There are times when a real estate investor has a great deal on hand but is forced to let go of the deal on account of not being able to get the funds necessary to finance the deal. Nothing can be more frustrating while having to wait long periods for the banks or financial institutions to approve the loan only to find either that they do not want to approve your loan or the deal slips through while you were waiting for the loan to be approved. This is when private money loans and private moneylenders enter the picture.
What Are Private Moneylenders
Private moneylenders are of two kinds. Persons having excess cash in hand and who are seeking to invest it are one kind. They are not moneylenders by profession but choose to invest their excess cash to fund such deals. They usually charge the lower interest rate on private money loans as compared to the hard moneylenders or the professional private moneylenders. Private parties charge about 8 to 12% interest rate on private money loan and they have no or very liberal pre-payment clause.
Hard moneylenders usually charge around 15 to 5 points and about 12 to 15% interest. A point is usually 1% of the loan amount that is deducted at the time of closing. The duration of loan varies as per the need but typically is between 3 months and a year. Some hard moneylenders are also known to offer loans up to 3 years too. These lenders usually give the loan after studying the collateral or assets of the borrower. They are more interested in studying the equity rather than any past credit history. They will study the fair market value of the neighborhood rather than take into consideration the deal negotiated between the two parties. They offer very low loan-to-value ratio usually around 60% or so.
The private moneylenders who are in this profession may charge a pre-payment fee. This is when you repay a loan before it is due. The penalty is to help the moneylender make up for having a huge sum of money on hand without interest, as you would have repaid it suddenly. The penalty charged is to make up for any interest lost on that money. The penalty depends on the amount returned and is calculated on that basis. The penalty is often reduced if a written letter of intent is submitted 30 days prior to pre-payment of the private money loan.
Advantages Of Private Money Loans
The main reason people choose private money loans from private moneylenders is that these loans are expedited. The loan can be arranged within a couple of days or maximum a
week's time. Anybody can apply as long as the collateral is appropriate and the credit history is not always checked. Therefore, people with a bad credit history can also qualify for the private money loan. If you have a great bargain and need to close the deal quickly, securing a fast loan with a private moneylender can be very advantageous. When times are rough and you need to prevent foreclosure, private money loans can be used to protect your property, or if you need finances to rehab a property. Sometimes, there may be a need to clean up the property, which traditional lenders may not fund, but you will find private money loans to fund the project.
Having good relationships with private moneylenders can be good as you will not only have the confidence that you can close any deal within a couple of days but also be able to guide an investor you are doing a flip on to get quick money to buy the property from you. You could get pre-qualification letters from the private moneylenders indicating that you are pre-approved by them making it easier to close deals. Of course, this is possible only if you have dealt with them correctly in the past and have earned their rust. Attorneys have contacts with private moneylenders as they draw the closing contracts and hence can recommend you to private moneylenders. Accountants are also able to help you secure a private money loan, as they know people who have ready cash that needs to be invested. Private money loans can range from $25,000 to $1,000,000.
Be careful in your dealings with private moneylenders. Should you create a problem other lenders may not fund any of your future projects based on your bad experience with one lender. They can be invaluable if you do not misuse the loans got from them. If you have a list of hard moneylenders you can contact you can go ahead with confidence in financing any deal and not waste precious time waiting to get your loan approved.
Real estate investors without any funds of their own can use private money loans from private moneylenders to finance their deals. Establishing good relationships with them can be extremely beneficial and can give them the confidence that any deal can be signed by them as they are pre-approved by the private moneylenders.
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