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If you have purchased or otherwise been involved in real estate, you may have encountered the term “Private Lender.” Such lenders (sometimes known as “hard money lenders”) make short-term loans (typically 12-24 months in duration but can be extended) which are secured by any type of real estate (residential, commercial, land, etc) The loans are funded by private investors as opposed to conventional or institutional lenders such as banks or credit unions. Private lending is increasingly popular in South Florida for a number of reasons and will likely continue to grow. This article will touch on the basics of private loans and the circumstances under which they can be an advantageous alternative to traditional financing.
Private lenders are primarily concerned with the value of the collateral property rather than the borrower’s credit, income and/or job history. For instance, Borrowers who are unable to obtain conventional financing due to a lack of credit history in the U.S. (i.e. foreign nationals) or negative credit history (i.e. recent job loss or foreclosure) may still be able to obtain a private loan if there is sufficient “equity” in the property that is being offered as collateral. The loan amount is generally determined by calculating the ratio of requested loan amount and dividing it by the value of property. This is known as the loan to value ratio (“LTV”). Private lenders will lend in a range up to 60%-70% of the LTV. Some private lenders may also consider the borrower’s plan for the property. As such, the borrower should be prepared to present a reasonable plan that demonstrates how they intend to ultimately re-pay the loan. Such plans typically focus on improving the property, “flipping” the property (i.e. re-selling the property), and/or procuring traditional, long-term, financing when appropriate.
Private loans generally require monthly payments of interest only with a balloon payment at the end of the term of the loan. Actual interest rates vary based upon the lender, property, and situation but are typically in the 8% to 14% range. The loan origination fees (sometimes referred to as “points”) can range from 1% to 5% of the loan amount. Since private loans typically carry higher interest rates and loan origination fees, they are not appropriate for every circumstance. For instance, a borrower with good credit/income/employment history purchasing a primary residence, and with no prior negative credit issues, should pursue conventional financing at a bank, credit union or other institutional mortgage lender which would be at lower interest rates provided there is not a significant urgency to close.
Many real estate investors utilize private or hard loans based upon the ability of the lender to fund loans quickly. If title to the collateral property is clean, such loans can be funded within seven to ten days and, in some instances, earlier. The ability to close quickly gives investors a distinct advantage in tight real estate markets. Conventional/institutional loans, on the other hand, can take 30-45 days or longer to fund. Other typical situations for private lending include land loans (which generate no income), “fix and flips” (where the high interest rate does not deter the borrower as it is a short-term hold), and construction loans (which the borrower can refinance into permanent conventional loans once construction is complete).
Based on the foregoing, there are certainly specific circumstances that may justify the higher interest rates and lender origination fees associated with private or hard money loans when conventional/institutional financing is either not available and/or not practical.
THE ELIAS LAW FIRM CAN HELP
If you need assistance with a private loan, feel free to contact The Elias Law Firm at 305-823-2300, via email at relias@eliaslaw.net, or visit us on the web at www.eliaslaw.net.
About the Author: Robert Elias, Esq. leads a boutique law firm specializing in all aspects of residential and commercial real estate transactions/lending, corporate law, asset protection and estate planning/probate. He is active in a variety of charitable and civic endeavors throughout South Florida and maintains an AV PreEminent Lawyer Rating from Martindale-Hubbell, the highest peer rating for professional excellence. Mr. Elias was named to the exclusive list of South Florida’s Top Rated Lawyers by American Lawyer Media.
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