I'm investing in Houston area doing flips (2) and buy and hold (1), I'm running out of room on my debit to income ratio to buy more properties so I was considering private lenders as a way to get out of that.
Couple of questions
- where can I get a list of private lenders in my area?
- in private lending, who is really taking the risk of the project fails?
One place to find private lenders is at REIA's.
Good question about risk. IMO, having done private lending for a while now, I would say the lender is at risk if 1) the LTV is too high, 2) Fire insurance isn't the right kind or isn't in place, 3) Title insurance isn't in place. If these risk factors are covered the lender is in pretty good shape. Flipper takes on risk once (s)he has skin in the game. Of course you can never completely remove risk, only mitigate.
@Ayman Elmasik There are plenty of private lenders in Houston and finding one shouldn't be a problem. Here is how I view private lending. First and foremost, private lending is relationship based, meaning if a connection is not made between lender and borrower, typically no deal is made. Secondly, comes experience, does the borrower have experience and to what level. If there is lack of experience at any level, then who does he/she have on their team that can assist in that area (i.e. construction, deal structure etc). Does the deal make sense. Did the borrower buy property at the proper price point to be able to interest a lender when all is said and done. Vet borrower and deal.
Here are some basic guidelines from a private lender perspective. Purchase price 70% to ARV minus repairs, attorney drawn promissory note, deed of trust along with some additional documents, closing at a title company, title insurance for borrower and lender, hazard insurance with lender named as additional insured, repairs costs held in escrow and distributed in conjunction with rehab progress. Let's not forget flood insurance if in flood zone. When all is said and done, the risk from a private lender is mitigated. Worse case scenario would be foreclosure in which lender would have to take possession of property at 70% to value. This would allow lender to take over rehab, or quickly market in wholesale market for quick resale.
Not all situations can be seen from the onset, however one can drastically mitigate the possibility of a project failing using the above mentioned as a guideline.