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