Private Financing

Private Financing

Private Financing is one of my favorite ways to find properties. They are easy to work with and you can work with them to create your terms. Many private lenders can even partner with you. They bring all the money and you do the deal.

When working with Private Lenders here are some legal Considerations:
-DO NOT MARKET TO THE PUBLIC
-DO NOT GROUP / MIX FUNDS
-DO NOT SAY OR WRITE “GUARANTEE”
-BUY PROPERTIES THAT ARE SECURE
Not following these can cause big legal problems.

What do you like to do to obtain private financing? Please post your answers as long as it follows the considerations above. If you have not obtained private financing before what do you think you can do to find them?

This is an open question for general responses to allow ideas to flow.

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If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125


very interested

I'm hoping to get some insight from the posts that follow.

Thanks in advance,
Rina

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"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)

"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11

For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249


Be a professional

It's the person you have to become as a real estate investor that attracts private money. Finding or creating a profitable deal is only the result of who you have become to find or create that deal. You must be able to create a business plan that clearly defines your exit stategy that benefits both parties, you must be able to read financial statements, you must know how to work the numbers to figure income and expenses, you must know how to manage the asset once it is purchased or put the management in place that keeps the asset rising in value, and most importantly you must be able to show the private money lender what their return on investment will be. When you become that person, private money will chase you down. At that point you will need to decide if you want their money. I have turned down private money in the past because when I met the investors I didn't get a good vibe from one of the partners. Just because the money is there doesn't mean it is a good deal for you. I know this answer isn't the clear cut answer like "post an ad and investors will start calling you" but it is the answer that has become a reality for me.

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You've got to find your obstacles and call them out! Unsheath the sword, and do battle with whatever it is that holds you back!


Follow up on the legal side of private lenders

This information was revised for easier understanding on 05/15/08.

I may get questions on the legal issues with private money.

Against what others later in this post have said - if you are lent money or in other words receive money from private investors such transactions can be called a security. Those that say receiving money for investments cannot be called a security have not done the proper research.

The difference between a Private Lender and a Hard Money lender is that private lenders are not usually investing in real estate when we approach them. They most likely have their money in stocks, bonds, IRA and so on.

The overview

Common securities that most will know are stocks and bonds. So, if you are getting money from multiple people and investing in real estate you do not want to be placed in the same category as stocks and bonds. In stocks and bonds companies group people together to receive money so the company that created the stock or bond can run business. To create a security such as a stock or bond you need a license which is there are licenses such as a series 7, 9, 10, 11 and so on. If we as investors receive money and then are considered by the SEC and NASD (the governing groups over securities) that what we have received and are offering to lenders securities not just doing private loans we are creating securities without licenses - this is illegal.

The information that I posted at the beginning allow us as investors to keep out of what the SEC and NASD terms a security.

The following is More in depth Information to Keep Us Out of Being Called a Security by the SEC.

The Reason for Securities associations
The government has a very high interest in private financing because this is a large area for fraud. The private lenders we approach most likely have not invested in real estate as an investment. The government wants to take care of those investors because the government feels that investor who have not invested or have little experience in real estate are oblivious and need laws to protect them.

Do not Market to the Public:

You should not market to the public but you can market to any "acquaintance" of yours. That would be family, friends, dentist, car salesman or people that are acquaintances.

Problems occur when we market out of this circle of acquaintances. The SEC does not seem to have an exact definition of what an acquaintance is either. But, if I market to the public at large through the TV, radio, newspaper, fliers, billboards, road signs or etc I run into the issue of marketing to the public which is one of the tests of a security.

The government, as a way to track people who market to the public, hires paper cutters (a term commonly used) to track ads that are discussing financing to see if they fall into a "security". This is why you will not find people looking for financing in the papers.

Do not Mix or Group People Funds

Another consideration is that you do not combine people’s money together under one loan. For example: if I have a friend giving me $50,000 and a Doctor giving me $60,000 I cannot create one loan with a loan amount of $110,000 dollars and a payment to the friend and doctor - this is a security. I can however create two loans and have two loans on a property one to the friend and one to the doctor. Both, loans would have different payments and documents.

Do not Say or Write the Word "Guarantee"

Not saying "guarantee" is just a good idea and helps keeps us from needing to indemnify a private lender.

