Essential Facts About Private Money Lenders

Private Money

Private Money An Alternative For Real Estate Investors

Introduction

With the changing face of the property market, many potential investors find the need to look around for non-traditional sources of money to purchase property, and private money lenders (PML’s) are perfectly situated to assist. Using the services of a private money lender will be of enormous help to first time investors who can’t secure traditional funding for whatever reason, while experienced real estate investors can mitigate their investment risk. Investors will often be able to purchase more properties, more quickly for more profits.

What Is a Private Money Lender?

A private money lender is an individual, a professional or a company willing to lend funds for many purposes with real estate investment being one of the main reasons. You need to find a private money lender who concentrates on lending for real estate. Importantly, PML's are not associated with banks or credit unions; instead, they are an alternative source of funding. They can be found everywhere but newcomers to real estate investment often don’t know how or where to start. Good places to start are family members, friends, accountants, lawyers, other investors, networking clubs or members of investment clubs.

How They Work

A loan from a PML is similar to getting a loan from a bank or credit union. Money is given as a loan to purchase property or carry out renovations. The loan is secured against the value of an asset – usually the property being bought. Interest is added to the loan which is paid back in installments over an agreed period (years).

Why Partner with a Private Money Lender?

There’s a variety of reasons to go with a private money lender including lower interest rates than banks, less paperwork, and better terms such as no penalty for prepayment of the loan. Plus, getting approved by a bank often takes longer than the approval process of PML’s who have a more informal application process. If the financial position of a potential borrower is okay, then the above reasons will save them much time, headache and money. If your credit history is not good, and a traditional loan is out of the question, a loan from a PML may be the answer – but you will still have to jump through some hoops to get a loan. However, credit history isn’t always that important to a private lender. Some will not care how low your credit score is.

If you find an unbelievable deal, and time is of the essence, it will often be faster to work with a private money lender. Banks are not known for making quick decisions about loans for property investments and having an “unbelievable deal” will hold no sway with a banking institution which prefers traditional loans for houses, flats, units, apartments and commercial property. Private money lenders can look outside the square and fund almost any type of property investment.

How Much Can You Borrow?

How new you are to investing will determine, to a large extent, how much funding you obtain from a private money lender. First time investors will find it almost impossible to get 100% financing from a company, or a professional PML. Seasoned investors, especially someone who has previously conducted business with a PML, can likely be funded 100% but the type of deal will have a big bearing on that. Is it a single family home, units, commercial property? Different rules apply for the various property types, and even the state you live in can make a difference to what you borrow for and how much. 100% funding is more likely if you are borrowing from a family member, a friend, someone from an investment club, or someone using retirement funds. With any one of them, be open to the possibility of negotiating terms and conditions of a loan in order to get it across the line. It may be an adjustment to the amount of interest you’ll pay, the length of the loan, how much security you can offer etc. Giving a little on one sticking point can result in the loan being approved.    

Is Private Lending Legal?

In the United States, it is legal to get investment loans other than from banks and credit unions, as long as you abide by the usury and banking laws of your state. Regulations include the rates a lender is able to charge. Also check whether the state requires a banking license.

Finding a Private Money Lender

Here’s a list of where you can start your search for private money.

  1. Friends
  2. Parents/ Relatives
  3. R/E Investor Clubs
  4. Social Media
  5. CPA’s, Attorneys
  6. Professional companies via online searches

Friends and relatives are the obvious one’s to start with. Simply ask – the worst that can happen is you get turned down.

Should You Engage a Licensed Attorney?

A transaction for a private loan is not required by law to have written documentation because verbal agreements are usually enforceable by law in the United States. For example – if you borrow $100,000 from your parents to buy a house and agree to an interest rate and a time frame to repay, that is up to you and your parents whether you want to formalize the agreement. However, you cannot foresee what will happen in the future so it is best to have some legal written documentation in place to detail the terms and conditions regarding the obligations of each party in the transaction. It's also best practice for an attorney to either put together, or at least review, any paperwork for private loans. This will protect the interests of both parties if a dispute should arise. In most cases though, the lender will not be a friend or relative, so the importance of legal documentation is obvious.

Paperwork Involved

Here are the main pieces of paper involved in a private money loan. Some states will have other names for the documents. The basic details for each one is as follows.

Deed of Trust/Trust Deed. A trustee (third party) is assigned to take possession of the property deed for the life of the loan to ensure the both parties are held to the conditions of the loan agreement. The trustee turns over the Deed of Trust to the buyer once the loan has been fully paid.

Promissory Note. A document whereby the borrower promises to pay a specific amount of money on specific dates for the life of the loan.

Loan Agreement. A document which gives an overview of the agreement including specific information about the property, the loan amount, rate of interest, length of the loan, and the result of non-payments.

Conclusion Obtaining a loan from a private money lender will often be the best option for a real estate investor searching for funding. However, as with all financial transactions, be sure you fully understand any potential risks involved.