| I am sure everyone has heard of the following term | | | | prove their annual income for the last two years. It is |
| "private money" or "hard money." People have visions | | | | killing self-employed people who have high credit |
| in their head of mobsters and cement shoes. I have | | | | scores with high reserves. However, they are unable |
| found people love to fantasize about the movies. | | | | to obtain a loan. The two things institutional lenders look |
| However, private money is part of doing real estate. | | | | at include the following: · |
| We are in the midst of a huge foreclosure storm hitting | | | | |
| across America. There are plenty of deals for | | | | 1. Appraisal value of the property · |
| everyone. However, one must know how to structure | | | | 2. Ability of lender to pay back the loan · |
| and close a deal. Conventional interest rates fall | | | | Proven track record of paying back loans It works a |
| between 7 to 10%. Private money is between 12-18% | | | | little differently in the private money world. The |
| and 2-8 points upfront on real estate deals. There is | | | | property is the collateral for the loan. The private |
| quite a difference as one compares the numbers | | | | money lender will usually lend up to 65% loan to value |
| above. The private money lender is making a great | | | | along with points plus 18% interest for the private |
| return on money. Why would a private investor accept | | | | money loan. They do not look at a person's credit |
| the higher terms when conventional financing is much | | | | score. Private money lenders do require "skin in the |
| lower? I have experienced the following reasons why | | | | game" with a down payment between 5-20% of the |
| an investor will accept the higher private money terms | | | | purchase price to secure their money. |
| due to the following: | | | | More Money in One's Pocket |
| Time | | | | It is all about money when it comes to real estate |
| Speed is the name of the game when it comes to | | | | investing. The institutional lender requires the investor to |
| closing deals. It is first come; first close that gets the | | | | put down 25% down payment of the purchase price. |
| deals. Conventional financing is taking up to 60 days | | | | The lender does not look at the equity in the property. |
| from start to close. That is a long time for the other | | | | So, the investor will use the private money lender to |
| person to receive their money. Conventional financing | | | | close on the property with no seasoning requirements. |
| requires the buyer to submit all of their documentation | | | | Then, the investor will do a rate and term refinance |
| to obtain approval for a loan. The lender must order | | | | with no seasoning required by the lender. This means |
| the appraisal. There are no guarantees since lending | | | | the investor has more money in their reserves and the |
| guidelines have tightened up. The seller will not want to | | | | private money lender is making money on their |
| wait for their money. Anything can happen during | | | | investment. Everyone is happy in the transaction. |
| those sixty days with the buyer such as cold feet, not | | | | Lending Criteria |
| qualify, death, divorce and so on. Private money funds | | | | The institutional lending is much more traditional |
| in seven to fifteen days. The property itself is the | | | | compared to private money lending. Private money |
| collateral for the loan. My private money lenders make | | | | lending is based upon the property itself and personal |
| decisions within 48 hours versus conventional financing. | | | | relationship. The private money lender has four main |
| The private money lender is always looking to lend | | | | points of criteria when lending to include the following |
| their money out to investors. Americans are always | | | | 1. Loan to Value- Currently, private money lenders loan |
| willing to pay for convenience and speed. Private | | | | up to 65% loan to value when it comes to residential |
| money lenders fulfill this need in both ways. | | | | and commercial properties. Land is at 50% loan to |
| Privacy | | | | value. Money is tight in this type of market. Developing |
| Nowadays, the conventional lenders ask for everything | | | | a personal relationship with a private money lender is |
| including pay stubs, bank statements, financial | | | | part of one's success in real estate investing. |
| statements, social security number, picture I.D., last two | | | | 2. Types of Property- Residential, multifamily and, |
| year tax returns and etc. to qualify for a conventional | | | | commercial are easy to obtain private loans. However, |
| loan. Also, the lender will pull one's latest credit report. | | | | it is hard to find private money for land during this time |
| Overall, the borrower is giving over all of their personal | | | | in the marketplace. |
| information in order to qualify for a loan. Well, some | | | | 3. Cash Flow- Some private money lenders do look at |
| people are very personal and do not wish to give over | | | | the cash flow in order for the borrower to pay on the |
| this information. Many people are facing divorce, death, | | | | monthly note. The private money lender wants to |
| and taxes owed so they may not want to disclose | | | | know that the borrower can pay on the note and pay |
| these items at the current time. Private money lenders | | | | back the loan at the end of terms agreed upon. |
| do not ask for this type of information. People are | | | | 4. Exit Strategy- Private money lenders want to know |
| willing to pay extra for the loan so they do not have to | | | | the extra strategy before they lend out the money. |
| go through the hurdles to obtain a loan. Plus, they do | | | | They want their money back at some point in time so |
| not give out their personal information for any reason. | | | | they can put it back out in the marketplace. My private |
| Americans love their privacy. | | | | money lenders love my exit strategy. The majority of |
| Qualifying | | | | my buyers take the property down with hard money. |
| The real estate investor is a special borrower. Many | | | | Then, start a rate and term refinance the next day to |
| times the investor will have five or more properties | | | | transition them from private to conventional financing. It |
| with conventional financing. Why? It is because they | | | | is a process I have perfected over the last six years |
| believe in investing in real estate and obtained | | | | and beyond. |
| conventional financing to cash flow the properties. | | | | 5. Interest Rate- Private money lenders charge from |
| Institutional lenders are putting many extra stipulations | | | | 12-20% for their money. The private money lender will |
| when dealing with non-owner occupied loans since | | | | lower his/her rates with a long term relationship for |
| mortgage fallout of 2008. One must jump through | | | | paying back the loans. One must prove themselves in |
| hurdles to qualify for a loan. Lenders are looking at | | | | this marketplace. A man's word is still worth something |
| credit scores and debt to income ratios. They do not | | | | when it comes to private money lending. |
| do stated, stated loans at this point. The investor must | | | | |