Private Money Lender

[ferco]

Have any of you been a private or hard money real estate lender. I've been approach by both a private individual well as by a more formal business entity who would serve as an intermediary in the transaction. I understand that individuals are using self-directed IRA's to do their private money lending and getting anywhere from 10-12-15 % per annum. In addition folks are using monies sitting in CD's and the money market also. I've queried references and they all seem to pan out.

Any happy endings or horror stories out there. Any significant accounting or legal loopholes or landmines to consider. Only the serious need respond (no sarcasm please).

 

[W2R]

Personally, I would not do something this risky for all the tea in China. (And yes, this is a serious reponse.) Even if the person was a friend or relative I wouldn't do it, because something like this can have a terrible effect on personal interactions.

For some I would do it as a GIFT, and if I wasn't willing to do it as a gift, I wouldn't do it at all.

 

[arebelspy]

It's definitely like any other investment: the reward is proportional to the risk.

If you're getting double digit returns, it will be risky.

And, like other investments, the more you research and learn, the more you can decrease that risk.

In this case, you'll want to investigate the property, have an appraisal done and run comps to figure out the ARV, have inspections done to know the rehab work required, and contractor bids on those costs, etc.

Now the person you're lending to will have most of this for you, but check their numbers. The more you do it and learn, the easier and quicker it will be.

But it will have risks, and it will take work.

Plus there will be times your money is sitting idle, between loans, so that will decrease your returns.

 

[Koolau]

Just sold family bidness to the next generation - on contract. Piddly interest of 3.5% (adjustable - but just barely). Gave great deal and also financed. I consider this a "gift" in itself. I DO believe I will be paid, but, if not, I am prepared to write it off for the sake of family. That's the only way I would enter into any private business dealings - with the idea that the relationship is more important than the money. If I get screwed, I will look at it as "my bad". Otherwise, the consequences go way beyond the money - which in the case of family, money comes in a distant second.

I really mean it when I say YMMV.

 

[REWahoo]

I understand that individuals are using self-directed IRA's to do their private money lending and getting anywhere from 10-12-15 % per annum.

...Only the serious need respond (no sarcasm please).

The following is a serious response totally void of sarcasm...

If someone advertises 10-15% annual returns I hear alarm bells ringing - especially when using funds from a self-directed IRA. It sounds entirely too good to be true - or at least too good not to have a serious risk component.

I sincerely hope those with real-world experience and knowledge of this form of lending will respond to this thread. I will be surprised if they tout this as an investment without considerable risk.

 

[tryan]

My first hard money loan was 10% (I borrowed ... getting started). Never missed a payment; 5 year interest only payment. Paid principle off when it was due.

Borrowed alot more at 6% from the same lender. Same terms. Experiance helps.

Carried a note - first position - for a buyer who had rented from me for 3-4 years. They were burned by a morgage lender (took a bunch of fees then rejected the ap). Did the note 2 pts over the conventional rate (at the time). He never missed a payment. Paid infull when he re-fi'd the house.

It can be a win-win.

 

[Nords]

Any happy endings or horror stories out there. Any significant accounting or legal loopholes or landmines to consider. Only the serious need respond (no sarcasm please).

Where is Calmloki anyway? Last post 2 Oct 11, last visit 14 Oct 11.

Their profile still says "Thinks s/he gets paid by the post" instead of "Gone travelin'". Mods, is there something you want to tell us about them?

Anyway, Ferco, maybe you want to send a PM to Calmloki.

I'd be curious how much money you'd have to pay to an IRA custodian to let you loan out your money. Assuming you can find a custodian willing to run an IRA like that.

If you're really interested in risking your money on real estate then maybe you'd rather look into church bonds. Church Loans & Financing for Church Construction & Church Renovation
[Insert "go to hell" punchline here...]

 

[brewer12345]

Personally, I would rather pick out some nice junk bonds, but different strokes. If you do this, either do extensive due diligence on the intermediary or be prepared to do this yourself as a full contact sport.

 

[JOHNNIE36]

I've done many over the years. Probably a dozen. Recently sold our last house on a contract for deed, land contract, call it what you may. In the last case, it was the way to sell our house. It was a manufactured home in a park and things wern't selling-still aren't. Must have been 80 for sale when we put our up for rent or sale. Rented it for a year and then sold it to the renters. We hold the mortgage. If it wasn't for that, we may not have been able to sell it. There are still 80 for sale. In the past we sold quite a few on "land contract" in Michigan, including an apartment complex. Sometime it might be a plus for the seller as well as the buyer.

I see ads in the paper, but I never considered just becomming a "private lender" whereby I just become a bank. I always had a vested interest in the property. Good money to be made.

 

[james7]

Have any of you been a private or hard money real estate lender. I've been approach by both a private individual well as by a more formal business entity who would serve as an intermediary in the transaction. I understand that individuals are using self-directed IRA's to do their private money lending and getting anywhere from 10-12-15 % per annum. In addition folks are using monies sitting in CD's and the money market also. I've queried references and they all seem to pan out.

