Banks and insurance agencies are usually the sources for investors for financing. However, this can at times be a tedious process that requires a lot of waiting time and documentation.
Private money lending is a good substitute for this, especially in the fast-paced real estate industry. Both an individual and a corporation can look into private money lenders instead of larger financial institutions to hasten the process of locking a deal.
A private money loan, essentially, is capital that is offered to an individual, investor, or to a business by a:
- a private organisation, which is similar to typical financial institutions, but is not attached to banks, and therefore requires fewer qualifications from the borrower;
- Private individual, who may be someone the borrower knows or someone who is part of the real estate financing industry. Just like many investments, private individuals release the money with the hope to profit from the returns.
Borrowers either work in real estate or are ordinary individuals seeking to invest in it. Borrowers may opt for loans to sell, rent, build or renovate a property.
Private money lenders are usually found within the local area of the borrower and are more likely to invest not just money, but their interest in the property and ensuring its success. Being hyper-local, they are more aware of the trends happening as well as the competition that might surround the property.
Unlike typical financial institutions, private money lenders can offer as little as a promissory note, or an agreement can be made through a deed of trust. Written in this document would be the loan amount, payment terms, interest rate, and whatnot. The property is mortgaged to the lender as a collateral until the borrower completes their payment.
To ensure transparency before finalising a deal with their borrowers, private money lenders look into three aspects:
- Credit score. The credit score will let private money lenders know if the borrower is timely in paying their debts.
- Pricing. The lender makes sure that the loan amount is within a competitive range.
- Exit Strategy. The lender looks into when and how the borrower must pay back the loan.
On the other hand, before choosing a private money lender, a borrower can look into:
- Making sure the lender has money that is available and was secured legally. The last thing a borrower would want is a loan not coming through right when they are in the middle of finishing the renovation of a rental space or in the final stages of building a house.
- Looking into the lender’s experience in the field. How much they know about real estate, financing, and even the locality of the property will be very helpful before locking figures.
But for as long as both the lender and the borrower are secure in their agreement, private money lending is an appealing option for both parties. Negotiations for easy payment schemes can be made between the private money lenders and the borrowers, and deals can be made in just one day.