi ce.

Make sure that you get the name and contact details of your escrow offi cers so that you can contact them. Otherwise, it is going to irritate you into making hasty decisions. Ask your chosen title company the right questions from the beginning.

• Ask the title company who else at their fi rm works on your fi le, and request all of their contact details (main account handlers and assistants).

• Ask them how you will be able to reach them if they are out of the offi ce.

59


• How many people are working on your fi le and who are they?

• Finally, ask them if they off er closing documents by email.

You will also need to run through a checklist of additional infor-mation that you will need to complete the escrow closing. Th is means that you have to make sure that your loan documents are fully prepared in advance and ready to be delivered on the day.

Your documents should come directly from your attorney. Your title company will not provide you with all the closing documents that you need; it is your responsibility to get them done on time.

Always review these documents at least 24 hours before closeb to make sure everything is in order. Th en, insist on having these documents sent to you via email, not FedEx. Email paper trails are far more reliable.

BECOMING A CROSS-COLLATERALIZATION MASTER

If you follow all of those great escrow tips, you should not have a problem releasing certain amounts of money periodically to your borrower. Now let’s move on to cross-collateralization. It is a convention that is used by lenders to secure your loans with additional collateral.

How does cross-collateralization work? If a borrower owns multiple properties, they can use the equity on one of the other properties to strengthen the collateral for the loan. In the perfect situation, the borrower would have a strong equity position in the other property.


60

For you, as the hard money lender, cross-collateralization is a desirable method for lenders to structure a deal when the borrower does not have enough funds for an adequate down payment. Instead, they would only have to pledge the additional asset as the remaining portion of the down payment.

Cross-collateralization is a fast wealth generator if you structure it correctly. It is highly benefi cial to you and the indi-vidual who is borrowing the money. You may not feel comfortable lending money based on a single asset or down payment.

If your borrower owns four homes and lives in one, but needs to borrow money to invest in another home, then the scenario would play out as follows: He needs cash for a 35 percent down payment, so he is able to pledge the house he plans to buy, plus the equity he owns in one of his other investment properties.

For the lender, this makes the loan a lot more secure; for the borrower, it allows them to get the appropriate funding needed to execute the right home repairs to improve the value on the invest-ment property. As a rule in this business, you do not get what you do not ask for.

Th is is why you have to ask to see if your borrower has any of the following asset types to submit as additional pieces of collateral, should you need it.

• Ask about any rental vacation properties or timeshare investments

• Ask about securities like stocks and bonds

• Request information on partnership interests in other businesses

• Ask about any existing life insurance policies

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• Check if they own cars, boats, and other high-value recreational vehicles

• Check that no liens exist on these assets already

• Cash in the form of a certifi cate of deposit

• A valid letter of credit, checked by calling the bank in question

If fi nancing does fall through and the loan cannot be paid back, then it is in your best interests to end up with the investment property and the additional collateral to cover extra costs. Th is needs to be calculated correctly, but always assume the deal may go bad. Th at way you fully cover yourself with cross-collateralization.

ACCEPTING PROPERTY AS CROSS-COLLATERAL: THE STEPS

So, do you just accept any collateral as part of the cross-collater-alization process? No! Th ere are concerted steps that should be taken before you agree to accept any real property as cross-collat-eral. Otherwise, you may end up being out of pocket.

First off, you should always have a title search completed to guarantee that there are no other liens on the property. Remember, liens on property promise creditor’s payment on money that has already been borrowed. You cannot use a liens property as collat-eral, because it is already pledged to cover other debts.

Checking for liens will also tell you if the property is “home-steaded” or not. Homestead exemption allows homeowners to protect the value of their primary residence from creditors and property taxes. You need to know this about any property your borrower proposes.


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SAL’S QUICK TIPAs a rule, always check the value of the property

and compare this to what the borrower

currently owes—to verify that there is enough

equity to serve as collateral for your loan. All

you are interested in is that equity. If it is there,

then it can be used in cross-collateral.

If your borrower has a mortgage, check that this mortgage is current and not in arrears. Always get the most recent bank state-ments from your borrower. Th is will let you know if that property is encumbered or tied up in a bankruptcy case.

Th e next step is to make sure that you are added to the insurance policy on the property as an additionally insured party. Th is is done in case of incident or unexpected property damage. If a property really is free and clear, put a lien on it, with your company as the benefi ciary.

If you discover that the property your borrower wants to put up as collateral has a mortgage on it, you can place a second lien behind that mortgage. If at any time the borrower defaults on payment or does not hold up their end of the repayment agreement, you are entitled to foreclose on all collateral.

Th e term homestead is used to give rights to a homeowner as head of a family, to designate real estate as his homestead. Th e actual homestead is exempt from execution by creditors, on a stated amount. Texas and Florida are examples of states with strict

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homestead laws that serve to protect homeowners from opportu-nistic lenders.

After completing all of this due diligence, check the form 1003 “schedule of real estate owned” to see if there are any other properties to cross-collateralize. Th en cross-reference the form 1003 with your borrower’s credit report to see if they have real property evidenced by loans that are not mentioned in the 1003 form.

If you can, have the borrower sign over deeds in lieu of fore-closure to save on foreclosure expenses, should it ever come to that. If you do not take the proper precautions to protect your money, you will lose it. Th is is a high-risk business, so the bottom line is that you neeG�WR�SURWHFW�\RXU�LQYHVWPHQW�E\�¿�QGLQJ�RXW�about cross-collateralization options.

NEGOTIATION SKILLS FOR CROSS-COLLATERALIZATION

Needless to say, this form of covering your interests is important to the hard money lender. Once you have discovered some collat-eral to mix into your deal, you will need to learn how to negotiate for the appropriate terms.

Th ere are many reasons why suggesting cross-collateralization is a good idea. Your borrower may approach you out of signifi cant need, but they also have poor credit. Th ey may not be able to cover the down payment on the property that they wish to purchase, or have no verifi able track record whatsoever.

On the other hand, you could fi nd yourself in the position where it makes sense to be overly cautious—because it is one of your fi rst times loaning real money to a customer. You may not


64

have been able to source a co-borrower for the individual, which leaves their estate open to creditor claims and foreclosures.

Th e terms that you negotiate will rely on what the reality of their situation is like on paper. After conducting all of your research and discovering the truth, negotiating for cross-collateral-ization can save you a lot of money if the loan does not work out.

Th e dialogue between you, as the lender, and the borrower should sound something like this: “We do not have an existing business relationship, so I do not know who you are. Your credit history shows some signifi cant blemishes from past decisions and actions. Th e amount of down payment that you are off ering is also inadequate.

“Because of all of these reasons I have to ask if you would consider cross-collateralizing one of your other properties, or perhaps one of your partner’s properties for my own peace of mind about the loan?”

Th is kind of approach is widely accepted in the hard money lending business. After all, it is a risky fi eld to be in, so precautions are common.

It also benefi ts your borrower, in the sense that they do not have the pressure to come up with the additional cash, which could be problematic and make the deal fall through. Instead, it is far easier to simply use an existing asset as accompanying col-lateral, to cover the risk of the loan.

SAL’S QUICK TIPWhen it comes down to repayments of that

hard money loan, the more your borrower

has at risk, the more likely they are to come

through and pay their loan. They will not

default on these payments, because there

65


is too much equity at stake. This is what you

want—a risk so high that payment becomes a

non-issue.

Work through the cross-collateralization steps with your borrower and negotiate until you are happy with the clean collateral they off er up. Make sure that you win if the borrower pays off the loan on time, but you win even bigger if your borrower does not pay and defaults. Th is way, you ensure that no matter what the outcome may be, you win.

WORKING WITH RELEASES: SECURITY CONSIDERATIONS

Cross-collateralization is easily one of the most secure ways to guarantee your loan is as low-risk as possible.

So, how do you work with cross-collateralization releases? Even-tually, the borrower will want to know, in detail, what the terms of this agreement are.

• You must insist on holding all collateral for the entire

term of the loan that you are lending on.

• There should even be financial penalties for early payment,

just in case the borrower wants to reduce repayments by

paying everything off all at once. Early payments need

penalties so that you can recover your interest even if

your borrower pays early. Otherwise they could pay off

your debt quickly and negate the longer term interest.


66

• Any collateral you release during the loan period will

weaken your security basis.

• Security is determined by predicting scenarios that

may play out if the worst is realized. If suddenly your

borrower runs out of money and cannot repay—the

last thing you want is to have just released their

cross-collateral property a week before because they

asked you to.

• As a rule, if the borrower is marketing and sells a

property that is serving as collateral, then allow them

to substitute that property with another one of equal

or greater value. It does not change the terms of your

deal, unless it takes something away from you if it

becomes yours.

• You should also be aware that if the borrower is

marketing and sells a property that is serving as

collateral for cash or terms, have the proceeds

placed in escrow until your loan is satisfied. The

interest from this money should keep you happy until

the loan is repaid.

When you are doing your cross-collateralization checks, make sure that you always assess the title on all assets. For whatever reason, borrowers can sometimes depend on the hard money lender’s inability to conduct these checks and balances, in order to borrow money.

It is not uncommon for borrowers to lie about certain prop-erties in order to make them seem like they are eligible for cross-

67


collateralization, when they are in fact already in liens. You have to systematically go through the paperwork yourself to be sure.

Be sure that you communicate with your borrower during the negotiation of terms and clearly state what your expectations of how and when any cross-collateralization property will be released. Make sure that this also refl ects in the escrow agreement, so that you are completely covered from a legal standpoint.

Th ere is nothing worse than not eff ectively communicating with your borrower, and then ending up in a position where they had no idea that so much was at stake on their side. Th ey need to know—in major detail—how much risk they are taking. Th is will inspire them to never miss a payment, which justifi es your high-risk loan to them.

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C h a p t e r 5

The Hard Money Lender Need-to-Knows

“The human species, according to the best theory

I can form of it, is composed of two distinct races,

the men who borrow and the men who lend.”

—CHARLES LAMB

A s someone that is getting into the hard money lending business, you have to understand that this is high-risk work. Th at is why there is such a great focus on hazard insurance and various other kinds

of insurance, as well. In this chapter, I will go through some crucial need-to-knows

that will keep you on the right track and prevent you from ever losing money on a loan. No matter the outcome, you as the mon-eylender always need to come out on top.

AVOIDING THE HAZARDS WITH INSURANCE

Hazard insurance includes a wide range of securities that protect against instances of fi re, vandalism, storm damage, and other


70

natural occurrences. If, for example, your collateral is damaged due to a storm, it changes the terms of your agreement.

In order to keep the agreement in order, you have to cover yourself with insurance. Th at is why you should not close the mortgage transaction until you are 100 percent certain that the amount of insurance covering the property is more than the loan amount, and should be for replacement value. Th is is key to fi nan-cially surviving any peculiar circumstances.

SAL’S QUICK TIPWhen you know that the hazard insurance is

in place, with adequate coverage, make sure

that you are listed as the mortgagee. A little

mortgagee clause that shows you are the

mortgagee with your name and address on

the policy matters. This clause should also

show that you are in first position to be paid,

should the property be foreclosed on.

Under no circumstances are you ever to allow a policy to lapse or be cancelled. You will experience untold drama if a hazard insurance policy lapses and something unexpected happens to that property asset. As far as you are concerned, the moment the property had your liens on it, you became responsible for the security and integrity of that home.

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C H A P T E R 5 : T H E H A R D M O N E Y L E N D E R N E E D - T O - K N O W S

Th ere are two ways that hard money lenders determine the amount of insurance to supply to a property. Th ey are “actual replacement cost” and “replacement cost”.

1. Actual replacement cost refers to the coverage that pays the cost of replacing property, less physical depreciation.

2. Replacement cost alone refers to the payment of the cost of replacing the insured property, without subtracting depreciation. It is very important to insure at least 80 percent of the replacement value of the property.

If, for example, a liens property burns down, then you want the hazard insurance policy to be able to cover a complete rebuild. Th at way, you are never at unnecessary risk of losing your money. Th is is your primary concern as a hard money lender.

THE MANY DIFFERENT TYPES OF INSURANCE

As a hard money lender, you have to be aware of the many diff erent types of insurance that cover you when you move into this kind of business. Th ese insurance types all need to be considered for your various property ventures:

• Hazard Policy: Your basic hazard policy will cover things like fi re damage, weather-related damage, vandalism, and malicious mischief. You can also attempt to secure an “all-risk” policy. Th ese provide complete comprehensive coverage and include other forms of risk—such as water damage from an internal plumbing failure.

• Vacant Dwelling Policy: A VDP allows for three months of vacancy, in which time a remodeling has to take place


72

in order for the policy to be valid. Th ese are used to cover risks associated with vacant buildings.

• Flood Insurance: Many properties exist in designated fl ood zones, and if this is the case for you, a fl ood insurance policy should always be an investment for you. Th ese many fl ood zones are determined by FEMA, through the National Flood Insurance Program. A property survey will show which fl ood zone the property belongs to. An appraisal will show what the fl ood zone determination may be.

• Builder’s Risk Policy: Th is is another basic policy that covers some similar features when compared to a Vacant Dwelling Policy. Th ey are much more expensive, however, and a lot more comprehensive. Some hard money lenders will only opt for a Builder’s Risk Policy, because it is so reliable.

• Loss of Rents Coverage: Th is particular type of insurance covers your borrower if the property is damaged by fi re or other forms of major events. You can never be too cautious when protecting your money, or the money that someone else trusted you to manage. So many things can go wrong in the area that you have chosen to operate in—which is why you need superior coverage.

Th ere is no legitimate reason not to have insurance before your loan closes. Th ese additional coverage products for real property include fl ood, hurricane, acts of God, earthquake, lava zone, and unemployment insurance.

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SAL’S QUICK TIPA very large part of your job as a hard money

lender is to minimize the risk in a high-risk

field. You are already doing all you can to

reduce the risk of lending to a particular indi-

vidual, which is great. But now you need to

acknowledge that there are external factors

that can affect your investment.

Th e only way to indemnify yourself against these “sudden” losses is to take out the right amount of insurance, and to make sure that your payments during the term of lending cover absolutely anything that goes wrong—even if the entire house is swept away in a fl ood.

CREATING YOUR LOAN TERMS AND GUIDELINES

Outside of your basic preparatory insurance policies, you may also want to persuade your borrower to take out unemployment insurance. Using Paycheck Guardian or AFLAC, you can make sure that even if the borrower does lose their job, they will still be able to aff ord the loan repayments—which is your primary goal.

Once you have settled on your insurance coverage, you will need to begin determining your loan terms and guidelines. Th is means becoming acquainted with the correct terminology in the fi eld, and instituting the right practices, based on these terms.


74

• Th e Loan Amount: Th is is the specifi c dollar amount that your borrower has borrowed from you in order to purchase another property.

• Schedule of Disbursement: Th is should be the same as “source and uses” or your “escrow agreement” so that payment releases and terms are outlined clearly.

• Interest Rate: Depending on where you live, your state will have certain usury laws. Keep your interest rate at a minimum of 15 percent to make money on your loan.

• Term: A hard money loan should never be longer than six months to a year maximum, or it will become a long-term nightmare.

• Origination Fee: Th is is what we call the fee charged for the origination of the loan. It is usually charged as a percentage of the total loan amount.

• Points: Check your state usury laws, but a 5 percent minimum is fairly standard in the industry.

• Prepayment Penalty: A prepayment penalty actually loses you money, so in an attempt to reduce this risk, instituting a penalty for fast payment is important. Th e average amount is 3 percent paid if within the fi rst three months.

• Extensions: If the borrower wants to extend their loan, and the lender approves it, this can be done at an extended fee of 1 percent of the original balance.

• Collateral: Th is acts as a fi nancial or cash placeholder—usually property or other assets that can quickly be sold for cash recovery.

75


• Fees: Th ere are lots of fees involved with this process, and you need to know about all of them. Th e application fee, draw fee, VOM/Payoff statement, and late fees are all counted.

• Taxes and Insurance: Th ese montly payments should all be escrowed and include any and all service fees.

• Assignment of Rents: If the borrower has to foreclose, this gives you the right to collect the rent on the property.

Th ese are only basic guidelines on the terms that you will have to create for each loan that you execute in your market.

PREPAYMENT PENALTIES AS PART OF YOUR LOAN

Let’s talk more about prepayment penalties as a fundamental part of your loan. Most private moneylenders will charge a pre-payment penalty on the loan if the borrower wants to pay it off early. Obviously, the lender also wants to make money—which is not possible if the loan is repaid in full almost immediately after providing the loan.

7KH�SHQDOW\�QDWXUDOO\�RQO\�DSSOLHV�IRU�WKH�¿�UVW�IHZ�PRQWKV�of the loan. After that, the borrower will not incur a penalty if they want to settle the debt. Traditionally, the prepayment penalty is part of the promissory note, but can also be added to the mortgage.

Your borrower will approach you a few months into the loan, and will request a full payment to close the loan debt. If it falls within that predefi ned period, they will be charged a penalty for paying early. Th is penalty will make up for the lost income that the lender should be earning from an extended loan.


76

SAL’S QUICK TIPKeep in mind that when you work often with

the same real estate investors (the people who

will become your loyal clients), they may move

fairly quickly with loan repayments, so your

penalty percentage matters. Many investors

often leave lender partnerships because they

discover another company that is willing to

accept smaller penalties for early payment.

As a lender, you have spent time and effort calculating your expected return on the loan investment that you are making to your borrower. It is important that you build these prepayment penalties into your business, or borrowers could pull out all the time, in pursuit of lenders who off er them better interest rates.

Make sure that you explain your prepayment penalty system to your borrower before they sign any loan agreement or handle money in escrow. If, for example, there is a prepayment penalty for the fi rst year of the loan, the penalty will be 3 percent. Any principal prepaid amount that is given during the fi rst three months of the loan will carry a 3 percent penalty on it.

Th ere are dozens of ways to word a prepayment penalty, but it is best if you give it to your lawyer to deal with. Th ey know how to phrase it in a way that is non-threatening and standard. Do not forget to put a prepayment penalty on every single loan that you make.

77


SAL’S QUICK TIPIf you do not build in prepayment penalties,

you are leaving money on the table—and an

opportunity for unscrupulous borrowers to

come in and take advantage of your lending

system, leaving you out of pocket.

Th e goal here is to research how other moneylenders handle their prepayment penalties in a way that does not distress their borrowers, and yet still protects them against fi nancial losses from ultra-short-term loans.

THE PROS AND CONS OF SECOND-MORTGAGE LENDING

As part of your education on general terms and lending guide-lines, you need to understand the various pros and cons to off ering private money second mortgages. Second-mortgage lending is always risky, so it is better to outline the realities of the service early on.

For a hard money lender, there are many positive reasons to lend second-mortgage money to borrower investors. First of all, there is a remarkably low barrier to entry in this fi eld of private lending. Not many people do it, because it is so high risk. Th e upside to that is that there will always be people wanting to fi nance their properties a second time.

Another positive is that these second mortgages are usually priced at a higher interest rate than other types of loans. Th e higher


78

the interest, the more money you will make for every month that your borrower keeps the loan going.

All second-mortgage loans can be structured to be sold and placed into an IRA easily. Th is means that if you ever feel like you cannot take on the responsibility for the loan any longer, there are options to sell the loan or the property, depending on your situation.

Finally, with second-mortgage loans come a lot of unique opportunities. When borrowers have access to cash based on second mortgages, they often purchase new properties, which begins a cycle of lending and buying—which can be very benefi -cial to you.

As with anything in the private loan business, there are negatives that you will want to look out for, as well. Th ese can be fairly substantial if you are operating as an inexperienced hard money lender, so take note of what these negatives suggest.

Th e fi rst is that second-mortgage loans are less liquid than other types of collateral. Th ere is more risk embedded in them because they cannot be immediately sold to recover the costs of the loan. First, the fi nancial institution that owns the initial mortgage loan amount will be paid, and then you will be given the cash for any additional equity in the home.

It is true that second-mortgage lending is higher risk to you than other forms of money lending. I would only suggest working with these second mortgages if you have worked alongside the borrower many times, and you trust them. Borrowers with larger, more established fi nancial portfolios are lower risk.

Sometimes, a second-mortgage loan can be wiped out without notice in some states in the United States. If this happens for whatever reason, you will lose your claim on that loan amount.

79


Th is is why not many novice private moneylenders work with second mortgages in the beginning.

Finally, these loans are impossible to leverage in any way. You cannot get more out of them. Th ey are what they are: a big risk. At the end of the day, you want to ensure that you are equipped with all the facts, in case your borrower defaults and leaves you to deal with the aftermath. As you can imagine, a second-mortgage aftermath is not fun.

SECOND-MORTGAGE LENDING RULES

“Seconds”, as they are known in the lending niche, come with a lot of rules that can save you endless hassles, if you choose to abide by them from day one. A lot of beginner moneylenders believe that the outcome will be diff erent if they attempt to close the risk gap, but most of the time this simply is not the case.