Purchase Properties that are Secure

Purchasing properties that are secure is simply buying a house below market. Fraud happens when a house is worth $100,000 and we get a lender to give us $125,000.

Where to Find Information on What I Have Said

Here are some lawsuits that the SEC and NASD use to identify what a security is:
-S.E.C. v. Howey [1946] 328 U.S. 293
-Silver Hills Country Club v. Sobieski [1961] 55 Cal. 2d 811
-Matek v Murat [9th Cir. 1988] 862 F2d 720
-S.E.C. V. Glen W. Turner Enters, Inc. [9th Cir. 1973] 474 F2s 476, 482

This information is for educational purposes only and you should get a competent attorney when dealing with private financing.

__________________

If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125


Weigh your options

I have been working on a pretty big project and as many of you know I have been looking for other investors and lenders but I have found, like it was said before, that the money may be there but the vibe was off.

Use due diligence when looking for lenders as well as when looking for properties. Find out what you CAP rate is for your specific area, negotiate the terms and interest rates.

Ask questions and get a business history on the lender you are looking at. Find out about their specific business practices and look at THEIR financial. Know that you are making an investment in them just as they are making one in YOU.

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Anita
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"FAILURE IS NOT AN OPTION"


nstreet

What does SEC and the NASD have to do with lending money?

Also I dont understand what (if at all) the difference is between private and hard. It all comes down to the same thing...getting a loan without going to a bank/broker.

Also you mention do not advertise to the public. What do think about this:

Creating a business card that says you offer hard money.

Thanks,
D

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Don't Wish the Past, Create the Future! - DH


private lenders

Hazco Investments wrote:
What does SEC and the NASD have to do with lending money?

Also I dont understand what (if at all) the difference is between private and hard. It all comes down to the same thing...getting a loan without going to a bank/broker.

Also you mention do not advertise to the public. What do think about this:

Creating a business card that says you offer hard money.

Thanks,
D

I think the concerns are overblown. In no way are you are creating a security. You are borrowing funds from multiple sources. And if it takes 2, 3 or 10 private investors to fund a deal then 2, 3 or 10 private investors are on the mortgage.

As for not marketing to the public, you certainly can advertise in the paper under Wanted To Borrow and say that you pay above CD rates so that savers can earn more on their money. That is marketing to the public.

I have an investor friend who did it just like this for more than 20 years. Never a problem.

D, you aren't offering hard money. You want to BORROW, not lend. Also, you do not want to borrow at hard money terms.

Private lenders are a pehnomenal asset if you can get it set up right. Every deal is a no money down deal at basically OO rates.


conclusion

nstreet, what exactly is the BOTTOM LINE here? your trying to say what? i'm feeling more confused than anything, sorry but, what i'm getting out of the post is you can't advertise to just anyone, and you can't put together loans like a blanket mortgage or wrap and don't say guarantee? YOUR HERO,SULLY.

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YOUR HERO, SULLY


same here

sully wrote:
nstreet, what exactly is the BOTTOM LINE here? your trying to say what? i'm feeling more confused than anything, sorry but, what i'm getting out of the post is you can't advertise to just anyone, and you can't put together loans like a blanket mortgage or wrap and don't say guarantee? YOUR HERO,SULLY.

I have been following it too an I have to admit I am confused also. Can you please clear that up for us.

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Anita
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TWITTER - anitarny / FACEBOOK - anitarny

"FAILURE IS NOT AN OPTION"


lenders on mortgage

Why would the private/hard lenders be on the mortgage? I mean if I borrow, they are going to give me the cash and then I would buy for the house. It would be in my or my co's name. I would have a separate contract with each lender with certian stipulations.

D

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Don't Wish the Past, Create the Future! - DH


Private Money

Hazco Investments wrote:
Why would the private/hard lenders be on the mortgage? I mean if I borrow, they are going to give me the cash and then I would buy for the house. It would be in my or my co's name. I would have a separate contract with each lender with certian stipulations.

D

OK. Let me try to explain. When you borrow conventionally, you go to WaMu and get a loan. You get cash which is used to buy a house. They get a lien on the property (deed of trust or mortgage depending on the state).

Same thing here, except you aren't going to WaMu. You are going to Joe, Fred and Ethel.

