Financing Fix and Flips

How Hard Money Lending Fuels Real Estate Investing

Q&A with Alan Haberman, Chairman, Rock East Lending LLC

Rock East’s chairman and founder, Alan Haberman, is widely recognized as one of the founders of the modern hard money lending industry. In the decades since he began, his companies have closed more than 15,000 loans for real estate investors, totaling more than $2 billion in loans.

Even before his career in hard money lending, he was a leader in the real estate investing industry. Known as the “King of the Conversion”, his law firm helped investors convert apartment buildings from rentals to co-ops or condos. This conversion industry was in fact a real estate investment strategy, but it came to an end in the early 1990’s as a change in federal tax law decimated the industry. But helping real estate investors achieve their goals was in his blood, and he found a new venue to do just that. The rest, as they say, is history.

Here, Mr. Haberman discusses how the industry has changed and shares some advice for those in the industry:

Q: How has the “hard money” evolved in the last 30 years??

When I started in this business, the industry was strictly individuals who had some money and leant it out to others. We built on that and pioneered the model of securing Lines of Credit from banks and blending their money with our money to make loans. There is incredible leverage in that model.

Back then, Wall Street had no interest in this business – I believe they felt it was ‘beneath” them. But after the 2008 financial crisis, all financial institutions were looking for ways to make money. With interest rates so low, it wasn’t easy. So hedge funds and private equity got into the Hard Money game. Ironically, at the same time, many banks got out of the game because of the losses they had suffered in the real estate crash.

Wall St. money has made it a much more competitive landscape. There was a time when we were pretty much the only game in town. My concern with the “Wall St. backed” companies is that they aren’t true hard money lenders. True Hard Money lenders like Rock East look at a deal and think: “how can we get the deal done for our client.” It’s about creativity. Many of our competitors who are backed by institutional money just look to see if a deal fits in the box. If it does, they’ll do the loan. If it doesn’t, they won’t. It’s almost like trying to get a traditional loan from a bank.

On the plus side, our approach to creative solutions remains a competitive advantage.

Q: When you started in the business, we didn’t have TV shows about flipping houses, let alone an entire network. Do you think they have been good for the business?

I think the shows are a mixed bag. I think it’s great that they inspire people to try something new and aspire for more. However, I don’t like how they make it look easy and they make it look like you always make money on the deal.

Like in any other business, you have to know what you’re doing. You have to have a great team (realtor, contractor, lawyer), you have to know the market values, and you have to be able to get the work done quickly. I always advise people to try their first deal with an experienced partner. Learn the business, and then scale it. It’s definitely not as easy as the TV shows portray. And no one makes money on every deal!

Q: What are the biggest mistakes that you see real estate investors make?

There’s a famous line in real estate investing circles: “You make money when you buy, not when you sell.” This means that your purchase price is the main factor that determines your profit. You have to buy right!

The second saying is: “The numbers don’t lie.” Don’t convince yourself the deal works if the numbers show it doesn’t. Don’t count on unrealistic appreciation or wishful thinking that construction will come in way under budget. Believe the numbers!

Finally, pick your partner very carefully. Most of the deals that I have seen go bad are because the partners get in a fight and everything falls apart. Make sure you know who you’re getting into business with. (Which is why I’m in business with my sons. ????)

Q: What qualities does someone need to be successful in real estate investing?

Real estate investors are entrepreneurs and small business owners. So like all entrepreneurs, they have to have an incredible work ethic. The business is 24/7. They also have to have an entrepreneurial attitude – flexibility, optimism, and adaptability.

Of course, money also figures prominently into the equation. I hate when I hear people say “you can get rich with real estate with NO money.” I just don’t believe that’s true. Even most Hard Money lenders like us require that the investor has some skin in the game. If you don’t have any money to get started but you bring other skills to the table, find a partner who can provide some capital to get started.

Q: What’s in store for Rock East Funding?

This is an exciting time for Rock East. We have seen tremendous growth this year and we are investing for future growth.

We have been seeing more and more clients keep properties as rentals. Providing 30-year, no-income-verification loans has been a growing part of our business, and we’re glad we can provide that solution for our clients in addition to the traditional “Hard Money.”

But what will always be core to Rock East is that we will always treat our clients like family. On every deal, they can count on transparency, responsiveness, and integrity. They count on us not just to finance a deal, but to provide advice as well. As we like to say to our clients, “Our Experience is Your Advantage.” And no one has more experience than Rock East Funding.