| If you are tired of hearing banks telling you that they | | | | Show proof that the real estate taxes are being |
| will not finance your real estate projects, it may be | | | | paid on the subject property. |
| time to consider using private capital to fund your | | | | Provide your Lenders with a Promissory Note |
| deals. The economic conditions that include the | | | | and Mortgage. Make sure you record the Mortgage |
| meltdown of many financial institutions have forced | | | | so that there is public record that there is a lien on |
| Lenders to be extremely cautious as they consider | | | | this property. |
| new applications. | | | | Provide your Lenders with a title insurance policy |
| Understandably, in order to help mitigate the risks of | | | | Make your Lender the loss payee on your |
| further losses, Lenders are being very selective and | | | | property insurance policy |
| cherry picking from only the very strongest loan | | | | Consider putting the deed in escrow with the |
| applications being presented to them. In addition, | | | | appropriate deed transfer paperwork filled out; this |
| most Lenders are modifying their underwriting criteria | | | | will provide your lender with a higher degree of |
| making it even more challenging to meet their | | | | protection. If you default, they will not have to |
| minimum guidelines. There has never been a better | | | | foreclose on you. |
| time and need to learn about the advantages of | | | | Will this be a secured or non-secured loan? |
| using Private Money to assist you in achieving your | | | | Is this a recourse or non-recourse loan? |
| real estate investment goals. This article series will be | | | | Warning! |
| limited to using single Private Money Lenders for each | | | | It is absolutely essential to make sure your Attorney |
| investment property. Raising money by pooling | | | | reviews the terms and conditions as well as any |
| investment capital from a number of lenders will be | | | | documents you are using with your Lenders |
| covered in a future article series. | | | | Keeping your Private Money Lenders informed |
| What is Private Capital? | | | | It is extremely important to keep your Private |
| Private Capital is money that's being provided to you | | | | Lenders informed on the progress of the project |
| by non- traditional lending sources and includes the | | | | they have invested in. When you initially discuss your |
| following: | | | | program with your Private Lenders, you should |
| Family members | | | | inform them on the method you will use for your |
| Business associates | | | | updates and at what frequency they should expect |
| Professional associates | | | | them. One critical point to keep in mind is to always |
| Your friends and neighbors | | | | be forthcoming with any type of bad news that may |
| People on your contact list | | | | affect them in any way; the last thing you need is |
| Here are just some of the advantages to utilizing | | | | for your Private Lenders to get the perception you |
| private capital: | | | | are holding back information. If you live by the |
| Lower due diligence and closing costs | | | | following two tips, you will usually keep your private |
| Having capital available in advance allows you to | | | | lenders happy. |
| respond quickly to deals that may become available. | | | | 1. Say what you do and do what you say |
| Keep in mind, the best deals do not last on the | | | | 2. Be completely transparent and never hold back |
| market very long you. | | | | any information |
| Less documentation required | | | | Creating your Private Lenders Investment Package |
| Shorter time to closing | | | | My experience as an Engineer has made me a big fan |
| No risk of being turned down for a mortgage | | | | of creating procedures and standard work modules |
| You make the rules with flexible terms and | | | | that make operating your business more efficient and |
| conditions that may be offered to your Lenders. | | | | consistent. Creating your Private Lenders Investment |
| The ability to take on problem properties that | | | | Package is a great opportunity to utilize these |
| most banks will not touch | | | | principles. With this package, you will be able to |
| Establishing your credibility | | | | illustrate how your investment program will work |
| Is seems that we are reminded on a daily basis of | | | | using a clear and comprehensive format. The |
| the latest scams that are being exposed around us. | | | | following are some recommendations you should |
| Unfortunately, the current economic challenges are | | | | include when putting your content together: |
| bringing out the worst in some people and it is | | | | Overview of the property including exit |
| understandable why so many are skeptical about | | | | strategies and timeline |
| investment opportunities being presented to them. | | | | Scope of work required |
| Demonstrating your credibility is by far one of the | | | | What do the numbers look like? |
| top characteristics Investors seek when they are | | | | Market conditions; why are you in this area? |
| entrusting their money to you. Investors may be able | | | | Overview of your company, staff, and |
| to tolerate if an investment properly executed to the | | | | professional support team |
| best of your ability does not end up as planned. | | | | Highlights of your experience |
| However, you may never recover if there is any | | | | Benefits and risks of investing |
| question with regard to your integrity and actions | | | | How the Private Money Lender is protected? |
| that have led to your Investors losing their money. | | | | Capital commitment form |
| How much interest should you pay your Private | | | | Make sure the deal is solid investment |
| Money Lenders? | | | | For some Investors, having a traditional lender |
| The amount of interest that you pay your Private | | | | scrutinize and possibly turn down the loan may help |
| Money Lenders is completely up to you and although | | | | prevent the Investor from entering into a bad deal. |
| there are no set guidelines for this rate, private | | | | Unfortunately when using Private Capital, depending |
| money is typically paid at a rate of 6 to 12%. | | | | on the knowledge and experience of your Lender, |
| However, lower or higher rates can apply based on | | | | some if not all of the "checkpoints" are not there. To |
| the situation. When considering your interest rate you | | | | be absolutely clear on this point, you should never |
| are offering, keep in mind that many states have | | | | consider an investment if you are not in a position to |
| usury limits which will put restrictions on the | | | | accurately determine the viability of the project. |
| maximum interest a lender can charge a borrower. | | | | Educate your Investors and make them understand |
| The following are some things to consider when | | | | the risks |
| determining the interest rate you will offer in your | | | | When you consider the reality that many Private |
| program: | | | | Lenders are not financial or real estate experts or in |
| How much experience do you have doing these | | | | some cases not even experienced in this area, you |
| types of transactions? (when you are a novice you | | | | can understand why it is essential to make sure you |
| may have to offer a higher interest rate) | | | | are properly informing them of the potential loss of |
| What is the term of the loan? (with a shorter | | | | their investment. Remember, despite all of your |
| term, you can offer a lower interest rate) | | | | diligent efforts, there is always a possibility that |
| The risk level of the investment (your Investors | | | | things will not go to plan. Having your Investors |
| will expect a higher rate of return on a riskier | | | | properly educated on these possibilities in advance will |
| investment) | | | | go a long way if and when you run into challenges. |
| Interest payment payout schedule (many Private | | | | Make sure to have a solid exit strategy for your |
| Money Lenders would accept a lower interest rate | | | | Investors |
| payment with more frequent interest payments | | | | When utilizing private capital, it will be essential that |
| being made) | | | | you have a viable exit strategy in order to get your |
| How do you protect your Private Money Lenders? | | | | Private Money Lenders paid back at the end of the |
| There are a number of things that you should | | | | loan term. Unfortunately, there are too many people |
| consider that will provide your investors with both | | | | who do not take this into consideration before they |
| the financial and emotional security they deserve | | | | enter into the deal. As part of the initial discussions |
| when they agree to put their money into your hands. | | | | you should have with your Investors, will be a review |
| Let's take a look at some of the things you should | | | | on what specific plans you have to return their |
| consider: | | | | investment capital. |