Private Lending Program Answered

October 31st, 2010

Private Lending Program Answered

What is private lending?

Q: What does it mean to become one of your private lenders?

A: When we have and want to borrow money against the equity in a property we own or a property we’re buying, we give our private lenders an opportunity to make us the loan… and earn high interest rates that are double or triple the rates you can get on bank CDs.

How is the money used?

Q: How will you be using my money?

A: As a professional real estate investor we need to fund new purchases, raise money to fix up, maintain and occupy our properties… plus cover the other costs associated with buying and selling houses.

For properties we already own and manage, there are times when we want to convert some of our equity into cash — without selling the property. This cash may be used to fund our house buying business, pay off other real estate notes that come due and handle unexpected cash needs.

Why don’t you just use banks?

Q: Why don’t you go to banks or mortgage lenders?

A: Banks and other lenders require applications, approvals and must follow guidelines imposed on the banking industry. Then there are limits to the number of loans they want to make to any one company or investor. On top of that, the time it takes for their approval process is never certain.

We can move much faster without these limitations by using private lenders. That allows us to negotiate more profitable deals while offering homeowners a quick and easy sale without new loan or deal breaking contingencies.

How can you afford to pay such high returns?

Q: How can you afford to pay double or triple CD rates?

A: We make our money by providing valuable services to the sellers, buyers, renters and private lenders we work with.

By cutting out the middlemen, we can avoid the costs normally paid out for real estate commissions, mortgage broker fees, loan fees and property management fees.

We also know how to get full appraised value from our buyers and avoid making price concessions. We can occupy house fast to avoid holding costs and we know how to fix up and maintain properties for less money then most people must pay.

We always formulate our purchase offers so that our buyers and sellers get a great deal. At the same time we establish a minimum profit of $20,000 or $30,000 earned or captured between the time we purchase an investment property and sell it down the road. We just won’t buy a property unless it makes sense for everyone involved.

Help for sellers

Q: How do you help sellers?

A: A lot of sellers today are having trouble finding a buyer when they decide to sell. And there are typically a lot of hassles a seller must endure to get their home sold. Using a long-term investing approach, we can offer sellers an attractive price, close or take possession whenever they want… and give them an opportunity to avoid all the hassles of selling a house.

Help for buyers

Q: How do you help buyers?

A: We offer several great programs and unique opportunities for buyers. This includes our owner financing program, our down payment assistance program and our sweat equity program. Buyers today are finding it more and more difficult to qualify for loans. Our programs help buyers get into a home they want to purchase quickly… allow them to start building equity for the future and help them avoid throwing their money away on rent.

Help for renters

Q: How do you help renters?

A: Tenants today face more restrictive rules and application requirements laid down by landlords and property management companies. We have positioned ourselves to be very flexible and creative in getting nice folks into our homes, thereby providing a much needed service. We can even rent to folks who recently had a bankruptcy or foreclosure.

Market conditions

Q: Aren’t you concerned about housing prices going down today?

A: We’re prepared to hold the properties we buy for 5, 10 even 15 years. That way we’re not as concerned about near term price fluctuations in home prices as other investors are. Most of our investing plans are determined by the income we expect the property to produce now and in the future. If we think a property may do down in value then we make any adjustments needed upfront… before making an offer to buy.

Rate and term

Q: What interest rate do you pay your private lenders?

A: We currently pay between 2 and 3 times rates offered on 5 year, FDIC insured CDs. As of June 2009, the national average for a 5 year CD is about 3%. We currently offer our lenders 8% to 10% interest on notes secured by real estate. You can research nationwide CD rates by visiting www.bankrate.com and selecting the “CDs & Investments” tab. You’ll always now exactly what interest rate you will be locking in with us prior to making any investment.

What determines the rate or return?

Q: What determines whether you pay me 8% or 10% interest?

A: We currently pay 8% on a mortgage in first lien position and 10% on a second or junior lien position.

Typical term of an investment

Q: How long will my investment funds be tied up?

A: Most of our private loans are setup on a 5 year term. However it depends on what you want and need… and what we want and need. So depending on our plans for the property, we might be able to offer you a 3 year term… or we may ask if you’re willing to commit to a 7 or 10 year plan… if that’s our preference. Regardless, you’ll always decide what term works for you on any note you invest in.

Is this a short term investment?

Q: What if I don’t want to go longer than 3 years?

A: Then we’d have to wait for a special opportunity where that would work for both of us.

What if I need an early pay off?

Q: What if I commit to 10 years and then need my money sooner?

A: Real estate notes are illiquid investments. However, our policy is to pay off (or replace) any private lender who requests an early payoff whenever we can. Sometimes a partial early payoff meets the lenders needs, allowing the rest of their money to continue to earn the high rates. We ask that you give us advance notice, preferable 60 days, so we can do whatever we can to meet your request. We would attempt to meet such a request by refinancing the property, selling the property or, most likely, finding another one of our private lender who’d like to take over your position.

Is there a guarantee if I invest long term?

Q: Do you guarantee my interest for 10 years if I get into a 10 year note?

A: Your interest is fixed and locked for as long as the note is out. However we may sell or refinance the property before the full term is up. You’ll always earn your note interest until it’s paid in full. But we do have the right to pay you off early.

What if I get pre-paid early?

Q: What if you pay me off only a month after I invest with you?

A: We understand that you might be liquidating investments or foregoing another investment program to get our high rates of returns. Therefore we agree in writing, spelled out in your note, that you’ll receive minimum of 3 months interest. So if we needed to pay you off sooner than expected, we would either give you the opportunity to move your mortgage to another property, or pay you off in full including a minimum of 3 months of interest earned.

