How To Use A Private Money Lender For Residential Real Estate Without Being Tricked

When investing in real estate, few people naturally think of using the private lender. It is not in the habits of Californians. However, the private loan has certain advantages, such as flexibility and speed. Here are some techniques for using a private lender without being tricked. 

WHY THE PRIVATE LENDER WANTS TO LEND YOU MONEY 

Contact one of the best Private money lenders for residential real estate if: you have financial problems or are unable to buy a personal home; you can also use it if you want to renovate your house which has a lot of equity. This is also the case for the purchase of a flip, an empty plex or a very damaged building. Likewise, if you want to buy to refinance later or for new construction. 

HOW DOES THE PRIVATE LOAN WORK? 

A loan from a private lender is a blank sheet. The main thing is to discuss the conditions from the start: when to repay the interest, what terms if you cannot repay on time or if you can repay earlier? 

• Loan-to-value ratio: The loan / value ratio is around 75%, or $ 750,000 for a 1 million building. This ratio is most often used, but it can go higher or lower depending on the terms. 
• Application fees: The application fees (2 to 5%) are used to analyze your application. If the private lender is forced to take back your building, they will also be used for legal fees. 
• Interest rate: It is between 10 to 18% and can vary depending on whether it is the first time you borrow or not. Currently, the most commonly used rate is 12-13%. 
• Duration: Often, the term of the loan is up to 12 months. For its own operation, the private lender favors the short term (3 to 12 months). The filing fees allow him to turn the money around quickly and when the money rolls, everyone wins! 
• Penalty: If your project has worked better than expected and you can repay earlier, the private lender will ask you for 3 or 6 months of interest. 
• Guarantee: A private lender can take out a mortgage guarantee on a building you own or that of someone who has agreed to guarantee you. 

IS THE MONEY LOANED LEGAL? 

The private loan is completely legal. The money can come from different sources: it can be the lender's money or even that of his business that he wishes to invest. The private lender can also borrow at a low rate and then lend you that money at a higher rate. This is a situation that we often encounter and another way of rolling the money! 

HOW TO CHOOSE YOUR PRIVATE LENDER TO AVOID BEING TRICKED? 

20 to 25% of people hesitate to use a private lender because of the risks. Here are some things to watch out for to avoid being tricked. 

1- Escalation clause or indexation clause: The principle of this scam: a clause that increases the interest rate if the loan is not repaid within the agreed time. In California, the maximum rate allowed by law is 60%. Interest may also accrue on the loan to increase it. If the mortgage is $ 100,000 with late payment of $ 1,000, the calculation will be made based on $ 101,000, etc. Do not hesitate to call on a lawyer or a notary to enlighten you. 

2- Pay money right away: With a private lender, everything must be done with a notary. If he offers to take the application fees directly, beware. Likewise, if he wants to lend you an insane sum at a very low rate, he risks taking the administrative costs, without giving you the loan. 

3- No flexibility: Make sure you have some opening. A good private lender generally accepts to extend over 12 to 18 months, if ever your project encounters an unexpected challenge. Likewise, it must also provide for the possibility that your building may be sold sooner than expected. 

4- Loan agreement too easy: If the private lender does not ask you for any income condition, any guarantee and offers a loan availability within 24-48 hours, ask yourself the question: where does this money come from? Unless you know him very well, don't take unnecessary risks.