Private Money, Hard Money, Loan Originations

By Dan Harkey

Introduction:

Real property borrowers can tap into lending sources beyond traditional banks and institutional lenders. Private money, a specialized subset of lending, is tailored for non-bankable or non-traditional loan transactions and offers many advantages. It empowers borrowers, enabling them to solve short-term problems and steer their long-term financial goals to success, a freedom rarely found in traditional lending.

Private money lenders, often private parties or groups, play a pivotal role in real property lending. They invest their funds into the loan, like a bank, providing the necessary capital for borrowers. The private parties become the secured lender noted on the promissory note, deed of trust, or mortgage. In return, private party investors have the potential to earn interest on their investment, making private money lending a potentially lucrative and advantageous investment strategy.

Locating private money loans:

Industry methods involve a strategic approach to locating private money loans. This includes targeting first-time home buyers, scouring public records from title companies for specific characteristics like low loan balances, keeping an eye out for construction permits for additions, and identifying properties with delinquent property taxes. Additionally, attending real estate networking events, joining local real estate associations, and leveraging social media platforms can be effective strategies. These methods can serve as a compass for loan agents and lenders, guiding them to potential borrowers needing private money loans.

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Historically, title companies could provide databases listing loans with private beneficiaries, indicating that the borrower has a private money loan. However, these lists may no longer be available due to privacy reasons.

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A few subsets of borrowers/ properties that have a propensity to need private money loans include:

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·????? Properties on a loan default list?

·????? Properties that have delinquent property taxes

·????? Properties that lack maintenance

·????? Properties under the control of beneficiaries of a deceased property owner

·????? Properties with a current private money loan

Quantifying the characteristics in a statistical model for a probability list is challenging.

My Motto:? “You locate a buyer; you do not create a buyer.”

The best way to locate private money loans is to develop a marketing plan with an extensive network of professionals with multiple clients. ?The type of professionals best to network with are:

·????? Mortgage brokers, both those who specialize in private money loans and those who don’t.

·????? Real estate agents, both residential and commercial

·????? Accountants, enrolled agents, and accounting firms

·????? Estate planning, divorce (family law), and probate settlement lawyers

·????? Financial Planners

·????? Real estate transactional and business litigation lawyers

·????? Contractors, builders, and developers

·????? Income property owners and speculative real estate investors

If you have 500 leads in your network and each of your network members has 500 leads, your universe of possibilities is (500 X 500 = 250,000).

Continuously providing something of value to members of your network is crucial to maintaining your presence in their minds. This can be in the form of industry insights, such as trends in the real estate market, market updates, such as changes in interest rates, or exclusive investment opportunities, such as properties with high potential for return on investment. ?Correspondence from you, personally, rather than some ordinary advertising/subscription newsletter, will speak directly to your prospect. ?Your communications must be authentic, personalized by you, and designed to help your client’s business development.

Referrals and repeat customers are the 'lifeblood' of successful loan agents or businesspeople. In this context, 'lifeblood' is the essential element that keeps a business thriving.? Referrals and repeat business contribute to financial success and underscore the importance of building solid client relationships. This highlights the value of your work and makes you feel valued and integral to the lending process.

Procuring loans directly from the public:

·????? There are many media platforms where you can advertise to solicit direct property owners who need alternative financing. ?Almost all of them provide advertising options at a reasonable fee. ?Google, Facebook, LinkedIn, and others are examples of media sources. ?The quality of these leads, however, is suspect. ?Establishing reliable communication with cold lead borrowers from these advertisements and obtaining the necessary data is, at best, difficult due to the amount of competition.

·????? ?Personal contact with homeowners on lists such as defaults and property tax delinquencies is possible. This method involves reaching out directly to property owners who are in financial distress and may need alternative financing. However, this system is research-intensive and competitive, as many other loan agents may use the same strategy.

Asking the Right Questions:

When a loan agent receives a loan inquiry, it's crucial to ask prudent, industry-standard questions. This helps determine the feasibility of the loan request and ensures a responsible approach to lending. These are fundamental questions for any lender when deciding whether to investigate further. For example, you might ask about the borrower's credit history, current financial situation, or plans for the property they intend to purchase with the loan. ?

The following information should come from the borrower.

·????? Loan amount required.

·????? property type: Single-family, owner- or non-owner-occupied, commercial, apartments, industrial, or other.

·????? Purpose and use of loan proceeds. It is essential to distinguish between business purpose and consumer purpose or a combination of both.

