What are your Private Lending Frustrations?
I have been talking to many investors over the past 8 to 12 months and they have shared many of their frustrations regarding Private Lenders. I want to hear more. Call me a glutton for punishment but the more I hear the better we can serve you.
Most of the frustrations have been along the lines of; how to find them or how to secure them. I am sure that there are many more out there that you can share. Let’s hear em. I will post my replys in each of the comments so take a look often.
I have taken a recent interest in becoming a private lender. I was wondering if there is a specific strategy that works better in obtaining the highest return on my money. Should I charge a flat, say, 12% interest rate, or should I negotiate my return in the form of a percentage of the final sale of the RE project?
REPLY FROM PAUL:
Linda that is great question. You can do what ever you would like. As a lender I would look at the experience level of the investor and charge accordingly. When I buy a house to flip I will not get involved unless I can make a minimum of $65,000 so you can do the same as a lender. You will not get involved for less than 12% interest.
We are coming out with a course on being a private lender soon. You can sign up for notification of it by visiting http://www.SecuringHighReturns.com
Is it possible to broker for private lending funds if I have no available cash and no credit?
REPLY FROM PAUL:
Rose, when you deal with a mortgage broker you are working with hard money lenders not private lenders. Private Lenders are individuals that will lend based on the merit of the deal and your acumen and personality. The deal is the most important part. Good deals will lead to good lenders.
When I started I did not have much cash and I was able to get lenders because of my due diligence and effort on the deal.
Most private lenders don’t pull credit, even though they should. If you have bruised credit you can usually get around that by explaining what happened to your credit and what you have done about it.
Basically you are looking in the wrong place.
I am looking for ways to retain my relationships with private lenders who frequently invest in my projects. Would increasing the amount of interest I am willing to pay on their loan be a good incentive for them to continue working with me?
REPLY FROM PAUL:
A lot could be said for communication. Make them feel a part of your success. Have a dinner to celebrate. Send cards and pictures of your projects. Things like that will go well to helping them feel a connection.
Just don’t over due it because you don’t want them holding you hostage for more interest or a big cut of your profits.
What are the guidelines for syndicating?
REPLY FROM PAUL:
That is a big topic. Too big for a blog post. Short answer would be to look up the SEC guidelines for exemptions.
I address that in depth in my Advanced Strategies manual in the “Cracking the Private Lending Vault” Course.
Is it possible to use funds from numerous private lenders for the purchase of one property?
REPLY FROM PAUL:
Yes, you can such as placing them in order of contribution size as individual deeds of trust or mortgages. This is not combining funds. The issue with this is you would then have a second and a third mortgage. Some lenders may object.
You could also create an LLC or an LP and raise funds this way.
How can I obtain a large amount of money to purchase a single, high-end house without having to pool funds from multiple lenders?
REPLY FROM PAUL:
Find a single lender that would feel comfortable lending on a high end house. The other option is to partner with someone.
I don’t know what the likelihood is of finding that person in your area is though.
I would recommend either doing a blind syndication or creating an entity such as an LLC or a Limited Partnership to raise the funds.
If I were to use private funding, what kind of involvement would a private lender have in my real estate project?
REPLY FROM PAUL:
Yes I would talk to the lenders and only work with the lenders that meet your criteria. The choice is yours with private lenders. You have an opportunity to set the terms.
What are the requirements, and what circumstances warrant the need to pool money for deals?
If I were to pay my private lender completely off before the end of the loan would I incur any prepayment penalties?
Is there a way for REIs to control the property financially and management-wise when there are private lenders involved in the deal?
REPLY FROM PAUL:
Yes I would talk to the lenders and only work with the lenders that meet your criteria. I have personally never utilized a private lender that wanted to control the deal. The choice is yours with private lenders. You have an opportunity to set the terms.
I am having a hard time determining if using private lenders is the right avenue for business goals. How can I determine if using private lenders is right for me? And if they are right for me, how do I know when to use them and not use them in my RE deals? Is there any sort of evaluation I can do that will give me some guidance?
As the syndicator of a deal, what kind of fees and returns can I expect to receive if I don’t put in any of my own money into the deal?
