Summary:

Private money, also referred to as hard cash, plays a vital role in the real estate industry.  When traditional bank or institutional loans are not an option, private lenders step in with their more flexible approval criteria.  This ensures that real estate owners always have available financial options, even in the most challenging circumstances.  It empowers them with a strong sense of control over their economic situation, instilling confidence in their decisions.

Lenders or mortgage brokers facilitate private money loans, which private investors fund. This key player not only arranges the loan transaction but also serves as the loan servicer, responsible for collecting the monthly payments from the Borrower and distributing them to the private party investors.  This step-by-step process ensures a smooth and transparent transaction for all parties involved.

Article:

Real estate loans are considered a form of security because they serve as evidence of indebtedness. Various securities exemptions are used to comply with federal and state securities laws.  Federal exemptions usually are Reg D, Reg A, and Rule 17.  In California, the Corporations Commissioner’s rules allow for multiple exemptions that may be applicable.  They are included in the private offering exemption 25102, - 25100(p), 25102(e)(f)(n), 25113, and 25102.5. 25102.5 is the most commonly referred to as the fractional note exemption.  A maximum of 10 private investors can invest in a single trust deed as tenants in standard form.  Rules are defined in sections 10237-10238, 10232.3, and 10232.5 of the Business and Professions Code. Specific regulations govern private money transactions, including licensing requirements, fiduciary relationships, trust accounting, and mandatory investor disclosures.  The reason for pointing this out is that all aspects are highly regulated for those who do not understand the private funding of real estate loans.

Private money financing is a standout solution due to its adaptability to various financial circumstances and property conditions.  It offers a flexible solution tailored to the Borrower’s specific needs, providing reassurance about their financial options.

• Bank rejections for any reason, including denial of credit due to:
• Credit problems.
• Debt coverage ratios.
• Cash out.
• Condition of property.  Is the property in a poor condition, questionable condition, or partially completed?
• A borrowing entity is a family trust, Corporation, limited liability company, or another form of entity, as opposed to an individual.
• If the cash flow from the Borrower’s business is difficult to determine.
• Fix and Flips.
• Is the property in need of rehabilitation?
• Avoiding the lengthy hassle of bank processing.
• Borrower’s financial circumstances:
• Credit problems and derogatory marks on their credit report.
• Tax liens and judgments.
• Arrearage in payments, foreclosures, and bankruptcy.
• Probate sale.
• Complex circumstances.
• Purchase and sell promissory notes and note hypothecations, usually at a discount.

Each loan transaction is thoroughly analyzed for pricing and acceptable risk.  Although the process is less rigorous than that of an institutional lender, it is still strict.

Initial inquiry:

• As the procuring loan broker, you play a pivotal role in initiating potential loan transactions.  Your primary responsibility is to facilitate the process and ensure all necessary steps are taken to secure the loan.  Your expertise and cooperation are highly valued and indispensable in this process, making you an integral and valued part of the transaction.
• As the procuring loan broker, the agent or broker collects data from the prospective Borrower.  They will discuss the type of property, address value, loans, protective equity, the purpose of the loan, payment plans, and exit strategy.
• Is sufficient protective equity above the lien to satisfy the lender’s requirements?  Protective equity, which refers to the portion of the property’s value that exceeds the loan amount, is a crucial factor in the approval process.  For example, a 65% loan and 35%protectioni.ve equity   The Borrower must have adequate protective equity because it determines the Borrower’s financial stability and ability to cover the loan amount in the event of default.  This concept is crucial to understand, as it directly affects the Borrower’s economic situation and the lender’s risk assessment.
• The preliminary value determination procedure is critical in the loan transaction.  It’s generally based on online inquiries, such as Redfin and Zillow, or comparables available to substantiate the value.
• All value determinations at the beginning of the process remain subject to obtaining a third-party independent appraisal during the processing period.
• If the transaction is a commercial property, the Borrower must also pay for a Phase 1 environmental site assessment.
• A few lenders may not require an appraisal, instead conducting their own internal valuation and accepting a limited Phase 1 environmental assessment.
• If needed, early discussion about the appraisal requirement and Phase 1 environmental site assessment is crucial.  This ensures that everything is done with a clear understanding, preventing any surprises for the Borrower and ensuring they are fully prepared and informed about the process.
• Will the net proceeds of the new loan pay off the debt, reducing their outgoing expenses and increasing their cash flow?
• The procuring broker should actively calculate improved cash flow as part of a submission, with the assistance of the real estate agent and the Borrower.   It is essential to consider whether the new loan enhances the Borrower’s financial situation or serves as an interim measure to address issues and regain economic stability.  Early in the conversation, the Borrower understands that they must pay for the appraisal upfront.
• Organizing the loan application process is crucial.  One way to do this is to set up a lead file using the property’s address and the agent’s name for reference.  Thisile serves as a centralized depository for all relevant information, making it easier to track the progress of the loan application.
• Request that the Borrower email all required exhibits for the loan transaction.  This will allow you to place them in the designated digital file efficiently, eliminating the need for cumbersome paper files and ensuring a streamlined process.
• Go to Outlook, look up the property, and set up an email for yourself.  Include 2 or 3 references, such as Zillow, Redfin, Realtor, etc., and send the email to yourself to place in your lead file.  This will give you an idea of the property’s condition, an estimate of its value, and a detailed physical description.
• Could you obtain a property profile from your chosen title company?  This will enable you to identify any liens and encumbrances recorded against the property, providing crucial information for the loan transaction.
• If the Borrower is an entity, you can look it up on Google and the Secretary of State’s business search.  This research shows that their entity is registered to do business in California.
• If the Borrower is an individual, search for them on Google and LinkedIn.
• Could you place the data in the digital lead file?
• If the property is located in another state, research the distinction between judicial and non-judicial foreclosure proceedings.  Many lenders only make loans in non-judicial states.  A few exceptions exist, like Florida and Texas, if the Borrower is an entity.  Some states provide for both methods.
• The bare minimum documentation for underwriting a loan transaction is a completed application, a recent home loan payment statement, three months’ bank statements, a credit report, and a background check.
• The loan is a second trust deed. Ensure you understand whether the contract prohibits placing a second lien on the property.
• As a matter of Law, you can place a second lien on a single unit to four units.
• An exception may apply if the first trust deed is in the name of a prior owner, rather than the current owner.  In that case, you may want to have it passed by your attorney.
• You must review the documents for units of five or greater, as well as all commercial, industrial, and land properties. The prohibition on placing a junior lien on the property will be stated in the deed of trust or the loan agreement.  The deed of trust is a recorded instrument, but the loan agreement is not.  Sometimes, the prohibition only appears on the loan agreement, so a copy is not readily available as a recorded instrument.  You’ll need to request it from the Borrower.
• If the Borrower is an individual and has a business, could you obtain three months’ bank statements for both the Borrower and the company?
• The key to having a business and a personal account is to figure out the trail of cash flow.  Sometimes, a written explanation from the Borrower is necessary.
• All commercial property inquiries should lead to a visit to the geo-tracker to determine if the property or properties in the vicinity may be contaminated.  Could you download the summary and place it in your digital loan file?

