Updated: Jun 27
What is Private Money?
Private money lending, as the name implies, means borrowing money from an individual investor. Real estate investors use private lenders to finance deals that either won’t qualify for a traditional loan or can’t wait the usual 30 days or so that a conventional mortgage loan needs for approval.
Key Facts of Private Money
Private Lender Loans are different that traditional loans from big banks, and the process of obtaining one will be different as well.
Speed of Purchase: On average, a private lender can underwrite and fund a loan in as little as 7-21 days. Banks can take up to 90 days to accomplish the same thing. The timeframe offered by a private money lender is, more or less, conducive to the deals a typical investor wants to finance.
Asset-based Lending: Private lending is primarily driven by the underlying value of the subject property. Therefore, a borrower does not need to rely on their credit to secure a loan.
Control & Profitability: Borrowers receiving private money have more control over their loan. Borrowers of private money do not need to take on equity partners.
Shorter Term Loans: Private money loans typically have a shorter loan period than those of a conventional nature, which reduces the risk of accruing late penalties.
Guarantee of Capital: Private money allows borrowers, independent investors in particular, to expand their business. A predictable source of funds is necessary for such an endeavor.
Private lenders are in the business of making money. Therefore, mitigating risk is a top priority. There are essentially eight factors to consider when deciding whether or not a potential loan opportunity is viable. They are as follows:
Each of these factors must be taken into consideration when determining whether or not to pursue a loan opportunity. Failure to mind due diligence and neglect either one of these could result in harsh consequences. That is why Gold Bridge Capital Solutions have specialized in the market of Private money and does the hard work for you.
What are the advantages of Private Money?
Private loans are particularly ideal for investors who want to buy a property that needs a lot of repairs. Conventional financial institutions often refuse to grant mortgage loans for properties that have been vandalized or seriously damaged in some way. Private investors, on the other hand, see the potential in a property that can be purchased cheaply, fixed for a reasonable price and then resold for a tidy profit.
Additionally, a private money lender will have fewer requirements than other lenders. More specifically, private investors focus on the potential profitability of the real estate purchase rather than the borrower’s financial history and credit score. Furthermore, private money loans can be granted relatively fast, whereas a loan from a conventional lender may not be approved for up to 45 days.
What are the Disadvantages of Private Money?
There are a few disadvantages to obtaining private loans. The first is that private lenders most often charge a higher interest rate than the average bank loan. The standard interest rate for private loans is 7 to 12%; however, you may be required to pay a down payment to 20% or higher. This is particularly true if you have poor credit and/or the purchase of the property is risky in some way. Lenders also add “points” to the loan, creating an additional expense for borrowers to cover.
Another disadvantage is that, unlike with banks, raising private money won’t allow you to pay off a loan over a 30-year period. You can expect to be required to pay the loan back within 6 to 60 months, although some more-lenient lenders, especially those you may be related to, may give you a couple of years.
One more thing to keep in mind: you will most likely have to use the property as collateral for the money financed from a private money lender. This means doing your due diligence to ensure a deal’s framework (and potential) meets your criteria.
What is the difference between Private Money Lending and Hard Money Lending?
Think of it this way: Private Money Lending involves borrowing money from people with the means to invest capital in your venture (there’s no financial institution backing this investor). A good example of a private money lender would be a friend or family member — anybody in your inner circle — or an individual investor who was intrigued by your proposal and wants to be a part of your investment.
Hard money lending is something that lives between private money lending and conventional bank financing. Though hard money lending doesn’t require the usual hoops to jump through that conventional financing does, hard money lenders are semi-institutional and do have their own set of established criteria.
Both types of lending should be part of an investor’s financing tool box.
While a hard money lender’s requirements may vary, there are standard documents associated with every transaction. Typical loan documents include, but are not limited to:
Letter of Intent (LOI): The LOI is essentially a formal document that acknowledges all of the parties involved are on the same page. It outlines an agreement between two or more parties before the agreement is finalized. While it is not legally binding, it serves as a preventative measure for miscommunication.
Purchase & Sale Agreement: The purchase and sale agreement, otherwise referred to as the P&S agreement, is the document received after mutual acceptance on an offer, which states the final sale price and all terms of the purchase. Some of the items covered in the P&S agreement include: final sale price, earnest money details, closing date, title condition, contingencies and more. Inclusions on the P&S agreement will differ from state to state.
Preliminary Title Report: A title is a legal document listing the history of ownership of a home. After the buyer and seller have reached mutual acceptance, an attorney or title company will review the home’s title to look for any problems that might prevent the home from being legally sold. The results are written up for the buyer in a preliminary title report. In other words, a report of this nature will reveal if anyone other than the seller has legal claim to the property.
Title Insurance: Title insurance, as its name suggests, is a preventative measure that protects a buyer from anyone that challenges the ownership of a property.
Proof of Funds: Proof of funds represents a buyers intent. It is a way for borrowers to prove that they have access to sufficient funds to complete a transaction. Typically a bank statement, retirement account statement or other legal form is acceptable.
Proof of Insurance: Proof of insurance is required for either a purchase or refinance to avoid a devastating loss.
Personal Guarantee: A personal guarantee places some skin in the game for the borrower. In other words, the borrower puts their own assets (real estate, savings, etc.) on the line. This is only in cases where the borrower can’t pay back the loan.
Mortgage Note: A mortgage note is a promissory note secured by the mortgage loan. The structure of the loan is agreed upon and document signed by the borrower.
Private money is a great way for investors to supplement their income if they are unable to fully fund a deal with the help of traditional loans or available cash funds. Private lenders are willing to give loans to investors who are able to present the profitability of the deal they are investing in. If you need more information about Private Money Lending, Contact Gold Bridge Capital Solutions for your specialists in Private Lending.