Summary:
Alternative financing, or private money financing, is not just a solution; it's a source of empowerment for the entire industry. It boldly bridges the gap where banks and regulations fear to tread, inspiring us all with its potential and instilling a sense of hope for the future. As real estate and mortgage professionals, we bring this empowerment to our clients, making a significant difference in their financial journey. The industry requires transparency, concise industry best practices, specific underwriting standards (credit score requirements, debt-to-income ratios, and property valuation methods), and a well-defined regulatory structure (including compliance with federal and state lending laws, licensing requirements, and consumer protection regulations). Real estate and mortgage agents are encouraged to see alternative financing as more than a tool. It's a valuable addition that can enhance the company's offerings and provide more options to its clients. By embracing alternative financing, agents can offer a broader range of solutions, increasing their value to clients and their competitiveness in the market.
The payday checks that roll in are generally extensive and frequent, based on successful closed escrows and loan closings, allowing agents to enjoy a superior lifestyle.
Article:
Real property borrowers can access a unique subset of lending beyond traditional banks and institutional private money. This specialized form of lending, often called 'non-bankable or non-traditional loan transactions,' is tailored for borrowers who may not meet the strict criteria of traditional banks. These borrowers, usually considered 'non-bankable' due to low credit scores, irregular income, or unique property types, can still access financing through private money lending, offering distinct advantages. It empowers borrowers to address short-term issues and align their long-term financial goals for success. The flexibility and freedom it provides are rarely found in traditional lending, giving borrowers a strong sense of control and confidence over their financial decisions and a feeling of security in their financial future. As real estate and mortgage professionals, we bring this empowerment to our clients, making a significant difference in their financial journey.
Private money lenders, often private parties or groups, play a pivotal role in real property lending. Like banks, they invest their funds into the loan, providing the necessary capital for borrowers. The private parties become the secured lender noted on the promissory note, deed of trust, or mortgage. In return, private party investors have the potential to earn interest on their investment, making private money lending a potentially lucrative and advantageous investment strategy. Private money lenders are individuals or groups who provide loans using their own funds rather than funds from a bank or financial institution. The potential for significant returns in private money lending is a strong motivator for private money lenders, fueling their interest in this form of lending and increasing the availability of such loans.
Locating private money loans:
Locating private money loans is a strategic process that involves several steps. It begins with targeting potential borrowers, including first-time home buyers who may not qualify for traditional bank loans. This can be done by understanding the specific characteristics of these borrowers, such as low loan balances or the need for property additions, and then identifying properties that match these criteria. This often involves scouring public records from title companies and checking for construction permits for additions. Additionally, attending real estate networking events, joining local real estate associations, and leveraging social media platforms can be effective strategies. These methods can serve as a compass for loan agents and lenders, guiding them to potential borrowers needing private money loans.
Historically, title companies could provide databases listing loans with private beneficiaries, indicating that the borrower has a private money loan. However, these lists may no longer be available due to privacy reasons.
A few subsets of borrowers/ properties that have a propensity to need private money loans include:
Properties on a loan default list
Properties that have delinquent property taxes
Properties that lack maintenance
Properties under the control of beneficiaries of a deceased property owner
Properties with a current private money loan
Quantifying the characteristics in a statistical model for a probability list is challenging, as it involves a complex analysis of various factors such as property condition, financial history, market trends, and borrower behavior. This process is not straightforward and requires a deep understanding of the market and the specific needs of the borrowers.
My Motto: You locate a buyer; you do not create a buyer.
The best way to locate private money loans is to develop a marketing plan with an extensive network of professionals and multiple clients. The type of professionals best to network with are:
Mortgage brokers specialize in private money loans, and those who don't.
Real estate agents, both residential and commercial
Accountants, enrolled agents, and accounting firms
Estate planning, divorce (family law), and probate settlement lawyers
Financial Planners
Real estate transactional and business litigation lawyers
Contractors, builders, and developers
Income property owners and speculative real estate investors
If you have 500 leads in your network and each of your network members has 500 leads, your universe of possibilities is 500 X 500 = 250,000.
Continuously providing something of value to members of your network is crucial to maintaining your presence in their minds. This can be in the form of industry insights, such as trends in the real estate market, market updates, such as changes in interest rates, or exclusive investment opportunities, such as properties with high potential for return on investment. I want to let you know that correspondence from you, personally, rather than some ordinary advertising/subscription newsletter, will speak directly to your prospect. Your communications must be authentic, personalized by you, and designed to help your client's business development.
Referrals and repeat customers are the 'lifeblood' of successful loan agents or businesspeople. They are the essential element that keeps a business thriving. Referrals and repeat business contribute to financial success and underscore the importance of building solid client relationships. This highlights the value of your work and makes you feel integral to the lending process, reinforcing your role in the industry.
Procuring loans directly from the public:
There are many media platforms where you can advertise to solicit direct property owners who need alternative financing. Almost all of them provide advertising options at a reasonable fee. Google, Facebook, LinkedIn, and others are examples of media sources. The quality of these leads, however, is suspect. Establishing reliable communication with cold lead borrowers from these advertisements and obtaining the necessary data is, at best, difficult due to the amount of competition.
