You can put a property under contract, find a buyer, create a mortgage note, and sell it to a note buyer without ever taking title to the property. Sound intriguing? It should. This type of financing is becoming more available as more private money enters the real estate market.
Private money has always been in the marketplace but not in the volume we are now seeing. Hard money loans have been a popular way to finance investment real estate deals in the past but this can be expensive. A typical hard money loan might not be for more than 60% LTV. The borrower has to pay points and it will be more like a bridge loan. The lender will usually require a balloon payment in a year or less. These work for short-term financing needs but what the market needs today is long term financing. Many of today's private lenders do not have hard loan requirements. This new money charges a higher interest rate than banks but make long term loans at more reasonable terms than the traditional hard money lenders.
There is still a lot of private money on the sidelines today. People with retirement accounts and wealthy people are tired of seeing their investments disappear on Wall Street. One day the market is up 150 points and the next it's down 300 points. It gyrates with every news headline without regard to financial soundness of the individual stocks and bonds. Wall Street is a high risk, low reward investment.
Many investors have pulled their money off Wall Street and have it in bank CDs and money markets. These are highly secured investments but the interest being paid is next to nothing. Certainly less than the inflation rate. That means investors are still losing money although at a slower rate than on Wall Street.
These investors want secure investments paying a reliable and higher return. Land contracts, mortgages, and deeds of trust meet the criteria many of these investors are looking for. A 9% return on their investment that is secured by real property. The 9% varies depending on the terms of the deal but is typical. In various situations it can vary from 6% to 12%.
Of course, an interest rate of 9% is more than the 3.9% that big banks are advertising. But to get that low 3.9% loan, borrowers need pristine credit, a 20% down payment, and must meet a bunch of other tough bank requirements that very few people qualify for.
Private lenders on the other hand are willing to lend to a broad spectrum of borrowers in exchange for the higher interest rate. Obviously, the higher the risk of default, the higher the interest rate.
A private lender looks at a variety of criteria but the borrower's credit score and the down payment are definitely key factors. I've seen private lenders make loans as risky as a low 500 FICO score if the borrower comes up with a 20% down payment. The interest rate for a loan like this is going to be near 12%.
At the other end of the scale are 8% loans with only a 5% down payment when the borrower has a credit score above 650. More typically, in the middle, you'll find an 8% down payment with an interest rate of 10% for a borrower with a credit score around 580.
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