Hard Money Deal Killers Every Real Estate Investor Must Avoid

Jonathan Surak (00:00)

Across the board, what we’re seeing right now, it’s not even just the new investors, but also the experienced investors we’re seeing is the scope of works. And I don’t think we talk about scope of works enough. Everyone talks about it knows what it is, but from the lending side of it, how do you perform and hit your strike zones as far as evaluations, right? Cause deal killers, one of the biggest deal killers is your ARV falls short.

Dylan Silver (01:59)

Hey folks, welcome back to the show. Today’s guest, Jonathan Surak, is an investor and hard money lender based out of New Jersey. He’s the VP and partner of RCD Capital. You can find them online at rcdcapital.com. Jonathan, thanks for taking the time today.

Jonathan Surak (02:15)

Hey Dylan, thank you for having me. Pleasure, thank you.

Dylan Silver (02:18)

Now, when we talk about investing and hard money in general, we were talking before the show about some mistakes that we see people making. I’d like to start there. You’re an investor. You’re also a lender. So you see all sides of it. ⁓ You’re in some very challenging markets, New Jersey and Chicago. What are the most common mistakes that you see people

Jonathan Surak (02:41)

Across the board, what we’re seeing right now, it’s not even just the new investors, but also the experienced investors we’re seeing is the scope of works. And I don’t think we talk about scope of works enough. Everyone talks about it knows what it is, but from the lending side of it, how do you perform and hit your strike zones as far as evaluations, right? Cause deal killers, one of the biggest deal killers is your ARV falls short.

Right? Whether you’re planning on renovating a property to either sell it or your exit strategy is to hold it, you need to hit your after repair value. And how do you make sure you hit an accurate after repair value? Is that scope of work? What are you doing to the property to create value? Right? So that scope of work is the most critical document that you’re going to submit to your hard money lender.

And what I see is a lot of people, when they come to us, they have the scope of work and it says, for instance, the kitchen $25,000. And it’s just line item kitchen, 25K. What does that mean? We need to build the story, have a picture of what that finished product is going to look like. It’s very hard just seeing 25K. What does that entail? Is that new cabinets? Is that flooring? Are you gonna use cork countertop, butcher block?

Dylan Silver (04:01)

Right.

Jonathan Surak (04:04)

of granted, right? We wanna make sure we have an accurate itemized list of what you’re doing to that property. And so the biggest thing that we do is back in the day, we used to just have people provide their own scope of works. But now we have a template where we want people to follow a template like the one that we provide to make sure it’s itemized appropriately. It sounds very easy. ⁓ just put down, okay, cabinets, I’m gonna do the backsplash.

right, the flooring is going to be this, that it’s easier said, but do people actually execute and do that? A lot of people, I still see fall short of that, right? And if we were to submit, we wouldn’t submit that to an appraiser because the appraiser wouldn’t have an accurate idea of what they’re going to have for a finished product so they can make sure pulling the right comps, right? So we make sure that it’s submitted correctly.

Dylan Silver (04:54)

Right.

Jonathan Surak (05:48)

But just that loses time, right? These deals, these hard money deals, right? You want to close quickly, sometimes a week, two weeks. You want to be able to provide an offer, especially today with, you know, a lot of these hot markets, you’re dealing with people going way over asking, right? You need to come in competitively, have a quick closing timeline, but you need to have your ducks in a row. And the biggest thing is we see people, they’re just falling short on the scope of work. So just make sure when you’re submitting your scope of work to any lender,

that that is itemized impeccably, as well as I would recommend to provide some pictures of what this product is gonna look like. The cabinet, I mean, today is easy, right? Cause you have AI and they can do sketches or just show simply, this is the backsplash. This is the countertop, right? This is the bathroom. This is what it’s going to look like. It has that.

Dylan Silver (06:27)

Right. Right.

Jonathan Surak (06:42)

appraiser have a very good idea of, okay, this investor or this person who’s coming in is going to rehab the whole property, right? And we tend to see, if you do that correctly, ARVs are very accurate. They don’t fall short and it doesn’t kill your deal. So that’s like the biggest pitfall from a renovation perspective that I see in all markets.

Dylan Silver (07:06)

Now, when we talk specifically about, you know, maxing out that ARV, I’m thinking also with my realtor hat on and people might be looking at comps that, you know, first comps can change in three months and if your deal takes three months, then those are now maybe no longer relevant. How much does that come into play when people are looking at maybe not being conservative enough with their sell price?

Jonathan Surak (07:11)

Mm-hmm.

