How much to pay private lenders?
Residential Real Estate Agent · Orange County, CA · Member since 2009 · 289 posts · 95 votes
Like the title says, how much do you pay your private lenders? I have seen that 8% - 15% seems like the average.
Now another question - is that 8-15% on the money they lend you or of your final profit?
Chris,
You asked about private money lenders and not hard money lenders. All the answers you received are about hard money loans.
I rarely pay points on private money loans. Most deals get 10% or 12% interest based on the loan amount.
So in your example of a $100k loan, at 12% interest, yes, you would owe $1k a month. Typically, I have the loan contract to pay the principle and interest in one balloon payment, and not monthly interest payments, so at the end of the term, say 6 months on flips, I would pay the private investor $106k
For holds, I would structure the interest payments monthly.
they should not be lending more than 70% LTV. As for duration, depends on the investment, mine are usually paid back inside of 3 months, but since I do deals all the time, I can have that same investor's money out multiple times on multiple properties. I also put my own cash ("skin") in the game as well which also keeps the LTV's lower.
Compared to a CD at 2%, yes, 10%-12% all day long.
This is probably a dumb question, but lets say I want get a loan of $100k for 3 months. That 12% is an annual rate, so I'd be paying the private money guy 3% or $3,000 for this money? What if I go over the three months and it ends up taking 4 months to get his/her money back? Do private investors usually like to have a penalty for that or will I just pay an extra $1k and owe $4,000 total?
Thanks.
Robert,
Unless you are sure you can get out in 3 months, don't make it for that short of a term. Make it for 6 months letting them know you usually get out in 3.
That stated, if you ever do go over, all my notes have late fees and interest charges on all past due matured amounts. Usually, that % rate is higher than the initial rate.
For example, if I borrowed at 12%, then the past due rate on matured amounts would be 15% (as an example)
I personally have never gone over the initial term so I have yet to run into the late charges and higher interest rates, however, I have had many investors re-invest the principle on other deals and thus the principle borrowed was kept.
If you want to make payments only at the end ...
You will need to work with a friend or relative that knows you and trusts you. An experienced lender (or one I've trained) would not take the interest and fees at the end.
If you default on the loan how does the lender foreclose? Depending on whether a Deed of Trust or Mortgage state, their only way to foreclose is if you miss payments or miss the deadline for repayment.
I would want to know quickly if you're having financial problems & to foreclose within 3 months of missing the 1st payment. If no payments are due ... how would I foreclose?
Hi, just a comment, I have usually paid 3 points of the 1 year T-Bill and I have never paid more than 10% and, I have never paid points to a private investor. I have used additional collateral and generally I'm at 100% of the deal, I take care of rehab costs, payments, and costs of sales. I have done deals from motels, grocery stores, apartments and industrial property as well as business only type deals.
If you are paying points to an individual, they may be bumping into state usury laws as they are not an institutional lender, check those in your state. Secondly, if you are paying points to an individual, you have the wrong person! In every community there is the retired couple or widow type wh is getting, now, 2 or 3 %, if you can find them (which can't be that hard) you need to appoach them and pay them three times what they are getting! Secure the deal for them, and as Will, sometimes its best just to keep the money to work with. Interest on 50K at 6% is only $250 a month. Instead of paying a point, you can keep the money on deposit for over 2 months after your return on the deposit. How many desals can you find in 2 months? Good Luck, Bill
Are you usually on the hook for the 6 months even if you get out in 3.
If you are on the hook for all 6 no matter what, have you ever negotiated a contract where you just pay 1% monthly with lets say a 3 month minimum and 12 month maximum and then pay the investor for just the months you had money borrowed?
So If i was looking for a buy/hold strategy with a hard money and did it for five years it would prob wouldnt be a very good roi unless i got a killer deal right?
i just hung up the phone with a 'private money lender' who offered me the following terms:
12-17% (17% w/10% down, 15% w/15%down, 12% w/20% down)
5 points (!?!?!??!)
