Private Money Real Estate Lenders Are Readily Available If You Know Where To Look.

Should you consider using private money real estate lenders as an option for your next real estate deal? No doubt that private money is the least expensive of funding options for real estate transactions. Private money is “safe” money that individuals have in their savings, checking and retirement accounts. These individuals have few options to get the highest return with the least risk. Many of them are becoming private money real estate lenders to make more money using their own money.

If they get a Certificate of Deposit (CD) the interest return may be less than a couple percent and locks them into the term of the CD. If they invest in corporate or municipal bonds, the bond values will decline if interest rates go up. If they go for the maximum return possible by investing in stocks, they risk substantial principal loss.

A viable alternative is for these individuals to fund real estate investor transactions by becoming private money real estate lenders. These fundings are of two types, either hard money or transactional funding loans. The same banks that are issuing the CDs are using this money to fund real estate transactions so why shouldn’t a private lender bypass the middleman (bank) and become one of the many private money real estate lenders?

Our experience has been that if the private lender personally knows the investor their mindset tends to bring in the history of the investor and not the realities of the deal. Even worse, the private lender wants to suddenly become a seasoned investor and evaluate the property his borrower wants to fund – even if it is a same-day transactional funding with little or no risk.

 

 

It is human nature for the investor to explain to the private lender how much money he will be making – with no money in the deal. This gets the attention of the private lender silently asking themselves the question, “Why not me, after all it’s my money?” Especially in extended loans where the investors will rehab the properties, the private money real estate lenders may decide they wants to be a 50/50 partner in the deal!

In addition, the private money real estate lenders often talk to someone they know who often knows less than they do but have an uninformed opinion about the transaction – usually a deal killer. Even worse is if an attorney gets involved who sole purpose is to take no personal risk and tells the private lender not to do the deal because of usually unwarranted risks.

What is an investor to do? Ultimately an investor should use the least expensive funding available since the cost of the money directly reduces his profit on every deal. I suggest an investor should start by using a professional transactional funder or hard money lender and get a couple of deals completed. Armed with the HUD closing statements he should then approach private money real estate lenders and casually say he would rather pay someone he knows the funding cost.

It’s very important that you get a funding source that is reliable and is not looking at your credit score or someone who remembers you when you were growing up. If you wait too long to find a seasoned funding source, you may have to resort to a 50/50 profit split. Once you have a track record, money will come to you but you have to take it one step at a time.

Less expensive and frankly easier, is to vet a transactional funding source well before you get your first deal. Too many times I have had investors come to me a day before a closing with a story about a transactional funder who decided not to do his deal and now he is losing the deal and his earnest money deposit (EMD). What is as important as the money source is how much are the total transactional funding costs. Too often junk fees can be more than the actual points on the loan so check well ahead of your closing!

To your limitless success,

Dave Dinkel

Real Estate Mentor Program Founder