Yeah. Having the ability to stress test your deal is very important. You need to make sure that if you sell that property, you know, 20, 25 K under the ARV, does it still make sense that you still gonna make a profit? Or if you’re not going to sell, if you’re going to hold as a rental, if you fall a little bit short, are you still at the end of the day going to make a profit? Or does it make sense to do that cash out refinance or

A lot of times you see in a situation ARVs just fall short or you go to a lender that’s not using an appraisal report or they’re not looking at the ARV or pulling correct comps. And now when you refinance, you have to bring money to the table. That’s a bad situation, right? ⁓ I see that all the time. I have people that come to us and they said, yeah, the lender never pulled an appraisal report. And I get it. Like sometimes people, want to close quickly. They don’t want to wait for an appraisal report, but

Dylan Silver (08:13)

Yeah.

Jonathan Surak (08:26)

A lot of lenders like us, have hybrid reports. I mean, at the very least you’re doing an internal BPO, right? Of getting that evaluation, but it’s so important to make sure that ARV is accurate. Cause like you said, you could fall short and that’s, that’s a terrible situation for any investor. So mitigating that. And if you have a good lender, right? They’re going to look at it and say, all right, we’re going to stress test this. The ARVs, your scope of works way too high or you’re buying it for

Maybe we feel like too much based on the market, maybe the as is value, it’s not really there, right? Maybe you have to do a price reduction and look at that. And a lot of times that’s what we see is when we get the appraiser report back, we analyze it and we see, okay, before this is not a deal anymore, is there anything that we can do to make it a deal? Maybe we need to go back and look at the scope of work, right? Maybe we’re missing something. Maybe we, you know, buy in a certain line item.

Dylan Silver (09:20)

Right, right.

Jonathan Surak (09:23)

But it’s very important to know when to walk away from a deal too, right? You can’t force these things to happen. And I have clients that, you know, they’ll make several offers and sometimes out of, you know, five offers, only one’s going through, right? And that’s a good thing. That means that you’re underwriting yourself and you’re stress testing these deals appropriately to make sure that you don’t get hurt at the end, right? That you have a good exit strategy and that if for some reason that you do fall short on the evaluation,

you’re not bringing money to the table, right? It still makes sense. That’s the biggest thing.

Dylan Silver (09:57)

I’d like to pivot a bit here, Jonathan, ask you a

granular question really about what strategy or what products would make sense if someone was doing like a flip to hold, whether it was an Airbnb or a long term rental. What would be the process of that? ⁓ I’m unfamiliar with it on my end. I’d love ⁓ to hear your perspective on how people could go about doing that.

Jonathan Surak (10:55)

Yeah, I, right now we see today, most people have shifted away, at least our clients from that fix and flip mentality. Fixing and flipping is great. It’s a great tool. I’ve done many myself and they have a purpose, right? They, they’re able to put money in your pocket to keep doing more deals. Most investors today are not doing that. What everyone is doing for the most part is they’re buying distressed properties.

pushing the values up by renovating them, right? And then refinancing into a 30 year DSCR loan, right? Debt service coverage ratio loan, a DSCR. And that’s what we see the maximum ROI long-term, right? Cause real estate is a long-term play. This is not a get rich overnight, no matter how many influencers you see online.

Dylan Silver (11:49)

Right.

Jonathan Surak (11:50)

I mean, that’s not the reality of it. It is a long term play. And that long term play could be five, could be 10 years, right? It’s especially if you’re a younger person getting in a lot of my friends, I’m in my thirties now. A lot of my friends are investing as well. I tell them it’s not an overnight thing. You need to look long term. So executing that refinance and holding that long term is key, right? Because there’s so many benefits from holding a rental property besides just the cash flow.

Right? You have the appreciation, right? The property is going to appreciate over time is going to be worth more. And then also there’s, not a CPA, but there is way more tax advantages of holding a property than rehabbing and selling. Right? You get crushed on taxes. If you refi, ⁓ sorry, if you sell versus refi, if you refinance that refi and putting money back into your pocket is not a tax event. Right?

Dylan Silver (12:36)

Right.

Now

is that is that process when someone goes from taking out a hard money loan to then refinancing does that ever become tricky for some people where they might not be able to do that?

Jonathan Surak (12:59)

where they won’t be able to cash out is what you’re saying?

Dylan Silver (13:04)

I forgive me for doing this in a thousand foot view, kind of ignorance level, but I’m assuming most people are taking some type of hard money loan to get the fix and the fixed portion, the rehab portion done, but then they’re refinancing it into something more long term.

