If you’ve been finding that money for your real estate deals is hard to come by -private money just might be the answer. In today’s article private money broker Shannon Quickfall gives you a good understanding of what a private lender will look at, and what you, as a borrower, should know.
I was scrolling through Twitter posts the other day and one of the people I follow had posted this joke:
A man walks into the bank and says to the bank manager “I’d like to talk to you about a loan”. The bank manager says “Great! How much can you lend us?”
I laughed because Dave and I had gone into the bank earlier in the week to make some large cash withdrawals. We owed my brothers a bit of money for their help with our rental property renovation in June, and we had to juggle money around to a few different accounts for property taxes and other upcoming bills. When we started giving the bank teller the sums of money we were going to withdraw, she started to panic saying that we should have called the bank ahead of time to let them know that we were going to be taking out more than a few thousand dollars in cash.
“But – you’re the bank! If you don’t have money, who does?” I was thinking.
Of course we smiled and apologized and eventually they were able to round up enough cash to meet our requests.
We had to laugh though – if you can’t go to the bank to get money where can you go?!
Of course, you might feel the same way when it comes to finding money for your real estate deals! The lenders have added so many restrictions that people all over North America are finding it darn near impossible to find financing for rental properties. In Canada, in particular, the regulations have changed so much in the past few months that people with multiple properties (like us!) are faced with a mountain of paperwork and a whole lot more trouble than ever before.
But, as we’ve said over and over, we don’t focus on the obstacles we’re facing. Instead, we place our attention on the ways we can get around those obstacles.One way to get money for your deals is to turn to a private lender.
Previously, we had a great article on private money and a fabulous video from Patrick Riddle of MustKnowInvesting.Com on the subject … this week we’re pleased to present a private money expert from our own backyard in Burnaby, BC to help you learn a little bit more about private money.
Julie Broad (& Dave Peniuk)
p.s. You can follow Julie on Twitter at:http://twitter.com/revnyou
An Alternative to the Traditional Lenders
Private Money: An Introduction For Borrowers
by Shannon Quickfall
How many of us have found a great deal but, for various reasons, just couldnot secure sufficient financing to make it work? Or how many of us have been in a deal where we needed refinancing but could not get it on the terms that we wanted? When that happens, we end up watching that opportunity pass us by – and in some cases there was a solution! There was a way you could have secured the financing you needed to close that deal.
Private lending is often an overlooked solution to financing problems. misconceptions, myths and mystery surround private lending.
There are a variety of lenders that could be called private lenders, for which the fees and costs of financing vary substantially. The focus of this article is to discuss private individual lenders, not institutions or investment corporations. The private individual lender can be difficult to access and so many borrowers end up with private institutional lending which can be more costly when fees are added in. Some of the benefits to using a private individual lender is that, in many situations, there are more opportunities to customize the mortgage that the borrower needs and, in many deals, fees can be lower than other institutional private sources.
How does private individual lending work?
A mortgage broker who specializes in private financing can help a borrower find an individual who will lend ‘privately’ (i.e., not through a bank or institution but directly on their personal behalf) on a property. An individual lender seeks a better return than bonds and does not want the risk of the stock market; instead, an individual lender wants to make money off of real estate without directly owning it.
A private mortgage is generally short term in nature (typically 12 months), is secured by real property, and the return is the interest that the borrower pays with, possibly, a lender fee.
The lender will make an offer on the mortgage stating the terms that they require to lend the mortgage. There can be a negotiation and private lending offers opportunity to tailor mortgage requirements more so than an institution who only offers certain mortgage products that may or may not be open and may or may not have other requirements. When an agreement is reached, a lawyer or notary will prepare the necessary documents and a charge will be registered against the property just like any other mortgage. Private financing does cost more that conventional financing, and private money is a market like any other which is moved by supply and demand; the price of which fluctuates accordingly.
The following are some of the situations where private financing offers significant benefit:
1. A private lender, may lend more on the basis and merits of the property so if a borrower has less than perfect credit or lack of credit or has a difficult time proving income but the property itself holds good value, the latter can make the deal work for a private lender whereas a conventional lender will decline it.
2. Private borrowing can also work for properties which are held in a trust, even a foreign one. Most banks won’t lend to a trust because they require a personal guarantee.
3. Private lending is also a good solution for temporary needs, such as when a borrower feels that in a short time their credit may be good enough to get conventional financing or if they are waiting for another deal to close in order to release funds to use for the new deal. This works well with private money because most private mortgages are for relatively short terms, 12 months or 24 months.
4. Private mortgages can even be negotiated to be ‘prepaid’ mortgages, such as when the borrower doesn’t want to make monthly payments; this way the borrower simply pays the whole amount (including the capitalized interest amount) back at the end of the term. This especially makes sense for someone who is selling their property and knows they will have the funds to payout the mortgage within a year.
5. Private lending is also a potential solution if the location of your property is outside of where a conventional lender is willing to lend.
A private lender has the same rights as a bank when it comes to being paid. If the mortgagor is behind on payments the private lender has the right to pursue foreclosure just like a bank would in accordance with provincial or state laws. As well, if payments are late, it is typical for a charge to be added which would be defined in the mortgage agreement. Some private mortgages may require the borrower to have life insurance but it is not necessarily a standard clause. What is important to remember is that for the extra cost of financing the borrower has the opportunity to negotiate what terms are important to them to make the deal work and a private mortgage broker can help with this as a mediator between the borrower and the private lender.
Private lending might be the right solution for you, but it’s worth nothing that it is not a solution to buy property with no money down. Realistically, in the current market, most private lenders will not lend above 80% of the property value, so you need to have at least 20% equity (and commercial properties need even more). Private mortgages can be in first or second position, and possibly a third depending on the amount of equity. They can be used for residential, commercial and even in construction financing.
Written by Shannon Quickfall, BBA
Shannon has a background in finance with a BBA from Simon Fraser University and currently a CFA candidate. She works with borrowers and private lenders to create mortgages that meet the needs of both parties.
Shannon can be contacted at:
Toll Free 1.877.294.9330
Toll Free Fax: 1.888.241.5767
Posted on July 14th, 2009