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Private Mortgage Lenders – The Money Source Everyone Warns You About
Banks and financial institutions are still the primary source of mortgages today. It is a really stable and fair business. Money is made available to a borrower to purchase a property and that property can be taken over if payments run into defaults. It is a concept that has withstood the test of time and will continue to go strong until the end of time. If we are to think about it, this is a pretty fair transaction where all parties gain. Buyers get to buy their dream homes, sellers get paid, banks make money, and many other supporting industries flourish.
In the real world however, this process can run into a bottleneck when barriers are erected to restrict the access to money. Even if you put up your property as collateral and have the financial means to repay the loan legitimately does not mean that you can obtain the loan that you want. The most common problem is when buyers are unable to get a loan quantum approved for an amount they need.
There can be a number of reasons for a low loan approval or an outright rejection. It could be because of credit disputes, pending lawsuits, previous bankruptcies, previous bad debt records, a high debt to income ratio, late payments of credit card bills, etc. These days you can even be penalized for being self-employed!
But for a short term investor or even a hardcore property player, bankers can actually take a back seat when it comes to real estate financing. They make you go through all the credit hassle over the course of 3 weeks and the end result is an insult. It’s just not worth the time and mental limbo. No, you do not have to put yourself through that if you know your way around block.
Private money have been in existence since trade began. People with money will lend you the cash you need as long as they feel comfortable with you and are compensated fairly for the risks they take on you. And let me tell you. The private lending market is buzzing! Just that big time financial institutions and banks have become so mainstream that people becomes oblivious to the availability of private money.
Private lenders usually work through brokers and other intermediaries. For all it’s worth, you might never even get to see the guy who is lending you the money. But don’t confuse them with loan sharks. They do their business within the parameters of the law. If you do your diligence checks on the deal you will be able to find out who they are.
You might then ask “Why do I need them any?!”. The reason is actually more simple than you think. They can be your only source of funding when every avenue you went to fails. And they are open to short term loans instead of forcing you to take up a 25 year mortgage. Terms are negotiable and if you got a winning project on your hands, they may even provide free financing for a stake in a partnership!
You don’t believe that? Just get involved in a $100m commercial property and these people will show up at your doorstep. But of course deals in those mega sizes are hard to pin down when you are now working on properties less than a million dollars in value. So this means that you have to be the active one if you need a private lender now.
Who are these mythical people?
They don’t walk around with a halo over their heads. They are common people like everyone else you see in the shopping malls. They could be from any social or economic statuses. But usually, you can expect them to have a load of cash assets filed in their portfolio folder. And most of the time, you are dealing with one individual or an individual (or company) that represents a network of individuals.
These people want to make their cash work harder, they have their own careers, run their own businesses, retired, or even sitting on inheritance money. Some might even be Directors of real estate companies. The point is that they have the funds and you need their approvals.
Excess cash is something everybody wants, but hates to see devalue. Leaving them in time deposits only garners an interest of less than 1%. You get 1% if you are lucky. Even at 1%, the cash is not going to keep up with inflation. The stock market is an obvious alternative investment, but it is too risky to many people. Real estate is more stable and will always have a value. More often than not, it appreciates over time as well. It’s not a coincidence that banks view real estate as the best collateral.
Basics of a private mortgage
The big picture is that a private mortgage is exactly like a common mortgage in that the borrower will get access to funds for a property transaction. Just that the funds come from individuals instead of banks and financial institutions. But when we superimpose the picture, you will notice the key differences.
Loans based on judgement. Depending on where you operate, maximum loan to value could range from anywhere from 60% to 100%. Private lender will make their own judgement on how much a property is worth and get their team of professionals to conduct research with due-diligence. They will then calculate a loan quantum based on the value they put on the property. Having adverse credit or being a former bankrupt is not going to be a dealbreaker unless you conduct yourself like a clueless financial lunatic.
Higher interest in return for higher risks. You have to admit that a private lender is taking on a huge risk by working with you. You could be attempting a “savvy” or “creative” transaction with no track record. Banks have turned you away. And now, you have turned up as a stranger at their doorsteps with an opportunity. Even if you have a good acquaintance to vouch for you will not cut it. Expect interest rates to be way higher than the banks. If you are not ready for that, you are knocking on the wrong door.
Period of loan. They are going to push for a short term loan. They are looking at getting back their investment with interest in as short a time frame as possible. Don’t be afraid to negotiate for a term that is comfortable for you. But you are very unlikely to get anything close to 30 years unless the private lender is ready to set up a trust for his grand children. Anyway, if you are looking for such a long time period, you are barking up the wrong tree.
Quick easy process. Unlike banks that make you wait a couple of days just to get a banker to call you, private lenders work fast. Once the terms of the financing is agreed, their attorneys will draft the papers in double quick time and request for your agreement. Speed and hassle-free is one of the big advantages of this channel. Don’t make the mistake of interpreting this as being complacent. The documents you will be looking at are some of the most expensive legal papers to conceive in the industry.
What happens if I default?
The private lender has as much legal authority to spank your ass as a conventional lender. In fact, they might include clauses in the contract that will overwhelmingly favour themselves. These can include buying the property from you are a pre-determined price, restructure the loan with more interest or a longer duration, foreclose the property as per normal, etc. Foreclosure are rare when private lenders are incolved.
You might now think that private lenders are not going to have a place in your investment encyclopaedia. But when you identify an investment home-run and the banks slam the door in your face, you are going to look for them, or they might find you.