Private Lenders - Great to find, but how?
Your hidden partners in profit.
Ray had a deal...a really good deal. He had found a structurally sound, but cosmetically run down, house that was perfect for his investing needs. After he surmised that about $10,000 of repairs would be needed, this potential investment property would be worth $75,000 with a current sticker price of only $40,000. For Ray, this was a no-brainer, but he had no means to get the needed money. He had little equity in his own home, and nothing else liquid he could use for cash. Likewise, even if he could get a home equity line or second mortgage, he couldn't wait 3 to 4 weeks to close. The opportunity would be gone.
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What Ray needed was a private lender. A private lender is someone who lends money for a property based on the property's value and inherent equity. The loan rate is higher than a mortgage, but for quick loans for short term needs, private lenders can be ideal. They are especially useful for real estate investing when working capital is in short supply. But how do you find a private lender?
There are a few options overall. First, it never hurts to inquire about potential lenders from friends and colleagues. Many people with extra money are willing to take a good investment at a higher rate of return. Looking at Ray's property, investing $50,000 ($10,000 for repairs and $40,000 for the home) is fairly safe if indeed the appraised value is to be $75,000 once completed. Even if Ray defaulted, the private investor would have ample equity in the property to regain his or her investment. For this reason, the investment is relatively secure and reaps a higher interest rate for the loan (usually more than 8 percent). Many friends may be willing to get involved in this type of situation.
Another avenue in finding private lenders may be to frequently visit your local courthouse and pull mortgage documents. Any individual (as opposed to a banking company) in the primary lending position on these documents may be a private lender. Some will be previous home owners who are owner financing, but others will be experience private lenders. This can be a good way to find people in your area that are actively investing.
You can also visit your local real estate investor associations. This is not a bad idea anyway if you are going to be actively rehabbing properties and investing in rental properties. It is also an excellent way to network with other real estate professionals. This of course includes private investors who lend money for hard equity loans.
More aggressive measures can include taking out ads in local newspapers and real estate journals to state your financing needs. Notifying investors through these publications will attract the eye of those who actively search for good investment opportunities. Also, when driving around, be sure to take note of any "we buy homes" signs. Many of these individuals can also be private lenders for hard equity loans. This can be an inexpensive way to find long term partners that can help you acquire your own properties for your investments.
Other excellent resources are mortgage brokers. Brokers are accustomed to making deals with borrowers, and many borrowers may not qualify for the conventional mortgages. Brokers also will be faced with borrowers who are under time pressure to obtain a mortgage or hard equity loan. If these brokers are well connected, they will know of several private lenders who can make a deal work for you. Likewise, because mortgage brokers represent your interests, they will seek a private lender who can give you the best rate and term even though it may be for a short term need.
Many private lenders can make loans happen in a very short time. This can be as quick as 5 to 7 days in some cases. Requirements include a valuable property to secure the loan, a significant amount of equity in the property to cover the investor's risk, usually some payment of points to reward the investor for their risk, as well as title insurance and appraisal assessments. Generally, fees are less than conventional loans, though points may be more.
If you find yourself in a situation similar to Ray's, a private lender indeed may be your best option. Ray secured a private lender through his mortgage broker; and within 10 days he had the cash he needed to complete the deal and perform the repairs. He resold the home a year later for $74,000, paid the balance of the hard equity loan, and still made a great profit of about $20,000. Without a private lender, Ray would likely have missed out on this great opportunity.