Private Money Lending Needs Knowledge Of Market Dynamics And Consumer Behavior
If you want to get started into money lending business then it is better to have the required knowledge about the market and its dynamics as well as the trends in the behavior and preferences of the consumers.
To begin with, you must ask what is the first thing that comes to your mind when you hear the terms ‘private money lending’ which is also called as “hard money loan” in the financial market. typically, you will have the imagination of a shady looking character conduct business in a dark alley and will probably as for sky-high interest rates that is hard to fulfill with. Well, this is not so.
However, you will find such characters in the market but then there are these characters in every segment of business. In the previous years, there were more bad apples than good ones that tarnished the image and repertoire of hard money lending industry.
These few predatory lenders attempted and followed the practice of “loan-to-own” and provided a much riskier loan to borrowers. They primarily used real estate as collateral with intent to foreclose on the properties. Fortunately, these types of unscrupulous hard money lenders do not exist in the market today.
However, there may be still some residual stigma remaining for a few real estate investors who have not utilized the services of a reputable and reliable hard money lender recently but exceptions do not make the rule.
The market profile
Private money lending thrives by loaning money to people with bad credit or those who have multiple loans existing against their names and cannot go for any traditional loans from any traditional banks and lines of credit. The features and market profile of hard money lending are as follows:
- It is a loan that is given for a short term ideally for a period of six months to three years at a high rate of interest sometimes more than 10%
- The loan is usually given against collateral security of a property or assets of considerable value and not based on the credibility of the borrower
- Apart from the citizens of the specific country or state in which the hard money lender operates these loans may be given to even foreign nationalsas long as they are secured in the property and meet the set parameters of the terms of the loan
- These loans are given to people with higher risk profile and even for funding pre-development, non-profit, church and other riskier loans
- Since these loans are given against no personal guarantee it is required to have a solid understanding of the loan process, the market dynamics and the value of the collateral
- The hard money lenders will have a flexible Loan-to-Value or LTV and will usually agree to grant a loan based on their affinity for a particular project, possible participation in equity and cross collateralization and
- You will need to have liberal underwriting criteria to determine the LTV and even provide loans if the LTV is too high.
Reputable and reliable lenders like Liberty Lending and other will study the prospects of a loan and will even follow subordinate liens for that matter. As long as the value of the property is there, you will need to provide loans in a first, second, third or even in a lower position to stay within the competition and prevent others eat up your prospective clients.
The loan expectations
When you make a loan you will certainly have some expectations and therefore it may be safe for you at the initial stages to good deal with a good LTV. You can do this when you are armed with better and proper knowledge of the value as well as the concept of Hard Money lending.
You can expect high yield in making such a loan as the finance cost will be more expensive as compared to nay traditional loans.
It is easy to close a deal in such cases as the borrower will be in desperate need of money. Each deal is unique in this matter and there is nothing set in stone and therefore deals and its terms may vary. Expect to adjust the lender criteria according to the specifics and prospects of each deal.
As for the borrowers, they will expect you to be more flexible as a lender. Here are a few of the other expectations that you must keep in mind both in the perspective of a lender as well as a borrower and sort it out as applicable:
- Title insurance is mandatory
- All judgments, delinquent taxes, and other liens on the property must be typically taken out of the proceeds as per the loan terms
- The insurance may add you as co-insured
- Set up the fund control on construction, development and budgets
- Charge all closing costs and feesout of the proceeds
- Put the property into a single asset LLC to which the loan is made
- Borrowers must be prepared to assign rents
- As in most cases you will want the interest to be reserved or prepaidat least partly
- You may charge upfront application, due diligence fee and commitment fee which may be typically non-refundable and
- You may need additional collateral by cross collateralizing other properties though it is expected that all borrowers have money in the deal just to make the LTV more acceptable.
There are also a few specific steps to follow to ensure that the loaning process is simple and fast. This process will usually include:
- Following a precise and all inclusive documentation checklist
- Drafting the commitment letter
- Follow proper due diligence
- Opening an escrow account
- Ordering of the preliminary title report
- Drawing and signing of relevant documents and recoding the same
- Issuance of the title insurance and eventually
- Distributing the funds.
Finally, it is suggested that you should know and believe that all borrowers who will come to you will consider you to be their last resort of financing. They will have tried all the conventional and institutional lenders first and then come to you. So make the most of it honestly and good luck!