Blog with MAE Capital

What is Private Money Lending?

February 24th, 2014 1:36 PM by Gregg Mower

Private money lending is where private individuals will invest in Deeds of Trust and Notes secured to Real Estate or a Business.  Private money lending is sometimes referred to as “Hard Money” due to the cost obtaining funding.  These types of loans are generally more expensive than traditional loans from Banks or Mortgage companies.  The reason they are more expensive is due to the increased risk they take when they lend their money.   The basis for this lending is the equity in the transaction.  Generally credit is not an issue with these types of loans.  The investors are protected by the equity in the property, if there is a default the investor will get the property back to sell.  So if someone buys a $500,000 building and puts $250,000 down, for example, the likelihood of the buyer defaulting on a $250,000 investment is slim.  If they do default the investor gets the entire $500,000 building, thus making the investment pretty safe all the way around. 

These loans are not for everyone, and for the most part for the informed investor and not designed for the first time Homebuyer. These loans are used for those situations where Banks and other institutions don’t want to lend or won’t lend.  Private money has been used for many purposes such as quick closing for those who flip properties, want to buy land, need a construction loan to build, need to buy a commercial building and many more uses.  Recently we closed a transaction where we used several different properties and businesses to secure enough money for a client to open a restaurant.  We have also used private funds for an RV park and motel.  We have also used private funds for quick closing for flip properties so the buyer appears to like a “cash buyer”.  The uses of private funds are almost limitless; if someone needs money we generally can find an investor for them. 

This brings up a very important point and that is that we use different investors from across the country for the different needs of our clients.   Each private investor has an appetite for what they are comfortable in lending on, or the terms they want, so it is important to use a broker, such as MAE Capital Mortgage, to find the source of funds that matches your needs to theirs. There is no secondary market for these loans and are generally held by private people or privately held companies or trusts.   In fact, with the recent changes to prime lending laws there are very few companies that actually have the ability to do this type of brokering as it requires regulation under the Bureau of Real Estate and most lenders are regulated by the Department of Business Oversight formerly the Department of Corporations in California.    The Agents you will be dealing with to secure this funding hold a BRE license and in most cases also a NMLS license. 

Ok so now you know a little about how private money flows, how do you apply for one of these loans?  Well it is a little different than applying for a standard mortgage in that you do not have to provide the documentation that is usually required by a traditional lender.  Usually, the process starts by the person needing the money providing a scenario of their needs.  Once we hear those needs we then go in search of an investor that will fund based on those needs of the client.  We then get an “offer” from the investor of their terms of which they will lend on the scenario.  Those terms include interest rate and fees.  Once we have received the terms from the investor we will present them to the client, and if they accept the terms we then get the required information from the client for the investor.  The investor will draw the loan documents and send them to an escrow company for signatures.  Once it has been signed and everyone has accepted the terms of the agreement the investor will fund to the escrow and the deal can close.  The terms can vary from an interest only 6 month loan to a 40 year amortized loan and everything in between.  The costs range from 3% of the loan amount up 15% depending on the risk and type of loan.  The interest rates can range from 7.5% to 15% again depending on the risk.  Remember the client does not have to accept the terms and these loans are not for everyone.  But for those that need to leverage money and can see the long term gain in utilizing this type of financing it works.

Private Money Lending, Hard Money Lending, Collateralized loans, Capital loans, whatever you want to call it is a tool used by real estate investors to leverage their capital so all their personal capital is not invested in one place.  This type of lending falls outside of the Real Estate Settlements and Procedures Act or RESPA in that it is used for people that use properties for business use.  The business use can be flipping, renting, and operating a business of some sort from the property the money is intended to be lent for.  Again, this type of lending is not for those that use or intend to use the property as their primary residence.  In fact, unless you can show that you are using the property for a business use this type of financing is not available.  For more information or to see if you can get this type of financing please give us a call we would love the opportunity to help you with your Real Estate investing goals. 

Posted in:General
Posted by Gregg Mower on February 24th, 2014 1:36 PM



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