Three Ideal Scenarios for Private Money
Experienced investors and real estate developers know the importance of having a private lender on speed-dial. When a real estate investor sees an opportunity it often means a quick close is needed and there’s no time to wait for bank financing which can take weeks to evaluate. Even if the property isn’t currently in a distressed situation, when the investor makes an offer and can close in 10 days or less, it can put the investor’s offer to the front of the line. Here are three perfect scenarios for private money.
Lending Outside the Box
Private lenders don’t have to underwrite to guidelines established by others. A private lender makes its own rules and evaluates a potential purchase based upon its own judgement. For example, there is a five unit building with a large commercial storefront on the first floor with four residential units above. This falls outside the guidelines of conventional financing such as loans underwritten to Fannie Mae or Freddie Mac requirements. While either can make exceptions with regard to mixed-use properties, this particular building is five units, not the four-unit maximum for a conventional loan.
A real estate developer sees the opportunity and along with the appraiser and inspector determines how much work will need to be done to get the property ready for market, if any. At the same time, the developer readies the paperwork needed to buy the property and close within a matter of days. At the same time the developer is working with his bank to put in place permanent financing which will replace the private note. The developer’s bid is slightly lower than a competing offer but the other offer can’t close as quickly and is turned away.
Subprime lending, loans so-called because the borrowers aren’t considered “prime” by their bank, is also an opportunity for private lending. Just an outside-the-box building can be considered by a private lender so too can someone whose credit is a “just miss” situation. Subprime loans don’t ignore a credit profile entirely but do place more attention on the initial equity a borrower has in the form of a down payment as well as the total loan-to-value.
Subprime lending doesn’t mean the private lender issues a mortgage loan to anyone with credit report but does consider other factors that a prime loan would not. For example, if the borrower did in fact default on the note and the lender was forced to foreclose, what would the property sell for in the open market and for how much? If the private lender does in fact see a solid exit strategy in a worst-case scenario, a subprime loan may be an option.
A private loan is also an ideal source for a bridge loan. A bridge loan is where a loan is placed on an existing property with funds to be used to acquire another. Once the initial property is sold, the bridge loan is paid off. In fact, multiple properties can be collateralized to access the needed equity to close on a future transaction. Traditional loans are wary of placing a loan on a property that is currently listed knowing the likelihood of receiving any long term interest is nil.
But just as in the previous two scenarios, the bridge loan is paid off and the real estate investor obtains permanent financing for the newly acquired property.