Needing some advice/info. I've typically been doing 3 rehabs concurrently with my own money and/or lines of credit. Wanting to do more in 2014. Here's the question:
How to structure with private money or hard-money? I mostly buy MLS-listed REOs and I make strong offers - cash, no contingencies, proof of funds etc. Now, if I will be using private money or hard money, how should I structure this? I can still make cash offers and show the seller my proof of funds (because I do still have enough cash to close if I want to), but at closing the deal will be funded with opm, and the lender will want a deed of trust or mortgage I assume. When buying REOs, they really don't like to see the deal change from a cash offer to a financed offer before closing. Can we just do this with a simultaneous double-close of some type? And the B-C closing would pick up the financing and deed of trust or mortgage from the lender?
There are many variations, @Deniz Cribbs, but the simplest, and probably most common, is just a straight loan. Here the borrower gets a fixed amount of money to buy the property and makes interest only payments each month to the lender until the property is sold. For many, but not all deals, a lender will expect the borrower to bring money to the closing table as well. This would typically be for anywhere from 6 to 12 months – the duration of most rehabs.
Sometimes the same lender or a different one will loan the construction money. This would be a similar type of note but in second position. Here, it’s common to disburse the money as construction progresses, as discussed above. The funds would be given to escrow who would dole them out upon direction from the lender, after a periodic property inspection.
Other deals could include a share of the profit, sometime called a Shared Appreciation Mortgage. Here, the lender takes a cut of the profit as well as interest payments. Of course there are also JV's and partnerships, where the money partner appears on title in some form, but these are not loans. I imagine there are a thousand ways to combine these and I've seen some very convoluted deals.
Some lenders allow the borrower to pay everything back when they sell. Some expect monthly interest payments. If the borrower can’t pay, private/hard money lenders have the exact same recourse as for any other real estate loan: foreclosure, deed-in-lieu, or any kind of work-out agreement.
( @Account Closed , I was kidding about whether funding a crack habit is a consumer purpose loan. Sarcasm is always hard to write.)
A few years ago we were buying a lot of REO with a lot of OPM.
The way we did it was to setup limited liability partnerships with the money partners and buy in the name of the LLP.
That won't work with hard money lenders but with private money, this could still be a possibility.
@Duncan Taylor - Were your money partners getting an equity stake using this method? I really would prefer to just borrow instead of giving someone an equity stake for my REO flips.
On the other hand, I would like to have some equity partners for rentals, so the LLP option might work good there.
On the other hand, I would like to have some equity partners for rentals, so the LLP option might work good there.
The structure we used most often was for the money partners to have a small ownership interest, say, 5-10% and then they would make a loan to the partnership after becoming a partner. That interest rate can be whatever makes sense. Then a collateral assignment was given by the partnership to the partner making the loan. It wasn't a mortgage.
In the multiple cases I've done this as a lender (not as owner/buyer), the offer is without financing contingency. It's a "cash" offer. For example, on a deal with BB&T as seller and a flipper as a buyer, Line 5(a) page 5 of Form 2-T says "CASH". The buyer provides proof of funds, etc., as you say, but the contract doesn't change. You say "...the deal change from a cash offer to a financed offer before closing" Why would you want to change the offer?
As long as you close, it isn't material to the deal if you have financing on the HUD-1. Are you saying the bank (in the contract) prohibits you from obtaining financing? This is counter to my state's (standard Realtor/NC BAR) Form 2-T. The contract says CASH and the closing attorney provided a D-T and note to the lender (my SDIRA).
@Chris Martin - I'm not wanting to change the contract. But most REOs have their own contract and/or addenda. And often these will say that any change (i.e. from cash to financing) must be approved first, or it may say that making such a change is prohibited. The seller/asset manager must approve the HUD-1 prior to closing, so they will know if you are actually bringing financed money to closing.
Brian, I use Private Money for most of my purchases. I found an individual with money that was not growing and I asked him to do the deal. All we do is at closing he brings the certified money and in turn he is secured by a recorded mortgage just like a bank. It is a very simple process. I keep the 20% the bank wants me to put down and he makes 10% Apr, 30 year amortized but the contract is for a year. I pay him interest only monthly . Just that simple.
Since you have cash, buy with all your cash then refi with your hml/pml after closing.
@Account Closed - That's most certainly an option. I was just wandering if there's a way to do this more like a simultaneous double close, where I don't have to actually bring my money to the table.
