I started investing in real estate over 8 years ago and I have done all kinds of deals. I started as a landlord and buying Rentals. Then, I started wholesaling and flipping properties (currently doing about 50 transactions a year over the last couple of years). I have also Owner Financed a couple of properties, own some Multi-Family (currently have a deal under contract and looking to close 3-4 more before the end of 2020), and a co-owner in a Tiny Home Park. There is more, but this post isn't about that LOL... I didn't actually start using Private Money until only 3 years ago! I had a very good friend, who flips over 50 houses a year, tell me about Private Money Lenders and I haven't looked back! Now, I fund the majority of my real estate deals with Private Money. I’ve borrowed & repaid millions of dollars from my investors. Not all of my deals have gone as expected, but if you do enough deals then you understand that is a part of the game. I’ve lost money on a few here and there and I'm sure it will happen again. But here’s what I’m most proud about in my real estate career: MY LENDERS HAVE NEVER LOST A PENNY! So even when I’ve taken hits on some of my deals, my lenders have always received 100% of their capital AND Interest that was promised to them. *And I will note that I have a fairly conservative/cash-flow approach to real estate and always have at least 3 exit strategies on every deal, just in case…if you're considering becoming a private lender, I would strongly encourage you to get to know your borrowers AND their investment strategy [critical] **I apologize for the long post, I just wanted to share how my Private Money Lenders changed my life as an investor.

@Chris Lockwood those are some good questions to be asking. 1. That is going to vary, but everything is negotiable. Most of my deals are in the 7-10% range. 2. I typically borrow the full amount, but I've had deals in the past, where I've only borrowed the purchase price from the lender and paid the repairs out of pocket. 3. That is negotiable, but most deals I see are interest only deals. So, if I borrow $120,000 at 10% interest only for on a 12 month term. I will pay that lender $1,000 every month until I refinance or sell the house and the lender gets their $120,000 principle returned. 4. I think answer to the question above answers that (let me know if I interpreted correctly). 5. The cash to closing depends on so many factors: how low you buy the deal, renovation costs, how much money you borrow from the lender, your exit strategy (flip or rental).

My wife and I have been loaning our hard-earned money privately to the local house flippers for ten years now. A few things to add and to clarify: 1) No sane borrower buys property without purchasing owner’s title insurance. Your lender’s title policy will be part of that. You will have to learn to read the preliminary title policy and specify each lien that gets paid off when your loan closes. The buyers title policy protects them from unknown/undisclosed liens, among many other issues. The lender’s title policy is different. It protects your loan position. This is so no one can claim to be in first position when it was your loan that was recorded first, etc. Loan priority and lien payoff are specified in your lender instructions. This is a very important document you provide to escrow, title, or the closing attorney, as appropriate. 2) If you are lending on flips, make sure your borrower has a vacant dwelling policy, with replacement cost, naming you as the Mortgagee, as well as builder's risk. A regular homeowner’s policy will not cover either of you. I find insurance binders maddeningly cryptic and I rarely understand what the borrower purchased. Always call the insurance company to confirm. 3) I don’t care that your attorney reviewed them, never use loan documents obtained from a borrower. As important as what’s in their docs is what’s not. Rather than pay an attorney to start adding terms which protect you to someone else’s docs, start with a set that was prepared with you in mind as the lender. You will pay a lending attorney once for this. Note: A lending attorney is not the same as a real estate attorney. I’m only half joking, but rest assured that when you sign our loan documents, as your pen barely lifts from the paper, you are probably already in default for something. 4) I cringe when some here write that private lenders can’t loan on an owner-occupied property. With exception of multi-family loans, owner occupancy is completely irrelevant. You should learn the difference between a consumer purpose loan and a business purpose loan and how the use of the money determines that. It’s more appropriate to write that the majority of private/hard money lenders can or will only make business purpose loans (which can be owner occupied). 5) The most important advice I can give to any aspiring lender is to only loan locally to experienced flippers and only to those you’ve personally met and gotten to know, like, and trust. Know, like, and trust is the ultimate real estate cliché but something we live by.

@Don Scott thank you for the reply. You just taught me more in a few sentences than I have learned in a week. I have a few friends and family who are willing to assist and now I have a better understanding of what to tell them. I know there is more details that this a lawyer can help with, but wow thanks!

