Why Real Estate Owners Chose Private Money Loans: Part 2 Examples 11 through 20
Borrowers, mortgage lenders, and trust deed investors should pay close attention; why? You may find yourself questioning why a borrower would choose a private money lender over a larger financial institution. While the reasons are numerous below, I have listed 11 through 20 micro case studies on why a private money loan could be the answer, and how all participants will benefit. If you missed part 1 of this article with case studies 1 through 10 can be found on my website danharkey.com or on my LinkedIn page.
11. Immediate approval and 4-day funding: Borrower reported being “jerked around” by their bank, while attempting to obtain a purchase money first loan. The borrower needed a 1 week close. Purchase price was $742,000, a new private money first trust deed of $372,000 payable at 8.5% with interest only monthly payments, due in 12 months. Borrower exit strategy is to refinance with a more responsive institutional lender. All participants happy.
12. High frequency property purchaser/dealer-rolling into new properties: New loan secured by a first lien on 5 properties in his portfolio. The borrower owned multiple rental properties free and clear. The borrower desired to purchase a more distressed property through his bank short sale strategy. Borrower wanted one first lien and agreed to collateralized 5 free and clear rental properties for a $400,000 loan, payable at a 9.5% interest only, monthly payments all due in 24 months. Exit strategy, refinance, sell or payoff loan with profits. All participants happy.
13. Settle litigation: A borrower transferred a San Juan Capistrano property into friend’s name in 2012 with agreement to purchase the property back at a future date. Sadly, his friend passed away unexpectedly, and executor of the deceased parties estate refused to transfer the property back. Litigation and eventual settlement allowed original owner to repurchase at agreed price. A loan of 100% of the agreed purchase price was cross collateralized between purchase property and borrowers free and clear owner-occupied home. A loan for $1,100,000 was made at 10.99% with interest only monthly payments, due in 24 months. Exit strategy was to complete construction of the San Juan property, primarily exterior landscape, and to refinance with institutional lender. All participants happy.
14. Cash out: A borrower wanted to take cash out from a free and clear property to rehab a separate commercial property he owned as well. The borrower owns 38 small properties but is not quite bankable. The borrower obtained a first trust deed on two commercial retail buildings. One building was a 2,161 sq. ft. leased to an upscale furniture and design center in Cleveland TN. The second property was a 2,277 sq. ft. commercial building in Chattanooga TN, at the time was vacant. The combined appraised value was $845,000. The borrower obtained a cross collateralized first trust deed of $350,000 payable at 9.5% interest amortized over 30 years, but due in 5 years. The loan to value was 41%. All participants happy.
15. Bank Declines: Bank referred borrower to private money lender because their client, although a good customer did not purchase a “bank quality” office building. The purchase price was $1,800,000 but needed significant tenant improvements before the owner occupant could move in his company. A private money lender made a $1,200,000 first trust deed loan amortized over 30 due in 5 years for an interest rate of 8.5%. 60% of the loan amount went toward the purchase, and 40% of the loan proceeds was transferred to a licensed construction fund control company, which was dispersed as the construction progressed. Borrowers completed the improvements and moved their operating company into the building. Exit strategy the borrower was able to refinance with a “SBA” loan. The bank retained a relationship with the borrower over the long run leaving all participants happy.
16. Distressed Property: A borrower purchased a distressed commercial office building in Lomita CA, the building needed to be remodeled and she wanted to move in her successful operating business into the building upon completion. The building needed a physical upgrade, and therefore was not a “bank quality” property. Private money as the only option. The borrower made a first trust deed loan to purchase the property at 70% LTV for a term of 12 months. The loan was for $507,000 payable at 8.5%, interest only. Exit strategy upon completion of the building he was able to obtain and long-term institutional loan. All participants happy.
17. Airbnb property: The property as an Airbnb short term vacation rental with annual gross income of $360,000. The borrower owned a luxury resort estate, water view and private beach access in Carlsbad, CA. Borrower needed short term 2nd trust deed loan, but bank did not like the cash flow from the short-term rental market. The purpose was to pay off 2nd and 3rd liens on the property. A private lender provided a 2nd trust deed loan for $1,537,500 behind a bank first of $1,511,000. The loan rate was 10.99% interest only, monthly payments due in 36 months. The appraised value was $5,000,000 reflecting an overall value of 61%. Exit strategy, the borrower eventually refinanced the 2nd trust deed with an institutional lender. All participants happy.
18. Refinance loan came due and provide cash out: Borrower owned small mixed-use building in Pasadena CA. The property consisted of retail storefronts, general office, and a residential unit. The property was listed for sale and therefore was not interesting for a bank loan. The borrower wanted to refinance the current 2nd trust deed and get cash out for another investment. A private money short term loan was a good choice for all parties. All participants happy.
19. Refinancing on a residential “bread and butter” property: A borrower needed to refinance maturing loans and allow for some cash out. The borrower owed 6 duplexes in Sacramento all bread and butter rentals. A private money lender made a first trust deed loan of $950,000 up the 65% loan to value and placed a cross-collateralized lien on all properties. The loan rate was 9.5% interest only, monthly payments all due in 36 months. Borrowers exit strategy was to refinance with bank or sell. All participants happy. All participants happy.
20. Refinancing on a commercial “bread and butter” property: A 17-unit motel in Gilroy, CA used as monthly rentals: Borrower owned the property free and clear but needed capital purchase another property. The cash out private money loan of $765,000 was secured by a first lien, payable at 8.5% interest only, monthly payments due in 24 months. The appraised value was $1,160,000, reflecting 58%, all participants happy.
There are 100’s of reasons that borrowers obtain loans from private money sources rather than banks or other institutional lenders. The idea of borrowing a short and an intermediate term allows the borrower to solve problems, create opportunities such as property improvements, increase tenancy, credit stabilization, debt consolidation, enhance their overall financial condition, and fix-up for the purpose of selling at a higher price.
Dan Harkey
Business and Private Money Finance Consultant
Bus. 949 521 7115
Cell 949 533 8315
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