Private Lending Process

I am a newbie looking for some guidance! I have read an abundance of postings discussing “Private Lending/Hard Money”. I was wondering if someone could explain the process to me.

  • Where would my profit come from (i.e., if I purchase a house for 60K (w/ private lending) and resale or flip at 75K, what is my general profit)?
  • Where does the lender make their profit (follow example above)?
  • Is there an advantage borrowing directly from the private lender vs. hard money loans arranged by brokers (additional fee’s, less profit for me, etc.)?
  • In comparison to a “Institutional” loan, what type of monthly payments are you looking at (pay interest only until resale, pay P&I, etc.)
  • What type of terms can you generlly get through “Hard Money” lenders (i.e., 6-month, 6-years, 20-years, etc.)
  • Are there penalties for repaying the loan in full before end of negotiated term (i.e., If I flip a house in a matter of weeks, are there penalties associated with paying back the private funding “early”)

Thank you to all who may be able to answer these questions!

Makbren

I believe private money (PM) would be cheaper and possibly as easy to obtain if you already have a source. The last PM I got was 12% interest and no points. I have a quote now for 14 % and 6 points. How it works is the Hard Money Lender (HML) will loan usually 70% of the appraised value of the property as repaired (ARV)and will usually escrow money for repairs. The title company will pay the closing costs and their fee and the seller their money at closing. If there is a shortage then you will have to bring money to close too. This is how the two HML work that I have dealt with. One wants me to bring 3% to the closing table but I know ways around that too. You make money by finding a deal that will appraise at less than or even equal to the 70% of ARV and fix it and sell it fast.

Most PM and HML want a certain minimum return. They get the points up front which usually go to the broker and the 14 to 15 % interest goes to their PM investor. I have been quoted a minimum of 4 months interest earned no matter how long you use the money and have even paid that at the closing too.

I believe most HML are interest only to keep it simple. Payments monthly unless prepaid. Most are for one year but they are hoping for less than 6 months so they can loan you the money again.

I hope this answers most of your questions. Let me know if you need more help. I can do mentoring and help you prepare documents for a small fee.