Personal contact with homeowners on lists such as defaults and property tax delinquencies is possible. This method involves reaching out directly to property owners who are in financial distress and may need alternative financing. However, this system is research-intensive and competitive, as many other loan agents may use the same strategy.
Asking the Right Questions:
When a loan agent receives a loan inquiry, it's crucial to ask prudent, industry-standard questions. This helps determine the feasibility of the loan request and ensures a responsible approach to lending. These are fundamental questions for any lender when deciding whether to investigate further. For example, you might ask about the borrower's credit history, current financial situation, or plans for the property they intend to purchase with the loan. This process of asking the right questions can make you feel informed and prepared, ready to make sound lending decisions.
The following information should come from the borrower.
Loan amount requested
Property type: Single-family, owner- or non-owner-occupied, commercial, apartments, industrial, or other.
Purpose and use of loan proceeds. It is essential to distinguish between business and consumer purposes or a combination of both.
Loan proceeds are used primarily for business purposes. What portion will be used for consumer purposes? Consumer purposes could include personal expenses, home improvements, or debt consolidation, while business purposes could be property investment or business expansion.
The value of the collateral property. How did the borrowers determine the value? A borrower's estimate of value is often incorrect or intentionally exaggerated.
Will the borrower pay for an appraisal report by a licensed and certified appraiser?
When did the borrower acquire the property, and how much did they pay?
What are the existing liens to determine whether there is enough protective equity? Protective equity is the difference between the property's value and the total amount of liens against it. It is a cushion for the lender if the property's value decreases or the borrower defaults.
Is the loan-to-value acceptable to a lender or trust deed investor? Bottom of Form
Who occupies the property? Is it an owner, tenant, vacant, or partly occupied?
Does the property have a rental income stream?
What gross rents, vacancies, and expenses are required to determine net operating income, often called NOI?
If the loan request is for a junior loan (second trust deed or mortgage), information about the senior loans will be required.
Documents for review may include a copy of the promissory note, loan agreements, and a recent payment statement from the senior lien holder or loan servicer.
I'd appreciate it if you could look over the recorded documents related to the senior lien associated with the deed of trust.
Does the first lien have a written provision in the deed of trust referred to as an alienation clause or what some call a due-on-further-encumbrance clause that would require the lender to obtain written approval to place a junior lien on the property?
Is the property owner/borrower a private individual(s) or an entity?
This fact is important because, in many cases, the original borrower may have been parents, possible deceased members, siblings, co-trustees of a family trust, ex-spouses, or other miscellaneous parties. Some earlier property purchases were taken subject to a lien that prior owners obtained in the past. Completing a property sale subject to means that the purchaser/borrower intentionally failed to notify the first lien holder of the transfer. Was the sale transfer kept a secret, deliberately, to get a lower interest rate? Therefore, the loan documents still show the obligor as the prior owner on the note and deed of trust.
Does the person requesting the loan have the sole authority to borrow and encumber the property with a new lien? Are there other parties of interest who may object to the recording of a lien on the property? An example would be an estranged ex-husband or ex-wife.
Are there multiple borrower parties that a lender must include in the application, processing, underwriting, and closing process? A lender's frustration will occur when the discovery that the borrower has intentionally excluded an undisclosed hostile party. I promise an unknown borrower party won't fool the title company. When the title insurer underwrites its coverage, it will ensure that the correct parties have signed the documents. Verifying the proper parties is part of their insurance underwriter and approval process.
Are you submitting the loan to a lender?
No amount of advertising will enable lenders to reach all borrowers. Most borrowers develop relationships with one or more loan agents in their search for loans. The loan agents gather information about borrowers and properties and interact with prospective lenders or other agents who represent the lenders. Because they have direct contact with the borrowers, they are the primary source of loans.
Loan agents vary greatly in experience, professionalism, and the effort they are willing to put into a transaction.
Loan agents who desire a quick and professional response should organize their files and convey a coherent set of facts to the funding lender. In today's world, managing means submitting in digital PDF format online.
Develop an executive summary to include the following:
Submitting the broker name, contact information, and the requested fee
Proposed new loan amount
Purpose of loan: purchase, refinance, equity 2nd, consumer, business purpose, consumer purpose, both
Summary of the proposed transaction, term, cash out
Will more than 50% of loan proceeds be used for business purposes? Will a portion be used for consumer purposes less than 50%?
Summary of the proposed transaction, term, cash out
Explain the collateral property address, type, description, amenities, and property condition
Use a loan application form, either a standard residential application (FNA form 1003) or a commercial application form. Commercial applications and financial statements are helpful.
Estimated value conclusion and sources of information.
Provide income stream for income property, if it exists, with rent roll and financial statement
Availability of cash flow from borrower and property to make monthly payments
Potential exit strategies: sale, refinance
Any noted strengths and weaknesses of the borrower or collateral property. Withheld and overlooked facts delay the process and may negatively affect the loan request.
A lender's job will be faster, more efficient, and more pleasant if the borrower's loan agent takes the time to get to know their transaction and articulate the material facts the first time around. Could you email an initial loan inquiry to the lender and follow up by phone? Most mortgage brokers are highly professional and submit a complete package with full disclosure in mind.