2-3 year balloon
when he was done, i asked, well, you said this was private money and it sounds more like a HML to which he responded: "it's all the same"
The person that referred me to them is a wholesaler who says with my credit and income, I should be getting a 10% rate with 5% down since it's private money. that's what he's seen him do for other people. the lender never asked anything about the deal itself and said that they can go as low as 580 on credit scores! wow!
he only lends in 2 counties....
Hi, Josh, your private lender is in violation of FA usury law at 17% and 5 points. Usury rate for FA on real estate loans is a whoping 18%. Points are pre-paid interest. To find the APR on your financial cal. compute the loan then take the costs of the loan, loan fess and points and subtract it from the PV and enter that as the new PV, then solve for the interest rate.
Additionally, any individual who is in the business of lending, as may be defined state by state, even if it is their own money, may be considered a lender. If so, they may be in violation of registration as a lender and then fall under federal requirements as well.
Any old phart out there charging those kinds of rates and points is in a business of lending and a shister IMO. He even has a lending structure as to the LTV! I'd drop a dime on him in a heart beat. (meaning make a call) If he wants to be a lender he needs to get a license like everyone else!
You don't find good private lenders as a referral from Realtors or searching out deeds of trusts. You find them by networking, primarily in social environments. If you become active in non-profit organizations in your community you will likely have a few names in a few months. You'll find that many volunteers in the community are people who have time to devote to their cause. If you have a similar interest in their cause, well, you have something in common. I was on the Board of Directors of the Ozarks Literacy Council, Chairman of Community Hosuing Assistance and Development, active with the Red Cross, American Cancer Society, on and on....make friends! Just let them know how lucky you are compared to others that you can make money so easily and with little risk involved, two key phrases you need to learn and use, return and risk. Many times, I would not ask someone to loan money I would talk about my deal and say I'm going to lose it since my investor is tapped out right now. After awhile I have had people begging me to take their money, no it's not a con job, but after these non-lenders found out what the risks and returns were, they wanted in! Take your time with lending prospects, don't rush them, make them ask! Good Luck, Bill
Hi, in FA, registered lenders, mortgage co.s, banks, lending companies are exempt. This applied to individuals making loans secured by 1-4 family dwellings. Commercial loans are exempt as I mention way up stairs here.
As to the attorney, a closing attorney is not responsible for the terms and conditions made in the contract, only to close it as required. Attorneys close deals all the time that have problems in the details, that is for the attorney that represents each party. Again, you SDIRA through the administrator is exempt in that state.
That's where my comments were directed. I'm certainly not against making money, just saying that I can almost picture guys like Josh was talking about, doing deals themselves, on the side, without much concern as to credit issues and with short pops on a high rate (preditory) loan. I have seen so many of these that I can't help but assume that such high rates, clearly justified on greed and not prudent underwriting, is preditory. I can see so flash cash going this route since a lender makes the deal possible and is, from that perspective, entitle to more than a 10% rate on the money for a day.
But a loan amortized with a balloon in 2 or 3 years is another story. Especially when, with a little more effort, it is possible to obtain funds from someone who just wants a fair shake, at a rate that relects the risk and an opportunity to earn much more than they currently receive. I hope everyone sees the difference, where I'm comming from here. From what you have said about you SDIRA, I don't consider that preditory exactly as I would imagine the originator takes underwriting issues into consideration as well, so go for it! Bill
FWIW, the guy answered the phone with the name of a mortgage company. so it appears that he would be exempt.
There ya go, see if you can join a bridge club! LOL
If you ever have a question on what to look for on a deal, just let me know...Really, I was in lending for almost 20 years and if I had a borrower willing to 17%, that would scare me from making the loan, why would they be so desprite, maybe there is something there I don't see...know what I mean? Bill
It has also been mentioned in this thread about state usury laws. Please keep in mind that all business loans for business purposes are exempt from usury laws, therefroe, you could loan to ABC, LLC and charge 10 points and 20% annual interest and not violate any usury laws.