Choosing your payments

Q: Will I receive monthly payments?

A: In most cases you can receive monthly payments of principal and interest, or interest only. Interest only payments keep your entire initial investment working for you each month.

Payments or interest accruing

Q: Can my interest accrue and grow if I don’t want payments?

A: In many cases yes, but it depends on the deal. Sometimes we prefer to make monthly interest payments to maintain a protective cushion of equity in the property over time. However, on smaller second mortgages, we may prefer to let the interest accrue if that works for you. That way we can simplify our bookkeeping and at times avoid a negative cash flow.

Accruing interest for exponential growth

Q: If I want my interest to build up without getting payments, will you pay me a compounded rate of return?

A: Yes! If your main goal is growth then there’s nothing like compounded interest. The amount of interest you earn grows larger each month as the outstanding balance on your original investment grows each month. This can be quite attractive when it compounded for many years.

Minimum investment

Q: What is your minimum investment?

A: We prefer to borrow at least $50,000 when working with our private lenders. If a deal needs less than that then it may be easier for us to just use our cash reserves.

Guarantee on investment

Q: Is your investment program insured by the government?

A: No. There is no government backed guarantee on these privately held real estate notes. Your main protection and security is the amount of equity in the property that secures the note. With enough equity a lender can use a legal or voluntary process of taking ownership of the collateral and then (if desired) sell the property to recapture the money invested plus any costs incurred in doing so.

IRS approved for IRA

Q: Has the IRS approved your program for retirement accounts?

A: The IRS does not approve or endorse investment programs but they do establish guidelines that must be followed in order for you to invest in real estate notes tax deferred or tax free. You may need the services of a custodian to invest retirement funds tax deferred or tax free. We have been pleased working with Equity Trust Company in Ohio (www.trustetc.com) and there are others like Entrust. We’ll be glad to answer questions about this or help get you setup right.

Loan to value

Q: How do I know if there’s enough value or equity in the property to sufficiently protect my investment?

A: It’s our policy not to borrow more than 75% of the value of a property using private lender money. That leaves at least a 25% cushion of equity. We will provide you with full details on the value, status and condition of the property whenever we present you with an opportunity to lend to us.

Cost and insurance

Q: Do you provide title insurance?

A: You can always buy title insurance if you want. We will buy you a lender’s title policy if you get involved in funding one of our new purchases.

Cost involved in investing

Q: What are the upfront costs involved in investing with you?

A: It is our policy to pay for all the closing costs so that your entire investment goes to work for you. We will pay for the closing agent, doc prep fees, notary fees, overnight mail fees, bank wire fees and recording costs. We do not charge any fees or commissions to our private lenders.

Insurance on collateral

Q: What happens if the property burned down?

A: We’ll always keep a valid hazard insurance policy on the property to protect against causalities. You’ll be named as a mortgagee and notified if the insurance was ever not keep in full force. Insurance distributions would be used to rebuild or repair the property, or used to pay you off.

Loan positions

Q: Will my money be pooled with other investors?

A: No. We do not pool funds. Your funds will fully fund one real estate note secured by a deed of trust on a property with sufficient equity as protection.

Junior VS Senior Liens

Q: What is a junior lien?

A: It’s a loan secured by real estate that is positioned behind a senior mortgage. In the case of a default, a lender can seize the property through a simple deed transfer or through the legal foreclosure process. Junior lien holders need to payoff or protect any senior lien holders in order to protect their position.

Protecting a senior lien

Q: How do you protect a senior lien?

A: You can either pay them off in full or bring their loan current (making up any back payments if needed) and then making any other payments that come due. This helps to stop or prevent a senior lender from foreclosing, allowing the junior lender to foreclosure from their position.

The risks of a senior lien

Q: What happens if I don’t protect a senior lien holder?

A: If the senior lien holder foreclosures then junior lien holders could lose their secured position on the property, putting their entire investment at risk. This added exposure to a junior lender is why we offer a higher interest rate. Many lenders are fine being in junior positions because they get higher interest, are protected by the equity cushion and typically have enough faith in the borrower to take such risks.

Common concerns

Q: If you default and don’t keep all your promises, how do I get the property?

A: We can’t make any guarantees but if we were in a position were we could not keep our agreements, we’d simply transfer ownership of the property to you if possible. If we did not (or could not) then you have all the legal rights of a secured lender. The best way to legally protect your interest in case of a default would be to hire an attorney. They normally would seek to get your investment back, any unpaid interest, any collection costs, all your attorney fees and maybe even more. A legal representative could advise you if it makes sense to foreclosure or seek ownership the property to protect or recoup your investment.

Tenant Problems

Q: If you rent the property out, what happens if your tenants trash it?

A: We’re the property owners and it’s our responsibility to protect our property as well as to protect your collateral. We’d fix it or take care of it and you should never have to get involved in such an incidence. It would only affect you if we were in default and you repossessed the property to protect your interests.

Next step to get started

Q: What happens next if I want to get started?

A: Once we know how much you want to begin getting a higher rate of return on, and when those funds are available, we will begin looking for a deal for you. When we select one that meets your goals and investment needs, we’ll give you all the details and then you can decide to pass or play.

Can I refer someone to you?

Q: Can you work with people I know who might be interested in your program?

A: It is our policy only to work with people that we have an existing relationship with, like yourself. You can certainly refer potential lenders to us and we will be happy explain the program and begin learn more about their investment needs and goals. Once we get to know them more then there is a good chance they can also become on of our private lenders.

For Further Information

For further information or to obtain a Confidential Private Lender/Equity Investor Questionnaire, please contact us by using the form below.