The average real estate investor relies on a steady flow of private money to supplement their respective deals, often in the form of a private money loan. But where can one find this endless stream of money? Not only are institutional loans lengthy and cumbersome, but they can also impede the progress of a residential redeveloper.
But the big question investors have is understanding how to find an Arizona private money lenders
. And what is the best way to convince private money to lend you the capital you need? And how does private lender financing work?
Conversely, real estate investment capital can allow investors to grow their businesses steadily.
The following illustrates the most critical aspects of a private lender loan, which will prepare you for the private money process and boost your credibility with potential lenders.
How to Acquire a Private Lender Loan
Private lender loans are different from traditional loans from big banks, and the process of obtaining one will also be different.
Speed of Purchase: On average, a private lender can underwrite and fund a loan in as little as 7-21 days. Banks can take up to 90 days to accomplish the same thing. The timeframe offered by an Arizona private money lender is, more or less, conducive to the deals a typical investor wants to finance.
Asset-based Lending: Private lending is primarily driven by the underlying value of the subject property. Therefore, borrowers do not need to rely on their credit to secure a loan.
Control & Profitability: Borrowers receiving private money have more control over their loans. Borrowers of private money do not need to take on equity partners.
Shorter Term Loans: Private money loans typically have a shorter loan period than conventional ones, which reduces the risk of accruing late penalties.
Guarantee of Capital: Private money allows borrowers, independent investors in particular, to expand their business. A predictable source of funds is necessary for such an endeavor.
+t the risk of sounding too cliché, money and experience are the most important aspects a private money investor needs to exhibit. Essentially, when it comes down to it, the most successful private lenders in Arizona
have an increased propensity for the real estate industry and a proven track record of identifying powerful lending opportunities. Perhaps even more importantly, however, is their tendency to remain hyper-localized, as a working knowledge of a region is critical to success. Understanding a particular market, particularly its direction, is an invaluable asset.
Your Private Lending Business: Determining Deal Viability
are in the business of making money. Therefore, mitigating risk is a top priority. There are eight factors to consider when deciding whether or not a potential loan opportunity is viable. They are as follows:
- Market Value
- Borrower Credit
- Borrower Equity
- Additional Collateral
- Lien Priority
- Pricing Strategy
- Exit Strategy
- Due Diligence
These factors must be considered when determining whether or not to pursue a loan opportunity. Failure to mind due diligence and neglect of either of these could result in harsh consequences. Due yourself a favor and navigate the process with precision.
Proper documentation of a private money loan
is of the utmost importance. However, many may be unaware that the paperwork involved in an Arizona private money loan
is not all that different from a conventional loan. Accordingly, the borrower in question must sign a promissory note (a written promise to repay the loan under specific terms) and a mortgage (documentation that will be used as collateral for the lender). In addition, residential loans may require an appraisal from an outside party: a property inspection report, a geology inspection, and the borrower’s financial record. An in-person examination of the property is almost always part of the decision-making process, which is why most private money lenders tend to focus on a local level.
While a hard money lender’s requirements may vary, standard documents are associated with every transaction. Typical loan documents include, but are not limited to:
Letter of Intent (LOI): The LOI is a formal document acknowledging that all parties involved are on the same page. It outlines an agreement between two or more parties before the deal is finalized. While it is not legally binding, it is a preventative measure for miscommunication.
Purchase & Sale Agreement: The purchase and sale agreement, or the P&S agreement, is the document received after mutually accepting an offer, which states the final sale price and all purchase terms. Some items covered in the P&S agreement include the final sale price, earnest money details, closing date, title condition, contingencies, and more. Inclusions on the P&S contract will differ from state to state.
Preliminary Title Report: A title is a legal document listing the history of ownership of a home. After the buyer and seller have reached mutual acceptance, an attorney or title company will review the home’s title to look for any problems that might prevent the home from being legally sold. The results are written up for the buyer in a preliminary title report. A description of this nature will reveal if anyone other than the seller has a legal claim to the property.
Title Insurance: Title insurance, as its name suggests, is a preventative measure that protects a buyer from anyone who challenges a property’s ownership.
Proof of Funds: Proof of funds represents a buyer’s intent. It is a way for borrowers to prove that they have access to sufficient funds to complete a transaction. Typically a bank statement, retirement account statement, or other legal form is acceptable.
Proof of Insurance: Proof of insurance is required for either a purchase or refinance to avoid a devastating loss.
Personal Guarantee: A personal guarantee places some skin in the game for the borrower. In other words, the borrower puts their assets (real estate, savings, etc.) on the line. Of course, this is only in cases where the borrower can’t repay the loan.
Mortgage Note: A mortgage note is a promissory note secured by the mortgage loan. The loan structure is agreed upon, and the borrower signs the document.
A traditional one-page form note and two-page form deed of trust no longer address the myriad of issues in today’s legal environment. Environmental problems, lending issues, and the enforceability of securities and protections must be addressed.
Legal documentation should be consistent with institutional lenders’ employment, only eliminating provisions that may not be relevant or unnecessary. Additionally, special consideration must be given to a well-drafted broker’s affidavit, especially in states where a licensed real estate broker must broker an otherwise unethical loan.
Private money is a great way for investors to supplement their income if they cannot fully fund a deal with the help of traditional loans or available cash funds. Private lenders are willing to give loans to investors who can present the profitability of the value they are investing in. Still, investors must be prepared to present the proper documentation to display the deal’s viability. If you do your research and mind your due diligence, you will be steps away from funding your next agreement with a private money loan in Arizona
Equal Housing Opportunity. This is not a Good Faith Estimate and this is not a Guarantee to lend and should not be considered as such. Costs, rates, estimates and terms can only be determined after completion of a full application. Actual payments will vary based on your individual situation and current rates. APR for loans vary from 7.99 – 29.5% and is based on Credit Score, Down Payment, LTV, Income. Mortgage rates could change daily. To get more accurate and personalized results, please call 623 582 4444 to talk to one of our licensed mortgage experts. Terms and conditions of all loan programs are subject to change without notice. Level 4 Funding LLC, 22601 N 19th Ave Suite 112, Phoenix AZ 85027, 623-582-4444 NMLS 1018071 AZMB 0923961 This e-mail is for the exclusive use of the intended recipients, and may contain privileged and confidential information. If you are not an intended recipient, please notify the sender, delete the e-mail from your computer and do not copy or disclose it to anyone else. Your receipt of this message is not intended to waive any applicable privilege. Neither this e-mail nor any attachment’s establish a client relationship, constitute an electronic signature or provide consent to contract electronically, unless expressly so stated by Dennis Dahlberg RI/CEO, Level 4 Funding LLC, in the body of this e-mail or an attachment. To the extent this message includes any tax or legal advice this message is not intended or written by the sender to be used, and cannot be used, for legal or tax purposes or advice.
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.