Will - Nationwide
I've loaned out money numerous times at 4-8% per MONTH on short term loans and the borrowers were making enough on the back end, they loved me. I have a thread on here somewhere on used car dealers and creating a new income stream. Done it several times for flooring. Run this ad in your local paper;
Private party has money to loan at EXORBITANT rates.
Your phone will ring off the hook.
Finance guy- I disagree with your prognosis on 17% loan scaring you off.
Example: Buy reo at 50% of value, spend 5% fixup and sell for 80
% as a good deal for buyer .
$100,000 value
$50,000 price
$5,000 rehab
$4250 interest (17% for 6 months)
$59,250 total investment
$80,000 sales price
Borrower NETS $20,750 in less than 6 months on NO investment.( less closing costs)
And you or some banker thinks he's desperate? No, just smart, imo...
P.S. And borrower is wondering why the banker is so stupid, and laughs all the way to the---------BANK!!! lol
Rich
LOL, Yes Rich, I agree with that kind of deal and I'll go for that, but the guy who comes up for a buy and hold, to live in or rent, something is going to be wrong there....Commercial deals=Credit, collateral, capacity and competence, does the deal make sence, is there enough profit in the game to keep the borrower playing and staying, can they pull it off????Bill
Rich makes a valid point here and goes back to a very common saying in our industry: "It is not the cost of the money that is of most importance, but the availability of it!"
Will - Nationwide
Bill- absolutely 17% would be nuts. That would never happen........Unless you lived with jimmy carter. I'm sure that your bank wouldn't have made the type loan I'm talking about. That is where the private lenders come in. Auto flooring, accounts receivable, advance commissions, auto repairs, Super Bowl annual coins( I actually loaned the guy $$ that owned all the dies for each Super Bowl annual coin), restaurants, and rehab companies. I've done them all and the least interest charged was 4% per month. Rich
Bill, I have no intent to debate this with you, as it appears you are talking my words, quotes" too literally and misconstruing the point.
Not sure which crystal ball told you bank lending rates would be 8.5% in 2 years, but NO, HML's would not lower their points and interest rates. On the contrary, they would raise them!
As to the word "availability", it was not meant to mean conventional lenders willigness (or non-willigness) to lend. As you know, getting conventional bank financing, while cheaper usually, requires long wait periods, 12,000 trees destroyed to make the paper to create all the forms, your signature on all 150,000 bank lending forms, your first born son, etc. (you get the point). With a private lender and experienced investor, it is: Here is the deal, the ARV, the LTV, the exit strategies, the promissory note, the deed, and the insurance policy. It is simple, easy and much quicker, hence the "availaibility" of funds is more important than the cost.
I have to jump in here. I am a real estate investor who uses private lenders. A great win-win situation. I've worked with 3 private lenders in the past and continue to work with 2. My typical terms are 10-12%. Yes, private lenders differ from hard money lenders. I do not pay points.... so I do not work with hard money lenders. The folks I deal with are individuals who are using either tied up CD money or are moving money from an IRA to a self directed IRA.
I changed things around a little at the request of my last private lender. He gave money for the purchase and I paid for the rehab. I gave him 20% of the profit per our agreement. The deal worked out very well for him and my partner and I. We will be closing on a property on Friday with this same private lender.
I'm always looking for additional private lenders because you never know when one might buy a full dressed Harley and decide not to lend any longer. I attract my private lenders through my website, marketing, and word of mouth. My partner and I sit down with a potential private lender (usually at a restaurant over a beer) and show them before and after pictures, numbers (purchase price, rehab amount, and sales price), discuss days on market, as well as how we market our properties. All in all a professional meeting. I also have a powerpoint spreadsheet setup in case folks request info through my website.
If the individual shows interest in what we do, we point them towards the next property that we will be putting an offer on, again go over the numbers, and then ask if they want in.
