DEAR BENNY: I plan to start flipping homes and have to use a hard-money lender at first. Once I make profits on a few flips, I’ll take that money and fix my credit. I am a disabled American veteran and just want to start flipping to make money instead of living off the government. My credit ain’t the best so I have no choice but to use hard-money lenders. I have over 30 years’ experience in construction, which is an asset. I will be attending a three-day work shop in the future as well. So what do I need to look out for? I have been told that hard-money loans can go up to 80 percent of the purchase price of the home. At 18 percent annually that’s only 1.5 percent monthly interest, correct? I’m just wanting to make sure I make good profits with a hard-money lender and not pay them all of my profit. What good would that be? I certainly do not want to deal with a loan shark. I am sure there are good and bad hard-money lenders. I expect I will have to come up with the earnest money down payment as well. – Robert
DEAR ROBERT: Please do yourself a favor and find an attorney who will work with you as you start your activities. You said it yourself: There are good and bad hard-money lenders.
To explain: A hard-money lender is someone who makes loans to people with bad credit or who need cash quickly. Their interest rates are high, and the lender relies on the security of the property in question.
And that’s my concern. If you buy a house and plan to rehabilitate it, the security that lenders look for will be shaky; the house you pledge as security may be completely remodeled, and until it is completed, will not have the equity – the security – the lender needs and wants.
Have you explored other loan avenues? Are there government programs that will financially assist veterans as they return to civilian life? What about contacting the U.S. Small Business Administration (SBA) to determine if they can assist you with a start-up loan for your start-up business?
Bottom line: Walk before you run. I am impressed with your goals, but you want to make a touchdown instead of having to punt.
RESPONSE FROM A READER: The information you shared in our newspaper about contractors would have benefitted my husband and I. If only we had known we were entering a mine field. Some contractors are completely unscrupulous. We were scammed twice by different contractors for the same home. The home we purchased in February is still unfinished and not move-in ready. At this juncture, our finances are severely limited but we are determined to have our dream home completed. We feel stupid and embarrassed as we ask ourselves how could this happen twice. Your article is helpful and we hope other people heed your suggestions. – Carol
DEAR CAROL: Thanks for writing, and I am sorry to hear that you have been taken. Hopefully, if you find a good attorney, you will resolve your issues. But this is a strong reminder to all readers: If you plan to do major construction in or on your home, don’t just sign what I call the contractor’s “two-page special.” You should consider using one of the American Institute of Architects (AIA) form contracts, but tailored to your needs. And always have at least 10 percent of the contract price set aside to be paid only when the job is complete and all contractors have signed that they have been paid so they cannot later file mechanic’s liens against your house. I prefer a 15 percent retainage if you can convince the contractor this is the only way you will work with him or her.
COMMENT FROM A READER: I have a comment on your recent advice to Eddy about burning his mortgage documents. It seems to me that making a photocopy of the paid-off mortgage would be a better choice for the celebratory burning party, followed by taking the originals to his tax accountant to confirm what should be saved for tax purposes – and for how long. Love your columns. – Lynn
DEAR LYNN: Thanks, excellent suggestion.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: email@example.com.