How We Financed The DealPosted on June 10, 2013 by
Our last column sure brought in a ton of calls and emails! In that column, we explained how last month we found, closed and financed a home in just three days by knocking on sellers’ doors – and didn’t use any of our own money. (You’ll find that column, titled “What’s Old is What’s New,” on our website.)
Here are the most common questions we were asked: What is a private-money lender and how do you find them? Why do private-money lenders lend to you? How are private-money lenders secured and paid?
More than a decade ago, Kim and I learned that a bank isn’t the only place to get a mortgage. There are individuals who will loan you their own money and fund your deals.
While banks can be a good source of long-term financing, they require a mountain of paperwork and take weeks to verify your information. It often takes a month or more to get an institutional loan. On the other hand, when dealing with a private-money lender (PML), because we’re dealing with a real person and the purchase property is being used as collateral for the loan, we’re often able to get immediate funding and close within a day or two. This is exactly what happened with our April purchase.
We’ve never sought out PML – they come to us. Over time, an investor builds his/her reputation. If your reputation is a good one, lenders will seek you out. If your reputation isn’t so hot, you’ll just hear crickets and no one will touch you with a ten-foot pole. If you’re new, you may want to partner with an experienced investor with a solid reputation, who can bring credibility to your deal.
Why do PML’s lend to us? They seek a good return – a better return than they can get at the bank. For example: Several weeks back, a couple contacted us. They had a $350,000 CD paying 4.1% interest. Their CD was maturing. The CD paid them $14,350 per year. This money, combined with their social security and pension income, ensured they lived comfortably. Problem was, when they rolled into a new CD, their interest rate was going to drop to a microscopic 0.72%. This meant their yearly investment income would PLUMMET by $11,830 – a huge financial blow to someone living on a fixed income.
This couple wanted to know if they could loan us money, secured by a property, at 4.1% interest. Theirs was a win-win offer. They would be able to maintain their standard of living and we’d be able to work with a PML instead of a bank.
So let’s look at how we financed the Green Acre house that we bought last month. On a Saturday, the seller agreed to a sale price of $50,000 if we closed within three days. We determined that the house needed a $10,000 facelift. We contacted a PML who agreed to loan us $60,000 to buy the property. The PML lender wired $60,000 to Lee Perkins, our closing attorney. Three days later, as promised, we bought the property. Today, the property is being rehabbed and will soon be offered for rent.
Private-money lenders allowed us to close on Green Acre quickly and without a lot of red tape. It allowed the seller to put the property behind her. It gave the PML a return that she can’t get at the bank. Like I said, a win-win deal!