Here are some great rules that should help you overcome the “seconds” risk:

• Always make sure that security instruments are

recorded. Do not under any circumstances accept

IOUs for this.

• Use the same strict underwriting standard that you

always use on your first mortgages. You need to be as

informed as possible about the financial state of the

property that you are measuring your loan against. It

has to be worth it.


80

• You must at all times insist on a monthly payment

for your second-mortgage loans. The very minimum

payment should be at least $200 per month, but

preferably more if you can write that into your loan

agreement.

• With second-mortgage loans, always seize on the

opportunity to cross-collateralize the deal, for extra

security. Adding more collateral to the loan lowers

the risk significantly, and gives you more to work with

should things go wrong.

• Always get a cosigner, so that responsibility for the

payment of the second mortgage rests on two or

more individuals. This is important, in case a specific

individual has to file for bankruptcy or cannot afford

to pay their loans off.

• Always insist on a personal guarantee. These have a

lot of pull in the real estate investment industry, so

use them when you can to guarantee cooperation.

• Check the titles to see what liens might be ahead of

yours. If you find any liens, make note of them and

follow their progress to stay aware of the property

asset and what is happening to it.

• Find out if that first mortgage is current or if it is

in arrears. Get a copy of the most recent mortgage

statement. Sometimes, a borrower will lie about a

second mortgage to try and pay off some of their

first mortgage.

81


• Get assignment of rents from other properties that

your borrower owns in order to maintain a consistent

flow of loan cash.

If you can follow these basic private lending rules, then you should be able to expand into the second-mortgage niche down the line. I do not recommend that you do until after you have done several lower risk lending deals.

Once the money starts coming in, it can be tempting to launch yourself into any and every mortgage deal that comes along. If you can maintain your critical eye and natural suspicion, then you should be all right. Check on everything, at all times!

83

C h a p t e r 6

Dealing with Payments: Closings and Defaults

“People are living longer than ever before, a phenomenon

undoubtedly made necessary by the 30-year mortgage.”

—DOUG LARSON

A s a private or hard money lender, a large portion of your business is going to involve dealing with repayments—both closings and defaults. If you know how to properly manage these, you can

become a very successful moneylender. It is the moneylenders who do not learn how to properly

handle closings and defaults who fail. Th ey do not systematize their processes and, as a result, they end up being ill prepared for any number of circumstances that can lose them money.

CLOSING TIME: YOUR LIST OF DISCLOSURES

When closing the deal on your loan, there are a number of terms that should be discussed or at least “disclosed” at the time of closing. Th is is to make sure that your borrower knows each and every detail, along with the terms for taking out a loan with you.


84

Focus on the following core disclosures to make

sure lines of communication are open:

• Speak about the main terms of the loan as found

in the promissory note that you have prepared for

yourself and the borrower.

• The promissory note discussion can include anything

from payment due dates, interest rates, and the total

loan amount, to where to mail payments and when

the final payment amount is due.

• Discuss the annual percentage rate, the amount

financed, total finance charges, and total payments

so that your borrower clearly understands. You can

even record the conversation as evidence, if you feel

it is necessary.

• Talk about any balloon payments and when they

are due. Sometimes, borrowers can forget about

arranged balloon payments, so bringing it up at the

close is important.

• Discuss your prepayment penalty plan and how it

works in detail, so that your borrower knows what is

required of them if they want to pay the loan off early.

• All costs of the loan should be broken down on the

closing statement, commonly called the HUD-1.

This will inform the borrower of the fees and extras

involved.

85

C H A P T E R 6 : D E A L I N G W I T H P A Y M E N T S : C L O S I N G S A N D D E F A U L T S

• Speak about the exact amounts of cash that will be

given to or taken from the borrower, so that they can

organize their financial schedules appropriately.

• Once the close is complete, speak to your borrower

about the three business days that they have to

change their minds about the loan.

• Talk in detail about the borrowers’ responsibility

to maintain the good condition of the home, his

responsibility to keep insurance going on all loan

structures, and his responsibility to pay property

taxes on time.

YOUR CLOSING DOCUMENT CHECKLIST DEFINED

Now that you have reached the close of your fi rst loan deal, you will need to run through a checklist of all the closing documents that the escrow team and others have helped you put together to ensure a successful closing:

• Your Promissory Note: Th e written agreement that your borrower signs to pay back the loan that they have made with you. Terms and conditions included.

• Your Mortgage Documents: Th e borrower’s mortgage documentation must be submitted for review to the lender.

• Th e Title Commitment: Th e borrower will transfer the ownership of their collateral to you for the period of the loan, as stated in this document.


86

• Your Hazard Policy: Details your insurance on a number of natural or high-risk occurrences in specifi c areas.

• HUD-1 Settlement Statement: Breaks down all costs and money transfers associated with the transaction. Will show the amount of cash needed from either side for closing.

• Final Truth in Lending (TIL): Th e document that helps borrowers understand their borrowing costs in their entirety.

• Right of Rescission Notice: Th e document that allows for the cancellation of the loan within three business days of closing.

• Purchase and Sales Contract: Th is is the agreement for the sale of real property should the loan terms not be met within the defi ned loan period.

• Operating Agreement: An agreement that outlines the borrower’s fi nancial and functional decisions, or intentions with the money borrowed.

• Articles of Incorporation of Lending to a Business Entity: Th e necessary documents needed in order to lend money to a business instead of an individual.

• Confi rmation Th at the Business Entity Is in Good Standing with the State: A document that proves the business was able to make loans based on its good standing.

Th is closing document checklist exists to help you realize how much actual paperwork goes into the lending process. It requires real digging and research to unearth the truth about risk and

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reward. You have to make decisions about the people who you will lend to based on their collected documents and information.

At the same time, your established business practices will determine the type of borrower or real estate investor that wants to do business with you. It all needs to be completely legal, fair, and closely policed, so that it turns out well for you and for repeat borrowers.

HOW TO ACCURATELY COLLECT PAYMENTS

Th e next part of your new career as a private moneylender will have you overseeing payment collections—and this can be as smooth or as nightmarish as you make it. It is the responsibility of the lender to systematize this process and build penalties and rules into your agreements so that you have legal coverage if payments are not being made.

At the same time, you still want to encourage repeat loans from real estate investors, so it makes sense for you to make the experience easy for your borrowers, as well.

SAL’S QUICK TIPYou are not in the note-servicing business, you

are in the hard money lending business. That

means that your job—your only job—is to find

deals and fund them. You should always use

a third-party servicing company for the rest.

You must never bother yourself with the daily


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ins and outs of debt collection—it will distract

you, and drive you nuts!

• Hand over your collections to a quality, highly reputable third-party servicing company with a great track record.

• Th is company will hold all original documents and copies of documents for you on each and every deal that you fi nance.

• Th ey will perform all of your monthly accounting for you, so that your books are always 100 percent up to date and accurate. Request weekly reports.

• Th is company will send out payment notices when payments are received from your various pools of borrowers.

• Th ey will create monthly reports on all transactions regarding the accounts that you host with them, so you can stay up to date on how your repayments are going.

• Your third-party company will handle all electronic deposits or debit of funds from your borrower accounts.

• Th ey will have annual payment cards sent to each side—1099/1098 interest information.

• Finally, your third-party company will deal with escrow and the payment of monthly taxes and insurance to keep you on the right track.

You cannot, as a private moneylender, expect to handle all of the admin, fi nances, payments, and collections that you need to

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perform daily—while still sourcing and funding new deals. Your bread and butter is making the loan. Th at is all.

If you try to take on the “other” side of the business, you will end up out of pocket. No one in the money business can aff ord to waste time working on the minor parts of lending. Th e deals are where the action is—and that is where you want to be.

Most title companies have loan services available, so inquire and spend a good amount of time fi nding and recruiting the loan collections company that will help you make your fortune in the hard money lending business.

MANAGING FORECLOSURE LAWS AND DEFAULTS

What on earth do you do if a borrower defaults more than once on their loan? Let me be completely honest about this, so that you do not go into this believing that a default will never happen. Defaults do happen, and they happen all the time—even when you know payments are coming from a real estate investor that can aff ord the repayments.

“Not having money” is just one of the dozens of reasons why people do not keep up with their loan repayments. Th ere is a human element to each loan that cannot possibly be anticipated. Your job is to do everything within your power before closing to minimize loss and be swift in responding to a default situation.

When a default happens, your fi rst priority is capital pres-ervation. You are in business for the sole purpose of preserving, insuring, and controlling your capital and the capital that you manage for other people: your clients.

Your second priority is return on that capital. Payments will fl ow again; you are just not sure when they will or why they have


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stopped. Eventually you will have to ask your attorney to fi le a Notice of Default (NOD). Regardless of the reason, you will need to fi le the NOD to the borrower and co-borrowers. Perhaps they need to be reminded of their promises.

In money lending, there is no such thing as “giving people a break”. Th at kind of attitude will lose money, yours and your client’s. Th at is why I always adopt the “scorched earth” policy. Immediately after a client defaults, I send off the Notice of Default.

Th is NOD is a powerful motivator to take immediate action, or risk losing the property and all other pledged collateral. Remember, if they cannot pay, legally that collateral belongs to you. You are in the business of making money from money—which means when the payments stop, the money has to be replaced somehow.

A friendly, but forthcoming, NOD usually gets those payments coming in quickly after default. If you ever reach a stage where your borrower has screwed up and cannot pay, then you simply assume ownership of his collateral and property. Th en you can resell it to recoup the funds. Th at is the promise that they have knowingly made to you.

SAL’S QUICK TIPForeclosure laws differ depending on the

state that you live in. The terms range from

21 days to 180 days. Any small detail that is

not properly executed can force you to turn

the clock back to zero here. Cover all of your

paperwork bases so that if default happens

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(and expect it to), the process of foreclosure

is quick and easy.

Time and accuracy are of the essence! Th at is why you need to stay up to date on your foreclosure laws. Make a note of where you are operating, and how they respond to foreclosures. Th en, you can timeline when the property will be handed over to you, so that you can work on reviving and reselling the place for profi t.

LEARNING TO AVOID AND MANAGE DEFAULTERS

Th e fi rst line of defense in any great private money-lending business is to avoid people who default on their payments. Th is means executing a pre- and post-initial default title search. At the same time legal is being initiated, you will need to run a title search on all of the collateral that your borrower pledged to you.

From the title search results, you will either get a “title is clear” or “title is encumbered” return. If the title is clear and the borrower is cooperative, you can look at restructuring the loan to make it more accessible, or perhaps you can accept a Deed in Lieu.

If, however, the title is encumbered, it is not clear—chances are the borrower will not be cooperative. Th ese are the moments when fi ling a NOD quickly will benefi t you the most. Any delay could cause questions and trouble.

If you have to proceed with foreclosure activity, have your “send notice” delivered to all borrowers that signed the agree-ments with an Intent to Foreclose in both email and certifi ed mail. Delivering both of these notices gives you the legal power to move forward.


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Th ere are many reasons why borrowers default on their payments; the following are a few to get you started and thinking along the right lines:

• Cost overruns: Th ey ran out of money and cannot fi nish their project. Th is is the most common cause of a default. To help fi x the problem, fi nd out the current ARV. If the borrower is cooperative, consider letting interest accrue on the loan so that the borrower can apply funds that would have paid interest payments to repairs.

à In this instance, you can also allow the borrower to place a private second mortgage behind yours—or, if they have a lot of equity, provide them with additional funding. You can also off er to subordinate your fi rst mortgage to a new private one fi rst.

• No sales: Th ey were unable to sell the property that they secured and repaired, so they cannot cash you out. In this circumstance, you can have the borrower fi nd a new lender to cash you out, or you can refi nance using the co-borrower’s higher credit and income—or save on closing costs by selling on a collateral assignment.

à In this instance, you can also have the borrower sell on terms to a new qualifi ed buyer who will assume the mortgage. You should be careful not to execute a “novation”. Th is is a clause lenders sometimes add to an assumption that completely releases the original borrower from liability and obligation to the mortgage.

Aside from these, anything from death of a family member to urgent business overseas can cause payments to come to a grinding

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halt. Make sure that your third-party collections company is always on top of who is paying and who isn’t.

WHAT ARE THE LEGAL OPTIONS FOR FORECLOSURE?

It is important as a private moneylender that you understand your legal options for foreclosure. Th ere are judicial and non-judicial foreclosures that operate in multiple states and have multiple complexities.

The Judicial ForeclosureIn an attempt to recover your capital, you will engage in a process through the US court system. A judicial foreclosure is run through the courts and involves fi ling complaints, notices, lis pendens, judgments, and court orders—things of that nature.

Each state has its own set of rules on how long a judicial foreclosure should take. Sometimes they occur within the month; other times they can take several months—depending on the cir-cumstances of the foreclosure.

You will always need a competent local attorney for a fore-closure action. People can become very distressed when they lose their properties—and they often feel the need to fi ght the loan in court, so they hire lawyers of their own. With the right documen-tation and a competent lawyer, you should never have any trouble if this happens.


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The Non-Judicial ForeclosureTh is method completely bypasses the court system, which can take a long time to pass judgment and make things happen for you. Th e sale of the foreclosed property becomes a private sale.

Th e Trustee named in the Deed of Trust conducts the sale. Th e procedure for doing this also varies from state to state, depending on who is managing the sale. Sometimes a state will allow more than one way to foreclose on a property, while others only allow one.

You will still need an attorney in a non-judicial foreclosure. Th ey will make the determination based on the state and if the security instrument is a Mortgage or a Deed of Trust. Th ese foreclo-sures are preferable, as they move faster than judicial foreclosures.

If you are lucky, you will hear from your borrower that their plans did not work out, and that they concede their property to you. In this case, you can move ahead quickly with a non-judicial foreclosure, and perhaps even host a home auction for a fast, lucrative sale.

You may have seen home auctions in the past where real estate investors are able to pick up homes by bidding on the price. Th ese are common, because they are a much faster way of recovering the costs of a loan, according to the documentation that you created.

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C h a p t e r 7

The Business End of Hard Money

“Now, one thing I tell everyone is learn about real

estate. Repeat after me: real estate provides the highest

returns, the greatest values and the least risk.”

—ARMSTRONG WILLIAMS

B eing a hard money fund manager, you will have to concern yourself with the limitations of your borrowers. People may borrow money when they know they cannot pay it back, or they may end up

having to give you their collateral as payment. While these things can be tough to deal with in the beginning,

and believe me you may hear more than one “sob story”, you cannot allow the emotions of the business to hamper your plans as a fund manager. Hard money is just that—hard.


96

WHEN A BORROWER FILES FOR BANKRUPTCY: CONTINGENCY PLANS

So, what do you do if a borrower fi les for bankruptcy? At this point, you have no other choice than to protect your own interests and money. After all, you are accountable to your clients and their investment money.

In today’s society, lawsuits are quite common, and there is no longer any stigma on fi ling for bankruptcy. Th at means that you should consider setting up a Bankruptcy Remote Entity for each and every loan you make. You can also structure your loan so that the title is held in escrow, for release only when the project is complete.

Th at way, when a client does fi le for bankruptcy, you can stop accepting payments immediately. You can also hire an attorney to square off with your borrower—so that an equitable resolution can be planned out. Th e quicker you recoup your capital invest-ment at this point, the better.

Th e good news is that if you do happen to sustain any principal loss, it will not last long. Th e points and fees on any sub-sequent loans will more than recapture any serious losses. A bank remote entity will act to contain and resolve litigation away from valuable assets, and they can fi le for bankruptcy without subject-ing assets to the bankruptcy proceedings.

In this role, you are the “secured creditor”, and you cannot take away your borrower’s right to fi le for bankruptcy. Instead of dealing with this, rather, off er your borrower incentives to not go down the bankruptcy route—like releasing their collateral or Policy Guidelines.

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C H A P T E R 7 : T H E B U S I N E S S E N D O F H A R D M O N E Y

SAL’S QUICK TIPCredit bidding happens when secured

creditors have bankruptcy sales that allow

them to control the sale of the collateral.

Under section 363 of the Bankruptcy Code—

the right to credit bid gives under-secured

creditors the ability to control their collateral

when it is worth less than the face amount of

their claims.

A good example is this: If some real estate is worth $200,000, and collateral for a bank loan of $350,000 was proposed to be sold, a debtor would fi nd it tough to sell this property. Th is is because there is an objection from the mortgagee in a bankruptcy sale for its value.

A secured lender would have the ability to bid the complete amount of their claim of $350,000 without off ering any cash at all. Credit bidding is seen as one of the chief rights of secured creditors in bankruptcy.

GETTING YOUR LOAN RELEASED FROM BANKRUPTCY

Th ere are many strategies that you, as the hard money lender, can use to get your borrower to release your loan from a fi led bankruptcy. Th ese “incentive” plays will help you sort out any projected losses from the move on your borrower’s part.


98

You can choose to waive PG in exchange for having

your borrower release their debt from the bankruptcy,

for example. You can also have them sign a Deed-

in-Lieu of Foreclosure, depending on what the title

report looks like.

The reality is that hard money lending is a risky

business. If your borrower does file for bankruptcy,

chances are that you are going to lose some income

and an amount on your principal. This depends on

what the terms of your loan may have been.

When bankruptcy is filed, a “cram down” may occur.

During this time, the debtor may choose to reduce

the principal amount of the secured claim to the

value of the collateral. They can also decide to reduce

the interest rate, and extend the maturity date of the

loan.

Finally, they may choose to alter the repayment

schedule. They could also make a minimal payment

on the unsecured claim. It all depends on what

the debtor is advised to do at the time. What often

happens these days is that a bankruptcy judge will

rewrite the terms of a loan, often at a complete

disadvantage to you, the mortgagee.

If this happens, then you need to put your ego aside very quickly and do what needs to be done to gain control of your collateral. Th e legal fees can add up in the blink of an eye. I have always

99


thought of federal bankruptcy judges as the closest thing on earth to a natural deity. Th ey have absolute power.

Th e truth is that the judges do not always fi le in your favor. Often, the outcome goes the other way, and you end up losing money because of someone else’s poor fi nancial decisions. You must defend against this through preparation and structuring.

If it does happen, then have incentive strategies in place to help your borrower agree to having your loan released from bank-ruptcy. Th is is the only way you are going to come out of the deal fairly unscathed—and even then, you will still probably lose money on your principal amount.

Th e best advice that I can give you is to sit down with your lawyer the moment you realize that a bankruptcy is happening. Get the right plans in place to minimize the fi nancial shortfall. If you are lucky, your borrower will be willing to make a deal. If not, you will have to recover the losses of this bad loan elsewhere.

SECURITY IMPROVEMENTS WITH SUBORDINATION

Th ere are ways that you can improve your fi nancial security using the process of subordination. To subordinate your lien, you will place yourself behind another lien or subordinate to another lien.

If a default does happen, the debt will no longer be the fi rst priority in line to those creditors that need to be repaid. I would suggest being very cautious when a borrower asks you to subordi-nate a loan. You will need to sort through a lot of considerations before it becomes fi nancially safe for you to do so.

However, there are ways that you can improve your own security here and comply with your borrower’s subordinate loan request. You will have to get blanket security in the form of


100

another property, or something of additional, verifi able value from both the borrower and their co-borrower.

Th e blanket security can come in the form of a boat, a car, RVs, title claims, vacation properties, cash, jewelry, and interest in companies. Th ese are all relevant pieces of security if you are looking for something above and beyond the norm.

You also have the choice of being “assigned” rent from their other properties, which can be a high-value assurance. Alterna-tively, you can get a letter of credit, or insist on advance principal payments during subordination.

As the lender, you should think about limiting subordination to a specifi c time period—one that does not exceed six months—or you could run into trouble. Always limit the loan term and the amount of that loan.

Your new amount should be enough for necessary repairs only. If you require it, review the escrow agreement again. If at this point property taxes are way past due, require them to be paid out of the new proceeds.

SAL’S QUICK TIPFor additional safety, you should also insist

that the new loan has the same signatures as

your loan, for legal purposes. Once again, do

not forget to check credit on all parties that

are borrowing the money from you.

Start from the beginning, and make sure that the insurance has not expired, and that you are still named as an additionally

101


insured individual. Finally, insist that a closing be performed with a large, well-known title company that can properly execute escrow agreements.

Once all of this is done, you should check to be certain that there are no materialman’s or mechanic’s liens ahead of you. Simple!

Let’s take a look at loan subordination. If your borrower needs another $10,000 for repairs on their

property, you have to decide what to do next. You allow them to fi nd a new lending source for the exact amount of those repairs. He goes off and fi nds a new private moneylender—but only if you will subordinate your mortgage behind the new lender’s claim.

Th e lien stack would change. Th e old lien stack would have $100,000 ARV; $65,000 fi rst mortgage; $0 second mortgage; and 65 percent CLTV (combined loan-to-value). Th e new lien stack would have $100,000 ARV; $10,000 new for repairs; $65,000 subordinated mortgage and 75 percent CLTV. A CLTV is the total loan amount that encumbers a property that is recorded on the title—divided by the market value. It helps to determine the risk and viability of the subordinating loan.