REPLY FROM PAUL:
When you do a syndication as the person that manages the group investment you can obtain a management fee and take a percentage of the profits. It will be a small portion but when you don’t put up the money you can still make money on it. You can set up the deal anyway you want to as long as it is still marketable.
Is there a way for private lenders to receive payment without being regulated by federal laws, such as the Real Estate Settlements Procedures Act and Truth-in-Lending Act?
Is there a “right” way to structure a loan with a private lender? Should it be done on a per deal basis or some other way?
REPLY FROM PAUL:
Yes and Yes. I would do it on a per deal basis and structure it whichever way works for you and your business. Personally I define the structure and then go and find a lender that can live by the terms.
When I work with private lenders I like to pay them off in a lump-sum at the end of a deal, after the house has sold. Though, sometimes I find myself having to make monthly payments to satisfy certain lenders. Are there any tips or suggestions that you have on getting the lender to wait for their payment until I have rehabbed and sold the property?
REPLY FROM PAUL:
Yes I would talk to the lenders and only work with the lenders that meet your criteria. I have personally never utilized a private lender that needed monthly or even quarterly payments. The choice is yours with private lenders. You have an opportunity to set the terms.
Can I receive a loan from private lenders with minimal documentation?
REPLY FROM PAUL:
Sure but I would want to have all of the deal information to present to them. Otherwise why would they want to lend you the money.
Are private lenders able to finance the everyday home owner?
REPLY FROM PAUL:
Some are. It depends on the lender.
Will private lenders be able to help me understand the tax and legal implications of my decision to work with them? How do I know that I am receiving the best rate with them considering all of the closing costs?
Are private lenders willing to invest their money in properties that I want to hold for a minimum of five years?
REPLY FROM PAUL:
Some are. It depends on the lender. If that is what you are after then I would only entice the type of people that are looking for that. Frankly though I would not want to have a first mortgage out there at 12% for 5 years.
I have been known to be a little of a control freak (at least that’s what my wife says). So, I need to know what I can do to explain the benefits of lending to my potential lenders but keep control of my deals at the same time. Any suggestions?
REPLY FROM PAUL:
I work with Private Lenders. I make sure they understand that they are receiving interest on the money not a percentage of the deal. I don’t want partners. They have no stake in the project other than as a lender. I keep them in the loop and if they have more experience than I do I will listen to their ideas. Other than that I don’t even ask or acknowledge their opinions.
I have some funds from a Private Lender but want to obtain a mortgage for the difference. Are there any stipulations on doing this? If so, are there any ways to get around them? thx
I mainly invest in high-end properties. Do you have any thoughts on determining a value acceptable to the lender without giving them a full appraisal? To order a full appraisal on high end properties can be quite costly.
REPLY FROM PAUL:
You can always give them a Comparable Market Analysis from an experienced Real Estate Agent. I typically will pay anywhere from zero to a couple hundred dollars to have them done for me.
Even though I am an agent I always ask someone else to prepare them so that I can remain arms length in the transaction.
I have found lenders but honestly, am a little frustrated because they are all saying they only want to lend for a 6 month to 1 year term. I prefer more of a 2 year or more term. How would I explain to them why they should do a 2 year term versus a 6 month – 1 year term?
REPLY FROM PAUL:
Find more lenders that are truly private lenders rather than hard money lenders. They like short term money because it actually increases their yield. They typically charge points up front and if they can do that 2 or 3 times per year they make more money.
With a private lender that does not charge points you can also show them what they would earn on the life of a loan rather than taking it back having it sit around earning nothing while they find the next deal on which to lend. This keeps their money working and is just what they want.
I have discovered there is a fine line between my potential lenders being “interested” and actually following through. How can I get them to commit?
It seems as though the people i have talked with want about 20% down (from my own pocket). Is there any way to get around this and find people who will lend 100%? Or do most require money down just like the banks do? The problem is I don’t have the money to put down which is why I need a private lender is the first place. I have 2 properties ready, just need a lender.
Since I have no assets to show my prospect lender I am afraid he won’t lend me money for the property I found. What are the minimum assets private lenders usually require?
