Hard money is so expensive! Does anyone know of a good source of funding that is not so expensive?
There are other sources, private money investors, borrow against your retirement maybe, and more. What are you trying to do??? Herbster
Hard money is expensive however not nearly as expensive as not doing a deal…
I wrote the following a couple years ago… Hope it helps.
Sources of money…
Some of you reading this will not have endless amounts of capital available to you to
start, so how are you going to make this happen?
Hard Money Lenders (Equity Lenders)
Typically, hard money lenders are private lenders who loan money based on value of
property. Most will loan up to 65% of the value of the property irrespective of the
purchase price. Some will loan as high as 70% LTV. You can usually find these lenders
in the telephone book under real estate loans. Look for ads that read “Loans based on
equity”. Their ads will be mixed amongst all of the traditional lenders and if you’re not
sure if an ad is that of a hard money lender just call and ask “Are you a hard money
lender”.
You will also be able to find hard money lenders in the classified section of the
newspaper under real estate loans.
Hard money lenders charge a premium to use their money, however without their
money you may not be able to finance your deal… Keep in mind that if it costs you 5k to
finance a project that will return to you 27k, so what. Hard money lenders typically
charge 12-18 % and 4-10 points.
Shop around and have at least two hard money lenders to borrow from. It is very
common for a hard money lender to limit the amount of loans they will loan to you until
you establish a positive working relationship.
One powerful benefit of using a hard money lender is that the loan is typically not
reflected on your credit score. In fact, if the hard money lender asks you for your social
security number, they are most likely a loan broker – not an equity lender who bases
their loan on the value of the property.
Private sources
Private sources are typically people who invest their money in real estate but don’t
advertise that they do. So how do you go about finding these people? I have found
the easiest method is to ask everyone you know if they finance investment deals or if
they know someone who does.
I have found that private money lenders are the least expensive source of funds
available as well. Yes, Private sources for funding is the least expensive method for
capital… A hard money lender is usually a Broker and, being a broker, can charge any
interest that they, and you, agree to. However, in California the legal limit someone
can charge to loan money that isn’t a broker is 10%; unless they are the seller of the
property and finance the sale, at which time they are not governed by a usury limit. In
California that is our usury limit, verify in your state what the usury limit is.
Why would someone invest in real estate with you?
• First, they understand real estate and they consider it a safe investment.
• They are in a good equity position in case they have to foreclose.
• The amount of return, although it’s only 10%, is much higher than they would
receive in a regular savings account.
• Real estate has always been more secure than the stock market and the
demographic on the private lender is one in which they no longer want to
“gamble” with their money.
• They are afraid to be “true” real estate investors and being a lender makes them
feel like they are REIing
Family and friends
I always caution people not to borrow from family and friends until they “know” what
they are doing. We have all heard the saying not to mix business with friends. With
that said, once you have your systems down and you’re confident that you will make
solid investments and those around you start seeing your individual paradigm shift they
will want to jump on board and help…
There are a couple ways that you can allow them to help you.
Equity partners
An equity partner is someone who takes the risk along with you and reaps the rewards
as well. I caution you not to make anyone an equal equity partner as someone has to
be in charge of the decision and your knowledge is worth more than their money. If
you choose this method, I would always use a TIC which stands for tenants in
Common. Tenants in Common agreement will outline duties, roles and percentages of
ownership. You will be able to get a TIC agreement by doing a Google search for
Tenants in Common Agreement.
For a $20.00 download fee you will be on your way.
Lending Partners
Lending partners are people you know who don’t necessarily want to participate in the
day to day transaction but would rather just loan you money at a rate of interest and
also participate in the return.
Always try to limit their involvement to just an interest rate and if you do, it may be in
your best interest to take a deed of trust on a property you plan on holding for a longer
period of time rather then one you’re planning on flipping right away. It will be a lot
less paperwork…
A word of caution however, try not to over encumber a property with 3rds 4ths and
5ths. Naturally, the market may decline and cause this to happen but you should not
enter the transaction upside down.
Institutional Lenders
Simply an institutional lender in the transaction is someone like bank of America,
Countrywide, Washington Mutual…etc. Their return is not based on the outcome of the
property. It is determined up front and their investment is a promissory note, which is
secured by a Deed of Trust. This deed of Trust can be on the property being purchased
or any other property you may own.
These lenders typically lend up to 80% of the purchase price or value, whichever is
lower, and base their interest rate and cost on your credit score.
Furthermore, borrowing from institutional lenders is in my opinion the least effective
way to buy real estate as an investment. You are generally limited to 14 loans before
your borrowing power is diminished and you can no longer borrow from these types of
lenders.
Use them as a last result.