Any happy endings or horror stories out there. Any significant accounting or legal loopholes or landmines to consider. Only the serious need respond (no sarcasm please).

I've spent thirty-five years in various jobs in the real estate world. At times I have brokered these loans, and have even lent myself. Many times they go well, and many times they do not. It is a very risky business, but I will spare you the horror stories. (I know enough real estate horror stories to write several books.) I do not advise one getting into it unless they can shrug off a loan as a total loss, then go about their daily routine as though nothing had happened. If you can do that, you may have found your niche in life. Keep in mind that these loans are on investment properties that banks will not lend on; that is why they are asking you for money.

About ten years ago I knew a man who was giving small loans (2nd or 3rd mortgages) of about $5,000 or less to area homeowners at about 18% interest. I guess his view was to make many small loans rather than a few large ones so that if one or two go bad, he wouldn't have to take a big hit, just a small hit. I don't know how his strategy worked out, but I would not have wanted to be in his shoes when the you know what hit the fan in 2006-2008, and the average American said they were not over extended because there were still checks left in their checkbook at the end of the month.

You have been approached by a private individual who can't get a loan anywhere so he came to you? The more formal business entity who will serve as an intermediary, might this be a mortgage broker? They get a nice fat commission at closing and if the loan goes sour you take the loss. You have queried references and they all seem to pan out? Did you think they were going to give you bad references?

Legal loopholes or landmines? A few or many, depending on how much lending you do, where, and what type. Lending is regulated by the states so you will have to check your state laws. If you ever decide that this business is your calling in life, make sure you have an attorney well-versed and experienced in real estate. Not their attorney, YOUR attorney. After their attorney, mortgage broker, or whatever self-proclaimed genius on their side has looked it over, written it up, or done whatever they are gonig to do, have your attorney look it over and give it the smell test. Ask him the risks, and if he would lend money the same way. Then throw your attorney's fee at them to be paid by the borrowers along with all the other fees.

i wish you good luck. If you have questions, PM me.

 

[chris2008]

Even with such interest rates it would take too long to recover from one loan that's lost.
Currently I am sitting on a 5000 EUR loan to the State of Greece, due end of Feb.
Even that likely partial loss, though small, is nothing I want to experience again.

 

[donheff]

Sounds like the promise of subprime loans. In retrospect it seems obvious that a lot of them would default. You are tapping a pool of low credit borrowers and can expect a lot of defaults.

 

[Finance Dave]

The following is a serious response totally void of sarcasm...

If someone advertises 10-15% annual returns I hear alarm bells ringing - especially when using funds from a self-directed IRA. It sounds entirely too good to be true - or at least too good not to have a serious risk component.

I sincerely hope those with real-world experience and knowledge of this form of lending will respond to this thread. I will be surprised if they tout this as an investment without considerable risk.

I agree...there is no such "safe" return.

 

[HpRyder]

Like Johnnie36, I'm selling a mobile home in a mobile home park where there are at least 25 mobile homes for sale or rent. The family is first renting the mobile home for 2 yrs during which time they are paying option money. Then they will exercise the option funds as a down payment. I'm loaning them the rest of the purchase price on a 5 yr note. The my risk is 1) that they don't go thru with the purchase, in which case I keep the option money & repair the place and try again, and 2) that they default on the mortgage payment, in which case I spend the option money to foreclose, repair the place and try again.

The only reason I was able to "sell" this is because no other mobile home owner in the park was willing to be a lender. And no banks are lending on mobile homes nor are there many mobile home buyer with cash.

The only other hard money lender experience I've had is loaning a 2nd on a beach condo, which they defaulted on. I had to make the 1st and the HOA current to prevent them from foreclosing before me. Then I foreclosed, out waited the IRS & state buy back period, fixed up the place and turned it into a rental which I still have.

Based on this experience, I would not use an IRA to do this unless you have lots of money to take care of any senior liens to avoid loosing the money you lent.

Oh yes I got a lenders insurance policy. But it would reimburse me the principal after I foreclosed and sold it on the open market. I still would have the expenses to get to that point.

 

[traineeinvestor]

If you are going to be a hard money lender, you need:

1. To be very confident that you know what the collateral will sell for

2. Have a rock solid legal right to sell in the event of default

3. The ability to do the maths and build in a safety margin if things don't go as planned

4. A very thick skin

Its not for the faint of heart. Put it this way: part of the nice juicy expected return is compensation for the risk of loss. Part is compensation for the potential stress you'll have to deal with if you have to go through a contested enforcement.

 

[frank]

very thick skin is an absolute must. I have done this in the past and it is still ongoing. three different properties. I considered the price and the resale in case I had to foreclose. I have been having good luck ,so far, but the interest rates are in the 6 percent range. nothing great but better than the banks.