With the financial market conditions the way they changed almost 2 years ago now, lots of people find it hard now to get a mortgage and buy real estate the way they used to during the "boom". This was dictated of course by the lack of mortgage products that banks and traditional financial institutions are now offering to consumers to fund real estate.
Where once real estate was viewed by the banks and mortgage companies as a very lucrative business because the property values were on the up and up, now these same banks and mortgage companies are not even offering mortgages on these properties anymore. The irony is real estate mortgages are much safer than a lot of other loans that the same banks are still doing.
What is one to do when you need to buy a property of your own or you find a good real estate deal that you need to acquire?
One of the best solution even in good times through history was always to find somebody who has money they want to invest in something secure, and offer them the opportunity to invest their money in the real estate you want to buy: that is what Private Money Lenders are.
Who is a Private Money Lender? Private Money Lenders can be people who saved cash in their bank accounts (making 0-5% interest rate these days), people who saved money in an CD (making (0-5% interest and locked for 1-5 years), people whose business generate more cash than they need and want to invest that money with a good return, people who saved money in an retirement account and want a safe return on their money away from the stock market or zero returns if not invested, ... Bottom line you can think of all kind of people that want to lend money on real estate funding as private lenders.
How to Find Private Money Funding for Real Estate Deals? A lot of times, these people are your normal people that you deal with everyday, and you wouldn't know until you start asking or offering the opportunity to people to fund your real estate deals after you talk about what you want to do. Basic every day marketing: spread the word that you are offering this opportunity and you'll be amazed who comes forward and tell you that they are interested. One small tip on where to start: pick up your cel phone, and go through the list of people you have saved there. These are important people to you for whatever reason, otherwise you wouldn't have saved their numbers. Just call and let them know that you are looking to offer this private money funding opportunity to people around you, and ask them to pass your name/contacts in case they know somebody is interested.
Now why would Private Money Lenders want to do that?
- Real estate private money funding allows them to earn a fixed private lending market rate typically from 8 - 15% on their money, that's a decent return compared to the 0 - 5% of the banks
- Their money is secured by a lien on the property that the owner is buying, and the property is their fall back in case of default: their money security is physical and cannot evaporate like in a stock market loss
- The owner is typically buying the property at a discount versus the market, so the private lender has an equity buffer that allows them to return at least their private money in case of liquidation of the property
- The owner agrees with the private lender to a mutual beneficial interest rate and term of the note for the borrowed funds
- The owner adds the name of the private lender to the property insurance so the private money lender gets his money back from the insurance company in case of a natural disaster or fire hazard
- The title of the property is encumbered with the lien of the private money lender, so the owner cannot sell or refinance their property without paying off the agreed upon money back to the private money lender.
- The terms of the loan are very flexible: it is really what both parties agree to fund the real estate deal, and since it is between 2 people usually, it is fast (as opposed to a normal 30-45 days bank loan) and does not require all the red tape and many documents a bank would require you to present in order for them to consider your loan or even approve it.
- The closing happens in a title company as usual, with title insurance or without as required by both parties, so you have a professional closing just like any real estate mortgage transaction. That protects both parties as per their requirements to the title company.
So you can see that there is plenty of benefits to actually use private money funding for real estate deals, and it can be applied to any type of property: Single family homes, land, investment properties (residential, apartments, ...). There is also no limit to how many private lenders you get, and the amount of each loans: it is a private loan between two people or organization. In a way, owner financing is a private lending deal to finance real estate between the seller (Private Money Lender here), and the buyer (the new Owner of the property), where both parties agreed to finance a certain amount at a certain interest rate for certain terms.