@Joe White, please be careful making blanket statements about "exorbitant" rates being illegal. Your statement does more harm than good.Unfortunately, your statement is blatantly wrong. Especially when you start talking about hard money and commercial loans. Many states have no usury limits on commercial or hard money loans. The reason they don't is so that business owners can conduct business as they see fit. If a business owner agrees to a high interest rate loan, it's because it worked for them. Short of coercion, you know it's a good deal if both parties voluntarily do the deal.

I love post that generate this much good conversation. I'm here for all of this.

WHY I LOVE PRIVATE MONEY LENDERS

Dean Cacciola

Flipper/Rehabber · Clay, NY · Member since 2015 · 4 posts · 2 votes

6y

That’s a great story thank you for sharing that with us. I have a very similar story just really taking off again as I secure more private money.

Good Luck to you!

1 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

I'm looking at offering private money loans and wonder if you can provide some advice on what's really necessary for me, as the lender, to protect my interests. Everyone's trying to keep costs to a minimum, so a lot of the safeguards might go by the wayside:

- Is it really necessary for me to have an attorney involved?

- Is it really necessary to have a new title policy when you have one dated within the last 6-12 months (for example, when the owner purchased the property initially and is now rehabbing)? Yes, I know that something could have changed during that time. But you can say that about a property that has a title policy as of a week ago. I guess the difference is that the title policy would pay up if necessary were you to have a current policy?

I would have a 1st lien recorded on a property that has 65% LTV. However, tax and mechanics liens take priority. So there are always risks. Just trying decide what is truly necessary.

Thanks for your advice!

Lisa

5 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

@Lisa Eckman

In my opinion, you should always have an attorney to represent you (the Lender) in the capacity of drafting documents. I typically cover that cost because I don't believe that should be a cost to my lender for me borrowing their money.

One of the documents our lenders always get is a Lender's Title Insurance Policy. Lender’s title insurance protects you as the lender against problems with the title to your property-such as someone with a legal claim against the home. The title policy the investor currently has is to protect himself, is an owner’s title insurance policy.

Now let me end by stating that I'm not an attorney, and you should consult one if you have concerns before lending. I hope this helps. :)

2 Reply

Scott T Brady

St George, UT · Member since 2019 · 12 posts · 3 votes

6y

@Lisa Eckman

I agree with @Don Scott in that if you're lending on a property it is wise to have a lender policy, especially if you intend to make this a way of doing business on into the future. Just remember, insurance is protection for what you don't know, not what you do. After 9 years working in a title office I've seen enough horror stories. Another title company in town once closed a seller finance deal (read: seller is now the lender), and the title company missed checking for federal tax liens on the buyer (a blatant oversight). Buyer takes title, federal tax liens attached to the property, buyer eventually goes into default, and now seller ("lender") foreclosed and resumed ownership to the property, with the tax liens. I didn't hear whether it was ever resolved, it would have been an ugly mess WITH title insurance, and a complete loss of any value without it.

You'll never see a big bank lend without title insurance, and it's almost always a cost born by the borrower (read: "you want our money, you pay to protect us")

2 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

Thank you both so much for your timely response! I'm going to talk to the potential borrower and title company tomorrow.

2 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

Scott T Brady, so in your example above, if they had title insurance, and it was Title's fault for not seeing the tax liens the borrower had, then wouldn't title have to basically pay off those liens?

What if you get title insurance today, and tomorrow a tax lien is placed on the property. I don't think title insurance would help at that point because it was after the fact. Right?

1 Reply

Scott T Brady

St George, UT · Member since 2019 · 12 posts · 3 votes

6y

That would be the simple process, yes.

The thing is it's insurance, unfortunately almost any insurance claim (auto, home, & yes title) is anything but simple. Once there's a claim it's now in attorney world, and the messy thing with this property was the tax liens were far and above the value of the property, and title policies have coverage limits (owners policy typically limited to purchase price, and lenders policy typically limited to the loan amount). Your thinking is correct, but like I said I never heard the resolution to this one, unfortunately there wasn't a clear path to a good resolution. Worst case, which this one might have been if they had a lender policy, would be the owner is reimbursed up to their "loss," but again I'm no insurance attorney so I'm not sure what would come of it. Even with auto insurance, you know people who hated the process of getting a new car after theirs was totaled; the lesson here is that insurance at least gives some recourse, without it you have none :-(

0 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

@Scott T Brady thanks for the explanation.

