April 10th, 2015 6:55 PM by Gregg Mower
Private Money Lending is just like it sounds, money that comes from private sources. Private sources are individuals, retirement accounts, hedge funds, basically any source other than regulated funds from a bank or loans sold to Fannie Mae, or Freddie Mac, or FHA, or VA. These funds are made available for non-qualified mortgage loans which are loans for a property that is something other than a borrower’s primary residence. Another name for this type of lending is “Hard Money” which references to the fact that is someone’s “Hard cold cash” they choose to lend instead of letting the bank lend it.
Private Money borrowers have generally come to the conclusion that they do not qualify for traditional bank financing where they are required to have excellent credit and be able to prove their ability to repay the loan through their tax returns. A private money borrower may also simply enjoy the convenience of not having to go through all the troubles and the time it takes to get a loan done through a bank. The property that a borrower needs funds on may not traditionally fit what a bank is looking for either, such as a fixer, or a mix-use property. There are many reason a borrower chooses to utilize private funds to fund their transactions.
The type of property that can be financed with Private Money is endless. At MAE Capital Mortgage Inc. we have made loans on a RV Park, Vacant Commercial Buildings, Raw Land, Land and Construction, Mix-Use property, Total fixer uppers, Apartment buildings, Churches, one loan to encompassing multiple properties and list goes on. The possibilities are endless, however it has to make sense to the investor who will be lending the money. The only real way to make the loan make sense to an investor is to have a good equity position. The equity position is a fancy way of saying that if you’re a buying a property with Private Funds the investor will want a large down payment and the larger the amount down the less risk to the investor and the better the terms will be for the borrower. The simple reason for a large equity position is that if the investor has to take the property back they will be able to re-sell it and get their money back and hopefully some profit for their trouble. The down payments required will generally start at 20% down for the single family investment property where the borrower generally has good credit and a verifiable source of income. Investors will require more down as the risk levels go up, such as, if a borrower has poor credit, or no verifiable source of repaying the loan back, if the property they want to finance would be difficult to re-sell like raw land. Each transaction is different and there is no way to be able to tell what the risks are until we have seen the property and talked with the borrower about their financial situation.
The Borrower will be required to complete an application and have their credit run as minimum requirement. Although the loan will be based primarily on the equity in the property, the borrower will judged based on their past credit history to determine the loan to value the investor will feel comfortable lending to them. Private Funding does not have requirements like traditional loans do with regards to how long a borrower must be out of Bankruptcy or Foreclosure. The only real requirement is that a potential borrower generally cannot be in the middle of a bankruptcy and get a loan. The reason for that is simple, an investor doesn't want the potential of losing their money if the courts decide to give the property away in lieu of a debt or forgive his note altogether. As far as a wait time they will only require that the bankruptcy be completed and released by the courts. A foreclosure doesn't matter to an investor so long as it is not on the subject property (already transferred from borrower’ name). However, Private money can be used to cure an existing foreclosure, so the borrower can remove a property from foreclosure prior to transfer.
Equity position seems to be a recurring theme here and it is. The more equity a property has, either from down payment on a purchase, or the difference between the value and the loan amount being requested on a refinance, the better the transaction appears. The way we determine an equity position is by an appraisal, in most cases. In some cases we have ways of determining value on a property without going through the expense of a formal appraisal. Either way a valuation of the property must be done and shown to a potential investor prior to them funding the transaction. On a purchase transaction this is easier to ascertain by simply looking at the purchase price and the amount of down payment the borrower is putting into the property in relation to the sale price. On a refinance we can generally pull comparable sales and determine a value based on other similar sales in the area. If we are doing a unique property, such as a commercial building, Land, or some other property where it is difficult to find comparable sales we will defer to a licensed appraiser’s opinion of value. So to say that no appraisal is required, is simply not true. Although, a formal appraisal may not be required on every transaction some professional opinion of value will be required to be supplied to an investor on every transaction.
All Private Money transactions will require a title search and title insurance. This requirement is to protect the investor and insure that the investors is in first lien position. This means that the title insurance will insure that if the loan goes to default that the investor would be the first one paid off upon sale. This is extremely important if the property has been damaged or requires completion in order to sell, as the large equity position required may have become eroded and other investors may have liens against the property. Title insurance also insures the boundaries of the property instead of having to have a survey done. The lending investor will also require that there is hazard insurance in place prior to funding the transaction. The hazard insurance policy insures the borrower and the investor that if the property burns down it will be replaced with an equal or like structure, thus keeping their investment secure. Although, this is a requirement of all loans being placed on real property it is extremely important for Private Money transactions where the borrower may be fixing up the property, or renting it out or both, these insurance policies provide insurance for both the borrower and the investor.
Those are the general requirements of a Private Money Loan. At MAE Capital Mortgage Inc. we will simply require a borrower, to get started, to provide us with and application, a borrower’s Authorization to check credit, and an address of the property, or a purchase contract if they are buying the property. We will do the appraisal and set up the title searches for our borrowers and investors. As far as where the money is coming from, well, that is our “Secret Sauce”. We have complied many sources of funding, some we will fund ourselves, and some we arrange on behalf of an individuals, and some we arrange through other Brokers who we work closely with that have the investor for the type of transaction we are looking to fund. This process requires a California Bureau of Real Estate Broker License which MAE Capital Mortgage Inc. has (#01913783). Although, sometimes the fees may seem high as there may be several sources that needed to be used to close the transaction. These types of loans are not for everyone, but knowing they are available, if you should need the money, is a great resource to have. We here at MAE Capital take great care to make sure our borrowers as well as our investors are well informed of the fees and risks upfront. We do look forward to working with you for your Private Money needs.