Need help on PRIVATE FINANCING

[Michael Seutin]

First I don't want people confusing private financing with hard money. Here I am NOT talking about hard money lenders but only about PRIVATE FINANCING.
My Question:
I want to have access to 30 or 40k and my ideal terms would be to get the money, find the property for buy and hold, buy it ant then repay the loan over 30yr fix at prime rate (around 5 or 6%). And ad a balloon payment in 5 to 7yrs.
each payment would include 50%principal and 50% interest every month.
Now to make the lender feel comfortable I want to back up his loan with an option to foreclose on me if I don't pay according to the terms.
1. How do you set up the paperwork so that his loan is backed by my real estate, do you get a real estate attorney?
2. I work in a hospital around doctors and nurses that make pretty good money, how would you approch them for such a request:
- would you present a business card, or a type of brochure explaining the terms, how would you word it ?
- I was thinking of possibly have a business card and a website where potential private lenders would go to and see all the terms I would offer. Need help on wording and best terms..
Lastly, could I get the money first and then find the property or do I have to first spend in flying trips, hotels... to find a property but then run the risk to not find financing after that...
While I am at it, are there any credit or credit cards that offer access to 30 or 40k at less than 10% interest/?
thanks, I know that's a whole lot of questions

[Jon Holdman]

First, the mechanics. Setting up a loan secured by real estate is easy. Title companies do it dozens or hundreds of times a day, since most real estate transactions involve a loan. The details vary from state to state. Typically there are two documents. A deed of trust or mortgage and a promissory note. The DOT or Mortgage gives a security interest in the property to the lender. As the borrower, you grant the lender this interest with the DOT or Mortgage. This document is recorded. The promissory note details the interest, payments, etc. Its between the borrower and the lender.

You say you want the payments to be 50/50 interest and principle. But you also say you want the loan repaid over 30 years with a 7 year balloon. Sorry, the math doesn't work like this. When you say "repaid over 30 years", you mean you want a 30 year amortization schedule. Doing that with a seven year balloon is fine. Payment on a $100K loan at 6% with 30 year amortization is $599.55. After seven years, the balance on this loan is $89,839.39. You can do these calculations using Excel or a financial calculator.

But, on the first payment $500 is interest and $99.55 is principle. The interest due is fixed by the balance and the rate. So, if you want 50/50 payments, your payment would need to be $1000. That's the same as saying the amortization period is 139 months, about 11.5 years. That gives you a 50/50 payment the first month, but in future months the payments are more princple than interest because the payment is fixed while the balance and corresponding interest payment are falling. Certainly you could set up a schedule where the payment is exactly twice the interest due, but that would be a pain.

Finding people who have money and will lend it to you is straightforward, but hard. You're just going to have to meet and talk to a lot of people. Tell everyone you meet about what you want to do. Some won't care at all. Some will listen polietly and then forget about you. What you're looking for is that one person who says "that's something I'd be interested in, tell me more". Now you have the opportunity to talk a bit more and eventually get around to asking for a loan. Talk to enough people about this and you WILL find some people who both are interested and have money.

Trouble is when you propose 6% as the interest rate most of them will laugh. Most, certainly not all, but most people who've managed to accumulate enough cash to fund buying a house know a bit about loans and investments. They will know 6% is bank rate financing. They will know you could get this at a bank if you have good credit, a down payment and a house in good condition. You'll say, but this is a junker house and I want to borrow the purchase price plus money to rehab the place and carry the property while I'm doing it. If you're unfortunate enough to run into someone like me, I say OK, fill out this 1003, show me your bank statements and pay stubs, give me an authorization to run your credit, give me the info on the property and a check for the appraisal. If all that works out, I'll fund you deal for four points and 15% or something equally outrageous.

So, you're hoping to find someone who has the money and is willing to lend it, but doesn't really know what they could be making on real estate. I'm sure those people are out there. I do think most of them know enough that they know 6% is a crummy deal. If you could get this for 9-10%, I truly think you'd be doing good.

Jim's suggestion is good. Find a money partner. But I'll warn you to do the math. Giving up 50% of a deal to a money partner is almost always more expensive than hard money.

The bottom line is you're wanting bank terms from a much more flexible lender. Someone like that might exist and you might find them. Much more likely, though, that the person you approach will be more knowledgeable than that and will demand much better terms than a bank.