Private lending @ 10% in Oakland, CA - good or bad deal?

Question

Hello BP- I'm a first-time investor in Oakland, CA. I'm in contract on a duplex that I plan to owner occupy. The building is in extreme disrepair and needs extensive work, foundation, full remodels on both units, new plumbing, electrical, roof, and sewer lateral. A conventional lender is not an option because they wouldn't appraise the property without ordering termite inspections. I have an option for private money bridge loan 80/20 LTV @ 10%. This will allow me to purchase the building, do the remodel and refi ASAP. I have strong credit and W2 to support a loan. Does this sound like a reasonable deal? Thanks!

Jackelyn Gonzalez · Answer

@Tim M. For that area you might be able to find a rate closer to 9% with 2 point charge. What you have is reasonable though.

Chris Mason · Answer

So it's more like 12.5%-13%. Still good all things considered.

• For an exactly 12 month HML, points are mathematically identical to a 1-for-1 rate bump. It's not super hard to take a calculator out and show that (for a term of exactly 12 months), 2 points upfront is the same as bumping the rate 2% in terms of what you will spend on interest during that 12 month period.
• For less than 12 months, points are more than 1-for-1. So when the HML wants 2 points up-front on a 6 month HML, that's the same as tacking 4% onto the interest rate mathematically.

Jeff S. · Answer

The terms seem quite reasonable, @Tim M. Since this is a duplex and you will be occupying one of the units, this loan falls squarely under Dodd-Frank, requiring all the associated notifications, disclosures, pomp, and circumstance. It will also have to be originated by a licensed CA real estate broker with an NMLS registration.

All of this is legal, but many/most HML's don't do these type of loans. Perhaps yours does? I hope your private lender and his or her "private money company" know this. You don't want to find out a week before closing that they realized they can't do this deal. Protect yourself.

Have you looked into a 203(k) loan? Alternately, the year you have to repay your loan will fly by. It's in your interest, and that of your private lender, to make sure you are preapproved for the refi as soon as possible, so you know that you will be able to repay your note on time. I would want to see that now. Good luck, Tim.

Chris Mason · Answer

Hi Tim,

10% @ 80% LTV is certainly more than reasonable for HML to a borrower with no experience under her or his belt. Well done!

How many points? Prepayment penalty? Balloon?

James Masotti · Answer

@Tim M. - 10% is what I offer my private lenders. So that seems pretty reasonable to me.

Tim M. · Answer

And thank you James for your feedback. I'm checking on all these details.

Tim M. · Answer

Great points Chris!! Appreciate the thoughtful logic. The points become very expensive since I only plan on holding the loan for a short time.

Tim M. · Answer

Thanks Chris and James! They charge 2.5%-3% in fees split between the private money company and the investor who will fund the loan. There is no pre-payment penalty or balloon because they want the loan paid off as quickly as possible. The longest they will hold the loan in 12 months. Appreciate any tips you feel will help.

Private lending @ 10% in Oakland, CA - good or bad deal?

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