Insider Tips from Hard Money Lending Expert

Aviva (00:02.79)
This week's Listener of the Week is EZR Stars. EZR Stars, maybe it's EZ All Stars, but just with a lot of consonants. Thank you so much for leaving us a five -star review. And for those of you listening, if you leave us a five -star review below, you might be next week's Listener of the Week. Week, week. This week on Commercial Real Estate Secrets, we have Jason Ballin hailing from...

Columbia, Maryland, Jason, thank you so much for being on the show.

Jason Balin (00:35.316)
Thank you, I certainly appreciate it.

Aviva (00:37.19)
Yeah. So Jason, tell us who you are, what you do and why you are here. Ready to tell the commercial real estate secrets.

Jason Balin (00:42.292)
Absolutely.

Absolutely, my name is Jason Bailen from Hard Money Bankers. I started Hard Money Bankers, which is a private lending company, about 16, 17 years ago. It was right in the heart of 2007, going on to 2008. There was a lot of funky times going on there, and no better time to go out and try to raise a whole bunch of capital from private investors that I didn't know to lend out on residential and commercial real estate deals. So I'm sure you can imagine that was a lot of fun.

But when I look at that in the rear view mirror, I said, hey, if we could do it then, we can do it in any market. And it's kind of only gone up since then. So we lend money to real estate investors that fix and flip properties, buy commercial assets, things like that. It's been a lot of fun. We also run a group for hard money lenders and aspiring private lenders called the Hard Money Mastermind. So we've got a network of a lot of good investors all over the country.

Aviva (01:37.894)
So for those listening who have never heard of hard money lending before, can you explain what it is and why someone would want to take out a hard money loan instead of a conventional?

Jason Balin (01:49.59)
Sure, and don't be scared by the term hard money. I know hard is kind of a harsh word, and it's not hard to get. But hard just means asset. We're an asset -based lender. We lend to commercial real estate investors and residential investors. And one might think, well, why wouldn't I just go to a bank? What's the difference between you two? And you could go to a bank to get a loan, and a bank would be like,

might end up being a little bit cheaper than a private lender or a hard money lender. And when I use hard money and private money, I kind of just overlap. It's kind of similar things. But in essence, a hard money lender has a pool of capital, either a fund or maybe their own money that they're lending out on. And it's mostly collateral -based. So if you went to a bank, you'd have to show tax returns. You'd have to go and.

in a formal underwriting process that might take 30 days or 45 days if you use a private lender or a hard money lender, not that it's just a handshake, there's property diligence that is getting completed, but it's a much quicker process, right? And I'm talking between a day to a week in order to get the capital for a real estate investment. And we all know for anybody who's a commercial real estate investor, you don't have weeks and months. If you go to SBA, it might even take a year.

to get a loan on a project. So you gotta move quicker so you need an alternative financing source and that's where hard money lenders typically come in.

Aviva (03:17.07)
when you say it's collateral based, what does that mean?

Jason Balin (03:20.916)
So what I mean by collateral base is we actually put a first lien, first mortgage or first deed of trust on the property, just like a traditional bank would go to. So for instance, let's say you buy a piece of property for $500 ,000 and a hard money lender or bank comes in and lends you $400 ,000. They would put a mortgage on that property or a deed of trust or a first trust or a lien. And that's the collateral if you defaulted and didn't repay back the loan, they can in essence foreclose on that property.

Aviva (03:52.006)
So say I am going to buy a commercial property and I'm looking at my loan options. Can you explain why I would go with you instead of a conventional baker? I know you briefly touched on this, but I want to really break it down for the listeners.

