Let’s start with a definition of “Private Money Lending.”
This is pretty simple. It means that a Private Party (person) is lending money. Private, meaning, not a company, bank, institution, group or any other type of entity that is in the business of lending money. So, it’s an individual who is lending money. In this case, lending money that is secured by real estate or a “Note, secured by a Deed of Trust.” This is generically known as a “mortgage.” We also call a Private Lender an “Investor.”
How does Private Lending work?
Well, generally a Loan Broker has a Borrower who needs “private” financing because they do not qualify for “conventional” financing for some reason. The most common reason is, they have had some sort of credit problem in the past and cannot get conventional financing. There are a multitude of reasons as to why they have had credit problems but that is another story.
We happen to see a fair amount of loans where the borrower is an heir to an estate. The borrower is receiving a piece of real estate as an inheritance and needs to pay off other heirs. They have had disagreements with the other heirs on the estate who then file suit against the borrower. At that point that borrower cannot get a conventional loan to pay them off and they need private financing.
This particular type of loan was typically done by a “sub prime” lender, in the past. Today, these Lenders are out of business and so we find a huge gap in the market for these types of loans. We will continue to see a lot of private money lending occurring in the future as well, until this gap is filled.
The actual mechanics of Private Money Lending are the same as with conventional lending. You have a person with extra cash, or a person who is using their retirement funds, lending money on real estate instead of a Mortgage Banker lending that money.
What kind of return on Investment is there for a Private Lender/Investor?
The big difference between private and conventional lending is the rate being charged. It is substantially higher for Private Lending, so the return on investment to the Private Lender is higher; sometimes as high as 14% annual return. This is due to the borrower’s credit problems as mentioned earlier. Most of the time we see the rate around 11%. Just like any other mortgage, the lender is paid monthly, as well.
Additionally, these private loans are secured with a lot of equity (low loan-to-value), these values being based on today’s market. Many times this is 50% LTV or lower, which makes these loans highly secure.
The loans are done through an escrow company with title insurance for the lender. Again, this is done just like any conventional loan.
We originate private money loans so if you need a loan like this (or any other real estate loan) or you are an Private Money Investor looking for a good, safe, return on your investment, feel free to contact me.
Geoffrey Gault 408-202-2089
San Jose Realtor (R)