ORGANIZING YOUR OFFICE: SYSTEMS WITHIN SYSTEMS

Now, that is all fi ne and I hope you have realized that in this game it is preparation that separates the successful private moneylenders from the rest. But there can be no adequate preparation without a distinct culture of organization in your offi ce.

Let me be crystal clear on this—most brokers and lenders fail horribly and go utterly broke because they cannot wrap their


102

heads around the need to become, and remain, organized. If you do not get organized, then you are setting yourself up for failure.

Post-it notes are fun to use, but they create chaos in an offi ce. Important details get lost when you cannot be bothered to insert the right information into the right places.

Technology matters for more reasons that you think. Running a private money-lending business without the right software or skills (and team) to use that software is a disaster. You cannot keep track of your money without these programs.

SAL’S QUICK TIPUsing technology is very much like hiring teams

of people to get things done right every time,

reliably and consistently. Software makes up

the basis for great internal and external office

systems. You could say that they are systems

within systems that help your business run

smoothly and efficiently.

As a side note, I should also mention that no real estate investors will do business with you if you are not automated and staying up to date with modern technology. It will attract borrowers who want to take advantage of you, for not having the right systems in place.

Always use Microsoft Outlook to manage your fl ow of e-mail. Pay for the full version to get all the extra features that the free

103


version lacks. E-mails are important, as they stand up in court as evidence, so track yours carefully.

Create a rule in Outlook that all responses to a loan request are placed in one dedicated folder. Th is way you can get to them and follow your streamlined screening process in a systematic fashion.

I use a website called www.groovypost.com to fi nd great step-by-step instructions on how to set up rules in Microsoft Outlook, and to get the reminder functions working. When you can automate professionalism and responses, then you can guarantee that no matter who reaches out to you, you can respond quickly.

Th ere will be many people who you are not willing to loan money to, but they could become borrowers in the future, so it is best to keep all applicants happy. Th is may not be a service business, but it helps if you do not come off as uncaring or indiff erent.

Private money lending really is a business, which means that you need to take the time to systematize your offi ce. Do not skip this part. Having built-in processes that make daily operations easy will improve your productivity, workfl ow, and reputation. Believe me when I say that reputation is everything in this fi eld, if you want to snag the best real estate investors.

BECOMING A CORPORATION FOR BUSINESS

Being a private lender is all about business—so it makes sense to cover your interests by using a corporation as your business model. Th is is widely considered as the most legally sound business entity, so it makes sense for you as a hard money lender.


104

With regard to protection and fl exibility, you will not fi nd a better form of business. Legally, the corporation will be com-pletely separate from you as the business owner. Th is means that you will enjoy limited liability, as there is built-in protection for you with a corporation.

Th e law states that none of your personal assets will ever be in jeopardy to settle any legal or corporate obligations. Th is is important, as you do not want to lose your own assets after starting and running a private money-lending company.

Your corporation will pay its own taxes, and it can own property (very useful) and enter into binding contracts with people. Your company will also be the entity that gets sued instead of you, which is very benefi cial.

I would never advise anyone thinking of entering the hard money business to do it without forming a corporation fi rst. Your company will need to be organized, managed, and maintained as a completely separate business entity for it to work.

Turning your business into a corporation also gives you addi-tional fl exibility with raising capital, and it gives you fl exibility of ownership. Th ere are many other reasons why forming a corpora-tion is the best choice such as credibility and the ability to manage corporate deductions, and lower IRS audit probability.

Along with the separate entity benefi t, this kind of company is a powerhouse when protecting your key assets. In the real estate, private money-lending business, this is a very serious concern, and one that is met as a corporation.

Make sure that when you are forming your corporation, your attorney ensures that all fi ling fees, certifi cations, and the entity name are 100 percent legitimate. I always keep a scanned copy of my business Articles of Incorporation and Operating Agreement

105


within reach, ready to be e-mailed at a moment’s notice, should the need arise. It is also a good idea to include “inc.” on all of your stationary and other communication pieces so no one can claim they didn’t know you were a corporation when they started working with you.

If you ever need to take back a certain property, you will have to give these documents to your title company when you sell. So you see, you need to form a corporation. Th e business of money lending is perhaps the most vulnerable to losses and risk, which means that the level of safety in this business legal structure is exactly what you need.

Even though creating a corporation is a bit more costly and complicated, it is well worth your time. Th e moment you realize that you did the right thing, you will be glad of it. Do not make the mistake of thinking a lesser business structure will do.

MANAGING AND EXPANDING YOUR LENDING BUSINESS

Once you have your corporation in place and you are offi cially a private money lending corporation—it is time to focus on your business management plan.

Remember what I spoke to you about at the beginning of the book? Your job—your only job—is to fi nd deals. Everything else needs to be undertaken by someone else. Please do not make the terrible mistake of believing that you can do it all yourself.

If you do, you will end up taking on the wrong borrowers and becoming overwhelmed in paperwork and bad decisions. It takes a team of people to make a private money-lending business get off the ground. You are only the driving force behind it.


106

Th at said, I would not recommend you perform any “common” tasks associated with your corporation. You should not chase after payments, or sell houses that have been foreclosed on. Even if it sounds fun, it will draw your attention away from your primary goal.

You should also stay away from servicing, bookkeeping, and sending out 1098 and 1099 forms. You are not an accountant, an administrative professional, or a secretary. Avoid the urge to fi nish rehab jobs that are left incomplete by your borrowers.

Do not ever (and I mean ever) entertain excuses from your borrowers. Th is sets a poor precedent, and it will come back to haunt you in the future. Do not check on your titles every week or get BPOs every week.

In essence, if there is something that you are doing that is stealing time and not directly impacting your potential to generate revenue based on fi nding deals, then it is out. You are a deal fi nder, and that is where you belong.

Everything else can be passed over to third-party companies, partners, and staff . Th ere is literally an entire industry that has been set up to manage and service mortgage and real estate-related asset companies. You need to take advantage of it!

Any moment that you are not fi nding and funding deals aff ects your bottom line and greatly increases your chances of future failure. Th is is a fast-paced, highly competitive business. Despite what you may think, there are always people willing to lend money to others.

At this stage, I would urge you to take the time required to properly set up and run your business, so that it can run indepen-dently of your input. You will be out there making deals. Every-thing else will be managed or done for you.

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SAL’S QUICK TIPTo maintain momentum, establish quality

contacts and continue to cultivate strong

relationships in your niche. Be as diverse

as you can and focus on your strengths—a

marketing strategy that includes pre-appli-

cation marketing, pre-close marketing, and

post-closing marketing.

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C h a p t e r 8

Setting Up Your Own Mortgage Fund

“I think the millions of people who had been

able to renegotiate their mortgages so they are

paying lower interest rates are better off.”

—DAVID AXELROD

O nce you have the details of your business setup out of the way, you can refocus on setting up your own mortgage fund. As a private lender, you will want to concentrate a lot of your time and

energy on building a strong portfolio.Learning to manage your very own mortgage pool can be

stressful if you do not put the checks and balances in place. Make sure you follow the advice in this chapter.

PORTFOLIO CREATION AND INVESTOR RELATIONS

To build a strong portfolio, you need to remember two core things. First, you must avoid borrower concentration risk at all costs. Your portfolio cannot be made up of several loans to the


110

same borrower. It really does dramatically increase your exposure to risk and defaults on your portfolio.

Second, you should avoid geographic concentration risk. It can be applied on a micro or macro scale, depending on the size of your portfolio. If you live in Tampa, for example, you should also make loans in Detroit to spread out the risk.

It does depend on the size and scope of your company. When gauging your mortgage pool’s performance, use a solid checklist of items like the following:

• Your average FICO score of 640 or better will strengthen your portfolio and your average LTV should be less than 65 percent ARV.

• Th e average term should be six to eight months, and some 80 percent of your portfolio should be current. Th at means no slow or late payments coming in after the fact.

• Your average interest rate should be as high as possible, while not violating any usury laws. All loans must be professionally serviced for detailed and credible payment histories.

• All collateral and property must be fully insured, and no second liens or judgments should be placed behind your loans.

When working with your investors, expect problems to arise. Com-municate and always be open and honest up front. Being proactive is a real value-added skill in this niche. Explain the situation and off er two or three ways for them to solve the problem.

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C H A P T E R 8 : S E T T I N G U P Y O U R O W N M O R T G A G E F U N D

Whatever you do, do not hide things. You reputation is vitally important! Never lie or cheat, and be aggressive when confronting issues or it could damage your reputation.

SAL’S QUICK TIPDo not judge investors based on how they

look—looks can be very deceiving. A valuable

private moneylender is cynical at best and

paranoid at worst. Do not let the folks with big

cowboy hats fool you; most of the time, they

do not even own a single cow.

HOW TO BUILD A PITCHBOOK FOR FUND PROMOTION

Your fund is going to need promotion, which also means that you need to create your fi rst pitchbook. One of the most prominent reasons why private lenders fail to raise money for their mortgage pool is that their ability to credibly and legitimately convey their message is never supported by anything.

Your message, or “the pitch”, and your ability to make a great fi rst impression are crucial to your success. Otherwise, why would other people help you raise capital for investment?

Post Bernard Madoff , people who are able to sell a deal on the back of a cocktail napkin simply cannot do that anymore. Investors want lenders who are smart and prepared, and who have the con-viction to communicate their goals clearly and appropriately.


112

Th at is why “fundraising” is so important to your business. In the fi nance fi eld of private lending, it may be the most important thing of all. In this chapter, I will go over exactly how to put together your pitchbook—which is the complete set of documents needed to adequately and persuasively sell your investment plan to investors.

It begins with a well-thought-out business plan or “deck”. Th e deck is simply a business plan that has been converted into powerful slides for quick and easy pitching. When you do step up to the plate and pitch, you should not have to read your deck.

Reading a deck is boring and uninspiring. Instead, talk around or “add to” your deck. Your investors will leave with all the materials they need for review later on. My favorite quote is, “You only get one chance to make a fi rst impression.”

Th is is so true in the world of fi nance and private lending. Make sure that your deck communicates your vision and the vision that you have for your mortgage fund. Have someone that you respect read it and edit it for you.

I would also suggest refi ning it over time, and adding to it as you see fi t. Diff erent investors respond to diff erent pitches. Th ink on your toes. My personal motto is “always fundraising”, because that is where I make my money.

Never stop talking about your deals and the opportunities you see in the marketplace. Once you have an investor on the line, close that deal! It always helps if you have existing investors who are very happy with the returns that you have made for them.

It is a key tactic to mention these past successes, short and long term—but you will need experience before this can be done. When you are starting out, your plan is all you have. Your fi rst few investors will be taking a big risk with you.

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Th at is why it can be better when you start out to ask for smaller investments from more people, rather than large invest-ments from fewer people. Th e larger investments will come at a later point, when you are more established.

CREATING YOUR COVER PAGE AND DISCLAIMER

Knowing how to build your pitchbook for promotion is essential to launching your private money-lending business. It begins with the cover page and disclaimer. If you can get these two things right, then you are off to a good start.

Remember my favorite quote? One chance is all you have to make that long-lasting impression that can either spark a great partnership or result in a breakdown in communication or a refused investment.

It is wise to make every part of your pitchbook something special, clean, and professional—but nowhere is this more important than on the cover page. You must spend some time making your cover page look incredible.

It is the very fi rst thing that your investor will see, and they will judge you based on it. Is your business legitimate or is it just a hobby for you? No one is going to invest money with a hobbyist. Th e risks are far too high!

If you are worried about the costs involved, do not be. Th ere are places you can go online where you can fi nd someone to create an awesome cover or deck for you. Th ey charge nominal fees and the quality of work often exceeds your expectations.

• Elance: Is a platform online that allows you to outsource work to freelance companies and providers at a rate that you set. Simply set the price range and everyone who is


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interested in your project will bid on it. Select the best provider.

• oDesk: Works on the same principles as Elance, with a slightly diff erent platform interface. Providers and companies will also bid on your project, based on your predefi ned budget.

• Fiverr: A platform where services start at $5 dollars per gig, which keeps overall costs very low. All you have to do is fi nd a provider and order, and the work is delivered to you within a specifi c amount of time.

Using these great platforms, you can create intensely professional covers and slideshow decks to support your pitchbook. You can even have a PowerPoint template made that you can use over and over in your marketing materials.

SAL’S QUICK TIPWhatever you do—do not be cheap. Your

investors will notice, and they will talk about

it. Better to spend a few extra dollars and get

the better-quality finish. That said, often the

better finish on these platforms is incredibly

affordable anyway. Anyone can get started

with these.

As for your disclaimer, do not overlook it or copy and paste it from somewhere else without checking that your fund’s name is

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on there. Streamline it to your needs and ask your attorney to read over it.

Th ese legal disclaimers are important, so it is better to make sure that everything that should be listed there is actually there. Otherwise, you could end up in a tight legal spot later on.

YOUR OVERVIEW AND OPPORTUNITY SECTIONS

Keeping in mind that your pitchbook is supposed to be a pro-fessional collection of slides—once you have introduced your investor to your fund via the cover and disclaimer slides, it is time to move on to the overview and opportunity sections.

Your deck overview should describe what your fund will be doing. It should have a purpose or reason to exist and a mission to follow. Th is should be laid out here in plain English. Th e shorter your text, the better your investors will understand the pitch.

Your overview must also contain a lead-in or topic sentence, and specialized bullet points to make it readable and engaging for your investor. Your slide should be branded like all the other slides, and belong to a professionally designed deck that you will use repeatedly for snagging new investors.

As a general rule, the language should be formal (you are talking about money), and you should use proper English grammar and punctuation. Never use exclamation marks in a pitchbook, as it makes your brand come across as informal and amateur.

If you are prone to adding more than one exclamation point after each sentence, stop! Leave it for Facebook or Twitter. Bad punctuation will chase away all the good investors. Th e last thing you want to do is lose all of your investors because your deck was poorly put together.


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So, as long as your overview is clean, sounds professional, and is surrounded by a great corporate design—you are on the right track. Th e next slide belongs to the opportunity that comes along with the investment.

It describes the market forces or investment environment that is creating the opportunity that you are now presenting to your fund investor. It should be compelling; try to word it properly so that the opportunity is obvious.

A good example may be, “Banks are not lending, and we are in a position to benefi t from the ability to be a capital provider in a market where no others exist yet.” Th is statement attempts to indicate that there are a lot of perfectly decent borrowers who will want to make use of the fund money, so that it will grow consistently.

In your “opportunity” slide, you can create or highlight a specifi c lead paragraph or sentence, and use a design that makes it stand out. Th e rest should be organized into neat bullet points that explain what the opportunity is all about.

At the top-left or right-hand side of the slide page, (depending on design), you can choose to place “overview” and “opportunity” at the top of the page in the header. Keep the branding consistent throughout to give the deck that corporate feel.

WORKING WITH YOUR INVESTMENT THESIS

After these key pages, it is time to create your “Investment Th esis” page. Th is page on your slide deck is one of the most critical, so pay attention to it. It refers to the reasons why you believe that your fund is uniquely prepared to take advantage of this opportunity.

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You should consider sourcing or referring to news articles that will prove your point in this section. Investors are often very skeptical people. Th ey know that talk is cheap, so they naturally look for proof or evidence that your thesis will work.

If you can prove that your thesis works, it will make you look smart, which increases your overall credibility. If someone breaks out a really good pitchbook investment thesis page, the chances are that they have thought their plan through and can make it work.

Th is page should also be created in bullet points—typically set on a white background so that the reader can easily scan over it and digest the meaning of the words. Th e investment thesis section does not have to be a single slide; it can actually be up to three slides long.

Any longer and you may be going into too much detail for the investor to understand your motivations. Too short, and it may not provide the investor with enough information on why your investment would work out for them in particular.

Th ese bullet points will build a solid case for your fund. It provides all the research needed to prove that your fund will have major returns for all investors. Th at is exactly what they want to know. Th e trick is to balance it out by using simple, clean language and not too many slides. You do not want to confuse your potential investor.

Your investment thesis can and should contain key charts to illustrate your most important points. Th e charts need to be made from scratch professionally, like your slide deck, and they need to keep in line with your corporate branding to work.

Do not copy and paste from the Internet or from other decks because it is cheaper. Th e resolution will be all wrong, and it will


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appear hastily assembled. For example, a good chart will show the old mortgage structures and their CLTV fi nancing, along with the new mortgage structures and CLTV fi nancing.

Th e visual impact of these should not be underestimated. To get a great set of charts for your deck, assemble the information and use a site like oDesk to get them made. For as little as $5 a piece, these charts will be made for you while you sleep.

I would aim for your investment thesis slides to be dynamic, punchy, and persuasive, with a chart or two to illustrate how much sense your investment process makes. You are aiming to impress your investor, not to disappoint them with poor graphics and lack of planning.

YOUR SPECIAL SAUCE: THE COMPETITIVE EDGE

What comes after your dynamic investment thesis slides? Your com-petitive edge, of course. I like to think of this slide as your “special sauce”, because it is the reason why you are so special. You have already explained why your investment process will work; now you need to justify why they should invest with you.

People may be drawn to great sounding investments, but at the end of the day, they will always make their decision based on whether or not they like and trust you as a person. Th at is why your competitive edge has to be something special.

Why are people investing in you and not some other private lender down the road who has a lovely deck and great ideas? You have to be practical in your explanation. Provide examples of why people trust you, who you are, and the experience that you have.

A unique Rolodex® of contacts for stable deal sourcing, the ability to leverage third-party services and administrative platforms

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to keep costs low, and your partner’s experience in this business all matters. If you have worked on similar deals or executed any successful sales at all, you should mention it in this area.

SAL’S QUICK TIPYour competitive-edge document is not a

rambling slide about who you are trying to be.

It is a well-thought-out supporting slide that

details what you can do, what your qualifica-

tions are, and how you, specifically, are going

to cause your fund to be successful.

Again—what makes you so special? What are your unique talents or skills that will make investing money in your fund the best darn thing your investor has ever done? Do not bother to include things that are not related to real estate.

I often see pitchbook slides that go on and on about a com-pletely diff erent fi eld, which casts doubt on the investment instead of making it more appealing to the investor. Avoid a monologue about your involvement in the software fi eld, unless it is related to your current position as a fund manager.

You are now in the real estate business, which means that a neat competitive edge slide will communicate your value to your investor in a few key bullet points. Th ink about an experienced management team section, one based on your unique relationships with your borrowers and your system for processing transactions.

“Deal fl ow” is something that may need to be expressed in this slide as well. You can make it more than a slide long if you have


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to, but do not waste your investor’s time by adding in ten slides about your experience if it has zero to do with fund management.

So far, so good! In the next chapter, you will discover how to complete your corporate pitchbook to promote your fund to investors. Once you get to that point, you will see just what a powerful tool a pitchbook can be if done properly.

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C h a p t e r 9

Dipping Your Toes into the Mortgage Pool

“Successful investing is anticipating

the anticipations of others.”

—JOHN MAYNARD KEYNES

N ow that you are well into your fund pitchbook you can focus on creating the rest of the slides that are going to impress and encourage potential investors to become a part of your mortgage pool.

Building a pitchbook is still one of the best ways to commu-nicate your mortgage fund investment opportunity to investors. Th at is why your next step is to outline the philosophy behind the investment.

PITCHBOOK BASICS: YOUR INVESTMENT PHILOSOPHY

Your investment philosophy will tell your potential investor what your core beliefs are about deal structuring and managing money.


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Th is is the part where you explain to your mortgage pool how you conduct business.

What are the principles you most prize? For example, you will not fund anything that is over-valued, and you will always jump in when the fi rst hint of trouble arises to make sure that it is managed correctly. People want assurances.

Th is is an extension of what you will do with their money, once they give it to you. A good investment philosophy is brief yet specifi c, and you say it exactly how you mean it. Remember, if anything goes wrong or if you end up deviating from your phi-losophy, it will ruin your reputation.

Th e investment philosophy slide should be divided into segments, with bullet points for each segment. Tell your investors who you will be lending their money to, even if you have to make a solid list. If you are specifi cally leaving out problem markets, then make a list of these as well. Sometimes it helps to see what you will not be doing.

Explain briefl y in bullet points how you will manage the lending process and which ethical codes you would like to run the fund by. Sometimes this is called the “lender-lending” philoso-phy. Th e more you outline your intentions for their money, the more they are likely to give it you.

Th at said, make sure that you believe in your own philosophy. Your investors will hold you to it, and they will expect a return on their investment identical to the one you have proposed. If everything has been done right, and they like the way that you conduct business—you could fi nd several ideal investors in the fi rst few weeks.

