Private Money, Hard Money, Loan Originations

         Private Money, Hard Money, Loan Originations

Introduction:

Real property borrowers can access sources as an alternative to banks and other institutional lenders.  The subset, private money lending, is designed for non-bankable or non-traditional loan transactions.

Private money lenders are generally private parties who invest in the loans.

How do loan agents and lenders locate private money loans?

Customary methods of developing a list of prospects include first-time home buyers, searching public records from title companies for characteristics such as low loan balances, watching for construction permits for additions, and delinquent property taxes.

Historically, title companies could provide databases listing loans with private beneficiaries indicating that the borrower has a private money loan.  These lists may no longer be available because of privacy reasons.

A few subsets of borrowers/ properties that have a propensity to need private money loans include:

• Properties on a loan default list 
• Properties that have delinquent property taxes
• Properties that lack maintenance
• Properties under the control of beneficiaries of a deceased property owner
• Properties with a current private money loan

There are many reasons for a property owner to choose a private money loan.  Quantifying the characteristics in a statistical model for a probability list is challenging.

My Motto:   “You Locate a Buyer; You do not create a Buyer.”

The best way to locate private money loans is to develop an extensive network of professionals with multiple clients.  The type of professionals best to network with are:

• Mortgage brokers, both those who specialize in private money loans and those who don’t.

• Real estate agents, both residential and commercial

• Accountants, enrolled agents, and accounting firms

• Estate planning, divorce (family law), and probate settlement lawyers

• Financial Planners

• Real estate transactional and business litigation lawyers

• Contractors, builders, and developers

• Income property owners and speculative real estate investors

There are many methods to develop a list of these professionals.   Marketing strategies are discussed in subsequent chapters.

I suggest that if you have 500 leads in your network and they each have 500 leads in their network, then your universe of possibilities is (500 X 500 = 250,000).

Continuously providing something of value to members of your network makes you ever-present in their minds.  Correspondence from you, personally, rather than some ordinary advertising/subscription newsletter, will speak directly to your prospect.  Your communications must be authentic, personalized by you, and designed to help your client’s business development.

Referrals and repeat customers are the lifeblood of successful loan agents or businesspeople.  Referrals help propel that person into the top 20% of salespeople who earn 80% of the available money.  The others make very little.

Loans procured directly from the public:

• There are many media platforms where you can advertise to solicit direct property owners who need alternative financing.  Almost all of them provide an advertising option for a reasonable fee.  Google, Facebook, LinkedIn, and others are examples of media sources.  The quality of these leads, however, is suspect.  Establishing reliable communication with cold lead borrowers from these advertisements and obtaining the necessary data is, at best, difficult due to the amount of competition.

•  Personal contact with homeowners on lists such as defaults and property tax delinquencies is possible.  A system such as this is research work-intensive and competitive.

Asking the Right Questions:

When the loan agent receives a loan inquiry, they should ask prudent, industry-standard questions to determine whether the loan request is feasible.  These are fundamental questions for any lender to ask in deciding to further enquire about the loan request.  

The following information should come from the borrower.

• Loan amount required

• Type of property: Single family, owner or non-owner occupied, commercial, apartments, industrial, or other.

• Purpose and use of loan proceeds.  Business purpose vs. consumer purpose, or a combination, is essential.

• Use of loan proceeds primarily for business purposes.   Or what portion will be used for consumer purposes?

• Private money is a better solution than an institutional loan.

• Value of collateral property.  How did the borrowers determine the value?   A borrower’s estimate of value is often incorrect or intentionally exaggerated.

• An appraisal report by a licensed and certified appraiser may be required.

• When did the borrower acquire the property, and how much did they pay?

• What are the existing liens to determine whether the loan to value is acceptable?

            Bottom of Form

•  Who occupies the property?  Owner, tenant, vacant or partly occupied?

• Does the property have a rental income stream?  What gross rents, vacancies, and expenses are required to determine net operating income, often called net operating income NOI? 

• If the loan request is for a junior loan, information about the senior loans will be required.  Documents for review may include a copy of the promissory note, loan agreements, and recent payment statement from the senior lien holder or loan servicer.  Reviewing the recorded documents related to the senior lien associated with the deed of trust is prudent.

• Does the first lien have a written provision in the deed of trust referred to as an “alienation” clause or what some call a “due on further encumbrance” clause that would require the lender to obtain written approval to place a junior lien on the property?

• Is the property owner/borrower a private individual(s) or an entity?

This fact is important because, in many cases, the original borrower may have been parents, possible deceased members, siblings, co-trustees of a family trust, ex-spouses, or other miscellaneous parties.  Some earlier property purchases were taken “subject to” a lien that prior owners obtained in the past.  Completing a property sale “subject to” means that the purchaser/borrower intentionally failed to notify the first lien holder of the transfer.  Was the sale transfer kept asecret, deliberately to get a lower interest rate?   Therefore, the loan documents still show the obligor as the prior owner on the note and deed of trust.

• Does the person requesting the loan have the sole authority to borrow and encumber the property with a new lien?  Are there other parties of interest who may object to recording a lien on the property?  An example would be an estranged ex-husband or ex-wife.
• Are there multiple borrower parties that a lender must include in the application, processing, underwriting, and closing process?  A lender’s frustration will occur when the discovery that the borrower has intentionally excluded an undisclosed hostile party.  I assure you that an unknown borrower party will not fool the title company.  When the title insurer underwrites their coverage, they will ensure that the correct parties have signed the documents.  Verifying the proper parties is part of their insurance underwriter and approval process.