If you want to buy a 200K property, WaMu has enough cash to fund the entire deal. (Well... ok.. they used to. But that is another story. Sticking out tongue )

It is likely that neither Joe, Fred nor Ethel has 200K to lend so you pool their funds to purchase the property. This is where the "security" concern comes in. But you are NOT selling a security. You are borrowing money. Joe, Fred, and Ethel get the same lien on the property that WaMu would have gotten.

But you don't pay any of the junk fees that WaMu would charge. You don't have to worry about the LTV as much (especially if you are buying below market- the lower of price or FMV rule should NOT apply.) In other words, you make the rules with Fred, Joe, and Ethel.

Hope this helps.


Security

Can someone explain why using a couple of private lenders for a common property constitutes a security in the eyes of the SEC rather than two separate loans for the same property from two individual private lenders.


I think it's the pooling of

I think it's the pooling of the money that is the problem (ie like a mutual fund).

But think about it like this.

I have a bank account at BofA.

I also own a free and clear property.

I go to WaMu and get a 1st loan and put the money in my BofA account.

I go to Wells Fargo and get a 2nd loan and put the money in my BofA account.

I go to Bank of the West and get a 3rd loan and put the money in my BofA account.

And so on.. That is basically what is going on here except 1) the banks are private individuals and 2) there is only a 1st mortgage.


still...

the mortgage would be in my name..right, and the private/hard lender(s) would sign a "promisary note" with me with some conditions. like I'll give you 7% on your money and maybe 10% of profit when I sell. Loan plus interest shall be paid back in 6 months on such a such date. If I default they can place a lien on said property.

this is how I have lent funds to other investors in the past. this is how I would expect it if I was the borrower.

D

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Don't Wish the Past, Create the Future! - DH


Correct mostly...

That is correct... But there has to be something tying the loan/note to the property that would allow the investors to foreclose if you do not make payments.

Otherwise, it is just an unsecured note ie secured by nothing but your word/signature. If you can get private investors to do that, even better. But I would expect they would want more security than that.


ok...

I thought by writing that they can put a lien on the actual address of the "flip" in the promisary note if I defaulted, that would make it backed by real estate (secure)

If I defaulted I wouldnt be able to sell the house until I settled with their lien.

D

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Don't Wish the Past, Create the Future! - DH


No. That is incorrect. If

No. That is incorrect. If you default on your credit card you do NOT lose your house. Because you are not securing the credit card debt with the house.

Unless you are talking about them taking you to court and getting a judgment and then attaching the property. I guess that might be a long way to doing it.

But that is not the way it would be set up.


wmark

how would you do it, if you were the lender? Do you have a form you could share?

D

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Don't Wish the Past, Create the Future! - DH


Qualm

Please guys take a deep breath! We need you, Keep coaching come on now your CLAWS are showing.

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cindy REI


Private Lenders/SEC

Ok, I think the "mutual fund" made the most sense for an explanation as to why the SEC would regulate this sort of financing. So are you saying that if you were to use a private lender from different sources it is illegal to do so unless reported to the SEC? Otherwise, a traditional lender would have interest, fees etc.....

JButcher


No.. not at all. What I am

No.. not at all. What I am saying is that you have different lenders on the same deal. That's it.

This has been litigated and is not an issue.


o.k. i just want to know....

how to borrow money from another source other than conventional lenders, i'm glad everybody is having intense conversation here but, i would really like to know how (exactly) to go about 1)finding a hard money lender or private lender,2)once i find one what is the next step? i know this post sounds dumb but, i called a hard money lender before and it was awakward and not much help.

see i couldn't get a lender to finance a bicycle for me, so as you can see this route would help me tremendously, TIME FOR SOMEONE ELSE TO BE A HERO, THIS TIME, SULLY.

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YOUR HERO, SULLY


Somebody PLEASE help him.

Somebody PLEASE help him. lol

__________________

"Obstacles can slow you down, but they can only stop you with your permission." Dean Graziosi (BARM pg 101)

"For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you hope and a future." Jeremiah 29:11

For a little about me, welcome to the site, and a few tips for new DG family members, click on this link: http://www.deangraziosi.com/user/3249


rina

good post,lol, little bugger, i guess you can kind of see my frustration in figuring the hard money lenders out. YOUR HERO,SULLY.

