MoneyFund

Private Money FAQ

Private money is often misunderstood. Many industry professionals know very little about it, and fallacies and misconceptions tend to dominate the collective wisdom.

What is private money used for?

Private money is generally used as a bridge: a way to get from point A to point B. It is generally a short to medium term solution (1-6 years), and there is nearly always an exit strategy going in. It is used for all types of real estate secured financing: commercial retail, restaurants, hotels/motels, marinas, elder care facilities, industrial, agricultural, raw land, land development, construction, rehab, multi-family, single family homes, manufactured homes, and floating homes. For a list of our loan programs, click here.

What are the interest rates?

Private money rates generally range from 13 to 19%. The rate is determined by looking at a combination of factors: (a) LTV ratio, (b) strength of borrower, (c) condition/desirability of property, (d) actual cash-in or real equity contributed by borrower. Typically our rates fall in the 13-18% range. A list of our loan guidelines may be found here.

What fees are involved?

We charge a loan fee (loan origination/ lender fee) generally equal to 6-8% of the gross amount of the loan. We also charge a doc prep fee ($500 or more, depending on the size of the loan), a property inspection fee ($500 or more, depending on the location of the property), and a collection account setup fee, which is based on the size of the loan. There are no hidden junk fees.

Can the fees be paid from the proceeds of the loan?

Yes, if there is enough equity in the project. This is frequently the case.

Is there a pre-payment penalty?

We generally have a 3-6 month minimum interest clause for our loans. With a 3-month minimum interest clause, for instance, it means that if a borrower repays a loan in 3 months or more, there is no penalty. If the borrower repays the loan, for example in 2 months, then the borrower will have to pay an extra month’s interest out of escrow at closing.

Why would anyone pay those kinds of rates and fees for a loan?

There are many reasons whey a borrower would choose to use private money over a cheaper institutional option. For example, professional real estate investors like to use private money when buying because they are able to make offers which are not constrained by long timelines and numerous rigid conditions. Often times speed is a very significant factor in completing a profitable transaction and in those cases it often makes sense to pay for a short-term private money option rather than loose the deal. Frequently the condition of a property won’t allow for the initial financing with conventional money, and in those cases private money may be used. Often the type of property is a factor: banks don’t like lending on raw land and lots, but private moneylenders are more inclined to do so. Cash leverage is another factor. Many lenders, for example, loans based on the true value of a property, not the purchase price, so sometimes we lend 100% of the total acquisition cost for a property. The structure of the deal may be a factor. Most private money lenders allow the buyer to establish their equity through the mechanism of a seller carry back; banks won’t do this. The list goes on and on.

What is the most common use for private money?

Our most common loans are probably construction, rehab, and land development loans. We have an entire FAQ devoted to these loans: see the Rehab and Construction Loan FAQ.

How fast can private money loans close?

We have been known to close loans in a matter of one or two days, but more typically, you should figure on 1-2 weeks. (Keep in mind that it is only possible for us to move quickly if the borrower, broker and other third parties are moving quickly as well.)

Is an appraisal required?

Some private money lenders require them. Evidence of value is a critical part of the private money loan process. However, it is our opinion that a good set of comps is just as effective in establishing value as a good appraisal. Many of our borrowers are professional investors, and we feel that they are qualified to perform the value analysis. This allows us to streamline the process. However, it is important to note that putting together a good set of comps is hard work. It requires great attention to put together a good value analysis.