I am not a real estate investment guru by any means. In fact, I only have 3 rental properties. The first one I bought without a down payment. I used hard money to make the purchase and then traditional loans to refinance and pay off the hard money lender. The fees were very high so I wouldn’t recommend using hard money unless you’re fixing up and reselling in a short amount of time. The second and third properties I bought together with only a 10% down payment compared to the traditional 20% or more required for investment properties.
For my next property, I was determined to avoid using benches. I wanted to find a deal with owner financing or private financing. Private financing is when an individual lends the investor the money to purchase the property. The investor/borrower then makes payments to the private lender just as they would to a bank in a traditional situation. Normally, he won’t get the 15 or 30 year terms that he gets with a bank, but he can get 1 to 5 years and then refinance. He will also have to pay higher interest rates; like 8-12% for first mortgage positions. If you want private money in a junior or second mortgage position, you may have to go up to 15% because of the higher risk involved for the lender.
Below are my recommendations on buying a property with private money.
1. Find a wholesaler. These are the men and women who have the “I Buy Homes” ads, signs, and sometimes commercials. These investors specialize in acquiring properties at a discount. They generally do not want to be owners. They like to get in and out and make a quick buck. They buy these properties for less than 70% of the fair market value (FMV). They then turn around and sell to an investor for a small spread.
2. Get a property from the wholesaler that needs little work. Make sure you are at 70% FMV or less. In the contract, be sure to use a “weasel clause” that states that the deal is contingent on you obtaining financing or is subject to partner approval. The partner in this case is your private lender. That way, if you can’t find financing, you can get out of the contract.
3. Once you have a property under contract, start putting together your “property information package”. This packet will consist of a cover page with a photo of the property and your contact information. The next page will be a 1-page executive summary detailing your goals, the types of properties you are interested in, and ideally any sample offers or experience you have that will help you make these offers. There are plenty of templates on the internet. Just search for “executive summary template.” The third page will be photos and features of the property. List bedrooms, bathrooms, and other outlets. The fourth page should be the county assessor’s page. Simply go to your county’s website and enter the address. You can then print the assessor page with the square feet, year. built, bedrooms, bathrooms, etc… All the information you’ll need when you get the insurance… but let’s save that for later. The fifth page will be the tax registration page, which shows the estimated taxes that you will pay. Page 6 will be a hard copy from RealEstateABC.com. Simply enter the address of the property and you will get a report showing the estimated value of the property along with a map of the location. Page 7 will come from Zillow.com. Enter the address and you’ll get another valuation estimate along with comparable sales data. If possible, highlight layouts that flatter your property and include photographs. When you go out to take photos of the property, be sure to take photos of similar houses on the street. You can include these photos along with the zillow page and get basic appraisal information.
4. Talk to everyone you know: friends, family, co-workers. Go to real estate investment groups and talk to other investors. Someone should know someone who wants to earn 8-12% of their money instead of the 2% they get at the bank.
5. When you find someone interested, take them out to lunch and show them your package. If it’s a good deal, the numbers should speak for themselves, but you may need to “sell” it a bit. If you find a fellow investor, you shouldn’t need much convincing.
6. Agree on the loan amount, interest rate, length of the loan, and whether you are paying principal and interest or just interest payments.
7. Contact a title insurance company and provide them with the information. Most likely, the seller/wholesaler has already sent a copy of the contract once he tells them where to send it. The closing attorney (usually the title insurance company works with one) can draft the promissory note and mortgage paperwork. While you don’t have to, it’s a good idea to apply for a “lender’s policy” on title insurance in addition to your policy. In the event that the lender has to take over the property, he or she has title insurance. Banks require this and it really puts the lender at ease.
8. Contact an insurance company to obtain your fire/hazard policy. The loss paid will be your lender’s information. This way, if the place burns down or the Earth swallows it, the lender is the first to pay. Again, this really puts the lender at ease and makes them feel more comfortable with the deal. When you mention the Loss Payee status and the Lender’s Title Insurance Policy, you will come across as very knowledgeable and professional.
9. The lender will approve all the documents and then the closing date will be set.
10. Go to close and sign the paperwork. The lender does not need to be present at the closing, but make sure the money is there ahead of time.
Congratulations! You are a real estate investor and you have used private financing!
Naturally, there are entire books and seminars on this subject. Be sure to do your own due diligence. If you’re not sure, ask a professional. Lawyers, other real estate investors, etc…
Happy investing!