Jason Balin (04:08.662)
Sure. So the two big reasons are flexibility and time and time restraints. So again, it depends if it's a residential project or a commercial project. You know, commercial due diligence is a little bit longer. But what will end up happening? And again, I know a lot of folks, the stigma might be that a hard money lender is kind of like a subprime lender. And that's not necessarily the case. A lot of the real estate investors that would use us are very bankable.

and they have means to do projects themselves. Some aren't, but some are. But they don't necessarily have the time or they just, they don't have the flexibility that the bank needs in order to do so. You put a property under contract, it needs to close in a few days or a few weeks. A bank is just not a good option. And then more importantly, you know, a lot of these, and we can talk about the commercial real estate investing more, focus on that if you want, but a lot of the commercial real estate investors might have,

You know, very, very good, you know, let's say off paper financials, but on paper, not great financials. Maybe their tax returns haven't been filed yet, or maybe they show a loss. And, you know, a bank wants a crispy clean guarantor and a crispy clean transaction. And sometimes you just can't show it. I mean, I know lots of real estate investors that we do loans for that have hundreds of thousands, maybe even millions of dollars a month in cash flow from these buildings. And...

you know, their credit's a 699 instead of a 700 or, or, you know, whatever, whatever, or it's a funky asset type. When I say asset type, like building type, and maybe they have two year leases in place and not 10 year leases in place. And it's a commercial office. That's a, that's one that banks don't like messing with. So to us, we're, you know, we're, we're driven based on, you know, can the bar perform and make their monthly payments? And is it a good,

is a good asset that we don't think the real estate investor is going to walk away from. And that's what we'll lend on. And you know, it's funny, you can go to a bank, you can have a building worth a million dollars, and you can go to a bank and you need $100 ,000 dollars which you'd think is very risk free, but you don't meet the credit profile or you don't meet certain profiles from the bank, and they won't give you a loan no matter what.

Aviva (06:28.23)
So in that vein, the past, what, two, three years have been really unique, is gonna be my nice way of putting it, when it comes to lending, specifically in commercial real estate, where banks have been a lot more apprehensive to loan in general. One, can you speak on that? And then two, can you talk about how hard money lending helps?

that issue that a lot of us have been dealing with these past few years.

Jason Balin (07:01.526)
So October 2022 was an interesting time because the interest rate, when I say interest rate, the short -term interest rates really, really skyrocketed. And that was, in essence, the cost of capital that a lot of these institutions had access to. So if you got a loan between, I don't know, before October 2022, from years back, you could probably get a commercial mortgage in like the 2%, 3%, 4%, 5%. It was very, very.

very, very inexpensive. And, you know, whenever the real estate market's hot and going good and there's a lot of liquidity in the space and more and more institutional capital and banks come online and want to deploy large, large sums of money, it ends up being like a commodity where it's just a race to the bottom and everyone's just giving away capital very, very cheap and easily and that's driving real estate prices up. And that's what happened kind of for, I don't know, close to a decade, I would say.

And then October 2022 , you know, the market kind of shifted rates doubled at least in some spectrum. And also the short term rates that homeowners were able to get are not short term mortgage rates that the homeowners were getting stuff. You know, you get a homeowner rate at two or 3 percent and then went up to six or seven. So that really kind of put a halt on a lot of real estate, a lot of commercial real estate. And keep in mind, most commercial real estate doesn't have 30 year fixed loans like homeowners.

You know, they may have an amortization schedule of 10, 15, 20, 25 years, but typically if you're getting like a bank loan, they want, they have some sort of like call period in five years where they can determine if they want to extend the loan or not. And if you had a 3 % rate and five years later, you know, your loans do, you're not getting another 3 % rate. They might keep you on your books and they might want to do a loan with you again, but that interest rates going back up to today's rates, because they're going to lose money.

on that if they re -lend it out at that. So that in essence changed a lot. And I think because banks were a little bit more cautious on things, money wasn't just everywhere to be lent out. The banks kind of chose what type of commercial asset classes did they want. And I'll give you an example. Would you rather, if you're a bank and if this is your capital, like honest question, would you rather...

Jason Balin (09:23.83)
lend to a professional office, like on an office, let's say you have two office buildings, would you rather lend on a professional office building that has a two, that most of their tenants paid, you know, two, three, four, five year leases, or would you rather lend on a medical office where most of their tenants were 10, 20, 30 year leases? There's a lot, there's a lot less risk on that. So that's what we've seen kind of on the banking side that they're really picky of what type of assets and what borrowers they're lending to today.