Once your philosophy section has been completed, you will have to get stuck into the exact approach you will be using for

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C H A P T E R 9 : D I P P I N G Y O U R T O E S I N T O T H E M O R T G A G E P O O L

each borrower, and what your past track record says about your experience. Th ese can be the deciding votes when trying to get your hands on a reliable, fl exible investment partner.

TRACK RECORD ETIQUETTE AND APPROACHING YOUR INVESTMENTS

After your investment philosophy slide, you can outline the proven track record and investment approach slides. Th ese two slides will help your investor see that what you claim to be able to do is achievable, and then you will explain step by step how to do it.

Th e fi rst slide on “proven track record” may be a diffi cult one, as hard money lending may be an entirely new fi eld for you, so you will not have any real experience in it. If you have never managed money before, there is no problem with that.

If that’s the case, only speak about your real estate-related successes. A great example might be to discuss how much in total deal volume (millions) you have done in short sales over your career. Any mention of top-tier sales should go in this area in a nice bullet point.

Always use numbers, because they are solid and depend-able. Numbers implicitly do your work for you, by selling your eff orts even harder than words do. Stating that the partners (you and your partner) have been involved in over 60 property sales is impressive.

Even more impressive is when this kind of number creates another one—in millions of dollars’ worth of sales. Consistent deal fl ow is something that your investors want to know that you


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have. Th is means that you need relationships with people inside the real estate industry already, before creating your investor deck.

Once you have properly outlined your investment track record, it is time to outline your approach. Th is is the step by step what that they have been waiting for. It can take up more than one or two slides as needed.

What is it that you will focus on? Will you be lending money on certain kinds of properties or assets? Be clear and purposeful with your statement bullet points in this section. Your investors have a right to know what you will be doing with their money.

It is great to have good intentions (philosophy), but if your approach is wrong, it could result in bad investment. Tell them what you are going to do with their money. You may also want to discuss how your investors will be taken out or how they will “recapture” their capital.

Th is means taking them down the process path until they get the returns you are promising back in full. When you are specifi c, and you are able to stick to these specifi cs, getting funded becomes easy.

So many private moneylenders mismanage their investors’ money, or they go outside the predefi ned philosophy and approach that made their investors interested to begin with. Make sure that you are not one of them. People do not have a sense of humor when it comes to money, investments, or returns on that risk.

SAL’S QUICK TIPYour investment strategy needs to shine

like a star off your deck, make logical sense,

and depict a clear path from “right now” to

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“return”. If you can achieve that, then you will

not have any trouble convincing people to

invest with you.

YOUR NEW INVESTMENT PROCESS: FIRST CALLS TO FUNDING

Th e next slide goes into a little more detail about your investment process. Th e pros call it “the fi rst call to funding” because it shows the investor how a deal lands on your desk, and what process it goes through to be a successful loan.

As I mentioned earlier, organization is key to being a great private lender. An organized lender has the world at their feet. But show an investor that you are disorganized and they will never give you a single cent of their money.

Investors want to know that you have a “tested’ or at least a “theoretical” system in place that will take their money from what it is now to what it is going to be once your process is complete. Th is will require discipline and planning on your part.

I guarantee that you will come across many investors who have a lot of money and are exceptionally hard to impress or even please. Expect fi erce questions and intense speculation—this is investment after all. Not only investment, but a new kind of investment with completely diff erent rules and fairly substantial risk.

Th ey will be looking to you to see if you have it all “fi gured out”—so be as confi dent as you can be. Always think fi rst! Before pulling out your manual, make sure that you make the necessary changes in that document that refl ect your business model.


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Your deck and your business model need to be in sync all the time. Th e fi rst calls to funding slide will be a graphical representa-tion of your investment process. It looks great when you take six key areas or so (per slide) and outline them in detail.

For example—sourcing, underwriting, fundamental analysis, investment discipline, risk management, and ongoing monitoring can fi t as their own titles on a slide. Underneath each of them, there will be a basic breakdown of the investment process.

Under sourcing, for example, you can create a few bullet points. Th ese could say “proprietary network of industry contacts” and “experienced team in acquisitions” and “creative, experienced approach to solutions”. It all depends on the process that you are trying to visually illustrate for your investor.

Th e paths will drive the investor forward—and they will see how at every stop on the path you have a fi xed plan that you have put into place. Not only do you know what your processes are, but you have worked out how they will succeed and why.

Make sure that you do not create too many slides for this area. It is still a slideshow after all, and that means short, punchy text as opposed to longer, drawn-out, complicated fi nancial terms and language.

Simple and clear is what you are aiming for. A clear slide is indicative of a clear plan. A cluttered slide is indicative of a cluttered plan. Keep it simple!

WORKING WITH YOUR DEAL FLOW

After your investment philosophy, tracking, approach, and process, you will be required to create a “deal fl ow” slide. Th is is a visual representation of how you handle your deals from start to

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fi nish. A deal determines what you and your investors get out of the loan.

Th is slide can be phrased in several diff erent ways. Th e main takeaway however, is that you should communicate to your investors that you will not be spending money needlessly on expenditures before you absolutely have to.

SAL’S QUICK TIPDo you know what the secret of being a truly

superior private lender is? . . . discipline! Disci-

pline is the sort of intellectual capital that most

of your competition in this space simply will

not have. That is why if you are careful enough,

you can create a deal flow that explains this.

It can appear basic, then fi ll it in with details. From prequali-fi cation, to off er term sheet, to due diligence, to drawing up documents, and closing—these are the deal fl ow steps you take to ensure that one complete loan is done as safely as possible.

Your slide entitled “deal fl ow” will contain a number of charts or images that depict your process in detail. Make sure that these match with the rest of your corporate deck. Spend a little more time to make them really visually appealing so that even the most diffi cult investors are happy with your plans and the way they are presented.

Your pitchbook is now starting to get full, and it is beginning to make a real case for investing with you. In general, I would


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advise you to try and sell this investment opportunity to a family member before striking your fi rst deal with a stranger.

If there are any holes in your argument, or gaps in your pitchbook (or if something is very unclear), then you need to fi x it before going into your fi rst meeting. It may also help to investi-gate what other private moneylenders are doing in your area.

How are they pitching to people? How can you be better, diff erent, or more professional? Interestingly, I once assisted a friend in setting up his fi rst private lending business, only to discover that that all private lenders in his area used blue and yellow in their logos. Th ey almost looked identical!

We just switched his colors to a more dynamic orange and blue, and suddenly people began to respond to his company as the “alternative” to the rest. It was much more appealing for the average investor to see him that way.

So you see, that little extra eff ort makes all the diff erence with a pitchbook. If yours looks the same as all the competitors in your area, you simply will not do as well. People are funny that way—they look for the better or the “diff erent” option.

YOUR TRANSACTIONAL LIFECYCLE AND UNDERWRITING CRITERIA

Th e next slide in your list of to-do slides is called the transactional lifecycle slide. For investors, there are few slides as nice as this one in your entire deck. It makes them happy to see it and when they are happy, you can earn money on their money.

Th e slide tells your investors exactly what will happen to one dollar, if they give it to you. Where does their dollar go? How does

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it come back to them with a good return? Questions like these are addressed in the transactional lifecycle slide.

Another illustration from Fiverr or Elance is in order for this slide. You will want it to be branded in a way that highlights certain transactional paths so that an illustration is formed of the process. Simple shapes and a basic transactional plan will need to be drawn up to give to your chosen designer.

Do not try to explain your process here—this is all about the image. It really does speak for itself—so leave it alone! Th e lifecycle of each deal fl ow will illustrate how the various companies interact. Each are governed by their own operating standards, with a clear mechanism for cash management between entities.

An example may be—deal fl ow—deals—your private lending company—deals—your capital investment company—investor—coupon—deal/investment/project. Keep in mind that this is not a “fl ow” illustration, so there will be diff erent parts feeding into the main source, which, of course, is your own company.

From there, you are able to move to the next key slide—your “key underwriting criteria”. Th is is where you will show each of your investors what you will specifi cally lend on. Do not under any circumstances put anything on this list that you do not intend to lend to. And never lend on anything that is not defi ned on this slide.

If you do, your investors can claim that they did not know about it, and it could cause a ripple of mistrust against you, which will hurt your reputation. I have known companies to become damaged on this principle alone, and eventually word will get around and income will be lost.

Divide your key underwriting criteria slide into segments, and use bullet points to outline what they are. A few examples


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may be well-collateralized funded transactions, control, extensive due diligence, and exit strategy.

SAL’S QUICK TIPThere are so many lenders who deviate from

standard underwriting procedures that you

can make a name for yourself quickly if you

stay within the confines of your own rules. This

happened when mortgage brokers became

mortgage pool managers.

Do not let it happen to you. To be a meaningful fund manager, you have to stick to your word. Th at means getting the underwrit-ing criteria right every time. At the end of it all, your reputation will improve because of it.

DECISION-MAKING: YOUR INVESTMENT COMMITTEE

Imagine if after all of these great slides your investor asks you who makes the decisions—and all you have to say is, “Me.” Your next slide is called “investment committee” because you should have some form of decision-making in place that exists outside of your own opinions and experiences.

Do not be afraid to stack your fund with highly qualifi ed talent that will help you fi ll the need for quality experience that you lack yourself. Few that start out as private moneylenders have any experience at all. So why do people trust them with their money? I would say a great pitchbook and a long list of incredible

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investment committee members. Do not choose people in your family, or your closest friends. Only select real professionals who add value to your fund on this list. Mentors are okay, too.

All you have to do is be sure that you incorporate the names, bios, and management write-ups in your investment committee slide. Even better, incorporate their profi le pictures.

Th e investment committee slide that I commonly use is an inverted triangle that contains the topics “comprehensive review”, “independent verifi cation”, and “fund investment committee”. I use striking, bold colors to make it stand out when my investors are reading it.

Understanding how the decision-making process works in your private lending company is an experienced investor’s core concern. Th ey want to know who will be accountable should their money be compromised, or if the promised return is not met by the due date.

An investment committee can consist of two or more members. You can add in an outside counsel or third-party member, as well, for extra credibility. From there, you can fi ll in the blanks under each topic.

For comprehensive review, you can bullet point your infor-mation on your property review process, preliminary approval, approval, and the documentation needed for fi nal approval. Any amount of detail can be included here as long as it is relevant and enhances your investor’s ideas about your decision-making process.

Th e aim of this slide is accountability, credibility, and trust. Th ings like third-party verifi cation of due diligence and asset data can be the diff erence between a new investor and one that remains skeptical about your mortgage pool.


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Often, you will come across investors who know nothing about mortgage pools, and these tend to be the easiest to convince. But there is nothing more satisfying than coming across an investor who has heard the pitch before, and prefers yours.

You know you are on the right track if you get a lot of investors like this. Th e only thing to it really is preparation, honesty, and commitment to their growing wealth and yours. You are all in it together as they say—so treat their money with the same respect as you treat your own money.

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C h a p t e r 1 0

A Closer Look at Fund Promotion

N ow that you are really into the “meat and potatoes” of your pitchbook, you just need to focus on a few more sections until you are complete. By now, your book is already a highly convincing

marketing tool. From this point, you just need to close the deal. Th at means

focusing on things such as risk management, communication, and agreeing to terms.

MANAGING RISK AND INSTITUTING LEGAL STRUCTURES

I am going to be 100 percent honest now, so steady yourself! You will come across investors who have heard similar pitches from people in the past, and are just not willing to let you have your say. Worst-case scenario, they let you pitch to them with no intention at all of investing.

Th is happens a little more often than you would like when you are starting out. What these people mainly want to know is how are you not going to screw up and lose all of their money like fast-talking moneylenders have done in the past?


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It pays to draw a line in the sand between you and the previous pitches that they may have heard. Explain why you are diff erent by focusing on your risk management detail. Th is game is all about risk. If you can take qualifi ed risks safely, you will become an absolute dynamo out there in the private money-lending niche.

Th at is why I encourage you to create a “risk management” slide for your pitchbook. On this slide, you will answer these two lingering questions: How are you not going to screw up, and, of course, what did you learn from other lenders’ failures that you have made provisions for in your fund management business?

Th ese two questions are diffi cult to answer, but do it well—and you can convert investors who have lost money before on a mortgage pool. Th ey want to believe in you and your vision for this pool, and you have to be a leader for them.

Divide your risk management slide into segments and bullet point each area. Create topics like “frequent portfolio review” and “strong borrower focus” to help potential investors see that you are not going to fall into the same bad habits, poor management practices, or lending traps that many other lenders do.

Your next slide should be on “legal structure” and should explain how your investors will be protected and insulated from that risk. In this section, you can go into detail about how the partners of your fund are governed.

Bullet point if you are just “seminar partners” or if there will be an operation agreement meeting to discuss who is responsible for which areas of your business. Create your exit strategy and include these plans for your “break up” in this area, along with how it will aff ect your investors and their circulating investment.

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C H A P T E R 1 0 : A C L O S E R L O O K A T F U N D P R O M O T I O N

COMMUNICATING WITH YOUR INVESTORS

Once you have dealt with risk, responsibility, and legal structures, it is time to create your slide on “transparency and investor com-munication”. Th is is an important part of your pitchbook because it sums up the communication and intention to do business on your part, on behalf of your investors.

SAL’S QUICK TIPYou will need a bullet-point outline to tell

investors why it is a massive benefit to have

access to you whenever they need you.

Complete accessibility is not something that is

very common in this niche, and investors like it

when they can call you for any reason.

Th is lets your investor know that you will not hide from them under any circumstances, and that your “open door” policy is real. Th e goal is to be marginally accessible—leave them with a sense that you can be called, but do not give them any reason to call.

By being “accessible”, the time that you spend doing investor relations takes away from adding value to the fund by deploying money to your various borrowers. Th ough it is not ideal, it is something that is expected of you.

Leave your investors with a feeling that if they really want to reach out to you they can, but that otherwise you will be busy making them money. You may have noticed that many large pub-lically traded companies have an investor relations department,


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and this is because investors like to know what is happening with their money.

In your case, this slide section needs to inform your investor of the amount of communication that will be taking place between you and them, to set expectations. Mention the reports, statistics, and quarterly updates that you will be sending them. Mention the annual reports and audited fi nancial statements and taxes that they will be able to read and review. If you would like to add a personal touch (and I highly recommend that you do), then also include a quarterly update letter, detailing the previous three months, how things are going, and what the outlook for the future may be.

By keeping your investors constantly “in the loop” with pre-arranged communication, reports, and updates, you will not have to speak to them again, until they need to decide whether or not to reinvest in your mortgage pool. At this point, they will have made money and will not be thinking about moving their invest-ment elsewhere.

Th is is why transparency is critical in the private money-lending business. Your investors deserve to be treated with the utmost respect, which means keeping them informed on every move that you make. Many even enjoy getting involved in how their money grows from month to month.

Nothing feels quite as good as sending your investors a quarterly update letter to tell them that things are going well, that they have made some good money, and that the returns are set to improve with time. Th ey will love that.

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FUND TERMS AND SPECIFIC SERVICE PROVIDERS

You should be reaching the last few slides on your power deck now, which is exciting and terrifying all at the same time. You have no idea how people will react to the pitch that you are going to make them. Th at is half the fun!

To round off this neat, professional pitchbook deck, you should create a slide that details all of your fund terms and condi-tions. You fi nally get to what you want from your investors and how you can get the ball rolling in the right direction.

On your fund terms slide, lay out what you are off ering your investors and what your minimum investment is going to be. Detail very carefully what their returns should be and make sure that they are within reason.

I have sat in front of investors who have simply bypassed all the other information and fl icked toward the rear where my fund terms were. Th is is the brass-tacks page, the one that tells the investors what you want from them.

Segment your slide again and bullet point your terms. From the structure, to return targets, minimum and maximum com-mitments, and asset types—this needs to be a carefully thought out page. State at what point your fund will close. Will it be a $10 million fund? Or a $3 million fund? It depends on what you are willing to work with.

Explain that if the fi rst fund works well, you will give them an opportunity to reinvest for the next, larger fund. Together, you can make a lot of money in the private lending business. Finally, you should add a slide in after your terms for third-party service providers.


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Credibility increases when you can discuss who is going to be doing what from a tax and legal standpoint. Your investors will have nightmares of you drinking beer and working on Quick-books every Monday night if you do not outline this for them.

Out of your management fee, you will be retaining certain, specifi c service providers. Th e better these service providers, the more chance you have of closing this deal. Lay out your third-party providers slide like your chart and graphical representation slides.

For example, I would use a legal graphic that points to the company I will use to handle all of my funds’ legal work. Th en a tax consultant graphic pointing to the tax company that I have chosen, and so on. You can place your master servicer and real estate appraisal companies here, as well.

Adding in their logos or images of their team are a great way to let your investor know that you are not alone in this. Prepa-rations have been made for your fund to succeed, based on the assembled teams that you have chosen for this work.

Th e specifi c service providers detailed on your slide will put even the most skeptical investor at ease, because they will under-stand that you have no plans to do this all alone.

CREATING YOUR APPENDIX AND BUILDING CASE STUDIES

Th e pitch is almost over—all that remains is for you to build in a good appendix and some powerfully persuasive case studies that you have taken the trouble to fi nd. On your appendix slide, you will place your “management biographies”—the brief write-ups that explain to your investor who you and your partner are.

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You can choose to include a profi le photo or not, but you must have some sort of image representing your fund on this page. Below your management bios, you should have space for a few case studies or case study slides.

A representative case study exists at the end of your pitchbook to illustrate what you plan on doing with their money in simple, representative terms—using real-world examples. If you do not have a real-world example, you can create an example.

All you have to do is fi nd an image of a house, and provide a simplifi ed representation of the details you have just outlined for your investor in your pitchbook. Start with the opportunity, then move on to purchase price, sale price, and net profi t, then detail the transaction steps and investment thesis—and arrive at an end goal.

Essentially, you will show them what is bought or funded, where it came from, why you funded it, and how much profi t was generated from that deal. Some experts call these historical deal samples, and you should spend some time walking through them with your investor. Be specifi c and keep it simple.

If you overcomplicate your case studies, it will raise more questions, which is not what you are trying to achieve. Th is is supposed to support your closing argument, which means that it has to be obvious and self-explanatory.

You can also choose to include some representative invest-ment opportunities—deals you have done in the past, or deals that you know about and can speak about in context. Th e more opportunities for historic deals and thought-out investment opportunities, the better.

As a general rule, do not exceed seven of these, or the investor will become bored and will lose interest in your deck. I fi nd that


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fi ve is a decent number. If you have zero experience and need to fi nd and create these representative case studies, look for invest-ments in your area in the real estate niche.

Th ere may be homes for sale that suit your criteria. If this is the case, grab the photos and use them in a case study scenario. Your investor will not mind, as long as you make it clear that these are not actual past studies done on previous cases.

PUTTING TOGETHER A MANAGEMENT BIOGRAPHY

For the sake of getting your fi nal slides right, let’s talk about your management biography here for a bit. Th is is the space that you will use to tell your investors who you are. Add in photos of yourself and your partner.

I like to call this page the “bragging page”, because you have to list all of your professional experiences, qualifi cations, career highlights, and educational honors. If you have absolutely zero of these, make sure that your partner does and list their bio fi rst on the deck.

Keep this part serious and subtly complementary to yourself. Always write in the third person, like your investor is reading a story. Do not under any circumstances use cute “awards” like “World’s Best Dad” or anything like that.

You have just spent dozens of slides building up your cred-ibility and a stupid statement like this can tear it all down in less than a second. Th ink “sterile and serious”, because that is the tone that you want to project.

On that note, consider the profi le picture that you use. It needs to be of you, in a suit, looking like you could manage a bil-

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lion-dollar fund. Do not use photos of yourself with other people, or family photos or casual photos.

Th is is the world of money lending, and moneylenders wear suits in all of their corporate photos. Who would you give your money to—a guy in a turtleneck sweater and jeans, or a guy in a snappy black suit? Th e answer is easy for me.

When you detail your education, enhance it by mentioning how your partner’s education balanced yours out and makes for a harmonious synergy in your partnership. Remember that you do not have to write down all of your qualifi cations or list all of your experience.

Choose the stuff that makes you appear to be primed for a fund manager position. Every single pitch is like a job interview, except you are asking for the money up front. Th is will take enormous trust and faith on the part of your investors.

Your management bio page should ooze sophistication and professionalism. Even though these are straightforward requests, you will be surprised at how many people get them wrong. Your bio, once again, is meant to enhance your pitch.

If you would like to get a bit more “modern” with your bios, then I would suggest having a corporate video made. Th ese are not expensive when using the outsourcing programs I have mentioned before, and they can really close a deal.

Simply refer your investors to a webpage that contains your video after your pitch meeting. Th e video should contain every-thing that is in your management bio, only done in a highly pro-fessional corporate video—special eff ects and all.


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SAL’S QUICK TIPPeople respond to video a lot more than they

respond to slides. I have used video in ending

many deals that have closed successfully. To

overlook new media as part of your pitchbook

tool is a mistake. It can be the nail that drives

home the sale!