·????? Loan proceeds are used primarily for business purposes. ??Or what portion will be used for consumer purposes?

·????? Value of collateral property.? How did the borrowers determine the value??? A borrower’s estimate of value is often incorrect or intentionally exaggerated.

·????? Will the borrower pay for an appraisal report by a licensed and certified appraiser?

·????? When did the borrower acquire the property, and how much did they pay?

·????? What are the existing liens to determine whether there is enough protective equity?

·????? Is the loan-to-value acceptable to a lender or trust deed investor?Bottom of Form

·????? Who occupies the property? Owner, tenant, vacant or partly occupied?

·????? Does the property have a rental income stream?

·????? What gross rents, vacancies, and expenses are required to determine net operating income, often called NOI?

·????? If the loan request is for a junior loan (second trust deed or mortgage), information about the senior loans will be required.

·????? Documents for review may include a copy of the promissory note, loan agreements, and a recent payment statement from the senior lien holder or loan servicer.

·????? Reviewing the recorded documents related to the senior lien associated with the deed of trust is prudent.

·????? Does the first lien have a written provision in the deed of trust referred to as an “alienation” clause or what some call a “due on further encumbrance” clause that would require the lender to obtain written approval to place a junior lien on the property?

·????? Is the property owner/borrower a private individual(s) or an entity?

This fact is important because, in many cases, the original borrower may have been parents, possible deceased members, siblings, co-trustees of a family trust, ex-spouses, or other miscellaneous parties. ?Some earlier property purchases were taken “subject to” a lien that prior owners obtained in the past.? Completing a property sale “subject to” means that the purchaser/borrower intentionally failed to notify the first lien holder of the transfer.? Was the sale transfer kept a secret, deliberately to get a lower interest rate? ??Therefore, the loan documents still show the obligor as the prior owner on the note and deed of trust.

·????? Does the person requesting the loan have the sole authority to borrow and encumber the property with a new lien?? Are there other parties of interest who may object to recording a lien on the property?? An example would be an estranged ex-husband or ex-wife.

·????? Are there multiple borrower parties that a lender must include in the application, processing, underwriting, and closing process?? A lender’s frustration will occur when the discovery that the borrower has intentionally excluded an undisclosed hostile party.? I assure you that an unknown borrower party will not fool the title company.? When the title insurer underwrites their coverage, they will ensure that the correct parties have signed the documents.? Verifying the proper parties is part of their insurance underwriter and approval process.

Submitting the loan to a lender?

No amount of advertising will enable lenders to reach all borrowers. ?Most borrowers develop relationships with one or more loan agents in their search for loans. ?The loan agents gather information about borrowers and properties and interact with prospective lenders or other agents who represent the lenders. ?Because they have direct contact with the borrowers, they are the primary source of loans.

Loan agents vary greatly in experience, professionalism, and the effort they are willing to put into a transaction.

Loan agents who desire a quick and professional response should organize their files and convey a coherent set of facts to the funding lender. In today’s world, managing means submitting in digital PDF format online.

Develop an executive summary to include the following:

·????? Submitting broker name, contact information, and the requested fee

·????? Proposed new loan amount

·????? Purpose of loan: purchase, refinance, equity 2nd, consumer, business purpose, consumer purpose, both

·????? Summary of the proposed transaction, term, cash out

·????? Will more than 50% of loan proceeds be used for business purposes?? Will a portion be used for consumer purposes less than 50%?

·????? Summary of the proposed transaction, term, cash out

·????? Explain the collateral property address, type, description, amenities, and property condition

·????? Use a loan application form, either a standard residential application (FNA form 1003) or a commercial application form. ?Commercial applications and financial statements are helpful.

·????? Estimated value conclusion and sources of information.

·????? Provide income stream for income property, if it exists, with rent roll and financial statement

·????? Availability of cash flow from borrower and property to make monthly payments

·????? Potential exit strategies-sale, refinance

·????? Any noted strengths and weaknesses of the borrower or collateral property. ?Withheld and overlooked facts delay the process and may negatively affect the loan request. ?

A lender’s job will be faster, more efficient, and more pleasant if the borrower’s loan agent takes the time to get to know their transaction and articulate the material facts the first time around.? Email an initial loan inquiry to the lender and follow up with a phone call.? Most mortgage brokers are highly professional and submit a complete package with full disclosure in mind.

Please share this article with friends and associates.

Thank you

Dan Harkey

Educator and Private Money Lending Consultant

949 533 8315? [email protected]

Visit my website at danharkey.com

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