Is it more traumatic to be told no by a date or a bank? Actually, I ‘m not sure but I can tell you I’ve gotten a lot of no’s from one of them…I’m not saying which. For many investors the no from the banks can be a serious problem. How can one possibly do real estate investing without a lender or a large amount of money in the bank?
There is another way to do it. It is referred to by many as “private money” or a “silent partner”. It simply means that someone other than a bank or a business that does lending is willing to loan you the funds to do what you want to do. When I first heard of it I thought that there can’t be very many people out there willing to do that.
As I have used private money myself, I have realized that there are definitely enough people out there that are willing to do it. There can be a wide variety of reasons as to why they would want to, but it comes down to this – they want to make money and believe that you can do it for them.
A typical situation would look like this: someone out there has a significant amount of capital (money) that they want to be working for them. For whatever reason, they don’t have the time to do all the work of real estate investing themselves, or maybe they don’t even want to do it.
The other side of the transaction is the investor who is either new or just stretched out with all available capital currently in properties already. When the two parties come together, we have profitable activity.
Let’s take a look at why each side may want to pursue this. As stated earlier, the investor who is looking for the capital may be stretched out so that banks will not lend any more money. He or she may also have a poor credit history or maybe even just not like banks. I attended one seminar where the speaker had worked for a bank and been ruined by them. He stated that he did his first 26 deals without any assistance from banks.
The person with the capital is simply looking for the highest return on their investment. Many investments are performing so poorly in the last several years that there are very few places to get a high return on money without substantial risk. Real estate provides a relatively safe high yield – provided that the person supplying the capital does some due diligence to make sure the person they are funding has the ability to complete the deal.
At a minimum, here is what should be disclosed on any private money transaction: The financial situation of the property should be fully known – how much is either owed on it or how much is it going to be purchased for; what is the market value once it is either fixed, rented, or resold?; how much is it going to cost to fix, hold or resell? What other sources of money is the property purchaser going to use?
Notice that the focus so far has been on the property. The property is very crucial to a successful investment. The other piece is the purchaser. The lender has to have some idea of the competency of the purchaser. The best proof is a portfolio of previously successful real estate deals. Absent that, the investor has to rely on a judgment of the character and competence of the property purchaser.
Where does one go about finding either side of the transaction? Probably the best places would be investment clubs or groups. Do a web search on “real estate investment club” with your local area and you may be surprised at how many there are. Another source is on various classifieds in print or online. Many property purchasers advertise looking for investors. It is less common for investors to advertise for property purchasers, because they would be overwhelmed.
Completing the transaction is the easy part. Most commonly, a Deed of Trust and Promissory Note are used. The property owner completes both and gets the deed notarized and recorded. This way the party supplying the capital for the real estate investment has the property as collateral and can be certain the person they are supplying the money to is not just going to run off with it.
The terms of repayment can be whatever the two parties agree to. I am not an attorney, so if there are some terms that would be prohibited in your area, I wouldn’t know. For any transaction involving real estate investment and lots of money you should seek professional counsel.
There is a certain good feeling being able to do real estate investing without the need of a bank. I highly recommend it!