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YOUR HERO, SULLY


ok Sully....CLASS IN SESSION....lol

sully wrote:
how to borrow money from another source other than conventional lenders, i'm glad everybody is having intense conversation here but, i would really like to know how (exactly) to go about 1)finding a hard money lender or private lender,2)once i find one what is the next step? i know this post sounds dumb but, i called a hard money lender before and it was awakward and not much help.

see i couldn't get a lender to finance a bicycle for me, so as you can see this route would help me tremendously, TIME FOR SOMEONE ELSE TO BE A HERO, THIS TIME, SULLY.

Sully this is the approach I first used when I started looking for a HL.

I posted that I was doing exactly that and posted non-specifics of the deal that I was looking for one for. EX: 12 unit apartment complex, 800K, etc...you have seen it before. Well most of them or rather all of them have hard noses about what amount they will lend. 60-65% LTV is pretty average right now but they want a CAP rate of 10% (HAHAHA). I put it out there that I was looking but I used my criteria to solicited responses.

Lender to loan on 12 unit complex
Price 800K
Cash Flow - 120K annually
Net cash flow 80K annually
CAP 8%
Interest 9%
$$$ Amount d0wn (if you dot have the 30% down - this was commercial - then they want you to use at least 15% of your OWN money and the rest can come from another HL)
There are lost of variations to this scenario Sully but to help we need specifics.
So I basically only got responses from those lenders that we willing to work with what I was looking for. I posted on Craigslist, enote.com, DG.com. On CL I post in other cities other than mine.

I got a really good response. Created a great contact database of lenders and was able to start talking with the off the bat because they basically already know what I was looking for so it made for a lot smoother conversation.

CLASS DISMISSED

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Anita
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"FAILURE IS NOT AN OPTION"


hard money lenders

Okay in order for me to help you i must know the following. #1 What is your situation? If you have alot of equity than maybe it would be ok. #2 Hard money lenders offer loans without your credit being the best, or employment. It is mainly based on the equity you have. #3 The intrest is 13 to 14% some are higher. Tell me more. Cindy.

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cindy REI


sully again

cindy wrote:
Okay in order for me to help you i must know the following. #1 What is your situation? If you have alot of equity than maybe it would be ok. #2 Hard money lenders offer loans without your credit being the best, or employment. It is mainly based on the equity you have. #3 The intrest is 13 to 14% some are higher. Tell me more. Cindy.

Cindy is also completely right here too Sully. You see what I mean. Now the interest rates she quote were right on it. That is why I had such a hard time. I eventually ended up negotiating with one over interest rate and got 10.75% instead of the 9& I wanted but thats a heck of a lot better than 13%.

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Anita
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TWITTER - anitarny / FACEBOOK - anitarny

"FAILURE IS NOT AN OPTION"


ant: CLASS CLOWN

HAHAHAH,LOL, just kidding, i think i get it, however thier's no phone number to call? i'm saying you don't just pick up the phone and call national penn bank to qualify for a loan? do you have to post your deal on the internet? can't i just call if i have a super deal and i need funding for the deal i call joe sully hard money lenders @ 610-987-6543, you feel me? YOUR HERO,SULLY.

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YOUR HERO, SULLY


BLANK POST

see next post

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Anita
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TWITTER - anitarny / FACEBOOK - anitarny

"FAILURE IS NOT AN OPTION"


hhhh...you ned numbers.

sully wrote:
HAHAHAH,LOL, just kidding, i think i get it, however thier's no phone number to call? i'm saying you don't just pick up the phone and call national penn bank to qualify for a loan? do you have to post your deal on the internet? can't i just call if i have a super deal and i need funding for the deal i call joe sully hard money lenders @ 610-987-6543, you feel me? YOUR HERO,SULLY.

A week or so ago I posted a post that listed hard lenders let me find it and send it to you. So YES you can definitely just call some if you know number, but I did not know any and had never used one. So I created a database that I can now refer to in an instant by just picking up the phone.

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Anita
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TWITTER - anitarny / FACEBOOK - anitarny

"FAILURE IS NOT AN OPTION"


i copied the LIST?!!!

so don't worry about sending the list to me! you don't need to do all that work when i copied that info down already. Thats the list i was talking about i called a lender from that list and all i wanted to do was talk to someone about a loan and they were asking me for my loan# and all this other stuff, they thought i was from outer space when i asked to speak with someone about a loan.SULLY.

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YOUR HERO, SULLY


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