0 Reply

Corey YoungPro Member

New to Real Estate · Tyler, TX · Member since 2019 · 41 posts · 30 votes

6y

@Don Scott

I’ve got a question. Why would private money be better than a conventional loan? I assumed it was because of the closing associated with a conventional loan, but the hard money lenders I’ve seen are charging 1-3 points for their loans. That’s equal to or MORE than the conventional loan fees. Can you provide any clarification?

0 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

@Corey Young

I think the answer is because it is easier, faster, less hoops and less stringent qualifying guidelines/requirements.

@Don Scott, @Scott T Brady

Speaking of points, could you give me an idea of what you would expect to pay in terms points, interest rate and term? Say for a loan of less than $50k. Vs. a loan of $100k?

1 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

@Corey Young

@Lisa Eckman hit the nail on the head for the most part with her answer. Private money has many benefits! A couple of reasons is the flexibility in the negotiations because it is relationship based, and the speed in which a private lender can close a deal. Conventional loans is probably going to be the cheapest lending you can get most of the time but they typically take 30-45 days and ask for lots of personal or company documents for their underwriting. I've closed deals with some lenders as fast as 3 days!

Another reason to use private or hard money lenders to fund a deal is we typically borrow a % of the after repair value (ARV) which can include repair costs; where-as if you are borrowing from a conventional lender, they will only loan up to 80% of the as-is value with no repair costs.

I hope that makes sense.

5 Reply

Don ScottPro Member

OP

Investor · Houston, TX · Member since 2016 · 60 posts · 100 votes

6y

@Lisa Eckman I don't think it matters the size of the loan. I believe it should be what terms do you feel comfortable lending at, as well as what you negotiate with the borrower. I believe that both parties should be happy with the deal. Speaking from experience, I want my lenders to be excited/enjoy every project we do together. As a private lender, you are an investor; you are just allowing your money to work for you and make money for you!

2 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

Thanks again for the input. So, back to your original answers about having an attorney to represent ME to draft docs. What if the investor already has a "standard" Mortgage & Mortgage Note drafted by HIS attorney. It's very short and not complex. You would still hire an attorney to review AND have the investor pay the cost? I really want this to be easy for all parties, but also want to be protected in case something goes south.

0 Reply

Account Closed

Real Estate Broker · Boca Raton, FL · Member since 2017 · 11 posts · 4 votes

6y

I can share a bit from a lenders perspective. Considering the rights you would want as the lender, you wouldn't want to accept a borrowers note and mortgage without having your attorney review it. As a private lender, typically borrower pays for your attorney fees as part of their closing costs. Many of the institutional "hard money" lenders do the same. But conveniently leave out disclosing it as a cost to close. Instead of calling it a lender fee, they call it an "attorney fee" not a "lender fee." So you hear on the front end, the loan costs 1-2 points but end up being jacked at the end paying for their on staff attorney cost of $1500-$2k.

2 Reply

Rustam Uktamov

Flipper/Rehabber · Largo, FL · Member since 2018 · 13 posts · 9 votes

6y

@Don Scott

Great post! Thanks for sharing your experience Don. Experience is the most valuable commodity in real estate.

Can you also tell us how exactly did you make contact with your private lenders? I’d assume you’re talking about individuals lending their own cash, not institutional hard money lenders.

You said they lend you a percentage of arv, that sometimes includes the repair costs. Does that mean they lend you 100% on both purchase price and repair costs?

2 Reply

Corey YoungPro Member

New to Real Estate · Tyler, TX · Member since 2019 · 41 posts · 30 votes

6y

@donscott @lisaeckman
Thank you! I read that before but never put the pieces together.

1 Reply

James Williams

New to Real Estate · Charlotte, NC · Member since 2019 · 73 posts · 46 votes

6y

@Don Scott I loved this. Thank you for sharing, didn't actually feel long at all. I think you should write more often. I appreciate your candor and point of view.