• https://geotracker.waterboards.ca.gov/map/

The loan process includes the following:

• Could you identify a potential transaction and discuss the requested amount, as well as the collateral backing the loan?
• Obtain a 1003 residential or commercial loan application for non-SFR.
• Financial statement, real estate schedule, two years’ tax returns, or, as an alternative, three recent bank statements.  Some lenders may not require income verification when the Borrower has high protective equity.  Lenders are looking for cash flow to pay the loan payments.
• If the proposed loan transaction is a second lien, two things must be proven.  One is to obtain a recent payment statement to show the balance and that the loan is current.  The other option is to review the first lien trust deed to determine whether a second lien is permitted without the approval of the first lien lender.  There may be a due-on-sale or due-on-encumbrance provision, typically found in the trust deed or loan agreement, on all properties except one- to four-unit residential properties.
• Authorization to obtain a credit report is less of an issue.
• Obtain information about the Borrower’s property insurance coverage.  The lender must be named on the policy as a lender loss payee.
• A lender will verify that the association dues are current if an association exists.
• Are the property taxes current, or must they be paid out of the proceeds of the new loan?
• Other miscellaneous disclosures depend on the loan’s purpose, the borrowing entity, the property type, and the state of origination.

Loan purpose is paramount: Business vs Consumer:

• The Borrower writes the purpose of the loan proceeds.  The primary distinction is between consumer and commercial business purposes.  Consumer purposes fall under Federal laws, including the Truth-in-Lending Act (TILA), which reflect different underwriting and licensing requirements.
• Business purpose loans are made for 1 to 4 residential units, where the loan proceeds are used primarily for business purposes.  Businesses need to prioritize this. This means that a portion of the loan proceeds, exceeding 50%, must be used for business purposes.  A percentage of the loan proceeds (less than 50%) may be for consumer purposes.
• A consumer-purpose loan is one in which more than 50% of the loan proceeds are used primarily for personal, family, and household purposes.
• A Borrower may obtain a loan where the loan proceeds are primarily used for business purposes, but use a smaller portion of the proceeds for consumer purposes and still comply with TILA.

Setting up a professional summary to be sent to a prospective lender.

Your role as the procuring broker is to address all questions and concerns about the proposed transaction and present all material facts in a written format, known as an executive loan summary.

• Name of the procuring broker and the desired fee.
• The description of the property, condition, income, and value.
• The exhibit flow should include pictures, a location map, and a property description.
• Could you express the positive attributes of the loan transaction?
• Secondly, could you describe any weaknesses?
• If there are more than 5 or 6 exhibits, then send two or three emails with the exhibits.  In most cases, there is insufficient computer memory to transfer large amounts of data unless you use a program like LockBox.
• Could you please email the lender your executive summary of all the exhibits and follow up in two to three days?
• You can expect to be asked questions and provided with information to help you make an informed decision.

What real estate types are appropriate for private money borrowing?

• Single-family owner-occupied and non-owner-occupied.
• Apartments, office, retail, industrial, mini-storage.
• Special purposes, such as in restaurants and automotive-related settings.
• Land loans.
• Some, such as rural land, dirt roads, and environmental challenges, are much more difficult.