Finding Funding for Your Deals
Using a private investor is very beneficial to the real
estate investor because this loan does not usually report back to the credit so
it does not affect loan limits with Fannie and Freddie Mac guidelines.
There is usually quite a bit of savings because there are usually no
closing fees like you would find with a traditional mortgage.
It will still have more fees than a cash transaction, but less than a
traditional mortgage.
With the loan set up properly and the real estate investor
following some very specific rules, the transaction can also be very beneficial
to the lender. The main one being
that their money is invested in a fairly safe form of investment and they will
be able to get a better rate of return than what would usually be found with a
certificate of deposit at the bank.
So what are some rules? 1. Always have
30 to 35% equity in the deal; this means that the real estate investor is never
going to have more than 65% to 70% of the fully repaired value in the property.
If they are borrowing the purchase money and also money for any needed
repairs, the total borrowed plus any of their own money into the deal should be
under 70% of the total value.
A qualified individual, not necessarily an appraisal at
$350 to $400 a pop, should determine the after repaired value.
You could also have an experienced realtor do some research in the mls
and find their own comparables to determine the after repaired value, even the
investor could make this determination, but as a lender you need to be sure you
trust who ever is coming up with the end repaired value.
2. The
investor should never touch the money. At
the purchase the money should be wired directly into the title company or
closing attorney's account to pay for the purchase.
Any repair money should be paid out to the investor over the life of the
repair job based on the amount of repairs made to pay the contractors doing the
repairs. If you as the lender are
unsure of repairs you could hire someone to check on the repairs, just like a
rehab lender and charge the borrower a fee to pay your hired help to do these
checks. Or again if the borrower is
very experienced and someone the lender trusts they may pay out based on the
borrowers rehab schedule or if you don't trust the borrower, the lent money to
cover repairs could be made out directly to the contractors.
Again when the property is sold and the loan is paid off,
the title company should pay off the lender first before paying the profit to
the investor.
3. Secure the
money with forms: Promissory Note,
Deed of Trust or Mortgage (depending on your state), Assignment of Rents so the
lender can take over the property and collect the rents should the borrower
default, and a Disclosure form making sure everyone knows what was agreed upon
and the potential risks in the deal.
4. Insure the
Property both with a title policy for the buyer and the lender and proper
insurance for the property with the lender named as second insured.
If you would like to learn more about private lending I
would suggest attending the June
10th meeting of Mid-America
Association of Real Estate Investors when Jerry Clevenger will be sharing
his secrets on dos and don'ts in private lending. If you missed the meeting, members of MAREI can listen to the
meeting in the Archives.
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