Aviva (09:52.582)
And we're just going to go pure selfish with my next question because you brought up office space and I'm curious as to what you think is going to happen in the next one, two, three years with commercial office space in the United States as a result of the absolute mania and CNBS loans.

Jason Balin (09:55.318)
Sure.

Jason Balin (10:15.062)
So I think it depends on what market you're in. I think on a broad level, office is scary. But we lend on professional office. I mean, we're in the Washington DC area, and we lend all over the mid -Atlantic region, up and down. And it kind of really depends. I thought that A -type office buildings, class A -type office buildings, would have just

a lot of risk because just they're bigger in size. But from what, but from some research I had and from actually interviewing on our podcast, if a few folks in that space, they think they have the least amount of risk because they're owned by, you know, big REITs and large institutions and things like that. And they say, well, you know what, if these sit vacant for 10 years, you know, we don't, you know, it's fine. We'll, you know, we'll, we'll, we'll keep them and we'll just keep it, we'll keep it moving. But like the B stuff, the mom and pop type stuff.

they can't support that. So I think it really has to do with the locality of it. And I think as a one -off investor, and just like if you buy a business or you buy a stock or you buy a piece of real estate, you do the best you can when you're purchasing that. And you look at all the different directions of what could happen. And I think if you're owner operating those things yourself and you bought it at a good number,

you potentially have decent debt in place and you're not too over leveraged, I think it ends up working out. I mean, I will say as a lender, we're cautious on deals like that, but it's not like, nope, we're out of the commercial office game, professional office game, I should say. So I think for the most part, if you look at it on a smaller scale, on a localized level, and you're operating it and you're hands -on with it,

I think personally it's a fine asset class.

Aviva (12:14.66)
You know, we're finding here, I live in Denver and generally I find Denver is a pretty good indicator of like the greater United States. So I just focus really hard on this town and then try to relate it out. It's exactly what you're saying. The A class property is they're leasing. They're totally leasing the snot out of it because it has the amenities. It has the big windows. It's sexy.

But the C class that was built in the 20s, 30s, 40s, 50s, 60s, 70s, 80s that look like a jail and have no amenities and you might get stuck in the elevator. People don't want to rent that. And it's just been, it's really fascinating to watch. I don't think people realize how profound the impact the last...

Jason Balin (12:48.118)
That's right.

Aviva (13:12.32)
essentially the pandemic really had on real estate. Do I think it's real estate is going down as a result of the pandemic like MSNBC wants to say? No. But we are at the forefront of a major shift in real estate. And that doesn't mean it's crashing, it just means it's changing and it's a fascinating thing to watch.

Jason Balin (13:34.102)
But and also on that, you know, the reason these older buildings, not that they're just less.

desirable to the tenant, but there's capital improvements and real life capital expenses that come up that I think a lot of real estate investors don't take into consideration. Where it's like, hey, I'm making this much cash flow every month. And it's like, well, you know, just like anything else, you've got to stock part of that away because you're going to get to the point, especially in these older buildings, if you're in an older market, in an older area. And I lived in Denver for a few years, and it doesn't seem like Denver is such a newer city in general. But compared to some of these other places where,

You know, where that's a real issue. Like, you know, in essence, like, your cost to rebuild that is substantially more than a replacement cost on like a brand new building. And that's why some of these things will just get torn down and start from scratch. And I think a lot of smaller real estate investors don't take that in consideration. That like that's the issue. You know, across the board, there's one other thing I was going to mention related to that, but maybe it'll come back to me.

Aviva (14:36.262)
Can you explain what replacement cost is for the listeners?

Jason Balin (14:39.444)
In essence, just the cost if you had to rebuild the asset from the beginning.

Aviva (14:46.022)
Correct. I mean, obvious. Yes. But yeah, if it costs 200 bucks to build an office building, maybe you buy a C -class building for a hundred bucks a foot. You're already in the green because to replace that property, replacement cost, it would cost you a hundred bucks. Then if you want to get complicated, we talk about, you know, land value, but I'll save that for another episode. Another selfish question, Jason. The other day I was talking to a...

