Finding Funding for Your Deals

Using a private investor is very beneficial to the real estate investor because this loan does not usually report back to the credit so it does not affect loan limits with Fannie and Freddie Mac guidelines.  There is usually quite a bit of savings because there are usually no closing fees like you would find with a traditional mortgage.  It will still have more fees than a cash transaction, but less than a traditional mortgage.   With the loan set up properly and the real estate investor following some very specific rules, the transaction can also be very beneficial to the lender.  The main one being that their money is invested in a fairly safe form of investment and they will be able to get a better rate of return than what would usually be found with a certificate of deposit at the bank.   So what are some rules? 1.  Always have 30 to 35% equity in the deal; this means that the real estate investor is never going to have more than 65% to 70% of the fully repaired value in the property.  If they are borrowing the purchase money and also money for any needed repairs, the total borrowed plus any of their own money into the deal should be under 70% of the total value.    A qualified individual, not necessarily an appraisal at $350 to $400 a pop, should determine the after repaired value.  You could also have an experienced realtor do some research in the mls and find their own comparables to determine the after repaired value, even the investor could make this determination, but as a lender you need to be sure you trust who ever is coming up with the end repaired value.   2.  The investor should never touch the money.  At the purchase the money should be wired directly into the title company or closing attorney's account to pay for the purchase.  Any repair money should be paid out to the investor over the life of the repair job based on the amount of repairs made to pay the contractors doing the repairs.  If you as the lender are unsure of repairs you could hire someone to check on the repairs, just like a rehab lender and charge the borrower a fee to pay your hired help to do these checks.  Or again if the borrower is very experienced and someone the lender trusts they may pay out based on the borrowers rehab schedule or if you don't trust the borrower, the lent money to cover repairs could be made out directly to the contractors.   Again when the property is sold and the loan is paid off, the title company should pay off the lender first before paying the profit to the investor.   3.  Secure the money with forms:  Promissory Note, Deed of Trust or Mortgage (depending on your state), Assignment of Rents so the lender can take over the property and collect the rents should the borrower default, and a Disclosure form making sure everyone knows what was agreed upon and the potential risks in the deal.   4.  Insure the Property both with a title policy for the buyer and the lender and proper insurance for the property with the lender named as second insured.   If you would like to learn more about private lending I would suggest attending the June 10th meeting of Mid-America Association of Real Estate Investors when Jerry Clevenger will be sharing his secrets on dos and don'ts in private lending.  If you missed the meeting, members of MAREI can listen to the meeting in the Archives.