Hard Money VS Private Lending, + Owner Financing

[Dan Barman]

Hi BP world! A bit of a newbie here trying to educate myself on financing options, mostly to be able to make cash offers on fixer-uppers to rent and refi (BRRRR). Have got a couple questions I'm hoping you can help me with.

1. What's the difference between HML and Private Loans? What do the different terms look like? Which is more desireable or what are the situations where you'd want to go with one over the other?

2. When getting the above type of financing, how far into the deal should you be before approaching a potential lender? Do you negotiate an accepted offer 1st or even get a property under contract before approaching a lender? Can/should you get a property under contract without showing proof of funds? If you get the property under contract and are unable to secure financing, what happens then (penalties)? *I'm currently looking at properties in NY State. 

3. What's the upside for the owner in owner financing? I.E., what are the bullet points to hit with an owner when trying to strike a deal for owner financing? 

Thank you all sooooo much!

-Dan

[Jeff Wallenius]

@Dan Barman let's dive in here! 

1. A hard money lender is typically a licensed mortgage lender that provides loans for investors, builders, etc. A private lender can be anyone that wants to lend money to another person. This can be family, friends, colleagues, etc. Hard money lender terms can range across the board and typically get better depending on ones relationship and track record with the lender. Rates typically are in the 10-16% range with 2-5 points charged. Private loan rates will be at whatever is negotiated between the lender and borrower. The most desirable depends on each investors goals, money on hand, terms they can negotiate, etc.

2. I would tell you to start building relationships with lenders prior to writing any offers. It really is a relationship business. If you get a property under contract, they most likely will require POF's either at the time you submit the offer or after acceptance. You should make sure you have financing in place prior to getting started, otherwise your wasting your time and the sellers time by tying up their property for a time.

3. With owner financing you can negotiate the LTV, terms, payments vs. accrual to more of your advantage. HML are usually pretty set with their terms and requirements, especially when you are just starting out.

When you find your first property, close and start making payments to either your HML or private lender, deliver those payments in person. This provides a nice way to build the relationship and will pay dividends as you move through your investment career.

Best of luck!