I'm curious as to which bank you have that says in their addenda you can't finance if there is not a financing contingency. It's not BB&T since we've closed with them as I said above. Recent BoNY/Mellon and US Bank deals didn't have this stipulation either. I guess I've not see this as an issue, and as a lender I'd like to know which bank REOs to watch out for. I'd also ask your closing attorney if their firm has experienced an issue like you are seeing.
The only issue a bank can have is a loan not being funded and the deal not closing. Otherwise they have no interest in where you get your money so long as it's legal funds (an they won't know that from any source). I have never heard of a deed restriction restraining any buyer from financing or refinancing over any period of time.
Put the money in escrow by the time the seller gets the HUD-1, I can't see them barking at all. That can be in a cover letter transmitted to them. They are receiving cash.
Might consider too the liability taken on by a bank that refused borrowed funds that has no contingency to funding.
If your funding is from a partnership arrangement, the closing can be cash without any deed of trust or mortgage shown, the security arrangement is contained the partnership agreement through the assignments of capital interests. :)
It's not that they refuse to allow a financed sell. It's that the don't want you to change mid-stream from a "cash" closing to a "financed" closing. Like Bill said, I would imagine that they would have no problems if the money was already sitting there in escrow with the closing agent.
With the money sitting in escrow prior to asking seller permission to switch from cash to financing, as @Bill Gulley suggested, sounds like a great idea to me.
Another thought is to have a second refi escrow that is set to close immediately after the purchase escrow closes. The pml wires funds to purchase escrow after refi escrow holds mortgage and has secured lender's title insurance. That way, lender is secured and borrower has 'all cash' transaction. Refi escrows are pretty cheap. I haven't tried this but can't see why it wouldn't work.
@Bryan L. , many of the purchases I have funded as a private lender were REOs and I have never seen this as an issue. I usually invest through my IRA and simply direct the IRA custodian to wire funds to the title company that is closing the transaction.
The title company has balked a couple times when I agreed to fund more than the purchase price (I don't do that very often). This issue was solved by arranging a second closing for the rehab funds (secured by a second mortgage).
Everyone we know makes all cash offers to give the impression that there will be no risk of financing falling through, thereby killing the deal. For REO purchases, sometimes the banks care and sometime they don't. Ditto the associated title and escrow companies. You never know.
The same is true for standard sales, except the seller usually doesn't know enough to care and it’s their agent that must sometimes be convinced.
90% of the time the buyer (you) knows the bank or buyer's agent and works the deal with them in advance. The agents can grease the skids with buyers and with escrow. If you don't know the agent, because perhaps you made a blind offer off the MLS without calling the agent first, it involves a call from you to escrow to let them know there will now be a loan on a "cash only" deal. Everyone knows the game and just want's to make money. It's rare anyone gets upset, but it happens.
You can double close through one escrow & title company. Your lender wires money the title, the buyer closes, and then escrow processes the loan docs after. Lender instructions would direct escrow to only close your purchase after you signed the loan docs, thereby protecting the lender. Some escrow and title companies won't do this but in our experience, many will. It's helpful if you can choose these companies.
If this doesn't work, most of the suggestions everyone provided above will work. I like @Account Closed 's suggestion to use your own money and immediately refinance out with an HML except, and I hope this happens to you, you get so big you don't always have the cash to do this. Long term, it helps if you have a really good and trusting relationship with your lender. If they trust you, there are a few risky (for them) ways they can help you.
1) Lender wires the money to title as soon as escrow opens and before you’ve sign your loan docs. Once you make your surprise call informing escrow of the loan, the money will already be there. All the seller wants to know is that there is money to fund the deal. We've never had a deal fail using this approach. Obviously, we trusted the buyer, our borrower, to sign the loan docs.
2) A back-to-back (really the day after) close using two different escrows and title companies will always work since the bank can't control a loan once you own the property and you're not transferring title. Again, the lender has to trust you will sign the docs once you own the house.
There are many other options, some including land trusts, but these start to get complicated. Form your relationships and life will be a lot easier for you.
The title company has balked a couple times when I agreed to fund more than the purchase price (I don't do that very often). This issue was solved by arranging a second closing for the rehab funds (secured by a second mortgage).
Jeff, clearly the settlement agent needs a class. There is no issue with funding more than a sale price, the balance remaining is cash to the buyer. It just blows their mind as that isn't customary by lenders. There is no legal restriction to funding more than 100% of a sale price. They may have an issue with the lender's title coverage being more than the sale price, that can be adjusted. Ask to speak to the title agent (owner of the agency) or their attorney. If you're doing short term deals a second may not be an issue but that blocks the owner from tapping into equities that could be available. But I suppose you could do that again. :)
You can double close through one escrow & title company. Your lender wires money the title, the buyer closes, and then escrow processes the loan docs after. Lender instructions would direct escrow to only close your purchase after you signed the loan docs, thereby protecting the lender. Some escrow and title companies won't do this but in our experience, many will. It's helpful if you can choose these companies.