From there, its simple. No points, no application fee, no credit check, no draws, no inspections, no 101 pages of documents. We tell our potential private lenders that they must be able to close within 3-5 days, although even when pushing banks at this time, we are usually closer to a 2 week close.
Sorry if this has already been said but I would pay as little or as much as I could as long as the numbers fit within my model...
So if I were looking for short term money and had to pay a premium which by having the use of the funds allowed me to earn 50k within a 90 day period I would pay to the maximum the deal allowed...
In short it doesnt matter how much money costs if you make money...
Someone asked for terms
This is the portion of my contract that covers seller financing
Seller shall finance $______________. 00, at an interest rate of _______ percent. all due and payable in _____ years following the close of escrow date. The first payment shall be due _______ Days following close of escrow and shall continue every _____ month(s), amortized over _____ year(s) until paid in full and according the terms of this paragraphs. Balance to close, (U.S. Cash, certified or cashier's check) subject to adjustments and prorations: $___________.00. TOTAL $___________.00 Additional terms of the note are as follows; (i) Borrower will pay a late charge of $15.00 for each and every payment received more than 30 days after it is due. (ii)Privilege is reserved of prepaying the unpaid principal of this note in full or in part at any time without penalty. (iii) This note is subject to Section 2966 of Civil Code, which provides that the holder of this Note shall give written notice to the Trustor, or his successor in interest, of prescribed information at least ninety (90) and not more than one hundred fifty (150) days before any balloon payment is due. (iv) Privilege is reserved and Borrower may, at any time, substitute for the collateral that is security for this NOTE secured by a Deed of Trust. Said collateral shall be of equal or greater value. Value shall be determined by the Borrower. Seller shall execute all documents necessary to substitute collateral upon the request of the Borrower within seven calendar days of request to do so by the Borrower. (v) Privilege is reserved and Borrower may skip one monthly payment for each twelve (12) month period. The mortgage shall be extended one month for each skipped payment. (vi)The holder of this note and mortgage is limited to recovery of the debt evidenced hereby by foreclosure and sale of the property affected by the mortgage securing same. The makers/payors shall not be personally liable for any deficiency resulting from any sale and/or foreclosure hereunder. (vii) If this note is prepaid prior to _______ day of ______________________________, 20_________, then mortgagor shall receive a discount of _______________________percent (______%) of the remaining balance due. (viii) Privilege is reserved that Mortgagor shall have the right of first refusal to buy this mortgage under the same terms and conditions that mortgagee herein has agreed to sell this mortgage. Furthermore, this mortgage shall not be sold or assigned without the prior written agreement of the Borrower. (ix) The subject mortgage is fully assumable upon sale, transfer, or conveyance of the subject property. (x) The Deed of Trust securing this note shall be subordinate to a subordination agreement which will result in your security interest in the property becoming Subject to and of lower priority than the lien of some other or later security instrument. Subordination agreement shall be recorded and a pre recorded copy of that document is attached as exhibit B. (xi) Each payment shall be credited first on interest then due and the remainder on principal, and interest shall thereupon cease upon the principal so credited. Should default be made in payment of any installment when due the whole sum of principal and interest shall become immediately due at the option of the holder of this note. Principal and interest payable in lawful money of the United States. If action be instituted on this note I promise to pay such sum as the Court may fix as attorney’s fees. This note is secured by a Deed of Trust to ¬¬¬¬¬¬¬¬¬¬ trustee of Buyers choice
Will, I did not mean to use any of your words like that....Gees, I don't want a debate, my point was that HMLs won't be going down as banks start opening the doors. Sorry if it was misconstrued.
I guess better said than my previous post is that I don't see the justification for such high rates under these economic conditions. Where I am, there is no shortage of bank loans or private money. Maybe the Missouri 10% usury law has formed my opinion. I've only done loans in Mo., Ar., Tx., La. and Ks. oh, and one in Mn. I can admit that my opinion on rates may be skewed by these conservative areas. Bill :