Dear friends parents Whip in successful and I was really excited when I saw that we had this podcast episode because I knew I could ask you this question You know, I was talking to them and they just were like, oh, yeah We're just doing some hard money lending like literally as if they were doing it for fun Which I know they literally are just doing it for fun. What does that what in the world does that mean?

Jason Balin (15:26.07)
Perfect.

Jason Balin (15:41.366)
So if you're doing hard money lending for fun or as a hobby, that's scary. Because there, I mean, I hate to say it, and I've learned a lot over the last 16 or 17 years, but it's, but like, it's, not that you can't do this full time, but there's a lot to go into it, right? Like, you know, making sure the borrowers,

Aviva (15:44.614)
Hahaha!

Jason Balin (15:59.926)
the borrower legitimately is qualified to execute on the project, making sure that you really, really know the value of the property, not just, you know, the as is value of the property. They have to repair value. And, you know, is there a construction component? You know, if they say it needs $80 ,000 in construction or renovation, does it really need that? And valuing properties is challenging on the residential side and the commercial side. You know, are they localized? I mean, there's...

To me, the days of, hey, I've got this project, it's $500 ,000, and hey, I've got a self -directed IRA and I can't deploy it anywhere, I'll just give you the 100 % financing, $500 ,000, and just pay me back 10 % or 12%.

you know, in a good market and, you know, with a little bit of luck, like that works out, but like that's not a business and there's a lot of risk on that. Real estate shouldn't be risky if it's run the right way and underwrite the wrong way, but like think about when you buy a property, all the due diligence that you're doing to go into that. As a lender, you kind of have to piggyback behind that and confirm that all that information is correct. And too many private lenders, and when I say private lenders,

Like, in essence, the difference between a private lender and a hard money lender is a private lender's like, hey, I've got a few hundred thousand dollars, I just want to lend it off, one off to somebody, and they're just going to pay me back a rate of return. Hard money lender is a little bit more official where they're either pooling private capital together from other private lenders, or they're lending their money out, and they're just doing it kind of on a more kind of a, you know, more kind of business -like level. And...

There's just a lot to go into it. And I've seen so many private lenders lose money because...

Jason Balin (17:46.614)
They're just lending on bad deals. Sometimes they'll do second mortgages behind us. You never want to do a second mortgage behind a hard money lender. There's a lot of risk that goes into that. And they're not sure what they're doing. I'll never forget, right when we started this business, we spoke at an equity trust conference, which was a big IRA custodian in Orlando. Or not in Orlando, but that's where the event was. And I couldn't believe all these private lenders that were out there that just looking to deploy their capital. And they

They were, you know, it's like, hey, good news. I had money in this stock portfolio in this old 401k. I rolled it over into a self -directed IRA. Now I got $200 ,000. And they think they can just put it into anything. And it's just like, you know, a money manager is just going to send it back. It's like, you're responsible. You're collecting payments. You need to make sure it's a good deal. You need to make sure that you even have, if you need a license, some states even need licenses in order.

in order to do that. So there's a lot of miscellaneous things that kind of go into that. But like that's our full -time job is not just going out to find, you know, deals. It's, hey, we got to go find good deals. We got to make sure we link up with operators that can perform. We have to service the loans. We have to do proper legal docs. I our loan docs set is 75 pages, just like a bank. And I think that's overlooked sometimes.

Aviva (19:07.462)
Um, you think everybody reads those 75 pages? No, I know. I just get a kick out of people never reading their documents. That's a, that's a me thing. I dig.

Jason Balin (19:11.382)
No. I mean it protects us as the lender.

Jason Balin (19:21.75)
Yeah, well, you know, your doc packages typically start smaller and then as you've been in the business long enough, and I've done 3 ,500 loans and as potentially you get contested on a doc set, it's like, hey, maybe we need to add this language in there for the state the next time and the next time. And like, I feel like you start with something small and then you formulate into something a little bit more powerful.

Aviva (19:42.246)
And that's why I have a 20 page lease. So you brought up the concept of risk. How do you all mitigate risk before you deploy capital?