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Dynamite, I didn't know that you could double close with one escrow and title!!
I know title and escrow can be quirky ... I had one title company that wouldn't accept the escrow officer's notary because she didn't have a high enough bond ... bs ... I told title I'm not going to do the loan if I can't get clear lender's title, they backed down and accepted the escrow agent's notary ... jerks. Anyway, I get your point about some title/escrow being nutty and not accepting certain closing structures.
I get this question from borrowers all the time, it's good to have multiple, solutions!
We'll have to talk about land trusts one of these days ... yet another possible solution.
Thanks for the info everyone. I have a title/closing company that I normally work with. I've done enough deals with them that I'm sure that we can work out the details now that I have the basic ideas. On to making offers now.
@Bill Gulley , I agree that there should be not be an issue with the title company paying the amount funded which exceeds the purchase price to the buyer (borrower). However, as the title agent is specified by the bank in REO transactions I have found it easier to write a first and second mortgage than to try to convince the title agent of their error and jeopardize a very attractive purchase for my borrower. Whenever I have used this strategy the term of the notes was less than 6 months and both of my liens were removed when the home was rehabbed and resold.
@Jeff Rabinowitz - All 4 of the REOs that I bought last year - I was able to close with my own preferred title company. That meant that I had to pay for the title search and title insurance myself, but I was better able to control the closing by using my own preferred title/closing company. One can usually chose their own company, as long as they are willing to pay a little more for the closing. In my area it's customary that the buyer pays for title searches and title insurance anyway.
In situations where I loan more than 100% of the purchase price (not often) I as lender instruct escrow to "hold back" a specified amount. The hold back is then released as rehab progresses. The hold back shows up as a line item on the closing statement, with escrow releasing the funds when I send an authorization letter to escrow. Borrower pays interest on the full amount from closing. I'm pretty flexible when it comes to private lending but the borrower walking out of escrow with my cash is tough for me to swallow. You can even hold back an amount that forces borrower to bring cash to closing, yes, (s)he will get it back as rehab progresses but at least you know borrower will use the money for rehab and not for getting back on crack.
LOL, yes, I was going to mention construction disbursements, escrow generally charges for these too, but certainly worth the attention. Common due diligence and risk management. Your loan history with that borrower and the amount at risk are factors. Good way to go, David! :)
I know you're careful about compliance, David. Wouldn't a loan for "getting back on crack" be a consumer purpose loan or are you referring to more of a business purpose loan, such as for inventory? How do you secure these debts?
@Bryan L. , the buyer can specify the title company in Michigan for most transactions as it is the buyer who generally pays the closing fee. Here it is the seller who generally pays for the title policy to insure good title. The buyer must only pay for a lender's title policy if they need one (if they have a lender and their lender requires one). I usually choose the title agent when I am the buyer.
I suspect the buyer could choose the title agent even in an REO transaction but there would be a lot of pushback. When I have been a buyer of an REO I always closed at the bank's title company and all of the borrowers I have funded have done the same. The deals must be exceptional (and have been) to put up with the bank's control of the process and to deal with title agents who can be difficult at best.
Far and away most of my loans are made to entities, almost all to LLC's, therefore, almost by definition, they are business purpose loans. Most are SMLLC's ... there is absolutely nothing stopping a single member LLC owner from using the money for whatever (s)he wants, including personal use. The point of hold back is not so much to ensure the money is for a business purpose because rehab history and lending to an entity would establish that for legal purposes. I'm more interested in hold back's to ensure the money is used for the project I lent the money for, and not some other purpose. Example, I lent cash out one time and the guy used the money for another rehab he had going and the rehab I lent on suffered.
@Account Closed , I rarely let buyers (borrowers) leave a closing table with more than a few thousand dollars (maybe $10K) of my funds and will only do that if they are buying considerably under market value, are quite experienced, and/or we have done multiple successful transactions in the past. Sometimes I set up escrow accounts with title companies although I have controlled disbursements myself at times also. Yes, the borrower pays interest on the full amount of the funds which I commit to the project from the beginning.
On a recent transaction, I funded the purchase price minus ~$5k which the buyer paid in earnest money and closing costs. The buyer then used the personal funds they committed for rehab and received the proceeds of a second mortgage approximately a month later after they had demonstrated the amount of funds they had already used and the progress made on the rehab.