I can’t find any lenders that want to be in 2nd lien position? Can I explain any advantages to them for being in 2nd? I am not sure what they would be. Ideas would be helpful…
REPLY FROM PAUL:
A higher rate of return and plenty of equity left after them on the property so that you would be able to return their money with interest even if you had to sell the property at a deep discount.
I would like more information on how to pool investors together in an LLC. I am really interested in doing this but not sure where to begin. Advice would be great. thanks.
REPLY FROM PAUL:
Good idea and a great way to raise money for your business. There are some rules to follow when you find people to invest in your LLC or Limited partnership. You can find them by visiting the Securities Division of the state in which you live. You can also visit the SEC website and search for Regulation D Small business exemptions.
Most states will allow you to have a specific number of investors in your limited partnership that can bring money into the company to invest. You would then pay out a percentage of the profits based upon contributions. Sometimes you may want to have a minimum ROI others you may not want to.
I go in this in depth in the Advanced Strategies Manual in the “Cracking the Private Lending Vault™” course.
The first two private lenders I talked to require a business plan for each property I am interested in. Is this a common thing? What does a business plan entail?
REPLY FROM PAUL:
Not as often as people should. My guess is that you were talking to either Hard money lenders or sophisticated lenders. Not a bad thing by the way. It will help you set a higher standard for your deal and help you stay out of trouble.
A business plan should include at a minimum:
- Overall description of the deal
- What you will do to the property
- Whom you will use to do the rehabs and marketing
- Financials w/projected Proforma income and expense sheets and a P&L statement
- Exit strategies
The Forms and Tools Manual has examples of all of these inside.
How can I tell if a private lender really has the funds or is just talking like he does?
REPLY FROM PAUL:
Do some due diligence. Ask for references or require proof of funds before you discuss deals.
I am wondering if Private Lenders want to see proof of income before they lend their money?
REPLY FROM PAUL:
Some may want to see proof of income. But remember these are private individuals not banks or hard money lenders. Typically they are lending on the deal and the persons ability to complete it successfully.
I have experienced hidden and upfront fees by private lenders before they will even take a peek at the actual deal. Is this going to be the same for every private lender? I don’t want to pay upfront fees.
REPLY FROM PAUL:
You are working with the wrong lenders. I have never once paid an upfront fee or had a hidden fee with a private lender. I do take care of all of the expenses of the loan such as closing, appraisal, filing and courier fees and typically any fee that the lender needs to pay when using a self directed IRA. But that is usually it.
You may be working with a hard money lender or someone that is taking advantage of you. Look around for someone else. They are out there.
I’ve heard that in the state of WA a RE investor needs to file one form with the state regarding securities. What is that form, specifically?
REPLY FROM PAUL:
You can find that form in Video #3. I even show it to you and talk about what you need to do. It is the Form U2 exemption.
I am working off of the luncheon model of getting Private Lenders. I am having mixed success. I send out a couple thousand postcards with NO replies.
We are going to do it again this month any suggestions.
REPLY FROM PAUL:
I would hold off on dropping the next batch of postcards until you had an opportunity to test the list. If you received no responses from the original postcard then there is something wrong. It depends on where you got your list, your message and the list demographics.
I would adjust the postcard to something like a free recorded message where you can explain a little bit about how to earn a high return on their money with little work and risk on their part. It could also be for a free CD or report of the same message.
I have a feeling that the message is not resonating with your list. So rather than wasting your money on the postcard you should try something different.
You also need to ensure that you are meeting SEC regulations. Putting people into a seminar is a great thing. BUT Do not ask them for money at the meeting. I don’t know where you are located but many places has prohibitions against that.
The main thing you should be doing is meeting people and getting them interested in what you are doing. Tickle their fancy but don’t go right to asking them for money. I explain this all in my course and unfortunately if you don’t follow this just right one day you will have a State Regulator knocking on your door. I have seen this over and over again.
what happens to a person who raises 1.35 mil from ca investors and he lives in texas and he didnt file with the sec.
that investment also lost the investors the entire 1.35 mil
My biggest frustration has been the sheer amount of time it takes to network and build relationships with private lender prospects. It seems to be one of the only things you can’t delegate.
And that’s okay. I still DO it, and it works. But saving some time would be nice, too.
Alan Brymer
http://www.TheInvestorLibrary.com