Jason Balin (19:44.858)
Same thing.

Jason Balin (19:56.31)
Good question.

So we follow four things we call it the four C's. So collateral being the most important piece. Is it a piece of real estate that we understand? You know, is it a type of asset that we understand? Is it an area that we're comfortable lending in? Overall is the collateral good? I mean, I spent half my day on multiple listing in different platforms in order to value the real estate and make sure I'm comfortable with it. We only lend locally because those are areas that we know that we have resources that we can potentially offload properties if we had to foreclose on it. So that's number one.

Right behind that is character. So 4C is collateral, character, capacity, credit. Character being number two by far. And they're in this order. They're in that order. And as you've heard, credit's the last one, even though it is important. So characteristics. If you can't get the bar or the client on the phone now, not going to get him on the phone if he's two months back on payments. So it's important. We typically try to meet with everybody, make sure they understand all the terms, they understand the transaction.

able to do the transaction. So characteristics are very important. Sometimes we do background checks. We want to make sure that, you know, and the other thing is as a lender, you don't want to set up somebody for failure either. They might be a real estate investor that's just way over their head or it's like, Hey, like, I know you think you're going to sell this thing for $500 ,000 when it's over, but this is, these are the facts of why the chances, the chances that you won't. And we're also potentially in an arguably softer market than we were a while ago.

So character and then capacity, you know, can they make the monthly payments? Do they have a real exit strategy? Do they have the ability to execute on the construction and then credit? And again, credit isn't everything, but it does tell a story. And statistically, you know, real estate investors that let's say it's a construction project, real estate investors that have a big construction project and have lousy credit typically don't perform.

Jason Balin (21:50.12)
They have challenges to do that. And what happens if your credit's low? You can't refinance if you're doing a long -term hold because you need to get a bank loan on that. If you go over budget on your construction project, you might not be able to get capital from somebody else because they might not be able to give it. So like...

There's a lot to go into it, and again, we've done loans to real estate investors that do have lousy credit and do have other things that aren't great, but we've got to look at everything as a whole to see what makes sense.

Aviva (22:24.038)
Super interesting. Now I have one final question. We ask this on every episode of Commercial Real Estate Secrets. What currently makes you happy in your day to day as a hard money lender?

Jason Balin (22:37.822)
inside our business. So the reason I like...

Lending is I've owned my fair share real estate over the years I've been lots of rental properties that we sold because I was a crappy operator and I hate owning real estate and our ownership in real estate today is just limited partnerships with other operators and self storage and office and some multifamily stuff, but what I but I also do have like the deal junkie side of me and Being a lender I can get all of that out Without taking all the risk. So I look at a lot of deals every day I mean each one of our our office

is I have four partners in different markets and we each look at about a thousand deals a month and we end up each closing about ten of them. So I mean we look at a lot of deals so I can still get like that deal junkiness out of without having to do all the heavy lifting and taking on all the risk from that. So like I get enjoyment I get enjoyment from you know open up my email or my phone or and just you know reviewing and being creative trying to structure deals with people.

Aviva (23:42.598)
From from one deal junkie to the next I get it. I Was on my coaching call. I have a I have a coach for my commercial real estate brokerage I was on a call with her because I'm four and a half months pregnant and I was like I'm a deal junkie like I'm gonna pop out this kid I don't want to stop doing deals like and so from one junkie to the next I Get it So Jason, thank you for being on the show. Where can our listeners?

Follow you, find you, connect you, connect with you on the internet.

Jason Balin (24:15.198)
Absolutely. So anywhere at Hard Money Bankers, hashtag Hard Money Bankers, or jason at hardmoneybankers .com is my email address. Literally, we do a lot of content. A big part of our business is providing as much value and content to real estate investors on the residential side and the commercial side. So we're constantly doing content to do so. So anywhere at Hard Money Bankers, for the most part, you'll be able to find us.

Aviva (24:40.966)
Amazing Jason. Thank you so much for being on the show and for all of you listening. We'll see you next week. Yeah.

Jason Balin (24:47.67)
Thank you so much.