How To Use Private Money To Finance Reos And Short Sales
In the real estate market today, it not as easy to get hard money like it used to be a few years ago. While some hard money lenders have gone out of business, the ones still in business have tightened lending requirements too much.
In most cases, you have to make advance payments in points before being funded in addition to high interest rates. Your profits are therefore drastically affected. Most even need good credit to lend hard money nowadays!
This has stopped a lot of real estate investors from doing deals they once used to finance with hard money. In this article we cover how you can finance your REOs and short sales.
When buying a property, you must show the bank proof of funds before they can allow it to go through. A letter from a hard money lender used to act as proof of funds. Your proof of funds can be your private money source.
If you are a wholesale real estate investor, the process will work the same except source of funds will be private money. In this case, you cannot assign a contract to your investor buyer. You have to buy and sell the property on the same closing table in simultaneous closing.
The process goes something like this:
1) Identify the right property
In order to do a simultaneous closing, you must choose properties that will give you a sizable amount of profit. This is because you must pay some closing costs both when buying and selling the property. These fees can add up and eat up your profit.
I like profits of $10,000 and above for this type of transaction.
2) Identify your wholesale buyer
The wholesale buyer buys the property from you, sometimes a real estate investor. You usually end up selling your properties at a discount price.
Make sure the buyer shows you proof of funds or the deal might not close!
The contract you sign with them will be the regular purchase/sale agreement where they buy the property from you.
Your selling price will of course be higher than your buying price.
3) Get your private money to the title company
Get the private money investor wire the money to the title company. This money will be used to close the first transaction.
The cost of this transactional funding should be about 1-2%.
4) Your title company closes the two deals
Once the buyer has wired their money to the title company, you will walk home with the difference between your buying price and your selling price, minus the transactional fees you pay your private money investor.
You make more money since you have less fees than when using hard money. This is how this transaction will work:
$100,000 - after repaired value
$50,000 - bank accepts your short sale offer
$75,000 - price you sell to your buyer
$25,000 your profit at closing
Costs:- $1000 private money fees plus any closing fees
Since you are a cash buyer, you typically get your properties cheaper than regular buyers.
You can use this strategy to buy short sale properties and flip them to other investors. Lots of private money lenders can lend you all the money you need for such deals.
In other words you use the private money as the source of funds to buy the property from the bank, then flip it on the same table to a cash buyer such as a real estate investor.
Simon Macharia invests in real estate and has done most real estate investing transactions. Learn how a good real estate website can attract private money investors for your business.
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