When a loan broker submits a loan to a lender?:

No amount of advertising will enable lenders to reach all borrowers.  Most borrowers develop relationships with one or more loan agents in their search for loans.  The loan agents gather information about borrowers and properties and interact with prospective lenders or other agents who represent the lenders.  Because they have direct contact with the borrowers, they are the primary source of loans.

Loan agents vary greatly in experience, professionalism, and the effort they are willing to put into a transaction.

Loan agents who desire a quick and professional response should take the time to organize their files and convey a coherent set of facts to the funding lender.  Managing in today’s world means submitting in a digital PDF format online.

Develop an executive summary to include the following:

• Submitting broker name, contact information, and requested fee

• Proposed new loan amount

• Purpose of loan: purchase, refinance, equity 2^nd, consumer, business purpose, consumer purpose, both

• Summary of the proposed transaction, term, cash out

• Will more than 50% of loan proceeds be used for business purposes?  Will a portion be used for consumer purposes less than 50%?

• Summary of the proposed transaction, term, cash out

• Explain the collateral property address, type, description, amenities, and property condition
• Loan application form, either a standard residential application (FNA form 1003) or a commercial application form.  Commercial applications and financial statements are helpful.

• Estimated value conclusion and sources of information.

• Provide income stream for income property, if it exists, with rent roll and financial statement

• Availability of cash flow from borrower and property to make monthly payments

• Potential exit strategies-sale, refinance

• Any noted strengths and weaknesses of the borrower or collateral property.  Withheld and overlooked facts delay the process and may negatively affect the loan request.  

A lender’s job will be faster, more efficient, and more pleasant if the borrower’s loan agent takes the time to get to know their transaction and articulate the material facts the first time around.

Email an initial loan inquiry to the lender and follow up with a phone call.

For successful loan closings, eliminating activities that waste time.  Work toward removing delays, setbacks, excuses, barriers, and misrepresentations for a successful loan closing.

• I can’t get any satisfaction:

A loan broker calls or emails about a loan request but lacks knowledge about the proposed loan transaction.  The broker offers no information about the borrower’s qualifications or relevant details about the security property.

Why do some mortgage brokers merely transport a file with no inquiry?  The loan broker must collect the data and reasonably assess all the material facts with the idea of full disclosure.  Some brokers receive the package from another source and pass it on, expecting a nice fat fee for no effort.

•   Hang on, sloppy:

Sorting through a sloppy loan package submission is time wasted. The borrower’s loan broker is eager to get a loan completed.  They may accept a minimally completed loan application without complete financial data.

Or, the loan agent may fill out the loan application with some material information and forward it to the lender.  Some do not even bother with a DocuSign signature.  The borrower has never seen the application submitted.  Much of the data is irrelevant.

• The borrower was infatuated with inflated valuations:

Is time spent sorting out Pie-In-The Sky property valuations?  A few borrowers have illusions of grandeur when suggesting the value conclusion of their collateral property.

A few appraisers will complete an appraisal with inaccurate data, including dissimilar comps, improper adjustments, mismatching data, and plain, messy quality.  The funding lender may pull a property profile and go online to analyze comparable(s) and value conclusions, only to be disappointed.  A borrower’s broker should have done this upfront, which would save time and aggravation.

•  Money for nothing and profits for free:

A borrower has little or no skin in the game.  Many borrowers purchase a property with little or no down payment.  The new owner will borrow the rehab money from a fix and flip lender to improve the property.

When they come to you, their loan request is intended to refinance the purchase money first loan and have the rehab debt rolled into one new replacement loan.  The borrower owns the property but has no capital at risk and could walk away as the market goes down.  

• Foolish games:

A loan request is based upon future valuation rather than current property valuation and current equity.  Future value is speculative. The idea that a property will increase in value cannot be relied upon unless the lender’s business model is to make loans based on hypothetical future value, as in construction loans and fix and flip loans.  The business model is acceptable if the risks are priced into the loan.

A real estate loan secured by a lien on the property is usually funded based on current protective equity.  The market value less the lien(s) equals the value of the protective equity.  A loan request that does not contain significant protective equity at the origination will leave the lender at risk of the borrower defaults:

•  Supercilious and obnoxious fruit cakes:

Pushy and condescending borrowers and loan agents cause anguish!  Some people love to show disrespect by pretending they know how the business works, but you don’t.  The term “supercilious’ comes to mind.  They behave as if they are better than you and that your opinions, beliefs, or ideas are not important.  They feel you are beneath or of lesser quality because they have more experience than you.  They may have little or no experience, but you have 10 to 50 years in the trenches.   The opposite side of the arrogance and supercilious coin is always insecurity.  “Of course, you don’t need any documents- this is hard money?”

Treating everyone you meet with dignity and respect is only natural.  Only by actions and deeds will they deserve a different conversation.  Obnoxious people are always insecure, and belittling others makes them feel important.  But it rarely works.  It only makes them look like the fools and parasites that they are.

• Silence is not golden:

The borrowers go from interested in obtaining the loan to wishy-washy to silent, too dark.  They do not return phone calls and seemingly disregard the service provider’s time value.  The quicker this loan goes on hold (or in the trash bin), the less wasted time.  Processing and underwriting staff should focus on transactions most likely to close

• The Grateful Dead:

Saying “no” to a loan broker who should have known the transaction was a loser and should never be presented is, in most cases, problematic.  The loan transaction, borrower, and collateral property have no chance of success.  Still, the loan agent pressures the funding broker to perform supernatural miracles to approve and fund this (POS) loan.

Some mortgage brokers are highly professional and always submit a complete package with full disclosure in mind.  Seek those out to work with and make a mental notation about the others.