Borrowers, who own or want to purchase real estate, may need an alternative source of financing when their bank says “no.” That source for real estate loans is referred to as “private money” financing. Private investors who have capital will lend for a reasonable yield or return on their invested capital. The private investors essentially become your bank. These investors will accept the borrowers promissory note and deed of recorded trust on the borrower’s property as security for the loan.
Usually private money loans are short term, under 5 years, while allowing the borrower time to improve his/her financial position in order to obtain a bank loan or to sell the property. Many brokers solicit both borrowers who need loans and private investors who have capital to lend. The prospective borrower and property will be pre-qualified to determine if he/she has verifiable equity in real property and the ability to pay.
Reasons that borrowers prefer loans from private sources rather than banks may include the following:
- Avoidable hassle required by regulated banking institutions.
- Speed, some transactions require quick closing such as a week or two.
- Borrower credit problems, un-verifiable income stream, old foreclosures, write-downs, bankruptcy, divorce, judgment liens, partnership breakdowns or dissolution, tax liens, or poor debt-coverage-ratios.
- Property Condition, disrepair, excess vacancy, partially complete, fix and-flips, ground-up construction, or entitlements in process.
- Cash out and subordinate financing.
- Business purpose growth capital to improve financial condition.
Property types include single family, commercial, industrial, apartments, and vacant infill lots. First position and second position loans are considered. Loan to value ratios are generally 70% or less, which means that there is at least 30% protective equity in the event of default. Investor yields range between 8% and 11% per annum with monthly interest payments made from the borrower’s monthly payment.
If the borrower makes the decision to take a loan, a due diligence process is started in order to complete a loan package containing adequate documentation to present to private investors. This is done to assist the prospective lender/investor in making an informed investment decision.
To complete a package the following due diligence process is completed for the benefit of both the borrower, and the prospective investor:
- Complete a loan summary explaining the proposed transaction with loan-to-value, collateral property, reason for borrowing, borrower’s ability to repay, an explanation of investor yield.
- Appraisal of the real property from an independent, certified appraiser.
- Loan application completed by the borrower, with the purpose of loan explained.
- Credit report.
- Escrow instructions and loan documents completed including borrowers mortgage loan disclosure statement, with itemization of estimated borrower cost; lender’s instructions, promissory note and deed of trust and related loan documents.
- Preliminary title report.
Your private money mortgage broker may serve as an intermediary, soliciting, qualifying, processing, and underwriting the loan transaction, arranging the proper documentation and handling the closing process. Upon funding and closing the loan transaction, your broker may also become the servicing agent on behalf of the private money investor, collecting the monthly payments from the borrower and in turn dispersing the interest payments to the investors.
I may be able to refer you to a source for private money real property loans in your geographical area.
Business and Private Money Finance Consultant
Bus. 949 521 7115
Cell 949 533 8315
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