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.)
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.
I see. I like that idea. That way you don't have to worry about funds control and if they do a bad rehab job or no job at all you don't have to make the second mortgage. And yes you are in second position but you also control the first so as a second mortgage holder it's pretty easy to get cooperation from the first.
For you creative types ;) make sure you don't have usury issues charging interest on funds not made available.
A commitment fee usually is more in line, the fee can be financed.
Construction disbursements are made based on lien waivers produced by labor and material releases showing both have been paid.
If you can, drive by and see if there is really $4,000 sitting in the kitchen, that materials paid for is actually there. Funny how borrowers with multiple jobs going won't have the materials paid for anywhere near the subject site.
Oh, you know they only have one job going.....drive by their house and look in the back yard, LOL
Or, many title companies have construction disbursement services, they account for lien waivers, check on materials and progress, the services are insured and they take care of the accounting for advances. The borrower pays for construction disbursement activities. :)
I have read all of these postings on this topic, am new to investing and these questions interested me as well, but I am hung up on wondering exactly do hard money and private lenders 1)generally just providing the $ and no ownership interest on the property and/or are there all kinds of variations, many getting ownership? 2)IF there is no ownership interest to the lender than how does this work if say the person trying to do the deal, rehabbing and then reselling, finds him/herself unable to sell it in good time and becomes financially strapped and unable to pay the %..?
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.)
( @Account Closed , I was kidding about whether funding a crack habit is a consumer purpose loan. Sarcasm is always hard to write.)
Haaaa ...
Seems like @Charles McPherson has the right approach to me. Have them lend you the money, give them a deed of trust/mortgage securing the loan with the property, and take the cash to closing.
I realize this is an old topic, but I recently started asking these questions myself.
Our standard state (Utah) approved purchase contract has lots of language about financing contingencies. As all deals that are not seller financing close in cash (borrowed or not), I asked around to find out what purpose this contingency really served.
First, it is a notice to the seller that additional contingencies and risks apply: specifically that the buyer may not qualify and that the property must appraise to justify collateral.
Second, many conventional lenders require this clause in the purchase agreement for underwriting.
If your lender does not require a financing contingency and you, as a buyer do not need the escape clauses to fund and close, I do not see any reason not to tell the seller it is cash. If your private lender doesn't like the deal, it's probably because the numbers don't add up. If this is the case, you would back out because of due diligence regardless of the financing.
Alternatively, if you plan to close with cash but must liquidate another asset first, this is not a financing contingency the way it is written. If your stock portfolio (the source of funds) tanks after you make an offer, it has everything to do with how the property is being financed and may influence your decision on whether to move forward, but has nothing to do with the financing clause language.
Bottom line: If my ability to fund a project is not contingent on my bank approved credit worthiness and/or a formal appraisal, all offers are cash...And, so far, no one has had a problem with this.
Wm
@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.
Duely noted, dont ever invest in real estate in Tennesse.
I have read all of these postings on this topic, am new to investing and these questions interested me as well, but I am hung up on wondering exactly do hard money and private lenders 1)generally just providing the $ and no ownership interest on the property and/or are there all kinds of variations, many getting ownership? 2)IF there is no ownership interest to the lender than how does this work if say the person trying to do the deal, rehabbing and then reselling, finds him/herself unable to sell it in good time and becomes financially strapped and unable to pay the %..?
A trust deed will be granted by the buyer, it's esentially treated the same as if getting a conventional loan from the bank.