The Basics of Asset-Based Lending

Sometimes, you just never know who you’re going to meet on the streets of downtown Minneapolis.

A few weeks ago, after putting the wrap on my latest set of Legal Minute segments, I bumped into Real Estate Radio Hour co-host Andy Prasky (we were leaving the WCCO Radio studio at the same time).  Andy and I were both blessed with the gift of gab and we we stood outside the studio talking – loudly, I might add – about real estate.  As we chatted, a gentlemen interrupted and introduced himself.  His name was Scott McLain, he was in town from Oklahoma and he was in the asset-based lending business with Red Dirt Lending, LLC.  I quickly also learned that he used Lommen Abdo as his legal counsel when he started doing lending transactions in Minnesota.

Andy and I sat down for lunch with Scott last week and learned more about his business.  As part of that discussion, I asked him to write something for this blog on asset-based lending – what it is, what it is used for and debunking some of the many misconceptions about it.  Scott accepted my invitation and has written a very informative piece that I hope the readers of this blog find informative and useful.  I encourage all of you to check out his website,, or email him at, for more information.

Enough of my gabbing; here’s Scott:

The Basics of Asset Based Lending
Scott McLain
Red Dirt Lending, LLC

Jeff asked me to do a guest post as to the basics of asset-based lending or “hard money lending” as some refer to it.  One problem I ran into early on in my career is that different terms mean different things to different people, to be sure.

For our purpose and as it relates to Red Dirt Lending, a “Hard Money” loan is a “business purpose loan” with a 1st mortgage position on a single family residence purchased for restoration, resale, or rental.  They are NOT consumer or “subprime” loans.  Therefore we do NOT lend to individuals and we ONLY lend to legal entities, such as an LLC.

Although we always run our customer’s credit and maintain files which include other financial data, the primary underwriting decision is based on the experience level of our customers combined with how cheaply they’re buying a property and of course the “reliability” of the comparable sales in that given neighborhood.

Elements of the product:

– Six month terms (interest pre-collected)
– An annualized 16.9% interest rate pro-rated to the day
– Maximum LTV of 70 %
– Loan Fee = 5 points
– Loan amounts = Approx. $100,000 to $400,000
– Repair funds available post-closing and as completed (draw basis)
– Loan Fee and Closing costs rolled into the loan

In short, and the reason people rationalize paying our fees/rates, is that banks really don’t lend on beat up houses without a solid relationship along with unrelated and outside collateral (just in case).  A bank will take 45 days to tell you “no” while we can say “yes” and close in 10 days.  Clearly, the best buys are reserved for those that can close quickly, and with cash.

Other reasons?

– Our customers maintain control of their deal; i.e., no partners
– Over 90% financing is available
– Can do several deals at a time
– We answer the phone

A “money-partner” (usually a friend or family member) can act quickly as well but they typically gobble up 1/2 of the deal, which, if the flip is successful, is MORE expensive than hard money, and if they’re flaky, can sometimes leave the house flipper high and dry at the closing table.

Nationally, very few companies are organized to the point that we are.  As a matter of fact, a vast majority of these loans are made by “money partners” or prominent individuals to investors who “flip this house”.


1 Comment on “The Basics of Asset-Based Lending

  1. Thank you Scott and Jeff for this brief article on asset-based lending. I am familiar with your company and how you are set up. You certainly have a niche program set up for the lending industry. I know have a couple of clients that have used your services in the past and had nothing but positive things to say about the processing and funding of their loans. For the right person, this may be just what they need when they cannot find financing in the traditional marketplace. I will continue to keep you and your company in mind as a referral partner when I come across others that may need what you offer!