The best investors use all of the options they have at their disposal. Subsequently, bank loans may not always be available. There needs to be a backup plan for any situation. For many investors there is only one alternative: private money. The thought of private money has dramatically changed over the past few years. Instead of turning to private money only as a last resort, there are many more private money lenders with various terms and fees than ever before. Not only does private money not have to be your last choice, there are many deals that you should think about making it your first financing option.
As the name would indicate, private money loans are secured from a private group or individuals. Because of this, they can dictate the terms, fees, rates and guidelines they are willing to adhere to. Unlike traditional lender financing that has to follow a strict set of program guidelines, private money lenders can determine their own criteria. Instead of looking at a credit score or income on a tax return, they may look at bank statements or the credit history of the person in question. The rates and fees will be higher than a bank, but you are getting a service that you would not have otherwise had. Once you have access to private money, it could change the way you conduct your investing business.
Making a cash offer has much more force behind it than sending an offer over with only a pre-qualification letter. Cash offers will give the seller some assurance that the deal will actually close in the time-frame they desire. This is especially important when dealing with short sales, foreclosures and REO properties. Lenders and loan servicers do not want to wait around for a loan that may or may not get approved. Even though the mortgage market seems to be loosening a bit, there is still no guarantee a loan will get approved. Between the appraisal and the many stages of underwriting, mortgaged loans are still far from a sure thing. Sellers know this and look for the comfort of cash offers.
A conventional mortgage takes anywhere from 30-60 days, depending on the applicant and the property. This is an awfully long time to wait for a loan to close and an offer to get accepted. By the time you end up waiting for approval, there may be changes in the market or other opportunities that you want to get into. By using private money, you can turn many more deals over throughout the year. Instead of waiting 60 days, you may be able to close two deals in that same time period. Even if you close just a handful of deals over the course of a year, you will see a sharp increase in your bottom line, even with the increased fees and rates. Many investors will look at the interest rates on private money loans and think they are not worth the expense. In reality, premiums will not be that significant if you are only holding the loan for a couple of months. It is when you have to make this higher payment over 30 years that it will be a factor. Paying a higher short-term rate to close more deals and make more seems like a tradeoff you should consider every day.
Depending on the property, a private money loan may be your only option. Lenders will underwrite off of the appraised value to determine their property value. If there are comparable sales that are lower in the area, you will have a difficult time getting the appraised value where it needs to be. Additionally, there may be time considerations that you have to meet with a conventional lender. Some will not let you buy and sell within 60 or 90 days without documenting improvements and upgrades.
As an investor, accounting poses one of the biggest challenges. It can be difficult, even for a certified accountant, to document all of the sources of income you receive. Without providing pay stubs, bank statements or tax returns, getting a traditional loan can be nearly impossible. Even if you cannot show all of your income sources, you can still be a successful investor. You can use private money to get started or to grow your portfolio until your income is documented and allowable for lenders. This can mean one deal every six months or every transaction, but once you establish a relationship it can be mutually beneficial for years to come.
Private money doesn’t have to be used on every deal, but it should at least be considered. Even if you have excellent credit and income, some short term deals don’t need to be run through a bank. You can be better served using private money for a few months and moving on to the next deal. Between your realtor, attorney and investment contacts, it is much easier to find multiple private money lenders in your area than you may think. You may not have a need for one now, but you never know when you will down the road.