Jonathan Surak (13:21)

Yeah. So that’s actually a great question. And a lot of things I see with other lenders, when someone approaches them and says, I want to do a fix and flip loan, they just look with the blinders, fix and flip. does the, how does this person exit from this property? What’s the ARV, right? For us at RCD capital, what we do is if a client comes to me and says, Oh, Jonathan, I’m definitely going to fix and flip this house. I’m going to sell it. I say, okay, that’s great. However, on your appraisal report,

I’m going to order three evaluations. I’m going to order your as is value. I’m going to order your ARV or your subject to, and then I’m also going to get your market rent assessment. I want to know what that property would rent for if you did decide to pivot and hold it as a rental, because a lot of times I hear people, yeah, I’m going to sell it. And then, you know what the market shifts, you know, they list it, maybe they’re not getting, you know, as many offers as they thought, right. And they just fall short. And now

Selling it really doesn’t make a lot of sense, right? They could still maybe make a profit, but it’s not as much as they maybe thought. Maybe they had their budget went over. They had change orders. You see this all the time, right? So making sure on the front end, you look at really your two exit strategies. It’s either you’re going to sell or refi. We want to look at both options, right? And all investors should be looking at both options to see, all right, well, if I have to pivot, does this still make sense as a rental?

So right off the rip, if you’re submitting a deal to us for a rehab loan, we’re gonna look at it and see, does this make sense as a rental? Yes or no, right? And we take that into

And if it doesn’t make sense as a rental, are we still gonna do the deal? We’re have a conversation and make sure that ARV is very solid.

Dylan Silver (15:46)

Right, right.

Now, I’ve noticed this in the markets that I’m active in, that you have properties that are potentially flipped and sitting, right? And that this can be very, very challenging for folks because of what you just mentioned, right? Now, do you have to pivot? What are you going to do? Are you going to break even or maybe even take a loss on these deals? Is that a matter of, hey, they bought the deal for too much and they’re trying to sell for too much effectively?

Or is it, you in some markets, you’re going to have properties sitting on the market for maybe longer and people aren’t taking into consideration that they might have a property on the market for months.

Jonathan Surak (16:31)

Yeah, it depends again on what market you really need to look at your days on market. And I always tell, you know, any client that comes to us, what’s the days on market, get a pulse of what that is, right? Talk with your realtor and make sure that we can allot for holding costs because hard money is expensive, right? It has a benefit. It works fast. It’s flexible. It’s low doc, not looking at your income, right? It’s very asset based driven, but it comes at a cost. that could very quickly eat away.

your profit if you’re holding on to it too long. So knowing the days on market and know when to pull the trigger and say, you know what, I’m not getting the offer that I thought I was going to get. I need to pivot and hold this as a rental. And maybe it’s not long term. Maybe it’s one year or two years. But we got to get you out of that, that, you know, bridge on that hard money loan, which again is 12 months to 18, 24 months, depending on the terms.

you want to exit out of that as quickly as possible, likely into a 30 year DSCR. ⁓ And there’s a lot of different options with prepayment. A lot of people think, ⁓ well, if I go into a 30 year, I’m going to be locked in. I’m going to have pre-payment penalties. There’s options not to have prepayment penalties, right? If you’re planning on holding the property for five years and you elect to go on a five year prepay, you’re going to get the best rate, right? However, if you tell me, you know what, Jonathan,

Dylan Silver (17:58)

Right.

Jonathan Surak (18:01)

I couldn’t sell the property for what I thought. I do think the market’s gonna pick up in the next year or two. I don’t wanna do a five year or a three year prepay. Well, we have a two year prepayment option, right? The rate might not be as good as the five year, but the exit is gonna be more advantageous for you. So a lot of times you just need, for us, I like to talk with the client on the phone.

Dylan Silver (18:24)

partner

on this deal basically.

Jonathan Surak (18:26)

Yeah. And you want to figure out what’s problem solve and let’s cause it’s not one size fits all right. It’s, that’s what I love about it because every deal is a little bit different, right. Depending on so many different factors. So we want to figure out how do we structure the best deal for you. Maybe getting the lowest rate is not really what you need. Maybe you need to have obviously a combination of both, but maybe you need to have a better exit strategy. So we’re seeing a lot of people coming to us for

Dylan Silver (18:40)

Yeah.

Jonathan Surak (18:53)

a 30 year, but a short term 30 year, maybe they’re only planning again, on being in it for two years. So knowing when to pull that trigger is very crucial because you get to a point, right? Where you kind of pass the point of like no return, right? Like you don’t want to wait until you’re past maturity and now you’re paying these high interest fees like default interest or extension fees. That’s weirdly.

Dylan Silver (19:08)

You’re in it.

Jonathan Surak (19:18)

really where you can get in trouble and start losing money and then maybe even unfortunately bringing money to the table to refinance, right?

