What is the most common mistake you see investors make when utilizing hard money?
This question was asked to Brandon Moulton by Fernando Angelucci.
His first answer was when the investors start in huge amounts in terms of construction budgets.
Another thing is going to or investing in places or municipalities that they are not familiar with because every municipality has different requirements. And this could affect the inspections that could result in the stoppage of work.
His message to investors is that if you are not playing by the rules, you may find yourselves tied up with a hard money loan that could take away your profit.
Watch the full video and learn more about this topic.
Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,
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Fernando Angelucci (00:00):
So yeah, I’m glad you kind of covered some of those things. So, let’s switch gears here. And now, let’s talk about the borrower themselves or the,
Brandon Moulton (00:20):
Sure.
Fernando Angelucci (00:20):
So, you know, hard money is a great tool if you know how to use it well, but it can be a pretty disastrous tool. If you don’t know what you’re doing, you know, what are some of the most common mistakes you see real estate investors making when it comes to utilizing hard money?
Brandon Moulton (00:41):
So, there’s a few I’ll touch on here. I would say, starting very big and in terms of construction budgets, and then maybe municipalities that they’re not familiar with. I mean, here in Chicago you go to Berwyn, some of the other local municipalities, they have different requirements and they can really jam you up on inspections and stop work orders, et cetera. And if you’re not playing by the rules of the game, you can really find yourself, you know, tied up with a hard money loan or private money loan, that will just really chew away your profits. So, know your municipalities inside and out, I would say, start with a smaller budget, especially out of the gates and you know, those bigger budgets and those luxury class A stuff could be very dangerous. Because, if you don’t make, hit the market time, you could be sitting on that for quite some time and really just getting chewed up like I said. So, budgets and municipalities are the two biggest pitfalls, I see.
Fernando Angelucci (01:56):
Yeah, absolutely. And one of the things that I’ve noticed, especially on the municipality side is when investors are trying to game the system. So, I’ve seen some pretty nasty deals where the investor tried to avoid pulling, permits, the municipality found out, and then all of a sudden they get a stop work order. Now, they can’t do construction for, you know, six to nine months, until they remedy this. And that’s, you know, six to nine months of hard money. That’s a lot of interest to be paying. Another thing that I’ve also seen is the timing of the market. Like you alluded to, you know, in Chicago, we have pretty severe winters and the real estate activity from buyers from end buyers, homeowners dropped significantly during the winter time. And so does prices. You usually see a 5 to 10% drop in prices across the board during those times.
Fernando Angelucci (02:47):
And, I’ve seen some larger projects that the scope kind of exploded a little bit. The construction took a lot longer and all of a sudden now they’re listing in winter as opposed to trying to list early fall, late summer, that caused a lot of issues. So yeah, very, very important things to watch out for, one of the nice things I like about working with you, Brandon is, you’re not only a lender, but you’re almost like a third-party advisor. You come and you help them with their scope. You tell them, Hey, I don’t know if this timeline’s really making sense. How can we tweak this to make sure that you’re geared? You know, because you’re always looking to have your clients, perform well, the last thing you want to do is take a property, because Renovo is not in the business of owning property. Renovo in the business of lending capital to successful real estate investors. Right?
Brandon Moulton (03:34):
Yup.
Fernando Angelucci (03:35):
So,
Brandon Moulton (03:37):
So yeah, I mean I work, you know, having, you know, writing hundreds of these deals over my career, kind of seeing, you know, how these deals go and what to expect and, you know, what budgets are appropriate given what their plan is? And, you know, also asking if they’ve rehabbed and places these different municipalities to make sure they’re aware of all the requirements and which ones are particularly tough. So, like you said, we’re looking to get in and out of these deals, want to have a successful track record with our guys, and continue to turn the money and help them hit their goals, plain and simple.
Fernando Angelucci (04:19):
Yeah. So, one of the things that I’ve also noticed, just because we have buyers that always ask for referrals. And a lot of these buyers already coming from a previous hard money lender that made some kind of mistake and then have gone over to work with you guys and stayed with you. What are some of those common mistakes you’ve seen your competitors make, which has caused business to migrate from them over to you guys?
Brandon Moulton (04:46):
I would say the, you know, the biggest one, you know, they can lend folks into a problem, when they’re really, they don’t have those conversations and if they fit the box, so to speak on paper, you know, maybe it doesn’t actually makes total sense. And then, they can get guys into a couple more projects than they should. And then that creates friction long-term, and then, an opportunity for us. I would say the other piece is over promising and under delivering, especially on timelines, that’s a big one, thinking they can get it done and they can’t actually get it done and for any variety of reasons. And then, the third is there’s, you know, with the national guys, there’s just things that happen on wall street or from these institutional players that back them that they might just say, Hey, you know, if your budget is more than 50% of your ARV, we can’t do it. Or, if your purchase price is 50% less than your budget, that’s just a hard no. So, they start to run into those kind of hard no’s in the box type lending scenarios.
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