Private money and/or hard money loans - structure

[Bryan L.]

Needing some advice/info. I've typically been doing 3 rehabs concurrently with my own money and/or lines of credit. Wanting to do more in 2014. Here's the question:

How to structure with private money or hard-money? I mostly buy MLS-listed REOs and I make strong offers - cash, no contingencies, proof of funds etc. Now, if I will be using private money or hard money, how should I structure this? I can still make cash offers and show the seller my proof of funds (because I do still have enough cash to close if I want to), but at closing the deal will be funded with opm, and the lender will want a deed of trust or mortgage I assume. When buying REOs, they really don't like to see the deal change from a cash offer to a financed offer before closing. Can we just do this with a simultaneous double-close of some type? And the B-C closing would pick up the financing and deed of trust or mortgage from the lender?

[Jeff S.]

There are many variations, @Deniz Cribbs, but the simplest, and probably most common, is just a straight loan. Here the borrower gets a fixed amount of money to buy the property and makes interest only payments each month to the lender until the property is sold. For many, but not all deals, a lender will expect the borrower to bring money to the closing table as well. This would typically be for anywhere from 6 to 12 months – the duration of most rehabs.

Sometimes the same lender or a different one will loan the construction money. This would be a similar type of note but in second position. Here, it’s common to disburse the money as construction progresses, as discussed above. The funds would be given to escrow who would dole them out upon direction from the lender, after a periodic property inspection.

Other deals could include a share of the profit, sometime called a Shared Appreciation Mortgage. Here, the lender takes a cut of the profit as well as interest payments. Of course there are also JV's and partnerships, where the money partner appears on title in some form, but these are not loans. I imagine there are a thousand ways to combine these and I've seen some very convoluted deals.

Some lenders allow the borrower to pay everything back when they sell. Some expect monthly interest payments. If the borrower can’t pay, private/hard money lenders have the exact same recourse as for any other real estate loan: foreclosure, deed-in-lieu, or any kind of work-out agreement.

( @Account Closed , I was kidding about whether funding a crack habit is a consumer purpose loan. Sarcasm is always hard to write.)