WHAT YOU NEED IN YOUR CONTACT AREA

You are almost completely done with your fi rst-ever pitchbook! Th at is great news. On the very last page—to end it off well—you need a practical contact area. Th ere are lots of people who debate what should and what should not go in your corporate contact area.

I believe that this page is the end goal. If your investor decides to invest, they will do so by fl icking to this page and calling you. Or they may decide to do some additional research on you, and who you are—in which case, they will still use that contact page.

• Make sure that your name is on your contact page in full

• List your offi ce address details here

• List your phone numbers—both your landline and your personal cell phone numbers

• Always list a website if you have one

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If you have a website that allows investors to access reports, list the log-in details so that they can look around. If not, mention that it is something that will be added to the website soon.

Your URL should take them to a corporate website where they can get a little more information about your company and what it does there. There should also be more detail on who you and your partner are.

Some private moneylenders are also including their social media pages here. Th e only one I fi nd particularly useful is our Facebook group or LinkedIn company page. Both are great places to chat about real estate and private lending, and to make interest-ing contacts.

In this day and age, you can expect your investor to Google you before investing. What will they fi nd when they do? If your profi le is full of drunk photos, poor grammar, and represents a dysfunctional life—they will not invest, based on who Google thinks you are.

Th e best way to avoid this is to be active online. Remove the media you do not want your potential investors to see, or direct them to pages and networks where they can see and read about you all they like.

Personal character testimonials are particularly good on LinkedIn. If you can get some friends in the money lending or real estate business to recommend you there—that can go a long way on your contact slide.

Alternatively, you can keep it simple by excluding all social media connectivity. I just think it is unrealistic to expect new investors to not search for you online. If you have a bare minimum online presence, it is perhaps better to avoid it.


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Th at completes your pitchbook! Once it is formatted and nicely stacked, you can print it for one-on-one review or email it to prospective investors. I would suggest always being there face to face to answer any questions. Th at is how you close the deal!

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C h a p t e r 1 1

Structuring Your Hard Money Fund

“It is difficult to begin without borrowing, but perhaps

it is the most generous course thus to permit your

fellow-men to have an interest in your enterprise.”

—HENRY DAVID THOREAU

B eing a fund manager is an incredible and terrifying experience. It is your responsibility to structure your hard money fund so that it does exceedingly well. Th e only way that you are going to learn how to do

this is to work through this chapter. Structuring your fund begins with basic knowledge of terms

and functions. From there, you can piece together a fund that will impress and interest your investors.

THE KEY GROUND RULES OF FUND STRUCTURING

A fund can be described as an entity that contains multiple assets and multiple investors in a pooled format. Th ere are diff erent types of funds, namely open-ended funds and closed-ended funds. Open-ended funds allow you to raise money and deploy it all the


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time, whereas closed-ended funds have a defi ned raise period and work mainly in the real estate space.

• Open-ended funds: Models that work are mortgage pools and fi x and fl ip.

• Closed-ended funds: Fixed real estate models with set investment rules.

Diff erent funds have specifi c types of capital, namely equity and debt-based capital. Equity involves investors becoming owners of the LLC with equal treatment, who are issued units at a fl uctuat-ing or state share price. Debt involves the fund-borrowing money from investors who are called “note holders”. Rates and returns always vary for this capital.

Th ere are two main entities that can be created in this scenario. A fund which is an LLC, and will always be managed, may have limited partners. Th e fund manager is usually a general partner. Th en there is the management company, owned by the private lender or real estate investor. Th ey can bring partners into this entity as they see fi t.

Before structuring a fund, you have to have a few things in place. Do you have an asset model? A functioning asset model is imperative for a manager looking to structure a fund. Some asset models simply do not work, and others do. Asset models like mortgage pools, fi x and fl ip, and buy and hold are all examples.

Along with your good asset strategy, you will need some fi nancial modeling. Create a thorough fi nancial model to properly understand the economics behind your decisions. Find out about volume, fees, average interest rates, size of your deals, how long deals will be on the books, and how many you will off er borrowers.

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C H A P T E R 1 1 : S T R U C T U R I N G Y O U R H A R D M O N E Y F U N D

SAL’S QUICK TIPA financial model allows you to see whether or

not your fund is financially viable. There is no

room for assumption in private lending. Start

right, or do not start at all. Finally, you will

need to figure out how you are going to raise

the capital for your fund.

• How are you going to execute your capital raising plan?

• Develop processes, systems, and procedures for repeat fund sales.

• Develop materials (like your pitchbook) for sourcing investors.

Remember that raising money in a fund is key to sourcing repeat investors and fi nding new investors based on past investment success. Doing it one by one is not a good strategy, as it prevents you from systematizing your pitch.

STRUCTURING YOUR FUND: THE BASICS

So what exactly do you need to know about structuring a fund? What is going to guarantee your success? Th e answer to that is—nothing. All you can do is plan as best you can, learn along the way, and make changes as you go.

Th ere are so many issues that you need to consider when putting a fund together. Every decision you make aff ects ten other decisions. It is like playing dominos, so make sure that


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your decisions are as right as they can be, based on your personal research and input.

A fi rst-time fund manager does not even know what these decisions are going to be. Th at is the truth! Here is a sticky scenario as an example. You decide to put “a leverage” on your fund that will impact your investors with respect to qualifi ed monies. So you decide to take IRA money—retirement money—and then leverage that.

But all of a sudden, you now have investors that have to pay an unrelated business income tax and penalties that ruins the income growth that they will get by investing with you. Th ey might as well have never joined your fund! Every decision has an impact short and long term.

You should try to understand how one thing aff ects the other in your fund. Th at means knowing every detail of the duration times to begin with. Some key characteristics and decisions that you will want to make in your fund are concerned with duration.

Is your fund going to be an evergreen fund? Th ese do not have an end date. If not, you will have to set an end date. Th is end date is especially important for you, because your fi rst-time investors will want to know when they can expect the return on their money.

Back when I started my fi rst fund, I set a fi ve-year time limit to it. Fund One also contained a clause specifying that after three years, no new investors would be taken on. At this point, I utilized the capital returns from the disposition of the assets and repaid the investors. At the fi ve-year mark, I set a time to actively sell off the rest of the assets at fair market value.

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If loans still existed, we sold them to second parties to transfer responsibility. Fund Two lasted for 20 years, as did Fund Th ree. Th e fourth fund was an open-ended debt fund with a $50 million senior credit facility attached to it. Fund Five was my evergreen fund.

Along the way, you will learn all kinds of things. For example, when we hit Fund Two, some of our investors were not sure how they would get their money back. Th ese were troubles that my partner and I had to deal with extensively.

Th e question became—whether you do a term or a year-end fund—what would we do about redemptions? Th is question had to be answered.

WORKING WITH REDEMPTION AND SHARE PRICES

Th e fi rst thing on the agenda is making some key decisions about how you are going to communicate with your investors. How are you going to communicate in your off ering documents that you will redeem their invested units if they want their money back?

Legally, there has to be a certain amount of time where your investors cannot get their money back at all. To qualify for this exemption, you need to put this in your documents. It is called a lock-up period. Typically, if you have a fund with larger-velocity assets, you need a lock-up period of 24 months.

You can choose a shorter lock-up (six months) or a longer lock-up. Usually, penalties are issued if an investor wants to withdraw their money from your fund. Never give any preferen-tial treatment to an individual investor—follow the rules. Th ey get paid out as stipulated in your documents, or they pay the penalty.


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It works on a fi rst-come, fi rst-served basis. Legally, you do not have to cash them out until the stipulated date, but it is up to you. Ultimately, the lock-up period needs to match the nature of your fund (long-term deals vs. short-term deals).

My current Fund Six is an evergreen fund, with 24 months lock-up—then investors can request to have their money returned to them. Th e manager does not have any obligation to do this until year seven, however, because it was outlined that way in the documents.

Th e last thing you want is a rush to withdraw funding after your two-year period is over. Create a clause that makes it legal for you to use the “fi rst come, fi rst served” rule so that your fund does not collapse and end up underfi nanced.

With regard to share price calculation—you as the fund manager have to make sure that the method used for calculat-ing your share price is fair and as equitable as possible for your investors. Many investors will come in and out of your fund at diff erent points.

If your share price fl uctuates, with people moving in and out of your fund at diff erent times—how do you calculate a fair unit price? For example, think of a mutual fund that contains 100 pub-lically traded stocks. Th e market dictates the price of each share, so pricing each unit is easy. Th e sum total of each individual share price is used.

In private placement, however, there are no publically traded assets, so there is no fi xed point that fair market value can be determined from. Every individual asset has its own value. Th e point is that you need to spend a good amount of time calcu-lating a fair share price for each of your fund units.

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Doing additional research into this is important, as it will aff ect many other parts of your fund. Namely, how much capital you are able to raise from investors. Th is is why you have to take the time to sit down and fi gure out a fair unit price.

THE ART OF LEVERAGE AND ASSET LEVEL FEES

Once you have sorted out redemption and share pricing, you can move on to using leverage and establishing asset level fees. Th ere is one decision that stands out above many others—will you use debt to leverage your business?

If you are, you must mention that in your documents. Are you going to use leverage or not? How are you going to use it? When is the right time to use it? Which circumstances should be present in order for leverage to be used? Restrictions will need to be placed on the leverage that you choose.

All of these decisions have implications for your investors. Will you take on debt at the fund level? Will you use a credit facility in a borrowing-based formula? Will there be an eligibility requirement? Will you take on leverage at an asset level?

Here is an example: If I am operating a real estate-based fund, I will almost always leverage at asset level. But buying an apartment building for $5 million means that I can get non-recourse debt at 60 percent of that for 4.5 percent. After this, you are still expected to pay your investors considerably more in returns, which is impossible.

SAL’S QUICK TIPYou need to understand that using leverage

is an art, especially in the real estate niche.


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Going into this business with little to no under-

standing of leverage is a great way to lose all

of your investors’ money and end up with a

failed fund.

Asset level fees are extremely misunderstood in the private lending fi eld. It directly aff ects your ability to raise capital, which is key to building a quality fund. A mortgage pool makes a great example.

When you initiate individual deals with an investor, you as the private lender will put those deals together. You will personally keep the points, prepay, balloon rates, exit fees, construction fees, and more. Understanding how to allocate these fees is vital! In a fund, who keeps the points and other asset-related fees?

Alignment between lender and manager must result from this, so it is not a small consideration. Big mistakes can be made on asset-level fees that will cause you to have trouble raising capital for your fund.

Every decision that you make aff ects other aspects of your fund. Th at is why understanding and proper asset-level fee alloca-tion is a primary concern to you and your partner now. Otherwise, you will end up with some very unhappy investors.

If you are not strong in this area, ask your partner for help. Th ere is a lot of terminology and understanding that goes into working with these specifi c decisions that you want to be aware of. Nothing is as bad as ruining your fund because of one misplaced, poor decision.

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PAYMENTS, EXPENSES, AND MANAGEMENT FEES

When structuring your fund, you will also want to consider the “waterfall”, or who gets paid, and in what order. Outlining these details up front can save you a lot of headaches down the line, as people expect to know this when they buy into your fund. Make it an important part of your documentation so that it is clear.

Who gets paid fi rst and when is of primary importance to you and your investors. If you are going to take a more realistic look at what happens, expect to see something like this: your fund expenses, management fees, preferred returns, profi t split, and performance fee.

Fund expenses include quite a lot of things, such as planning, fi nancial statements, tax returns, audits, administration fees, and servicing fees. Operating a fund can cost a fair amount of money, and these concerns must be dealt with before anyone else even sees a gentle wisp of money.

• Consider your general fund expenses. Th ese need to be paid fi rst, on time, every time, before anyone else.

• Th ese fees include accounting fees, tax returns, fi nancial statements, audits at least once a year, fund administration, and loan servicing.

Your management fee (as you know) is also a critical fund expense. Your investors want to know that you are able to manage the day to day of the fund and its assets so that promises are met. If there is no management fee, then you get to come in every day and work for free in a completely impossible environment.

Th e management fee is specifi cally designed to “keep the lights on” and the fund managed correctly. Investors always feel better knowing that the fund manager is receiving some form of


154

payment or compensation. Generally, they are happy with the middle ground, that is—not too much payment, and not too little, either.

You will fi nd in this fi eld that when the chips are down and the manager is not getting paid—they just give up and leave. Th is is not because of failure; it is because the manager did not place a manager’s fees clause into the original documents.

Only accepting asset-level fees and not considering manage-ment fees is not a great idea. To my thinking, it will warn off savvy investors and you will not end up too happy about it, either. Your job as the fund manager is to build the fund so that it can sustain itself while you are growing, and while you are winding down.

One day, you will have to pay your investors back! Th e man-agement fees on a typical $100 million fund is about 1–2 percent. It is comparatively small when seen in this context, so it should not be a problem for you to build into your fund documents.

If you fail to make provisions for yourself as a fund manager with these fees, then a time will come when your asset-level fees are not good enough. A cash-strapped fund manager is not something that bodes well in investment circles.

RETURNS AND KEY TAKEAWAYS

Finally, when you structure your fund, you will need to consider your returns. Once the fund expenses and management fees are taken care of—you need to work on the returns. Investors will need to get their preferred returns right after this.

A preferred return ranges from 6 percent to 10 percent, depending on the asset model and risk profi le. Only after your investors have been paid back are you then able to get a profi t split

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and tend to the fund. Profi t splits are meant to feed the fund and result in wealth for you and your investors.

You can split them any number of ways, depending on your model. A 50/50 split is common, as are 60/40 and 70/30 splits. Th is should be placed in your fi nancial model, so that you know exactly where the profi t goes when it is ready to be divided.

Preferred return ranges from 6–8 percent. Of course, it depends on the risk profi le of the fund and, naturally, on the kind of asset model that you employ. Determining the management fee, preferred return, and profi t splits are all incredibly diffi cult without a variable-driven fi nancial model. Th at is why you should invest in one.

So, now, hopefully, you are better equipped to take on struc-turing your fi rst fund. To make sure, I am going to repeat a few important points:

• You absolutely must have an asset model and some

volume. The deal that you are dealing—what is it?

• Build a variable-driven financial model. Make sure

that you fully understand the economics of your

fund. If you fail to do this, you will try to climb Everest

without using stops at basecamp. It does not turn out

well.

• Develop a concept and game plan for raising the

capital that you need. I have helped you develop a

pitchbook, but the rest is between you and your

investor.


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• Next, structure your fund in a way that it can actually

be administered. Back in the days of Fund One, I

made the tragic mistake of spending more than

$50,000 having my documents created, only to

realize that there was no way to administer them.

None of the existing software could handle what was

in our document.

• Lastly, structure your fund in a way that your interests

and the investors’ interests are as closely aligned as

possible.

Typically, fi rst-time fund managers go for the fi ve-year fund—so I would start there. As for the rest of your structure, you will have to run through these requirements again and begin to put together your documents.

Th ese documents can start off rough, and then slowly evolve into the important fund agreements and operating manuals that you need. A well-structured fund has every chance of succeeding because everyone will benefi t from it.

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C h a p t e r 1 2

Adopting the Fund-Manager Mindset

“To create something exceptional, your mindset must

be relentlessly focused on the smallest detail.”

—GIORGIO ARMANI

A fund manager is a highly responsible and account-able individual who has a very specifi c role to play for his investors. Th at is why if you want to become a fund manager, you need to learn to adopt the

mindset that keeps funds earning and growing. As a fund manager, there are fi ve core functions that you

must deal with on your journey. Get these right, and you will be an unstoppable force in the private money-lending business.

FIVE CORE FUNCTIONS OF A GREAT FUND MANAGER

Th e fi ve core functions that will accelerate your growth as a fund manager are origination, underwriting, asset management, capital raising, and fund administration. Th ese are all concerned with


158

taking care of the assets that you have in your fund and your ability to raise, use, and manage this capital in a professional manner:

1. Origination: Th is is your ability to create the fund, or bring it into being. It also alludes to your ability to fi nd borrowers who can submit their criteria for underwriting.

2. Underwriting: Th is is the process that occurs when you raise investment capital from investors on behalf of your corporation or fund. You cannot operate without mortgage underwriting, which is the process that you will use to determine which borrowers are eligible to borrow from your fund.

3. Asset Management: In private lending and fund management, this is the system that you will use to monitor and maintain things of value to your company, investors, and borrowers. If you can do this extremely well, it will pay off .

4. Capital Raising: Th e ability to raise capital is seen as a vital process for fund managers. Often, people enter and leave the fund during the duration of the borrowing period—and it is up to you to do continual capital sourcing.

5. Fund Administration: Th is is the set of activities that is carried out to support the process of running your fund. Th is includes all documentation, legal or otherwise, and the systems and software that you have in place to make each application run smoothly.

As a fund manager, if you can perfect your mindset on each of these fi ve points, you have every chance of running a very suc-

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C H A P T E R 1 2 : A D O P T I N G T H E F U N D - M A N A G E R M I N D S E T

cessful initial fund. While your fi rst fund is always the most chal-lenging, it will teach you everything that you need to know about running longer, more complicated funds in the future.

BUSINESS DELINEATION: PARTS OF A FUNCTIONAL WHOLE

Th ere are four main themes that I use when talking about “adopting a fund manager’s mindset”. Th e fi rst theme is straightforward and involves understanding the diff erent aspects of your business.

One of the key problems that I fi nd with new fund managers is that they struggle with the various functions inside their own business. Because of this, they are not capable of doing a larger job down the line. Th e goal is to delineate the functions in your business so that you fully and intimately understand them.

If you take the time to think through the various compo-nents that make up your business model, you will be a better fund manager—in my humble opinion. It will drive a lot of decisions that you will make when you fi nally structure your fund.

It all reaches back to those fi ve key points that I mentioned: origination, underwriting, and asset management. Inside of asset management, for example, is loan servicing, property manage-ment, collections, REO, and repositioning.

When setting up a fund, you are going to have to make decisions about splitting your assets, which is why it is important that you understand origination. For example, there are some origination fl at forms that have “loan ups” working for your orga-nization. Typically, your loan ups function on a commission basis, as a percentage on the points that you are charging for the deal.


160

However, keeping these points as a manager is not aligned with your investor’s best interests, as it will make capital-raising more diffi cult. Ideally, from an investor perspective, you would run up all of the points through the fund fi rst—and then it would come out of the other end, waterfalling back to the manager.

If you do that, you will not have any money associated with each asset. If you are not clear about the economic model, it will be very diffi cult to make decisions when setting up your fund. Balancing your need for economic reality and the ability to attract capital from your investors is the kind of alignment you are looking for.

SAL’S QUICK TIPAn improper economic structure will ruin your

fund. Make the fund less attractive to investors,

and you will contribute to difficulty in raising

capital. Make your fund investor friendly, but

totally impractical—based on your compensa-

tion structure to your loan originators—and it

will still not work.

Th e words that you use mean diff erent things to diff erent people, which is why defi nitions matter. Loan servicing, for example—you need to diff erentiate between the servicing function, the col-lective function, and the asset management function. You should allow the fund to be treated separately from a fee standpoint, so

161


that you can allocate duties to the right parties and be able to pay for them.

Th is becomes most important in wind-down scenarios. In decision-making, understanding the various components of your business helps you make better decisions about your fund and all other aspects of your model.

It drives decisions to hire internally or outsource certain functions, economic structures of your fund, and compensation systems. Are you a wholesale or retail lender? Consider servicing versus asset management.

BECOME THE KEEPER OF YOUR INVESTOR’S MONEY

Th e next mindset change concerns your investor’s money. You have to be the appointed keeper of this money, which is a huge responsibility. Sometimes people will save for years to get enough to invest with you. Th is is not something to ever take lightly. Lives are won and lost with money management in this fi eld.

• Th ink of all money in your fund as your money.

• You are the bearer of the bulk of fund management risk for your client.

• Good decisions are a key part of your job description.

• Take note of the perils of fund management.

• Your fund deals are made and owned by you, and you alone.

• Be aware of bad practices and avoid them.

• Maintain an ethical integrity for your clients.


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SAL’S QUICK TIPAs a rule, I think of all the money in my fund

as my money. That way I do not do deals with

the money that I would not do with my own

money. You are accountable for fulfilling your

investment promises and bringing people the

return that they are expecting.

• When doing one-at-a-time deals, it is easy to convince yourself that the investor is making the decision and understands the risks. Th e truth, however, is that the risk is far greater than they can imagine, because the onus is on you to fulfi ll these fund promises.

• Keep in mind that your investors are trusting you to make the right decisions. Th ey are betting on your knowledge and drive to get them the returns that they expect. You and your team will be responsible for millions of dollars. You are getting your management fee and that nice profi t split—so good decisions are a serious part of your job.

• When I did my very fi rst funding, a mentor of mine taught me about the perils of managing a fund, and how easy it was to manipulate a fi le or an appraiser. Th e fi nance industry is rife with these kinds of unethical practices. It is the reason why the fi nancial crisis hit in the 2000s, because there was so little accountability from fund managers and brokers.

