How to use Private Money/Hard Money on a deal

[Tim Vecchioni]

So I have looked been looking all over the net for the answer to this, have watched 2 webinars, read countless articles, and they all say the same thing! If you have little or no money to use on your own, find private money! Ok, well I found it! Say my parents want to help me out after I showed them an amazing deal. Write me a check and let's get going right? Not so fast! According to my lenders that I have talked to, the money that is "gifted," needs to sit in your account for 60 days before Fannie Mae/Mac forget about caring for it. Sure if I had the money for 20%, they could just pay for the rehab costs, etc, but that is not the case! I do not have the full 20% that is needed but still want to push forward and purchase a property! So everyone says they keep investing using other people's money. HOW!? Please explain, because there is nowhere out there, that I have found over the last 2 weeks that explains it well. They always just say they use private money, hard money, etc if they find an amazing deal and need to act fast. Hopefully, I am not just missing something, but I am totally stumped on this one! 

Thanks for the help!

P.S. - Can you also explain if you had a PML/HML for the full purchase price, which could happen in the future after forming relationships, how that would work as far as applying it to buying the house. Because I would assume you are running into the same issue? Or is it considered an all cash purchase at that point and it makes the process easier? Thanks!

Tim V.

[Michael Le]

It is 60-70% of the ARV. So if 60-70% of the ARV covers 100% of your purchase price then basically you're no money out of pocket right? The private money lender might require some upfront points but even that can be deducted from the loan.

For example, let's take a basic 3/2 house that is worth $100k. Let's say you are able to purchase that property for $60k and you need to put in about $5k to get it fixed up enough to be worth the ARV. The PML might charge you 10% interest plus 2 points. So two points on a $65k loan would be $1300. If they're willing to take those points on the back end, they would wire you the $65k but you would owe them $66,300. They would hold a first lien position on your property just like a bank would. If after 6 months you fix it up and refinance then you just pay off the balance. If you default then they take the property over and because their loan amount is only 65% of the value of the house then even at a fire sale they could at least get their money back.

So the hard part really is finding a deal like this.