3 Reply

James Williams

New to Real Estate · Charlotte, NC · Member since 2019 · 73 posts · 46 votes

6y

@Don Scott could you possibly expand on how you started using private money lenders? Where did you find them? How did you approach them? How difficult is the process? What do they charge you on average? Do you use the same lenders all the time or do you find new ones constantly?

0 Reply

Christopher Gilmore

Specialist · Dallas TX (dallas, tx) · Member since 2019 · 1 post · 0 votes

6y

@Don Scott How did you approach your Private lenders and what was the time frame from meeting to lending?

0 Reply

Dave DeMarinis

Lender · Santa Rosa, CA · Member since 2017 · 283 posts · 255 votes

6y

@Lisa Eckman I appreciate your desire to streamline and save money (regardless of who is paying) as I feel the same way. However, you basically can't save money on title (see below) and trying to save on legal is VERY BAD risk reward.
1. Title - You need a Lender's Policy. I had a situation where the lender was funding 100% of a deal and so the borrower didn't get Title Insurance as it didn't serve a purpose in this case. The Lender's Policy is more expensive if there is no Owner's policy. It is probably the same if the Lender declines Title Insurance but you shouldn't find out.
2. Legal - It should be $150 to $500 for a note, mortgage/deed of trust and loan docs. If you are in a state using a closing attorney, many will prepare these without extra charge but you will want to make sure they are representing you as the Lender.

Disagreements are never about what's written. If they occur, it is about what isn't written. Don't take that risk for you and your borrower over a couple hundred bucks.

3 Reply

Dave DeMarinis

Lender · Santa Rosa, CA · Member since 2017 · 283 posts · 255 votes

6y

@Lisa Eckman Sorry - forgot two other very important things. Make sure it isn't Owner Occupied. It is pretty much impossible for an individual to legally lend on Owner Occupied in most states. In some states, you need a mortgage license or broker to originate any loan. Check with the state licensing board responsible and an attorney. However, you really need a loan compliance attorney, most real estate attorney's probably won't know the intricacies of this answer.

0 Reply

Chris Lockwood

Kansas City, MO · Member since 2019 · 7 posts · 10 votes

6y

I would like to get some clarity on a hypothetical situation. None of these numbers are real, but I think this will help people like me put it all together as I have read this thread. Let me also say I have not used private money, but I do have a few interested parties who are willing to help me, but have no clue what to do either.

Situation: SFH for sale $59,000. Needs $20,000 in repairs. ARV $120,000. As the investor I need to borrow the purchase and reno costs. Here are my questions.

1. What is the typical range of the percentage rate?

2. Can I borrow the full amount?

3. What will I pay the lender to the until I refinance or sale?

4. How much over the initial loan will I have to pay?

5. How much cash would I need to ring to closing?

I know these figures will very, just looking for a general idea. If I'm not asking the right questions or express myself clearly please let me know. That is for any response.

0 Reply

Bob Floss II

Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes

6y

@Lisa Eckman A lot depends upon the relationship between the investor, lender, and attorney. If it's a first time deal, I want to just represent the lender and present their loan package protecting their investment. However, if I'm the closing attorney for the investor, I may prepare the loan package for the lender. I've done this many times before so the lenders typically trust me that I'm doing it right. The advice above was correct, I typically prepare the loan package on behalf of the lender, review title and request a loan policy, and charge my attorneys fees on the settlement statement.

4 Reply

Sharon Tavilla

Investor · Block Island, RI · Member since 2016 · 1 post · 0 votes

6y

@Don Scott

Novice BiggerPockets user here love this thread because I want to buy my 4th property, but I already have a primary resident mortgage and a mortgage on a rental property (small and large respectively).

My question is do private lenders usually expect to be paid within a shorter time frame like 1-3 years or less? Will they lend large amounts like $400k?

0 Reply

Lisa Eckman

Lender · Member since 2019 · 114 posts · 29 votes

6y

Do we have an Attorney's from OH on this thread that might want to chime in about looking over/preparing the docs for the lender side of things? Cost? I will be getting a lender's title insurance policy. The way I see it, my biggest concern, in terms of title, would be a tax lien, which would take priority.

Thank you ALL for your input on this. Very helpful!

0 Reply

WHY I LOVE PRIVATE MONEY LENDERS

WHY I LOVE PRIVATE MONEY LENDERS

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