Real Estate Investing

Private money lenders are the only real option for anyone that wants to buy property with little or no money down. The late night infomercials make it sound easy, but they are in the business of selling books, videos, software, etc. They are not in the business of making loans.

With a conventional bank loan, you will be required to put down or up, depending on how you look at it, 20% of the purchase price, meaning they might be willing to finance 80%. But, what about repairs and closing costs? That money comes out of your pocket.

So, for example, if you have found a fixer upper that you can buy for $65,000, you will need $13,000 for the down payment. You will probably pay all of the closing costs. You will have to spend your own capital on repairs. You know that after the repairs are completed, you should be able to sell the home for at least $100,000, a nice profit, but in the meantime, a lot of your cash will be tied up. With a private money loan, the picture can look quite different.

We have looked at a number of private money lenders that specialize in rehab funding. The best one that we have found approves loans for up to 65% of the “after repair value”. Banks never consider what the value of the property will be after you have completed the repairs. They only look at the agreed upon sell price. In the example above, you were able to get the seller to agree to $65,000 and you know that after repairs you can sell it for $100,000. Since the private lender will finance 65% of the after repair value, you can finance 100% of the purchase price. But, what about the closing costs?

In order to get the closing costs financed, you need to subtract them from your initial offer. For example, let’s say the closing costs are $5000. You would initially offer the seller $60,000. An appraisal supports your conclusion that the after repair value will be $100,000. You can still get a private money loan for $65,000. You just have to get the seller to agree to use the extra $5000 to pay the closing costs. Often a really motivated seller will do just about anything to get out of his or her mortgage.

So, you got the loan, you paid the seller, the seller paid the closing costs and you spent none of your own capital. Congratulations, you bought a house with “no money down”.

The best private money lenders can also provide repair funds, allowing you to keep your cash “flowing”, so that you can keep looking for more great deals. You may want to consider this unique form of financing for your next rehab project.

James has been in real estate for over 30 years and is an expert on residential and commercial hard money loans. He is a regular contributer to Hard Money Loans, a comprehensive resource for those looking to secure funding for real estate projects.

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