Credit cards
Depending on your level of motivation and credit worthiness, credit cards may be your
only means to capital. I know a hard money lender who started out loaning money that
he could get off his credit cards and now has over $8 million in assets. This is a true
form of using other people’s money. The downside is if you’re not a good money
manager when these cards start coming due and you have spent the resource of a
living expense then you will be robbing Peter to pay Paul.
Sellers
A lot of the time we don’t know how to ask the seller to help us finance the transaction
for us…Or maybe it’s just we don’t have the confidence to ask them. I have alleviated
that problem with my contract as I offer the seller more money if they finance the deal
for me. I give them 4 options for a sales price, the one that affords them the most
amount of money is 100% seller financing.
At times, especially when the property is completely paid off, the seller’s goal is to put
“some” money in their pocket. Rarely do they need “all” of their money. In this case
suggest to the seller that they subordinate to a second deed of trust and borrow the
amount of money they need from another source. If that other source allows
themselves to be in second position, then you won’t need the seller to subordinate at
all.
When you negotiate with a seller to carry the financing there are 4 options that are
most commonly used.
- All due and payable on a future date, no payments required. I like this
method as it doesn’t call for a monthly payment to the seller. Try and
make the One-time payment due after 12 months. - Interest only monthly payments. This is the second least expensive from
a cash flow standpoint. - Principle and interest amortized over a period of years all due and payable
and a date. Typically you will set the payments based on a term of 10
years and make the loan due and payable in 2 years. - Principle and interest due amortized over a period of time and due on the
last payment received. Much like a regular mortgage is constructed.
Assignment of contract
Assignment of contract is the act of taking a signed contract that you have with a seller
that includes the following Phrase.
ASSIGNABILITY: Buyer may assign this Contract.
And sell that contract to an investor who will follow through with the transaction. The
assignment money can be as little $500.00, or if the resulting transaction will result in a
large profit, than 10% of the profit is not unheard of. When you do assign the contract
it is important to have all parties release you from any known, or unknown, liability.
I will caution you to always be looking for the buyer of a property while looking for a
seller to sell you property. Having a property sold prior to negotiating a purchase is the
least expensive form of real estate investing.
Concurrent Transactions
A concurrent transaction is where you put the property under contract and offer it for
sale, enter into a contract to sell and close moments after you take title.
On your sale contract it is extremely important to include the phrase; Subject to the
seller obtaining title. If you do not include this phrase and subsequently do not
purchase the property therefore not being able to sell it to the buyer, you may be liable
for damages to the buyer.
The major issue with concurrent closing is that you are not on the Preliminary title
report. The lender of the borrower requests this from escrow which shows them chain
of title. Chain of title is important to the lender to see if there are seasoning issues.
Seasoning issues deal with the length of ownership and since you don’t own the
property and not on the prelim there could be a seasoning issue.
It has been my experience that seasoning is mainly a concern of the lender when the
borrower is marginal from a credit or income point of view. “A” paper lenders don’t
seem to like loaning on unseasoned property, in fact FHA requires a seasoning period
before they loan. However, there are many lenders who will. You will want to find
those lenders.
Trade
A seller who desperately needs to sell may need to in order to purchase a personal
property item. In most cases it will be a car. If you have a car that you don’t need
maybe a trade for their equity will be exactly what is in order. Trading has been around
forever….
Use your imagination, and get creative.
Property Exchange
Just maybe, you have a house that the seller would like to buy… Construct a property
exchange. Keep in mind that when you exchange your property for theirs you are not
exchanging it for what you paid for the property but rather the value of the property.
Subject to the existing loan (Subject To)
By far the best method for buying property with little, or no money down.
Subject to investing is buying the property subject to the existing mortgage(s) without
formally assuming the loans. The loans remain in the original borrowers name and
remain there until the loan gets paid off.
You will hear some people say that this is illegal. Hog wash… The only thing illegal is
that the lender can accelerate the due on sale clause of the loan. Ask yourself this
question: Why would a lender take a good paying loan and convert it to a foreclosure?
Especially when there are so many foreclosures already. The reserve amount that a
lender has to set aside on foreclosure loans doesn’t make it cost effective for a lender
to accelerate the loan. Not that it can’t happen, it just has never happened to me or
anyone I know.
Good Luck
Michael Quarles
that was great micheal!!!
Good Stuff Micheal!
He made it very clear the Private Lenders can be a lot softer than Hard Money Lenders.
The Question now is how to get some of the Best Private Lenders.
Easy! They’re already lending to your fellow investors.
Here’s an example. Let’s say you know ABC Investor is a local Real Estate Rehabber.
Simply look him up in the court records and see who’s holding the Deed of Trust (mortgage) in some places and Voilla! There’s your private lender.
Here’s what you have just figured out in just 5 minutes of research:
Who the private lender is
How frequently they lend
and Possibly how much they are able to lend based on the size of lien on the house.
No need to start from scratch. you already know they lend in your area and understand the drill.
Hope this helps you
Dennis