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• Th e deals that you make in your fund are yours. No one is looking over your shoulder every time you decide to do something right or wrong. One of the most diffi cult things to do is to accept the responsibility of being accountable for your own actions.

• I know appraisers who are dishonest and will accept a bribe in order to declare a home worth a lot more than it is. When this happens, you get a million-dollar appraisal, but you know in your heart that the place is only worth $650,000 at best. You may make four or fi ve points on that deal, which is about $35,000—but it deeply damages your integrity and character.

It is easy, as I said, to manipulate a fi le. You can fi nd an appraiser who is very “liberal” in their ethics, and you can make a 100 percent LTV look like 65 percent. Whatever you do—do not do this. When the market turns (and it will), your business and your fund will implode.

Th ere are many fund managers out there who are only looking to make themselves wealthy, and to benefi t from their investors’ risk. Do not be that kind of manager! Do what is right, not what is expedient.

Th is should be one of your core values and is probably the single biggest reason for your success, longevity, and reputation. Be the steward of your investor’s money. Take it seriously, and you will never be short of investors or ethical borrowers.

FOCUS ON STRICTLY ENFORCED GOVERNANCE

After you have adopted the keeper mindset, you should focus on fund governance. I went to California and attended a conference


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there. Th ere were loads of institutional panels, people chatting and explaining what they are looking for. Th ere were also people from larger institutions speaking about the kind of fund managers they were looking for.

Anything below a $100 million fund has to be treated dif-ferently from what these guys were talking about. It just does not translate well. Institutional investors look for many things in a good fund manager, namely great fund governance.

When you speak about the way that you govern your fund, you are being transparent—and investors really appreciate that. Otherwise, they could end up investing in a fund that is not aligned and that contains poor practices, such as number manipu-lation and unethical fi xing.

With transparency, your numbers are there for everyone to see. Th at means that no matter who your investor is, they will be attracted to your fund. From high-net-worth individuals to family offi ces and private investors.

SAL’S QUICK TIPWhen you are transparent, it becomes easy to

raise your capital. Alignment is the next part of

your strict governance plan. Clever investors

look to see if the fund manager and their own

interests are aligned. If the fund structure

is aligned, it means that your fund manager

is more reliable, because your outcomes are

connected.

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If this is suitable, then they will check your track record. How long have you and your principles been around? How long has your management team been together working as a unit? What is your track record of success and failure?

How many deals have you done? What were the results of those deals? Can you produce accurate documentation that assists in the transparency of your practices? Audits and fi nancial state-ments that keep everything in the green are great here.

Th at is why, to support your track record, you need to build in regular audits. Th ese should be available to any and all potential investors on request. Th e last thing that these investors look for is ongoing, regular communication. If you can tick all of these boxes, then fi nding investors will not be a problem for you.

An example of great fund governance would be having an investment committee, published operation and control pro-cedures, orderly liquidation plans, key man insurance policies, investor rights to obtain information, co-investment, suspension of investments if key man is lost, and fee structure alignment.

Th e practical implications of strict fund governance means that you will have to put some weight behind it and incorporate these into your off ering documents. Th e key is fi guring out how to do these things without limiting your own actions.

You will need to decide which things you would do anyway and commit to them. Th is will all help you raise the capital you need for your fund. It certainly helps if stewardship is in your DNA already.


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BUILD A SUPPORTIVE BACK OFFICE

Finally, you should invest heavily in having a good back offi ce function. Most fund managers that you meet are “deal” guys. Th eir funds are set up by attorneys and they have no idea how it is going to be administered.

Structure is modeled after traditional institutional private equity funds, which we know are unbalanced and non-transpar-ent. Most do not know why it was set up the way that it was. It is these guys who are usually only after personal benefi ts.

SAL’S QUICK TIPThe fact that everything outside of “deals” will

be someone else’s job does not mean that you

should not play a direct role in creating what it

is these people will do. Structuring your fund

correctly affects your job, so you have to know

all about it!

Keeping poor records, and losing track of fi nances, deals, and administrative tasks is not acceptable in this environment. If the fund manager does not know what their administrative team is doing, then they could derail the whole fund by slacking off or incorporating bad practices into the business, without his knowledge.

For Fund One, I spent a lot of time fi guring out how to set it up. I put the off ering documents together, and it took about three or four months. Th en came everything else. I quickly realized that

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I would need to track all the documentation and deals. I did not have software or people to manage the software internally.

Eventually, after much convincing, I persuaded my attorney to redo the documents in compliance with new software that I had purchased. Most attorneys have worked on institutional-type funds, but that does not mean that they can apply those rules to your fund.

Administrative became a very big concern. I still needed staff . Luckily, it can be easily outsourced if you set it up correctly. If you have put together a solid fi nancial model, you will already bake the costs into the business pie.

Do not forget to do all of the research up front before drafting documents, to make sure that they can be administered, tracked, and made transparent. It can be done internally, but believe me, it will take years to master that skill.

Committing to good, clean governance means being a better fund manager who can handle both internal and outsourced administrative duties. Asset valuation issues are the number one most diffi cult issue, especially in an open-ended fund.

At the very least, a pro fund manager should be able to hire the right people to administer your fund. Th is is the nuts and bolts of your business! Th ink of it this way: you would expect your fund manager to know what his staff is doing in the offi ce if you decide to invest in a fund with your own money. Th ink like an investor and it will make you a better manager.

RUNNING THROUGH YOUR KEY TAKEAWAYS

Th ere are several key takeaways from this fund manager mindset section that will help you grow into an eff ective, effi cient private


168

lender. Work on them as much as you can, and you will develop into a powerful manager with endless investment options.

• Always know and understand your business and its key components or parts.

• Be very clear on the delineation of duties and responsibilities assigned to diff erent people who will work towards the success of your fund.

• Be a solid, dependable steward/keeper of your investors’ money. Make good investment decisions on their behalf, and do not fall prey to greed, fear, and not having someone constantly monitor how you do business and why.

• Commit to excellent fund governance. It will help you raise the capital that you need to put your fund together, and it will also keep you honest!

• Develop or hire a good back offi ce; it will make a huge diff erence in the long run.

Look at it this way—if any of these areas are not covered to your utmost potential, then your investors will doubt the success of your fund. Any doubts at all must become a part of your review process and you should fi x them.

SAL’S QUICK TIPWhen a new investor sees your fund, they

should not only be impressed by the level of

transparency there, but also be blown away by

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the detail that you have assigned to structur-

ing and governing your own fund.

At the end of it all, it comes back to mindset. Are you in this game for the money alone, or do you really want to make your fund successful for everyone? If your goal is the latter, then you need to work on your skills—even outside the safety of “fund management”.

Th e biggest key takeaway here is to be an investor as well as a manager. When you think like your investors do, you will often be able to smooth over issues before they arise and fi x gaps in your fund off ering.

When all is said and done—they are investing in you. If your mindset is not right, the best investors will not trust you with their money. Projecting an air of openness, transparency, and success is crucial in becoming a highly successful fund manager.

Your private lending career is about to begin. Make sure that it begins ethically, correctly, and thoughtfully. Th at is the best advice that I can give you!

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C h a p t e r 1 3

Successful Fund Management: The Details

“Effective leadership is putting first things first.

Effective management is discipline, carrying it out.”

—STEPHEN COVEY

N eedless to say, fund governance is a priority. A fund manager who cannot execute good fund governance will never have a successful fund. And you need that fund if you are going to lend money

to your borrowers so that you can earn money. Successful fund management begins with you, and it ends

with you. Pay close attention if you want to check all the boxes when you put your documents together.

CORPORATE GOVERNANCE ACCORDING TO INREV

It is important that you know all about fund governance—what it is, why it is important, and which techniques or ideas will help you on your journey. As I have mentioned before, good fund gov-ernance will help you raise the capital that you need, consistently.


172

INREV (Investors and Non-Listed Real Estate Vehicles) is a tool that I use to help explain some fund governance issues that you need to know about. Diff erent people will go to diff erent lengths to incorporate governance into their fund.

Some will go to great lengths to have it, and others will not be bothered. Th ere are 18 areas that have been determined by Th e INREV Corporate Governance Committee as the main features of corporate governance relevant to investors and managers, in relation to the principles set out in the INREV guidelines.

INREV is a European independent standard board that has taken the time to develop high-functioning concepts, standards, and ideas on fund governance. It is in a super-user friendly format and presents online as a kind of fund governance checklist.

You must use the INREV self-assessment tool when putting together fund governance. It will help you build the architecture that you need into your fund, and it helps you leave out those things that you do not want incorporated there.

You can fi nd the link at: https://www.inrev.org/guidelines/inrevguidelines/corporate-governance-self-assessment.

Below are the 18 areas they speak about, that you

should consider:

1. Fund decision-making

2. Reporting in line with INREV guidelines

3. Investor default

4. Investors engagement with valuations

5. Investment committee

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C H A P T E R 1 3 : S U C C E S S F U L F U N D M A N A G E M E N T : T H E D E T A I L S

6. Side letters

7. Use of third parties

8. Co-investment

9. Risk-control processes

10. Key persons

11. Indemnification

12. Fee and carry structures

13. No-fault removal of manager

14. Conflicts of interest

15. For-cause removal of manager

16. Confidentiality

17. Non-executive board

18. Rights of investors to obtain information

WHAT IS GOOD GOVERNANCE?

Some of what you will fi nd in INREV will not be applicable to your fund governance style, so keep that in mind. In the meantime, let’s talk about good governance. What is it?

Good governance is when the fund requires the prior approval of its investors to amend the fund agreement, including the invest-ment strategy, with an approval level of between 65–85 percent of investors’ commitments. Th e fund reports the detailed results, along with all amended documents, and the investors vote.


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Th is is how your fund decision-making process should go. For example, how much they invest, the period of the fund, the mechanism for termination, changes to the investment strategy, changes aff ecting the liquidity structure, the replacement or removal of the manager, and how the manager is compensated through the fee structure.

After fund decision-making has been clarifi ed, you will move on to the creation of your investment committee. Good gover-nance here means the fund has an investment committee made up of balanced members, manager representatives, and non-executive offi cers. Th e investment committee members have the balance of skills and experience that will add value to your processes. All con-clusions are reported to your investors.

Your committee will also take an active role in all aspects of the fund’s investment (overall strategy, acquisitions, and disposals), along with your operational activities. You must have an invest-ment committee process outlined in your documents so that your investors understand how your fund manager will do business.

Th e third concern is the use of third parties. Does your fund make use of third-party service providers, such as fund adminis-trators or loan services? Investors like having unbiased, competent third parties involved to make sure that everything is honest and ethical. Good governance means that the fund declares that the manager is accountable for obligations and duties that have been subcontracted to third parties.

With indemnifi cation, good governance means that the manager, employees, and offi cers are indemnifi ed against losses arising to the fund with reasonable exceptions—negligence, fraud, criminal acts, and willful misconduct, for example.

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Good governance with no-fault removal of manager is about your investors having the ability to call any time to vote to remove a manager. Th e manager will receive fees for three months, with reasonable expenses and profi t split.

For cause removal of the manager, good governance dictates that 50 percent of non-confl icted investors can call for a removal vote at any time. Manager and affi liates that invest cannot vote, and causes can range from bankruptcy of the manager, to fraud, negligence, material breach, and under-performance of the fund.

With rights to information, good governance demands that the manager provides investors with adequate reports of the fund at asset level. All material issues and investments must be disclosed, and frequent investor meetings held. Investors can inspect the books anytime.

Good governance also has rules on side letters, co-investment, key persons, fee structures, and confl icts of interest. Make sure that when drafting what you consider to be good governance, you take all of these key areas into account!

WORKING WITH OPERATIONS AND CONTROL PROCEDURES

INREV can be useful in gaining good ideas and concepts for your Operations and Control Procedures. Before I continue speaking about the areas of good governance, you will need to understand that these will become a critical part of your fund governance.

Operational practices can include disclaimers about changing processes and procedures when you need to, as long as your investors agree. Your documents must be able to change and evolve along with your experience, which is why this is necessary.


176

All investors in your fund will have access to your Operations and Procedures document.

Inside my Operations and Control Manual, there are several sections—internal controls, privacy policy, disaster recovery plan, liquidation plan, stated value methodology, and the underwrit-ing manual. Th e internal controls will be discussed with investors, because they will want to know who is handling their money.

Th e section will give investors information about your hiring policies, background checks, and legal assistance. Bank statements, disbursement verifi cation, check signing policies, bank wires, two signatures, accounting systems, and more will make sure that you keep theft from your fund to a minimum. It is an ugly realization that staff steal because it is easy, but they do.

Th e extensive disaster recovery plan will contain information on what will happen if everything burns to the ground over the weekend. Th ese are required for funds of $50 million or more, and we did ours with Wells Fargo and created an emergency response team. Th is includes system and computer backups, in case they are ever compromised.

If liquidation hits, how will it be handled? Your Opera-tions and Control Manual should cover it—detailing who gets paid out fi rst. Maximizing the recovery of each individual asset is important, not speed. Speed will lose you money in a liquidation.

With your stated value methodology, you will explain how you are able to pay the value of each asset. It is a simple process—just take the unpaid principle balance of the loan, and add it to the accrued interest at any point in time. More diffi cult calcula-tions will have to be made, in case of foreclosures for example, and methods must be included for these scenarios.

177


Th e underwriting manual will be about 15 pages or so and will go into some detail about the kinds of properties that you prefer, what the guidelines and collateral are, and how you will appraise the property. In the hard money business, it is downright rare to come across a good underwriting manual.

Th is document helps investors see what it is you are investing their money in. By giving them confi dence in constant commu-nication, you will be able to change your documents at will. With your investment committee overseeing all of this, the process is poised to succeed and to appease even the most paranoid investor.

WHY DO YOU NEED TO MANAGE YOUR FUND SUCCESSFULLY?

Th ere is a massive laundry list of reasons why successful fund management needs to be your absolute top priority. It is true that if your fund succeeds, more funds will follow—I know because I have been there, and the money is good.

• If you do not take the time to adequately manage or govern your fund correctly, you will start a war against your brand and yourself. Investors that lose money with lazy and unethical fund managers see it as a personal aff ront. Th ey will tell everyone about you, and your reputation will be ruined.

• Inadequate fund management will take you down seriously bad paths, including those that you personally may not subscribe to. Unethical behavior is rife in the money-lending business, whether it comes from you, your committee, or your back offi ce employees. Make sure that theft is impossible with good governance!


178

• Your investors will lose confi dence in your ability and they will begin to pull out if they believe that you are not successfully managing their investment. It is your job to make sure that what you have promised comes to pass.

• Your investors may move to expel you from your own fund. At this point, any number of charges can be brought against you—including negligence, fraud, theft, and many other terrible career-ruining charges. It is best to stay clean and focused and work hard for your investors so that this never happens.

• Without proper fund management, there are dozens of problems that may arise in the legal space. It just takes one investor to feel victimized before your entire house of cards comes crashing down. When this happens, you will have to deal with the problems and the consequences of these reactions.

• At any time, for any reason, there can be a property crash. Funds that do not plan for a property crash will have to liquidate, while those that did plan may survive by seeking out alternative means of lending or by providing lending services.

• Inadequate fund management will—perhaps worst of all—cast a dark shadow over your own eff orts. Some of the best fund managers I have ever met pour all they have into these funds. When things go south, as they sometimes do, it can be you who ends up bankrupt with no money. Do not let this happen.

179


SAL’S QUICK TIPA fund that is managed correctly will never be

short of investors, or borrowers, or reliable

partners/committee members, and employees

to keep it going. When you start your fund,

imagine that it is a shiny penny. Over time, it

is your job to keep that penny shining. Many

things will try to tarnish it, but with your good

governance documents—you will always have

the most direct solution on hand.

Never underestimate the power of good planning, and eff ective decision-making as a result of good planning. When all else fails, your documents will keep your fund going. Th ey are the founda-tion that will carry your fund through rough times.

COVERING ALL AREAS OF GOVERNANCE

In the example I gave above, there are 18 key areas of governance to be concerned about. To continue fi lling in the gaps, here are the rest of the areas we did not cover.

A side letter is a side agreement, or collective bargaining agreement that is not part of the underlying or primary collective bargaining agreement. It is a document that is ancillary to another contract. Side letters in good governance are when the fund does not enter into side letters—or if it does, the policy is to disclose all side letters and agreements.


180

Th is should be stated clearly in your fund marketing material, and the terms of your side letters should be available to any investors, at any time, on request. When working with co-investment and good governance, you should know that key persons and individuals who run the fund can co-invest their own money directly into the fund.

Individuals should have a meaningful amount of co-invest-ment in relation to their basic salary and net worth. Plus the co-investment arrangements should run for the entire life of the fund. Incorporate this into your operating documents.

Key persons, such as a small group of fund managers, can be designated as key people, and the departure of one of them should trigger a key man event. If the situation is triggered, then the investment period is suspended until the appointment of a suitable replacement for a key position. Investors, of course, have the right to reject any appointments if they are not qualifi ed enough.

Fee structures should be detailed in good governance in two sections. Your management fee, which is the base management fee that is calculated, covers the manager’s costs and a modest profi t margin, so that manager actions do not aff ect the fund. Th en there is the performance fee, which is a threshold that is calculated in relation to other comparable funds.

A full workup of performance fees is required, including those held in escrow accounts. Th ere should be no catch-up mechanism for the manager at all. If a confl ict of interest should arise, good governance dictates that there is a clearly defi ned protocol in place to identify and manage confl icts, involving Chinese walls.

Th e manager should be required to off er all investment oppor-tunities that fall within the investment guidelines and restrictions

181


of the fund, exclusively to the fund. Ultimately, it is up to the manager to ensure that the investors get what they deserve, and that no confl ict of interest arises that may disrupt the growth or progression of the fund.

Once you have worked through all of these key areas, you will be equipped to streamline your own good governance policies so that your investors can see that you are dedicated to quality business practices, ethical partnerships, and long-term wealth generation.

Being a private moneylender will require you to keep these areas of good governance in mind at all times. Questions about your business model, your fund, and your many operational pro-cedures will come up repeatedly. It is best to prepare for them and to make your potential investor understand that good governance is number one in your fund.

WHEN GOOD GOVERNANCE GOES BAD

Good governance keeps every part of your fund working like clockwork. Bad governance, then, becomes the nest of termites that eventually eats its way through your company until the roof caves in.

Good governance that goes bad is because of you, the fund manager. You can make every eff ort to place every conceivable restriction, rule, and process in your Operations and Control Manual—but if there is no one enforcing these rules, then anything goes.

Unfortunately, the truth is that the private-lending industry is mired in poor practices and terrible governance. Like I was saying earlier, it is a fi eld peppered with fund managers who want


182

to trick investors, doctor numbers, and take high commissions from sales that do not benefi t anyone.

You will set up your fund so that your committee watches you and your employees. You will watch your committee—third parties will also be heavily regulated and watched. But when all is said and done, these are just ideas on paper.

When no one is looking—it is a huge temptation for many people to change a number here or there. Creative accounting, bribery, fraud, and corruption go hand in hand with the private money-lending business.

Your goal as someone who believes in good governance is to make your fund as airtight as possible. In fact, it will be the col-lection of documented rules in conjunction with your own moral integrity that will attract investors to your fund.

When good governance goes bad, all you can do is fall back on your outlined procedures and follow them to the letter. If you break your own rules, then expect to be voted out. If an employee steals, then enforce company policy in every conceivable respect.

When you work in the private money-lending business, trust is everything. Borrowers want to know that they can trust you to hold up your end of those risky deals they make. Investors want to know that you are not going to allow their money to be siphoned off like sand running through greedy fi ngers.

Without trust, I daresay that you have no chance of ever becoming a fund manager or starting your own private money-lending business. Eventually, you will fi nd yourself in hot water with your investors, with your borrowers, and with your employees.

Th e best thing you can do at this point is to accept the con-sequences and bow out gracefully. An unethical moneylender is

183


a cliché for a reason. It is tragically easy to get there, even if you started out with pure intentions.

Th is is especially true when your fund is not performing as planned and you have investors to answer to. It is better to be open and honest about the situation than attempt to hide it with unethical plans that will eventually be exposed anyway.

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C h a p t e r 1 4

Your Hard Money Track Record

“You have to create a track record of breaking your own

mold, or at least other people’s idea of that mold.”

—WILLIAM HURT

Y ou are almost on your way to becoming a power-house private moneylender. One of the last things that remains is learning how to keep a good track record of your experiences and processes. So, what

is a track record, anyway?I usually describe it as a collection of decisions and experi-

ences that yield specifi c and measurable results over a long period of time. Let’s go into some detail.

WHAT IS A HARD MONEY TRACK RECORD?

So many people claim to have a good track record, though they do not even fully understand what a track record is. Now excuse me for saying so, but in a niche brimming with unethical behaviors, it is impossible for everyone to have a good track record.


