How We Financed The Deal

Our last column sure brought in a ton of calls and emails!  In that column, we explained how last month we found, closed and financed a home in just three days by knocking on sellers’ doors – and didn’t use any of our own money.  (Click here for the article titled “What’s Old is What’s New”)

Here are the most common questions we were asked: What is a private-money lender and how do you find them?  Why do private-money lenders lend to you?  How are private-money lenders secured and paid?

More than a decade ago, Kim and I learned that a bank isn’t the only place to get a mortgage.  There are individuals who will loan you their own money and fund your deals. 

While banks can be a good source of long-term financing, they require a mountain of paperwork and take weeks to verify your information.  It often takes a month or more to get an institutional loan.  On the other hand, when dealing with a private-money lender (PML), because we’re dealing with a real person and the purchase property is being used as collateral for the loan, we’re often able to get immediate funding and close within a day or two.  This is exactly what happened with our April purchase.

We’ve never sought out PML – they come to us.  Over time, an investor builds his/her reputation.  If your reputation is a good one, lenders will seek you out.  If your reputation isn’t so hot, you’ll just hear crickets and no one will touch you with a ten-foot pole.  If you’re new, you may want to partner with an experienced investor with a solid reputation, who can bring credibility to your deal.

Why do PML’s lend to us?  They seek a good return – a better return than they can get at the bank.  For example: Several weeks back, a couple contacted us.  They had a $350,000 CD paying 4.1% interest.  Their CD was maturing.  The CD paid them $14,350 per year.  This money, combined with their social security and pension income, ensured they lived comfortably.  Problem was, when they rolled into a new CD, their interest rate was going to drop to a microscopic 0.72%.  This meant their yearly investment income would PLUMMET by $11,830 – a huge financial blow to someone living on a fixed income.

This couple wanted to know if they could loan us money, secured by a property, at 4.1% interest.  Theirs was a win-win offer.  They would be able to maintain their standard of living and we’d be able to work with a PML instead of a bank.

So let’s look at how we financed the Green Acre house that we bought last month.  On a Saturday, the seller agreed to a sale price of $50,000 if we closed within three days.  We determined that the house needed a $10,000 facelift.  We contacted a PML who agreed to loan us $60,000 to buy the property.  The PML lender wired $60,000 to Lee Perkins, our closing attorney.  Three days later, as promised, we bought the property.  Today, the property is being rehabbed and will soon be offered for rent.

Private-money lenders allowed us to close on Green Acre quickly and without a lot of red tape.  It allowed the seller to put the property behind her.  It gave the PML a return that she can’t get at the bank.  Like I said, a win-win deal!