You can use private money to flip bank owed properties bought super cheap, or fund short sale deals that you may be finding in your market area. When working with private money lender prospects sometimes you can be at a loss for what to say, what to present and what to expect when working on securing funding for your real estate investments. I recently got some questions sent in on raising and using private money and decided to share my answers. Here is a handy transcript of the questions and my perspective answers:
Questions On Private Lender Relationships
Q) Do private lenders ever question the distribution of funds at closing, or is it not an issue?
A) Rarely an issue. They should be more concerned about how they are protected with the equity in the property. It is a little more common to come from the seller who is junior to the private lender. In that case you explain you are using a “buy and hold approach” and there is a need for money to fund and operate the deal.
Q) Do you tell your private lenders in advance that you will be taking cash out at closing for business expense purposes or other purposes?
A) There is no reason to do so as it does not effect there equity position or collateral protection. But if they ask about it, I explain the need or reasons behind it.
Q) Do they become aware of this at closing when funds are distributed?
A) Not really, but possible. And it has never been an issue.
Q) Are they typically present at closings?
A) No. They send money to closing agent by cleared funds or wire. I had one local investor who wanted to attend the first couple closings and I had no problem with it.
Questions On Private Lender Commitment
Q) Do you ever ask private lenders to deposit funds in escrow prior to closing?
A) Yes, they can send the funds early to the closing agent if convenient.
Q) Do you get a letter of commitment or intent in advance of closing to minimize private lenders backing out of deal at last minute?
A) I do have a commitment letter in my investor packet. It is a simple tool you could also create spelling out the basic terms of agreement and having them sign or initial. I do not use one though. I just get a strong verbal, letting them know I will not be offering the opportunity to others because they have committed. Most of my commitments are by phone and email for established investors, or with new ones I have already met with once to explain program and now offering a deal by phone or email afterward. It has not been an issue for me.
Q) Do you use any paperwork related to private lenders other than a note and deed of trust/mortgage?
A) I provide an amortization schedule. Many times my private money lenders will ask for me to use a “Direction of Investment” form if they are using funds form a self-directed retirement account. An example can usually be found on the website of the company that administers the self-direct retirement account.
Good Luck and…
I hope that these answers to some of the most common questions about working with private lenders will help you fill in the blanks and have your own custom conversation starters and scripts for working with your own prospective private money lenders.