186

Th e only way I claim to have one is because I have physical data that proves it. No one doubts my track record, because I have actually tracked it! If you cannot prove that your track record is good, then you do not have a good track record—period!

So, you need to be able to prove your record. What exactly do you have to prove? It depends. For me, I tracked a fund from zero to our target goal of $4.8 million in revenue. I fully remember approaching that goal and then surpassing it. Plus, I used the techniques in my documents to capture the data to prove that I had completed them successfully.

Because I can speak about my track record, and then back up the words with actual physical data captured via software—I gain huge amounts of credibility in the eyes of my investors. Better yet, when you get into the habit of tracking your own record—you can predict future outcomes.

Th at means that by analyzing old data, I can state with close to perfect accuracy what may happen with a similar fund or expe-rience in the future. Old data is proof of future experience, and investors understand that.

When I hire people, I specifi cally use a process called “top grading” to get an impression of who they are. I will interview them—forcing them to recount experiences from high school all the way to present day, in chronological order.

When you force people to recount their lives like this, you get to see gaps, or holes, in their stories. If, for example, they jump from high school to fi ve years later—this is a red fl ag. For me, I would much rather hear that between the ages of 18 and 20, having a good time was more important than working.

You can fi nd a lot of skeletons in people’s closets when you ask them to recount their lives like it is a track record. A track record

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C H A P T E R 1 4 : Y O U R H A R D M O N E Y T R A C K R E C O R D

then, is about taking your life and looking at it as if someone is searching for those hidden skeletons. Make sure that if you have any, you are upfront about them so that they do not cast doubt on your fund.

WHY DO YOU NEED PROOF OF YOUR LENDING ABILITY?

Having proof of your lending ability is paramount to becoming a successful private moneylender, especially if you do not have any real qualifi cations behind your name. Demonstrating proof is important because it gives you credibility.

Imagine two people trying to convince you to buy a book. One has great stories about that book, lots of impressive fi gures and facts. Th e other person has an accompanying booklet that details all the accurate facts, fi gures, and proof about that book. Who are you more likely to trust? Th e word guy? Or the data guy? You cannot argue with data.

When I look at employees, there are certain things that I look for. Ultimately, you want someone you can invest in, right? Your mortgage pool or whatever fund you are starting rests on your ability to come across as a credible moneylender.

Th ere will be people who naturally trust you (friends and family) and still many more that do not know you—and their default is on “do not trust”. Your job is to bridge the gap—quickly. You have to take them from not knowing you, to knowing and trusting you in a few short meetings.

As a rule, people are very visual. At the end of the day, they want pictures, graphs, charts, and data over words. You have to


188

take your collected track-record data and transform it into the kind of visual graphics that impress people.

People are notoriously bad listeners. In fact, part of the reason why you have hard-copy data visualizations is so that they can review them when they are not being confronted with an avalanche of information.

I got really frustrated at one point, because my words were not enough. After my mentor taught me about data, it all changed. You have to repeat your words over and over again, and the data helps. Data is concrete and unchanging. It is proof that what you say is true.

SAL’S QUICK TIPPeople are also not particularly interested in

reading tons and tons of text, which is why data

visualizations come in handy. They can quickly

and easily absorb the information without

much effort, which makes them understand

your pitch and where you are coming from in

almost no time.

Another benefi t is that when you talk and have data to back up this talk, it makes you more confi dent. When you exude con-fi dence, people are more likely to respond to you in a positive emotional manner. It makes investors comfortable when you are who you say you are.

189


If you go in there with a fantastic story about who you are, you face an individual that is more likely to believe that you are lying or just talking nonsense for the sake of an investment deal. Th at is not what you want at all.

Raw data converted into powerful visuals is exactly what you need to get off the ground as a private moneylender, looking for investors for your fund.

WHO WILL REQUEST PROOF OF COMPETENCY?

Th e next question is—who is going to ask for this data proof? You would be surprised. At every level, you will encounter people who want to know, for sure, that they are doing business with a decent, competent, and experienced professional.

Th e main target groups are, of course, your investors. You are asking for money, so prepare to be scanned for all of your secrets! You have to be able to demonstrate the performance of your fund to new investors all the time.

At any moment, you could fi nd yourself in a position where you need to replace investment income, so you have to fi nd a few more investors. When this happens, you need to have ready to use data and data visualizations available for your portfolio/pitch.

When I partnered with Wells Fargo, I also had to demon-strate to them that I would be an asset to their lending team. Th ey want to see what you have done, and how well your fund has performed. Nothing else is as important.

Th e moment your fund is doing extremely well, and you need to expand—you should capitalize on your track-record data to raise more capital. But, overall, as a capital-raising tool you will not fi nd better tools than your data visuals.


190

Your business partners will almost certainly request your proof of competency. If they are going to go into business with you, they need to know that you are not going to end up causing a huge mess in such a fragile and loosely monitored fi eld.

As I said before, there are a ton of unethical people out there lending money. What you want is to unite with other ethical moneylenders who also have proof that they are committed to what they do, and are really good at it.

Often in business partnerships, your slice of the pie depends on your experience and track record. If one of you can demon-strate more experienced than the other, the more experienced one will get the bigger slice.

Th ere is real business power in keeping track of what you have done, and how successful it has been. Today, there are thousands of private lenders who are full of talk and have very little success to show for it.

Th ese guys pilfer money, lose it, employ bad practices, and cause havoc wherever they go. Th at means that you have to instantly prove to your investors, partners, and borrowers (yes, even them!) that you are an ethical, decent moneylender.

When you have numbers to back up the talk, the world of lending is at your feet. Alignment always happens at a much faster rate if you have documented proof of who you are, what you have done, and how success follows in your wake.

KEEPING TRACK OF YOUR TRACK RECORD

Now a fundamental question—what if I am just getting started? Obviously, everyone starts somewhere. It is completely unrealistic

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to expect new moneylenders to have years’ worth of successful data to back up their new venture.

When I started out, I was so young that many of my clients immediately dismissed me as a child who knew nothing. It made things diffi cult and frustrating, because I knew that I was good at my job. Th e trick is to pull any and all successes from the past—from the very moment that you were in high school.

People understand that success tends to follow individuals around, so make it seem like you have had plenty of experience with success. I reached back and pulled out successes from when I was 16 and 18 and worked in the business world.

In the beginning, you just have to take every day as it comes. We all start somewhere. Th en if you build deep relationships with the people you already know, they can be your testimonial source. Friends, family, and relatives may be close to home, but they are still people who value your character.

No family member is going to give a glowing testimonial of their deadbeat son if he is trying to get people to invest money in some scheme. I think that, deep down, people understand that. You have to create wins of any kind as often as you can. Success breeds success.

Th at said, it is not a marathon either—it is a sprint. Time is irreplaceable. You must get lots of investors, and move on your fund as soon as you can. Th e more investors you have, the quicker you can get your fund off the ground. Once your fund is working and earning—it will be easier to fi nd or win more stubborn fi sh in the wealth pond.

If this means getting your older brother to invest some money that you can loan to someone with a guaranteed return—then do it. Even proving that you have done these smaller side deals can


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convince some people that you may be able to handle a mortgage pool fund.

Do not tell them that you know what you are doing. Carefully collect the track record data from every investor, and every new experience. Once you have a few, it will make a very impressive graphical representation of your successes.

Once you have this to show people, I guarantee that their impression of you will change, even if you are as young as I was when I started. Remember—your goal is to project success by fi nding it and reporting on it to your future successes. Th is, in a nutshell, is your job.

If it takes a while, then so be it. Time cannot be replaced, so if you have no experience and you know it is going to be a while—work at it now. Get investors now, even if they are little ones. Prove to people, in any way that you can, that you are worth the investment.

THE END RESULTS TO AIM FOR

You are going to need some end results, and pretty quickly. Th at means knowing how to track yourself over time. Th ere are numerous pieces of software that will help you create a data picture of your experiences.

I use software such as Morgaja, Salesforce, and other data-base-based programs. It all depends on what you are willing to do. I would focus on tracking all leading-edge and lagging activities in a spreadsheet, even if it is in Excel.

Data tracking means having the discipline to create the numbers, record them, and then use them over time to see what

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patterns emerge. You can draw insights from these numbers and create conclusions for your investors.

Th is way, you can accurately study the numbers over time and look for trends in your experiences. What are you good at? Where do you need to improve? What are the most impressive results you have received so far? How can you leverage these results in your next investor pitch?

Th ese days, there are even apps that you can use on your phone that will help you capture, monitor, track, and analyze any data that you like. I like to think of it as a kind of data journaling. It is something I do every day, because it makes success easier.

Having this data on hand also makes you smarter and more organized. My investors love it when they ask me a direct question and I can answer in accurate numbers, backed up with quantita-tive data. People who know what is going on in business, getbusiness.

Once some time has passed and you have enough data to work with, it is your responsibility to select the right numbers, distill them, and then convert them into graphical representations for your pitchbook or data sheets.

I like to turn each set of images into a story, because people relate to stories. If you can engage your investor emotionally, then they will listen to what you have to say. What lessons did those numbers teach you about your practices?

Th ese data stories are a great sales technique. Th ey can be inspiring and cause people to believe in you, which is exactly what you want. Th ink of it as a conversation that you might have with a down-and-out coworker at a bar. You want to cheer them up, inspire them, and move them to take action—all based on one really engaging narrative.


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Th en you will whip out the data images to blow them away and close the deal. People really respond to this tactic, and it is one I have never stopped using in my career. It works like a charm—and better, it causes trust wherever I go.

Th e end result is trust, and it is something that you should always aim for. If you have zero experience and are wondering how to get your money-lending business off the ground, now you know. It just takes some creative tracking, distilling, and a great story.

TAKE ACTION WITH THESE STEPS

As I mentioned previously, tracking your data is key to launching your “trust” process. Th is means you will need to take action in the following clearly defi ned ways:

• Get a tracking program like Excel, and create your own tracking sheet. Th is is where you will place all of the numbers and data that you want to track and capture.

• Track things like loan numbers, interest, due dates, how much of the payment is made, the PNI, the loan term, the maturity date, the paid-off date, note rate, principal balance, property, property values, losses, and so on.

• Create mini-reports on the history of each loan, so that you can orientate yourself in what is happening with every borrower, investor, and partner.

• Set data dates, and then compile data sheets over the last three to six months. Create your visuals based on the distilled data that you have collected from these tracking sheets.

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You should also look into specifi c tracking software and apps like the ones I use (Salesforce, for example), because they can auto-generate reports for you. Many of these programs will also let you create professional visuals by importing spreadsheet data into a charts and graphs program online.

SAL’S QUICK TIPIt is also important to track the “story” of your

past investors. Your potential investor should

be able to see when someone agreed to invest

with you, and what they got out of it. This

above-all data is the set that will bring you the

most investors.

In the beginning, this data can consist of once-off loans. People understand that if you are good at once-off loans, then there is nothing preventing you from becoming a talented fund manager. Mostly, people will give you the chance to prove yourself if you can off er them proof that in the past you have come through for others.

Show how much capital you have raised and how you have turned that into more money for yourself and your investors. Do not be afraid to make it personal—remember, your goals are aligned with your investors’.

If they lose money, it should be very bad for you. In this way, you can convince your initial investors to take the chance and start out with you. If you work hard, and smart—you can quickly


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build yourself a track record that will impress nearly anyone in the money-lending business that you come across.

Start with a loan. Lend someone money. Make it successful and prove that success with tracked data and pretty visuals. You will see how people respond in time, and begin to believe that you are able to deliver on your business promises.

Th is is how you will physically document your track record as evidence of your past successes. And this alone will put you ahead of thousands of fast-talking, word-only moneylenders who practice unethically and do not put their investors fi rst.

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C h a p t e r 1 5

Your Capital-Raising Strategy Defined

“If you don’t want to work, you have to work to earn

enough money so that you won’t have to work.”

—OGDEN NASH

T here is a distinct philosophy that I believe in when raising capital for each fund. You have to be a conscious learner and someone who is willing to evolve with your fi nancial commitment every day, to

grow. Th is is why when I am gearing up to raise money, I focus on

fi ve capital-raising themes that keep me focused on my commit-ment to the fund.

FIVE CAPITAL-RAISING THEMES TO FOCUS ON

Learning is about trial and error, as I am sure you know. Over time, you will improve as a private moneylender, but you will need to make your own mistakes while you are learning. Th e best advice I can give you is that your strategy, plan, and tactics should


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be based on your own personal experience and preferences, not someone else’s.

Th e reason why I say this is that diff erent fund managers have strengths in diff erent areas. Some do not like cold-calling for example, in which case you should know that forcing yourself to do it is not going to work out for you.

If you are not a natural networker, save your energy, and move in circles where you feel confi dent and relaxed. Th ere are loads of strategies and tactics that you can deploy that will help you grow your fund, while allowing you to enjoy what you do.

Creating plans on paper that you are not willing to do in person can cause trouble. Rather, do what you are good at, and play to your strengths. It is important to be strategic in your approach—to reduce risk and hazards:

• Build a comprehensive plan by writing it down. Refer to it and update it regularly. Once your plan is down, you can develop a “philosophy” for your brand. Outline what you will do and what you will not do for your investors. Choose the main pillars of your prospect activity wisely.

• Next, start with what you already have, by working inside-out. Leverage whatever relationships, databases, organizations, and connections that you already have! Capital raising always starts close to home. Th ere is no magic way to raise money from people when you have no real experience; you need to secure that experience fi rst.

• Accept that capital raising takes times and requires real patience. It is going to be hard to go out there and get

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C H A P T E R 1 5 : Y O U R C A P I T A L - R A I S I N G S T R A T E G Y D E F I N E D

things done when you are starting out—but have faith and keep working at it, to get your reputation to where it needs to be.

To recap, the fi ve themes are as follows:

1. You are responsible for being a good fund manager.

2. Strategy and tactics must be based on personal preferences.

3. Be strategic in your approach to fund management.

4. Start with what you already have.

5. Accept that it will take time and patience to get it right.

THE TWO MAJOR ELEMENTS OF CAPITAL-RAISING SUCCESS

Th ere are two major elements involved in being successful at capital raising, and they are crucial skills to learn as a fund manager. Hopefully, you have a fund that is economically aligned between manager and investors, and there is a real balance with good governance, structure, and asset strategy.

Th e fi rst element is proper investment structure. If you have an investment that is fundamentally attractive to your target audience, it will be a lot easier. When this happens, it is no longer a numbers problem, but a people problem.

Your fund should not have poor and unattractive economic structures. Th ey should contain strong, solid structures that do not undermine your own ability to sell. Beyond that, you really need to understand what it is you are selling.

I spoke to a lot of people who were contemplating their own funds, and too many of them did not even know enough about


200

it to answer even the most simple questions. Many managers just do not know how their fund works, which is not great for capital raising.

Th ey also do not know why it has been set up as it has been, or what the investor’s issues really are. A lot of their own fund is just a giant gap fi lled with questions, which is terrible planning and will cause a lot of problems when dealing with it.

Everyone who approaches you is a sophisticated investor, or at least you should treat them that way. Understanding all aspects of your own fund and being able to answer these straightforward questions is key to growing as a capital raiser.

People ultimately ask the same questions over and over again, so getting to know your fund is not even that diffi cult. Questions such as, how does this work? How do I subscribe? How do I move the money? How do I get redeemed? What are the lockup periods? What ballpark area are we talking about with fi nancial returns?

Your investors will also want to know what will happen to your company if you leave it, and what will happen to their money. I have almost never heard a good answer to that question, but it is a common question and one you should be prepared to answer.

Learning over time is where your focus should lie. At the end of it all, if you are terrible at charisma as it is, you can simply learn and rehearse the answers to these questions. Eventually, you will get better and better at delivering those answers!

SAL’S QUICK TIPKnow what you are selling, and know your

investment structures. When you have these

two things going for you, implementing a

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strategic plan does not seem so difficult.

Once-off capital from investors is great as a

track record, but now it is time to get money

for your fund—which is a whole different

story.

Make a list of people from your existing database, and create profi les on potential investors. Identify who you can talk to about investing in your fund. Bankers, attorneys, CPAs, wealth managers, and advisors are all people you may want to consider!

JUST THE BEGINNING: LAUNCHING YOUR STRATEGY

Th is is the very beginning of your excellent launch strategy—exciting times lie ahead! Once you have that short list of profes-sionals who you want to pitch to, you will need to organize them into categories. I usually use these categories to determine their likelihood of investing with a grade—either A, B, or C.

I usually sort these people using common traits and by building profi les based on these commonalities. Th en, I target them and build any capital-raising activity around that. Th at is why you need to determine what the common thread, trends, or tendencies are that belong to your key list of prospects.

Understand who you are pitching to, and why your pitches have been successful in the past. Th at way, you can prepare for them all over again. If they fi t well with you, then it is worth putting together this master list. So, go through your existing database and gather all of the names of anybody and everybody.


202

Th is includes potential investors and centers of infl uence, such as bankers, attorneys, CPAs, wealth managers, community leaders, and advisors. From here, you will categorize your list. Th at means once you complete your list, you will fi ll each name with details and categorize them according to their status and relevance to your fund.

Th e commonalities will make themselves apparent—what do your best sources or infl uencers have in common? Why have they been successful for you in the past? You want to come across as a personal, connected private lender.

Successful people follow the same beat, which is why you are going to perform these groupings. Th ese groups are a baseline so that you can organize each pitch and begin to implement your capital-raising strategy.

If you do not do it this way, you are failing to work strate-gically—and this is hazardous to your business. Once your list is sorted out and categorized, you have a starting place to work from. Now, think of it as a pond full of fi sh.

What kind of materials do you have to use to catch any one of those fi sh? Th e tools that you choose matter more than you understand right now. People respond to technique and strategy in the money-lending business.

If they ever catch sight of the fact that you are disorganized or lacking strategy—they will pull out faster than anything you have ever seen. Th at is just how the business works. Not only do you have to be prepared, but you also have to be confi dent that what you have prepared is going to work for your target pool.

You must be bringing these investors the opportunity to make an intelligent decision to join your fund. Your fund is what

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matters, and whoever decides to invest in it will further your goals and improve your next pitch.

Th e next time you prepare for a pitch, you will have that name and those details. From there, every potential investor is an obstacle that you have to overcome and align with your plans.

WORKING WITH TOOLS AND A WRITTEN PLAN

What tools do you need to help your investors make the right decision about your fund? A few. Tools show that you have spent some time fi guring out the fi nancial details of your fund. You are going to detail your preferred return, your profi t splits, and expenses. It is all going to be there for your investors to see—com-pletely transparent.

You can expect that about 5 percent of the people you pitch to will be interested in investing in your fund. Th ose are realistic numbers. Using your solid fi nancial model, which you typically do not give to investors, you will show them briefl y how you have all of your costing sorted out.

Th is demonstrates that you have taken the time to fi gure out the fi nancial details of your fund, and it creates confi dence in your ability. Begin with a good fi nancial model. Crunch the numbers—you will need them. From there, an executive summary will work well.

It should be short and sweet—about three pages long and built as a summary of the investment. People who casually show some interest should get these printouts. After this section, you can create your fund description and term sheet.

Th is is a more thorough description of the overall investment and goes into more detail where it matters. Th is section is typically


204

six to eight pages long—and a lot of investors make an investment decision based on the term sheet.

Th is is where you will include your management fees, water-falls, and preferred returns. After this area, you should add in a PPM (Private Placement Memorandum). Th is should be an eff ective selling tool, as well as a legal document that contains vital fund details.

Many people do not think investors read these, so they do not make them. But in my experience, nearly all serious investors will read the PPM. At the very least, you can expect them to read some of it, and it will aff ect their decision-making ability.

Th is will also contain the subscription agreement, operating agreement, and any sundry agreements that you want to attach to your fund. After the PPM comes the pitchbook or deck that I described previously in this book.

Th e deck is made in Power Point and it should tell a story. Th is emotional and visual document will help you sell your fund idea to potential investors. You should have short, medium, and long versions of your deck to be used at diff erent times, with various people.

Th e deck should contain a summary, bio, track record, investment features, your strategy, testimonials, and references. It should also contain as much visual representation of your data as possible.

A written plan is the fi nal piece of the capital-raising puzzle, and includes an introduction, overview of your strategy, constitu-tion or philosophy, the key pillars, and a revolving 90-day action plan.

Your key pillars are your main areas where you will focus your eff orts. I suggest every fund have three to seven pillars, depending

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on the bandwidth that you have and the capital that you are trying to raise. Th e 90-day action plan is concerned with the actions that you will take over this period when creating systems and processes, and leveraging your time.

SHORT- AND LONG-TERM CAPITAL-RAISING TACTICS

Short-term tactics for capital raising include creating your fi rst email campaign, and making it an ongoing “drip” campaign that sends emails to the right people once a week, once a month, or at whatever frequency works best in your area.

