Private Lending ED

Private Funding Concerns: Are we seeing a false bottom to the real estate market ?

The many new private lenders out there who want to fund projects with me always ask: Are we there yet? and I reply: Where? After a little chuckle they yell: the bottom! A report by Deutsche Bank last week shows still more price drops to come. All the statistics in the world will never predict a true bottom. That's because there are too many unknowns and secrets.

The first and most important one is: What will the banks do? No one knows. All we can do is use all the information we do have and make an intelligent plan. The key piece you need to know is what are your exit strategies? Do you have a plan A, B and C? You should evaluate each real estate investment with plans in hand.

If your plan is to buy and hold for the long term, how will you get out if you need to sell short term? Will the property have enough equity? What is your cushion or safety net? Answer these questions and others and you will have a secure, profitable real estate transaction. To find out how download our free report www.PrivateLendingED.com - All the best!

When a private lender funds a private money loan does the transaction close with an attorney or a title company?

As a private money lender secure profitable real estate deals are your primary concerns. When funding a real estate transaction it is wise to use a professional. Even seasoned real estate brokers who could fill out the paperwork in their sleep, would not close without one. Why? Because they know the paperwork will be handled by people who are knowledgeable and trained to keep your transaction secure.

One very important factor in keeping your investment safe, which a title company or attorney will suggest, is a lender's title insurance policy. This is often missed by private lenders because they buy with cash so it isn't always obvious that it is needed, unless you use a proffessional to close the deal! 

Where the transaction is being completed will determine whether you use an attorney or a title company. In California we close with title companies. In Georgia, the title company is a law firm. Check with your real estate investor to learn which you will be using. If they don't know, find another person to work with. A successful real estate investor should have the correct information.

I'll explain title insurance and the benfits of having it in my next post. Until then, all the best.

How do I evaluate whether a private money loan is a good investment or not?

As a private money investor it is crucial to be able to evaluate whether your real estate investor has brought you a viable, profitable opportunity. Of course private equity investments all have particular exit strategies designed to make money. Being able to properly identify the specific plan that works for the property being invested in is vital to your success as a private banker. Let's go over some fundamental rules of thumb.

Real estate investors buy properties at a discount and borrow funds below the market value of the property securing the loan. Equity and your maximum loan to value (LTV) is your buffer and your primary detail to calculate for every transaction. Here's how you do that:

First, determine the after repair value (ARV) of the property being considered. The ARV is what the property would sell for in 30 days, fixed up, to a nice family with pets.

The next thing we consider are the repair costs. What needs to be done to get the house in salable shape. Obviously each property will have need different levels of repairs. An experienced real estate investor will have his construction team estimate the work to be done and provide the private money lender with those numbers.

The third number we must know is the purchase price of the investment. Once we know all three numbers we will be able to properly evaluate the total loan to value. An acceptable LTV should not exceed 80%. In terms we can see numerically: If a property has an ARV of $200,000, the repairs are $15,000 and the purchase price is $125,000, your loan to value is calculated by adding the repairs to the purchase price ($125,000 + $15,000 = $140,000) and dividing by the ARV ($140,000/$200,000) your result is a loan to value of 70% making this a more secure, profitable deal.