Private money can be the piece that solves the puzzle for your most challenging clients
I want to show you how private money can work for your clients to solve problems and provide a pathway to success. You will see how private money can create a successful transaction when that looks impossible. I want to avoid the knee-jerk response that private money is “too expensive” by showing you how much private money can save your clients – in money, in time, in frustration. Here we go…
Here are 5 of the most common scenarios:
The Consumer Bridge Loan has new guidelines mandated by the Consumer Financial Protection Bureau. If you haven’t done a bridge loan recently here is an overview.
1. You have retired clients who have lived in their current house for a long time, maybe decades.
They have lots of equity, but very little income, and their cash is locked up in retirement accounts that extract a big penalty for withdrawal. They want to downsize, but the thought of selling before buying terrifies them, and they believe they can’t buy before selling. You know that if you could get them out of the house and get it cleaned up and staged you would be able to put a lot more money in their pocket. The solution here is a consumer bridge loan. As per government rules, no income is necessary to qualify – it is strictly based on equity. The bridge loan has no prepayment penalty, and can be paid off as soon as the departing residence is sold – even if it’s only a few weeks – without any additional fees. It is expensive. However, the origination fee often comes back to the client in the increased market value of their home when they are out of it and it can be properly staged and marketed. And, yes, the interest rate is high, but most bridge loans pay off in less than three months, so your client may only have one or two payments to make before the bridge loan is paid off. And, forgetting the incredible hassle, do you think it is going to save your clients money to move and rent a place after selling while they house hunt for an indeterminate amount of time?
2. Your clients found a great investment property, but the onerous down payment requirement is putting it out of reach.
In this scenario the clients may have a few different options. If the borrowers have enough equity in either their residence or another rental property they may be able to get a private money second for the down payment for the new purchase. Another possibility: one key to making private money work for your clients is to understand the magic of cross-collateralization. They may be able to buy using a private money loan, cross-collateralized by another property. The cross might be their residence, a second home, or another rental – or it could be a property owned by a relative or friend. In this scenario they purchase the new property, stabilize or increase the income, and refinance into a less expensive conventional loan.
3. Your client is in contract, close of escrow is approaching, and suddenly the lender can’t perform.
You may not be able to get an extension, there may be a back-up offer, and you may have almost vanishingly little time before the close. This is a classic private lending scenario. Depending on the circumstances private loans can close in as little as 5 days, sometimes even less. If your back is ever up against the wall, call your private lender.
4. Your old clients, not in the market for anything, happen to be driving by a Sunday open house, walk inside and fall in love.
Offers are due in two days, there are going to be multiple offers so your clients have to come in with a strong offer, a quick close and minimal or no contingencies. They would qualify for a conventional loan, but they haven’t even started the process. With a consumer bridge loan they can make an offer with no loan or appraisal contingency and a lightning fast close. Since there is no prepayment penalty they can pay the bridge loan off quickly with no penalty after they have beaten the competition and closed on their new home.
Okay, I promised the 5 most common scenarios, but I am going to cheat. There are a lot of ways private money can help your clients, way more than 5, so here is a list of more ways that your clients can use private money:
- Running out of money during a remodel or rehab. Even with a house torn apart down to the studs, a private lender can make a loan that can get the house finished.
- Property is titled in a trust, a foreign national, or a corporation or other entity. Conventional lenders often have a problem with this, private lenders do not.
- Another loan is coming due. Your clients are under pressure to move more quickly than they want to because an existing loan is coming due and the lender won’t give them an extension.
- Client has a conventional purchase loan approved but needs a quick 2nd on their current residence for down payment. This can possibly be done in as little as 5 days.
- Divorcing spouse needs to buy out an ex and doesn’t qualify for conventional. A private lender may be able to use projected income if the client has been out of the workforce for a while.
- A trust needs a loan to facilitate distribution of assets. A private lender can lend to a trust for tax or other reasons.
- Condo in litigation. A private lender can often loan in this situation.
- Property has an issue. Even something relatively minor can derail a conventional loan, an unfinished bathroom or a small crack in a foundation. Private lenders are “make sense” lenders; if the problem is easily fixable, the loan can be done.