You can educate your potential investors by sending them these targeted e-mails, which can be managed through marketing automation software. Give them something of value in these e-mails, and follow up with “Invest in my fund.” Th is will convert for you over time.

Drip e-mail campaigns need to be sent at regular intervals. Th ey should contain educational content, and you can add people to your email list as you go. Every time you meet a new potential investor, you want them to sign up to your list. Th is will help you convert people who need to learn more about your fund, and think about your pitch.

Remember your contact categories? Th is will help you segment your e-mail list—A can be used for “top priority” investors, B for warm investors, and C for “almost convinced” or similar. Th e goal is to grow your list over time.

E-mail is an incredible tool for short-term and long-term capital raising. You can also call the best prospects on your list.


206

You must have at least fi ve candidates right now that could be your fi rst investors. If you know them, call and set up a meeting.

Arrange your list into people who you are going to call, and those that are going to receive soft e-mails fi rst. Work from most-valuable to least-valuable with your list. Loved ones are important, but in the eyes of other investors, they do not count as much as strangers.

Th at is why you should target family, but focus on friends and other people when you start out. Family can get your foot in the door, but friends will help other investors see that there are real people relying on your fund for growth and profi t.

Most new fund managers need to get at least fi ve to eight investors, so that they can say, “Yes, these people have invested with me already.” It is that fi rst sale that will be so hard, because no one has trusted you with their money just yet.

If you are going to raise capital, your investors need to be called based on your ranking system. Develop a campaign that supports your capital-raising strategy. Meetings can be at home, at coff ee shops, on the golf course, or at nice restaurants—it all depends where you are the most comfortable.

You can also consider hosting a launch party to “announce” your entrance on the scene. Your 90-day action plan may contain features for this party. It can be an important networking event and get the investment process started for you.

At the end of your 90 days, you should have a dedicated e-mail marketing plan, strategies for calling your prospects, and a launch party that has brought you your fi rst investors. Th is is how you enter the private money-lending niche.

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YOUR FUTURE AS A HARD MONEY LENDER

A long-term pillar for my own capital-raising strategies includes participating in events and organizations where investors tend to congregate and look for opportunities. It becomes a lot easier when you move in circles where these investors are open to your pitches.

Th ink about getting involved with the Entrepreneurs Orga-nization, Angel Groups, Single-Family Offi ces, and Wealth Managers. Each of these pools will off er you quality investors who are open to your capital-raising techniques.

Your future as a hard money lender depends on your ability to get your capital-raising strategy done correctly. It is the strategy that will take you from zero to private moneylender. Th e moment that you have attained your fi rst few investors, you will realize the possibilities when you are prepared and have the right tools and materials on your side.

SAL’S QUICK TIPA winning capital-raising strategy is about a

certain kind of mindset—a winner’s mindset.

It is down on paper in black and white, so that

you can follow, alter, and elaborate on it as

you learn about fund management.

It needs to have a good underlying structure and economics to work. It should be highly strategic, so choose your pillars wisely.


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Finally, it is all about preparation and execution. Find those investors and make the pitch—use your materials and take notes.

Every meeting, whether failed or funded, is a positive step toward fi nding enough investors to build your own mortgage pool. Th is fund will take shape after a while and leave you feeling like you can do anything.

Just like that, after all the hard work, administration, and eff ort—you will have money to lend, and a plan that will help you lend it responsibly for profi t. Th is is your real future as a hard money lender, or at least the kind who people want to trust and do business with.

My motto is that an average strategy that is well executed has more value than a great strategy that is poorly executed. You will be so surprised at how much better your pitch becomes when you start trusting your own planning ability.

As you take the fi rst step on this journey, remember this—people want to trust you. All the materials and processes that you have learned about in this guide have shown you how important trust is, and how you can achieve it on your own.

Enlist the right people to help you, make strong part-nerships, and venture into the exciting fi eld of fund building and private hard money lending. It is a dynamic and highly rewarding fi eld that will provide wealth and happiness for you and your family.

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C o n c l u s i o n

T his concludes “Th e Business of Private Lending”—and, as you now know, it is in fact a business. Every-thing from concept to strategic planning is executed in this niche with great care and eff ort.

When you are trying to convince others that you can take their hard-earned money and convert it into more money, you need to be a talented, charismatic fund manager. You also need to be a strategic private moneylender.

In the hard money fi eld, nothing is more satisfying than using money to make money. Th is is money that other people give you, which you use to generate income for yourself and your investors.

At the same time, you are helping real estate investors expand their own property empires by lending them the money that they need to buy and repair the homes that they will resell. In this business, the only thing that matters is trust.

Your investors, partners, and borrowers will trust you, and you will trust them. Everything in this guide has shown you how to build the plans and materials that you will need to back up your pitch, add credibility, and transform yourself into a reliable fund manager.

I believe that the tips and techniques that you have learned about in this book will keep you building funds and making money for years to come—if you can perfect the “trust” dynamic.


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Th is means professionalism, strict enforcement of policy, and careful monitoring of all of your fund processes at all times.

Th is is the beginning of your journey into the torrid world of private money lending. It is going to be exciting, terrifying, and empowering. I urge you to enjoy every second of it, and thrive on the experience that you gather from each encounter.

Th ank you for reading my book on private money lending. Now, it is time for you to put down the book, and pick up your new career.

Always capital raising,

SALVATORE M. BUSCEMI

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R e f e r e n c e s

CHAPTER 1

Th oughts on Wealth, Forbes, http://thoughts.forbes.com/thoughts/quotes/wealth

Hard Money Loans, http://www.bostonapartments.com/loans/hard-money-loans-1.html

Corsini, Ken, Understanding the Benefi ts and Risks of Hard Money, http://www.biggerpockets.com/renewsblog/2011/04/13/understanding-the-benefi ts-and-risks-of-hard-money/

Hinricher, Ryan, How to Use Hard Money to Purchase, Rehab, and Rent Investment Homes, http://www.nuwireinvestor.com/howtos/how-to-use-bridge-fi nancing-to-maximize-your-cash-53271.aspx

Commercial Rehab Loans, http://www.imoneyloan.com/rehab-loans-100-fi nancing/

Hard Money Myths Exposed, http://www.fi nweb.com/loans/hard-money-myths-exposed.html#axzz2noiKW600

Hard Money Myths Exposed, http://www.mikeshardmoney.net/newwp/hard-money-myths-exposed


212

Th e Truth About Hard Money Lenders, http://www.foreclosureuniversity.com/studycenter/freereports/hard_money_lenders.php

Davis, Brian, How to Use Hard Money Loans to Finance Real Estate, http://www.nuwireinvestor.com/howtos/how-to-use-hard-money-loans-to-fi nance-real-estate-52042.aspx

Kass, Benny, Th e Truth About Hard Money Loans, http://www.inman.com/2013/03/26/the-truth-about-hard-money-loans/

Hard Money Loan, Wikipedia, http://en.wikipedia.org/wiki/Hard_money_loan

Dorkin, Joshua, Hard Money: What Is It and How Do Hard Money Loans Work?, http://www.biggerpockets.com/renewsblog/2006/12/08/what-does-everyone-mean-by-hard-money/

Segal, Lloyd, Stop Foreclosure Now: Th e Complete Guide To Saving Your Home and Your Credit,: Hard Money Loans, http://books.google.co.za/books?id=nI3pyKToyhcC&pg=PA142&lpg=PA142&dq=hard+money+loan+competition&source=bl&ots=g5w8ZP3HQo&sig=RTtMn-XgCPBdKuA16MznpjY_Qw0&hl=en&sa=X&ei=LGmxUry-NsW34ATWqICIDg&redir_esc=y#v=onepage&q=hard%20money%20loan%20competition&f=false

Lending Money Nationwide for Hard Money Real Estate Deals, http://hardmoneywebsite.com/

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R E F E R E N C E S

CHAPTER 2

Mistake Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/mistake.html

Asset-Based Loan, BrainyQuote, http://en.wikipedia.org/wiki/Asset-based_loan

Houston, Grant, How To Set Up a Hard Money-Lending Business, http://smallbusiness.chron.com/set-up-hard-money-lending-business-17903.html

David, Hard Money Lending for High Yield Cash Flow and Security, Part 2, http://www.accesswealthstrategies.com/679/hard-money-lending-for-high-yield-cash-fl ow-and-security-part-2/

Earn High Yield, http://www.privatemoneylendingguide.com/investors/earn-high-yields

CHAPTER 3

Lending Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/lending.html

Broker Price Opinion – BPO, http://www.investopedia.com/terms/b/broker_price_opinion.asp

Brokers Price Opinion, http://en.wikipedia.org/wiki/Broker’s_Price_Opinion

Broker Price Opinions (BPO), http://www.corelogic.com/products/broker-price-opinions-bpo.aspx


214

Appraisal Institute Helps Appraisers Perform Evaluations for Lenders, http://appraisalnewsonline.typepad.com/appraisal_news_for_real_e/bpo---broker-price-opinion/

Wolfert, Barry, Opinions of Value – Broker Price Opinions vs. Appraisals, http://northatlantarealestatevoice.com/2009/04/02/opinions-of-value-broker-price-opinions-vs-appraisals/

What Is a Property Lien?,http://www.nolo.com/legal-encyclopedia/what-property-lien.html

CHAPTER 4

Investing, Goodreads, http://www.goodreads.com/quotes/tag/investing

Escrow, http://en.wikipedia.org/wiki/Escrow

Escrow Accounts Protect the Lender Against…You, http://www.bankrate.com/brm/news/real-estate/buyerguide2004/escrow-accounts.asp

Schaefer, Rolf, What All Property Investors Should Know About Cross-Collateralization, http://www.investopedia.com/terms/c/cross-collateralization.asp

What Is a Cross-Collateralized Loan? Do I Have One?, http://www.bankruptcytruth.com/minnesota-bankruptcy-information/what-cross-collateralized-loan-do-i-have-one

Strategies for Negotiating with Creditors, http://www.nolo.com/legal-encyclopedia/strategies-negotiating-with-creditors.html

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R E F E R E N C E S

Th e Basics Behind Cross-Collateralization Clauses, http://musicglobalization.com/2013/06/21/the-basics-behind-cross-collateralization-clauses/

CHAPTER 5

Lend Quotes, http://www.brainyquote.com/quotes/keywords/lend.html

Lender Placed Insurance Programs for Real Estate Portfolios, https://www.swbc.com/corporatesite/Details.aspx?PortalId=471d8736-2234-4d15-bf26

Webb, Candice, What Is Hazard Insurance on a Mortgage?, http://budgeting.thenest.com/hazard-insurance-mortgage-3605.html

Lender-Paid Private Mortgage Insurance, http://www.investopedia.com/terms/l/lender_paid_pmi.asp

What Does Hazard Insurance Cover?, http://www.allstate.com/tools-and-resources/home-insurance/hazard-insurance.aspx

5 Rules of Hard Money Lending, http://www.thefi rstfl ip.com/2/post/2010/06/rules-of-hard-money-lending.html

Wotapka, Dawn, Explaining the Methods of Hard Money Lenders, http://blogs.wsj.com/developments/2011/07/21/explaining-the-methods-of-hard-money-lenders/

CHAPTER 6

Van Steenwyk, When Easy Money Is Hard to Come By, Hard Money Is an Easy Call, http://www.realestate.com/advice/


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when-easy-money-is-hard-to-come-by-hard-money-is-an-easy-call-55160/

Hartman, Jason, Closing More Deals with Private Money, http://www.jasonhartman.com/closing-more-deals-with-private-money/

Glossary of Terms, http://www.privatemoneysource.com/glossary.php

Private Lending 101 for Private Lenders, http://www.privatemoneylendingguide.com/investors/articles/hard-money-lending-overview

Rogers, Karen, What Happens When You Default on a Hard Money Loan?, http://smallbusiness.chron.com/happens-default-hardmoney-loan-61461.html

Lawsuit Against OC Lender Illustrates Dangers of Hard Money Lending, http://articles.latimes.com/2009/may/04/business/fi -hardmoney4

Hard Money Foreclosure Issues, http://www.privatemoneylendingguide.com/borrowers/articles/hard-money-loan-foreclosures

Foreclosure Issues, http://www.privatemoneylendingguide.com/investors/articles/hard-money-lending-foreclosure-issues

CHAPTER 7

Real Estate Quotes, http://www.brainyquote.com/quotes/keywords/real_estate.html

217

R E F E R E N C E S

Hard Money Lenders Help Th ose With Bankruptcy and Foreclosure, http://www.zillow.com/advice-thread/Hard-Money-Lenders-Help-Th ose-With-Bankruptcy-and-Foreclosure/460595/

Evans, Brad, What the Heck Is Subordination?, http://www.bradevans.com/WhatIsSubordination.html

Richason, Owen, What Are Th e Benefi ts of Becoming Incorpo-rated?, http://smallbusiness.chron.com/benefi ts-becoming-incor-porated-3935.html

Ward, Susan, Should You Incorporate Your Small Business?, http://sbinfocanada.about.com/cs/startup/a/incorporatadv.htm

CHAPTER 8

Mortgage Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/mortgages.html

Geraci, Anthony, Mortgage Pools and Funds, http://www.geracilawfi rm.com/documents/Newsletters/Email(1107).pdf

Becoming a Hard Money Lender, http://www.fi nweb.com/loans/becoming-a-hard-money-lender.html#axzz38nbrzgrK

How Hard Money Lenders Structure Loans, http://www.fi nweb.com/loans/how-hard-money-lenders-structure-loans.html#axzz2sBQZoNgf

Pitch Book, http://en.wikipedia.org/wiki/Pitch_book

Raising Money: What Is a Private Placement Memorandum (PPM) and When Do You Need One?, http://redmountainlawblog.


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com/2012/06/19/raising-money-what-is-a-private-placement-memorandum-ppm-and-when-do-you-need-one/

CHAPTER 9

Investing Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/investing.html

Skimming the Pitchbook, http://www.fi nweb.com/investing/skimming-the-pitchbook.html#axzz2sBQZoNgf

DeChesare, Brian, A Day in Th e Life of an Investment Banking Analyst, http://www.mergersandinquisitions.com/investment-banking-analyst-life-worst-day/

DeChesare, Brian, What’s In a Pitch Book?, http://www.merger-sandinquisitions.com/investment-banking-pitch-books/

Hunter , Internal Wall Street Pitchbook Shows Th at You, Th e Clients, Are Suckers, http://www.dailykos.com/story/2013/05/22/1211018/-Internal-Wall-Street-pitchbook-shows-that-you-the-clients-are-suckers

Amter, Robert, Not All Hard Money Lenders Are the Same, http://realtytimes.com/consumeradvice/mortgageadvice1/item/381-20130328_hardmoneylenders

CHAPTER 10

Lending Quotes, BrainQuote, http://www.brainyquote.com/quotes/keywords/lending.html

219

R E F E R E N C E S

Managing the Risks of Growth: Hard Money and Resilient Financial Systems, http://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb9605/sp02.pdf

Pricing and Guidelines, http://www.montegra.com/lending-guidelines/pricing-and-guidelines/

Hard Money Loans: Pine Financial Group, http://www.investorsbeat.com/hard-money-loans-pine-fi nancial-group/

Ferguson, Mark, How to Finance Rental Properties with Hard Money, http://investfourmore.com/2013/03/16/how-to-fi nance-rental-properties-with-hard-money/

Hard Money Loans, http://www.alliemae.org/hardmoney.html

CHAPTER 11

Borrowing and Lending Quotes, http://strangewondrous.net/browse/subject/b/borrowing+lending?start=1

When Hard Money Loans Make Sense, http://www.investorsbeat.com/alternative-funding-when-hard-money-loans-make-sense/

Structuring Private Real Estate Funds, http://www.investmentlawgroup.com/structuring-private-real-estate-funds

Marrs, Nathaniel, Louis Hellebysch, Krishnakshi Das, Varia-tions in Structuring Whole Fund and Deal by Deal Carried Interest or Promote in Real Estate Funds and Joint Ventures, http://www.kirkland.com/siteFiles/Publications/8D341009F2A6FCFEC975F8DC5B655D5B.pdf


220

Real Estate Private Equity Funds, https://www.deloitte.com/assets/Dcom-SouthAfrica/Local%20Assets/Documents/ZA_Consulting_RealEstatePrivateEquity_051107.pdf

CHAPTER 12

Mindset Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/mindset.html

Origination, http://www.investopedia.com/terms/o/origination.asp

Finance/Funding, http://www.nature.com/bioent/2003/030101/full/nbt0599supp_29.html

Private Money Investing, http://en.wikipedia.org/wiki/Private_money_investing

Th e Advantages of Fund Investing, http://www.morningstar.co.uk/uk/news/58957/Th e-Advantages-of-Fund-Investing.aspx

Jimoh, William, Investors List Benefi ts of Engaging Th e Services of Fund Managers, http://www.vanguardngr.com/2013/12/investors-list-benefi ts-engaging-services-fund-managers/

CHAPTER 13

Management Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/management.html

Corporate Governance Self-Assessment, https://www.inrev.org/guidelines/corporate-governance-self-assessment

221

R E F E R E N C E S

Defi ning Prop Trading is Hard Enough, But Good Governance, http://www.telegraph.co.uk/fi nance/newsbysector/banksandfi -nance/10509713/Defi ning-prop-trading-is-hard-enough-but-good-governance....html

Hiatt, Fred, Th e Shutdown of Good Governance, http://www.washingtonpost.com/opinions/fred-hiatt-the-shutdown-of-good-governance/2013/10/06/329f9c1a-2d0b-11e3-8ade-a1f23c-da135e_story.html

CHAPTER 14

Track Record Quotes, BrainyQuote, http://www.brainyquote.com/quotes/keywords/track_record.html

Palmquist, Mark, Th e Bad Side of Good Governance, http://www.strategy-business.com/article/re00244?gko=44c8f

Wells, Craig, When Good Governance Goes Bad, http://www.sumpters.co.nz/blog/when-good-governance-goes-bad

Find a Truly Great Hard Money Lender—Tips for Brokers, http://www.val-chris.com/blog/fi nd-a-truly-great-hard-money-lender-tips-for-brokers.html

Chiu, Kevin, Hard Money Financing Booms as Investors Sue, http://www.housingpredictor.com/hard-money-fi nancing/

Robinson, Olivia, Avoiding Hard Money Lending Loan Scams, http://backgroundintelligence.com/bi_siteRevision_090111/PDFS/AVOIDING%20HARD%20MONEY%20LOAN%20SCAMS%20copy.pdf


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CHAPTER 15

Quotes on Money and Wealth, http://www.randomterrain.com/favorite-quotes-money-and-wealth.html

Capital Raising, http://www.cuttingedgecapital.com/fi nancing-strategies/

Suster, Mark, How to Develop Your Fundraising Strategy, http://www.bothsidesofthetable.com/2012/01/16/how-to-develop-your-fund-raising-strategy/

Su, Th omas, Th e 10 Capital-Raising Strategies, http://smartinfobuzz.com/the-10-capital-raising-strategies/

Lechter, Michael, Strategies for Raising Capital, http://www.inc.com/resources/startup/articles/20061101/mlechter.html

An Entrepreneur’s Guide to Raising Private Capital, Lighthouse Consulting, http://www.kenyacic.org/dev/sites/default/fi les/entrepreneurs_guide.pdf

225

A b o u t t h e A u t h o r

SALVATORE M. BUSCEMI is a Managing Director of Dandrew Partners LLC in New York City, a commercial real estate advisory boutique fi rm that focuses on placing capital from prominent institutional investors into middle-market distressed commercial real estate investments.

Buscemi is also the Cofounder and CFO of Las Vegas-based Oasis Fractionalized Real Estate Equity (OFREE), a $15 million fund oriented solely toward the low basis acquisition, manage-ment, and redemption of broken fractionalized hard money mortgage assets, with a focus toward corrective development-oriented solutions to capture equity opportunities that are tra-ditionally unavailable in a traditional receivership or liquidation environment.

In addition, Buscemi also cofounded Dandrew Strategies LLC, a $30 million real estate solutions provider in the secondary mortgage market, specializing in non-performing residential mortgage portfolios.

Buscemi started his career and spent fi ve years as an invest-ment banker with Goldman Sachs, working with clients across a broad spectrum of industries. While at Goldman Sachs, he col-laborated closely with the fi rm’s divisional leadership during the transition from a partnership to a publicly held company.


226

A graduate of Fordham University in New York City, Buscemi has held leadership positions on several nonprofi t boards.

As the cochair for the YMCA of Greater New York’s Face-to-Face Capital Campaign in 2002 and 2003, he successfully co-led a $9 million capital campaign to create a new YMCA for Lower Manhattan. He is a frequent speaker and guest lecturer on real estate fi nance at professional symposia and has written numerous articles on the topic of residential and commercial real estate fi nance in various publications, including the Investor’s Business Daily.

Buscemi resides with his wife in New York City and Las Vegas.