Private Funds
Another source of financing for real-estate investors acquiring foreclosure properties is private funds. Rather than borrowing money from traditional sources (such as banks, credit unions, or mortgage companies), you borrow money from private individuals.
There are people with significant cash reserves that are willing to lend money, particularly on the short term, at rates higher than they get by keeping their money on deposit at the local banks. The best way to find these loan sources is to ask for referrals from your real-estate attorney, title company, insurance agent, tax advisor, and others in the real-estate business in your community.
Private investors can also be located by advertising for them in the local newspaper. Loans secured by real estate always pique the interest of those willing to lend money for interest income.
Hard Money Lenders
There is a special type of lender that makes special loans to real-estate investors. They are called
They are often used when the property is not likely to be acceptable to a traditional lender because of its condition. For example, the property needs a new roof and without it no lender would accept it as collateral.
When a hard moneylender makes a loan, it is not inexpensive. Often hard moneylenders ask for (and get) four points plus a high interest rate.
In addition, there is usually a balloon payment required within a year. But these types of loans can sometimes be used effectively by the real-estate investor.
Consider this situation: You acquire a property for $65,000 that should be worth $100,000 when repaired. You use a hard moneylender because the property needs major repairs that cost $10,000. You borrow $65,000 at four points (4 percent), which costs $2,600. You use your money to complete the repairs and flip the property in two months. The final profit to you looks like this:
$65,000 |
price of property |
$10,000 |
repairs |
$2,600 |
points for loan |
$1,082 |
interest on loan |
$78,682 |
total expenses |
$100,000 |
received from selling property |
$21,318 |
gross profit |
You can readily see how expensive a hard money loan is. By the same token, without it you cannot earn the final profit on the deal.
Other Investors
You should maintain a list of other real-estate investors that are working in your area. Sometimes they have cash available, or know of cash resources, and will work with you. It might be possible to commence a partnership for the pending deal.
Another option is for you to sell your deal to the investor. By using an
Always make sure that whomever you assign your contract to has the capacity to make the deal work and can close on the property. Without the closing, you may not see any profit for your work.
