WHAT IS PRIVATE LENDING? When we have identified a home that is priced well under market value, we give private lenders an opportunity to fund the purchase and rehab. Lenders can earn high interest rates – typically 4–5 times higher than rates on bank CDs and other traditional investment options.
HOW IS THE MONEY USED? On a rehab property, the money is allocated to the purchase price, renovations, carrying costs, cost to resell, and to a small, contingency fund for unexpected expenses.
WHY DON’T YOU GET A TRADITIONAL LOAN? The primary reason is: time and negotiation leverage. Many of the homes we purchase need to be sold quickly, within 10–14 days. A bank requires 30–45 days to close a loan. Also, our leverage is far greater when we purchase using cash instead of financing. Many traditional home sales fall out of contract because of financing issues; this allows us to negotiate a much lower purchase price and to reduce our risk. Lending guidelines are also continually changing. Most new requirements include applications, approvals, junk fees, and stricter investor criteria. They also limit the number of properties that can be purchased by one company. criteria. They also limit the number of properties that can be purchased by one company.
HOW CAN YOU AFFORD TO PAY SUCH HIGH RETURNS? We make our money on the purchase, and this allows us to purchase 30–50% below a retail purchaser. This instantly creates thousands of dollars in equity. Typically, we also cut out the middlemen and their associated costs, including commissions, mortgage broker fees, and loan fees. Our attorney costs are usually lower as well because there is less paperwork.
ARE YOU REALLY HELPING SELLERS? Absolutely. With your cash funding, we can offer something few buyers can. We are buying within their timeline in as little as 10–14 days. Knowing that we’re going to purchase the home in “as-is condition and renovate it is an important factor to most sellers of distressed property. Also, the seller won’t have to pay additional fees.
WHAT IF THE MARKET GETS WORSE AND VALUES GO DOWN? This is a great question and valid concern. However, our strategy is not to speculate 3 years down the road. Our goal is to purchase quickly and sell even faster. Most of our projects are completed in 1–2 months and sold in 4–5 months. The market doesn’t tend to shift that dramatically in such a short period of time; it’s typically a longer process for an area to decline. Remember, we’re buying in strategic areas where inventory is already low and demand is high; this greatly minimizes our risk.
WHAT INTEREST RATE DO YOU TYPICALLY PAY YOUR PRIVATE LENDERS? Most of our lenders are paid from 8–12%. Our rates will fluctuate very little depending on the purchase price and rehab involved. The lower the purchase price, we can sometimes afford to pay a little higher rate to make sure our lenders make it worth their time.
HOW LONG WILL MY FUNDS BE HELD? The majority of our loans are set up on an 8–12 month note, but it depends on the size of the project. If we are doing a tear-down and rebuild, we will have to wait on the county inspectors for approvals. This will cause delays. But, we account for these details upfront and will give you an estimated time frame for the return on your investment beforehand.
WHAT IF I’M ON A SHORT-TERM NOTE AND SELL THE HOME AFTER 1 MONTH? It’s extremely important to us that we do not waste your time. However, occasionally, situations may occur where we find a buyer immediately. In this scenario, we provide you with 2 options: we can move the note to another property, or we can provide you with a minimum of 3 months interest. Most investors see the strength of our purchase ability at minimum of 3 months interest. Most investors see the strength of our purchase ability at that point, and simply move the note to another property.
WHEN WILL I RECEIVE PAYMENTS? On a short-term note, we pay one large lump sum at closing. This is much easier to manage for both of us, especially if we’re working out of a retirement account. On a longer-term note, we will pay monthly, just like a typical mortgage.
IS THERE A GUARANTEE ON YOUR INVESTMENT? No. There is no government-backed guarantee on these privately held real estate notes. You’re deriving protection from the equity in the real estate. If at any time we were to default on the note, you have legal right to take the home (essentially foreclose on us). Many investors laugh about this and say, “I hope you’re a day behind on payments…I’d gladly take this one off your hands.” Remember that we plan for the worst, and our homes have thousands of dollars of equity in them. So, in a worst-case scenario, we just don’t make “as much” profit as we originally hoped.
IS THE IRS APPROVED TO USE RETIREMENT ACCOUNTS IN THIS MANNER? Yes. These are established tax guidelines, and it is completely legal. However, we always recommend the services of a custodian to invest retirement funds tax deferred or tax free.
WHO BUYS INSURANCE? We do. We pay for a title search and a title policy on the home, just as we would in a typical transaction.
WHAT KIND OF INSURANCE POLICY DO YOU GET ON THE HOME? If we purchase a renovation, we get a builder’s risk policy (Vacant Dwelling Policy). In case of any damage, insurance distributions would be used to rebuild or repair the property, or used to pay you.
HOW MUCH IS IT GOING TO COST ME TO LEND TO YOU? It is our policy to pay for all the closing costs so that your entire investment goes to work for you. We will pay for the closing agent, document preparation fees, notary fees, overnight mail fees, bank wire fees and recording costs. We do not charge any fees or commissions to our private lenders.
WILL MY MONEY BE POOLED WITH OTHER INVESTORS? No, we do not pool funds. Your funding will be tied to one piece of property secured by a No, we do not pool funds. Your funding will be tied to one piece of property secured by a deed of trust.
IF YOU DEFAULT ON THE LOAN, HOW DO I ACQUIRE THE PROPERTY? In this unlikely scenario, we would simply transfer ownership of the property to you, if possible. If for any reason we did not (or could not), then you have all the legal rights of a secured lender. The best way to legally protect your interest in case of a default would be to hire an attorney. They would seek to retrieve your investment, any unpaid interest, any collection costs, all your attorney fees and maybe even more. An attorney could advise you of whether or not it makes sense to foreclose on the property or seek ownership to protect or recoup your investment