Dylan Silver (19:26)

Yeah,

I mean, that’s a situation that I think a lot of people have found themselves in recently. mean, and part of it, too, is because if your experience flipping homes was, you know, previous to 2020, it almost felt like you couldn’t buy a deal wrong, right? That it just made up for itself in appreciation and that you could buy it wrong, take too long, still making money. Well, that’s not the case. Right. So, you know, like you mentioned earlier, it’s it’s not an easy thing to just jump into. And there are so many factors that you have to have, you know, the plan B. Hey,

What’s the rents in case we have to hold this? Jonathan, we are coming up on time though. Any new projects that you’re working on and then also too, what’s the best way for folks to get in contact with you or your team?

Jonathan Surak (20:06)

Yeah, for sure. The best way to reach out to me would, you can give me a call. My direct line here at RCD Capital is 201-895-1926, or you can email me, Jonathan@RCDCapital.com. That’s Jonathan, J-O-N-A-T-H-A-N. That’s the best way. New projects right now. Well, I have multifamily and I’m very active in the Chicago market, so.

I tend to be doing a lot of, I do a lot of self-management there. So that takes away sometimes a lot of my time. So I’m working on that, stabilizing some larger multifamily stuff. ⁓ That’s kind of really where I’m passionate. I love multifamily and kind of the stabilization right now is really where I’m focused on a lot of my bigger units, a lot of my bigger properties. And ⁓

kind of pivoting into self-management because a lot of my clients too, because of the way the interest rates are, the insurance, right? You’re seeing a lot of people transition to self-management and that comes with a lot of challenges, right? So what I implement and what I recommend is do a hybrid management where for me personally, I manage day to day. You know, that means if any maintenance calls come in, I’m picking it up, I’m sending my contractor or my maintenance personnel out there.

And then the hybrid part ⁓ is I have a management company that handles all my subsidies, my section eight. They handle my lease renewals for that, the inspections, right? All that stuff. I could do it. Do I want to do it? No, because it’s time consuming and I’d rather put my energy into somewhere else. So if you’re thinking about jumping ship and maybe doing self-management and you don’t want all that responsibility, you have like subsidies, right? Talk with a property management company that might be able to work out a hybrid system.

where it’s still beneficial and you’re maybe saving more money ⁓ than ⁓ the alternative, is have them deal with everything. A lot of people wanna be hands on. Most of my clients, they love to be hands on, right? So maybe you need to balance that and do a hybrid. ⁓ And then the newest project I’m working on, me and my wife are building ⁓ a ground up ⁓ home right now. It’s gonna be for us. I’ve never done new construction personally. ⁓

We’ve lended, we’ve underwritten many new constructions. I know the fundamentals, but I’m actually going to be the GC on it, which I’m pretty excited. So that’s something new and ⁓ I’m looking forward to the challenges. And we were just looking at, you know, price per square foot right now, especially in Jersey. You’re from New Jersey, so you know, buying property right now in Jersey is crazy. And it’s honest. If you’re able to…

Dylan Silver (22:34)

Thanks

Yeah.

Jonathan Surak (22:54)

You know, luckily we were actually subdividing a property that we already own. So having land in New Jersey is just very rare, especially in, you know, northern New Jersey, where you’re close to Manhattan, very rare. So ⁓ we’re able to subdivide that. We’re working on that right now and all the plans and the permits to execute the, you know, the pour the foundation, et cetera. And ⁓

Dylan Silver (22:58)

Okay.

Jonathan Surak (23:16)

That’s our new project and we’re really looking forward to that. And hopefully from what I gained experience wise, I’m hopefully going to be able to transition that into the more of the investment stuff and ⁓ maybe do some new construction myself because we’re seeing a lot of clients, a lot of new construction people are pivoting and they’re like, well, you know what? Like, it actually makes more sense now in some markets, not everywhere looking at new construction. Maybe the ROI is not as, ⁓ advantageous, but

Dylan Silver (23:30)

lot of new construction.

Jonathan Surak (23:46)

your maintenance is way lower, right? So you see a lot of people kind of transitioning to a new construction right now. It does come with its own challenges, know, price of lumber, fluctuating and like all the material. But if you’re able to get a good deal with new construction, tends to, ⁓ you can mitigate the risk a lot better. ⁓

Dylan Silver (24:05)

Yeah, for sure.

There’s a lot of flippers who are looking at new construction and other segments of real estate because they’re realizing it’s not quite as easy, right? But there’s a lot of new construction happening all over the country for sure. But Jonathan, thank you so much for coming on the show today. Thanks for taking the time.

Jonathan Surak (24:22)

Yeah, Dylan, was a pleasure. Thank you so much for having me.