Private Lenders

by Vena Jones-Cox

real estate financingAlot of times I’ll get inquiries from investors having problems thinking outside the box and coming up with creative means of financing a property. “I made an offer on a bank-owned property, and now I’m trying to figure out a way to finance the deal without coming up with my own money. I have traditionally gone to banks, which I am trying to get away from doing. I have 3 weeks to come up with $22,000. The house needs $5,000 in repairs and will retail for $55,000. I’m going to have to hold it for at least a year. Any suggestions?”

There are lots and lots of ways to get money to buy real estate without going to a bank to borrow it. In your case, we can eliminate several options”the common owner financing techniques like lease/options and land contracts”because the property is institutionally owned. So what you’re looking for here is 3rd party financing that doesn’t involve banks and which will be relatively quick and easy to get. My first thought is to forget about spending a year fixing up the property and wholesale it instead. If your numbers are correct (and the $5,000 reflects the cost of labor and materials), you should be able to sell your right to purchase the property to another, more cash-rich investor for a profit of $5,000-$10,000. All you need to do in this case is find a good, experienced cash buyer who wants the property, and assign your right to buy it to him for a cash payment. As long as his total purchase price (what he pays you for the contract and what he pays the seller for the property) leaves a decent profit for him after he fixes up and resells the home, you can take your profit out now and not concern yourself with coming up with the money to buy it.

But if you’re determined to acquire and repair this property, there are 2 other possibilities. The first is to find a partner who wants to put up the money to buy and repair this deal in return for part of the profit. The other is to find a private lender who’d like to act as the bank, and finance the deal in return for a fixed return of 8%-10% interest on his money. Of the two, a private lender will give you more control over the deal and a higher overall profit.

A private lender is an individual who has funds in the bank or in a self-directed retirement plan that he’s willing to loan out for good, safe deals like yours. Now is a great time to start cultivating these folks: there’s an awful lot of money sitting around earning 2% because the owner is afraid to invest it in the stock market.

A private lender can act much more quickly than an institutional lender, because he doesn’t need to see reams of paperwork or process an application through an underwriter or board of directors. Most private lenders can close as quickly as they can get an appraisal on the property”and they don’t charge the fees, points, and closing costs your bank does. All you generally need to do to close with a private lender is to prove that the security for the loan”the property itself”is worth significantly more than the loan amount, that the title is clear and marketable (most private lenders do want you to buy a lender’s policy of title insurance for them at closing) and that the property is appropriately insured with the lender named as loss payee.

When you start asking your friends, family, and colleagues whether they’ve got $27,000 to loan out at 8% interest with a $55,000 property for security, you’ll be surprised at how many people you know who will jump at the chance for this kind of return. Start cultivating private lenders now”you may never have to use a bank to finance a property again.

Vena Jones-Cox is a past president of the Real Estate Investor’s Association of Cincinnati, the Ohio Real Estate Investor’s Association, and the National Real Estate Investor’s Association. Vena has been featured in publications such as The Cincinnati Enquirer, Smart Money Magazine, Money Magazine and Reader’s Digest in articles about successful real estate entrepreneurs.

Vena Jones-Cox’s real estate business focuses on finding great deals on 1-3 family homes, and then lease/optioning them to homeowners or wholesaling them to investors and renovators. All told, she buys and sells about 50 properties per year.

Vena is a frequent guest lecturer at real estate investment groups throughout the country, and particularly enjoys working with new investors. Vena frequently authors articles on real estate investment and the regulatory environment for various newsletters and publications, including her own monthly newsletter. She has been a guest speaker at the Cato Institute in Washington, D.C., lecturing on the effects of lead-based paint regulation on small investors. And in her spare time, Vena Jones-Cox hosts a popular weekly call-in radio program on public radio.

See The Value of Long-Term Rentals.

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