There are a variety of choices for real estate loans, but if you are an investor, you might not know about all of your options. If your investment specialty is buying fixer-uppers and reselling them for a profit (rehabbing), then you would probably be happy to know that there are lenders that specialize in making loans to people like you. Sometimes they are called hard money lenders, rehab lenders or just private lenders. They are becoming increasingly popular with rehabbers for a number of reasons.
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First of all it's easier. Because there have been so many defaults over the past several years, commercial banks are making fewer real estate home loans than usual. It is harder to get a mortgage and it is particularly difficult to get a loan approved if the house that you plan to buy is not your primary residence. Most private lenders prefer investors and rarely deal with people seeking a regular mortgage.
If you are able to get a real estate investment loan at a regular bank, they will only finance 80% of the sales price. That's the second reason that private lenders are becoming more popular. They do not require a down payment. They can finance 100% of the sales price, if the value of the property after repairs is good. Where a bank bases acceptable loan amounts on the purchase price, private lenders consider the after repair value of a property or the fair market value after repairs are completed.
Another reason that investors are turning to private lenders for real estate loans has to do with the time involved. Closing at a bank usually takes about a month, sometimes longer. A rehab lender can close in as little as two weeks. That's about how long it takes a banker to give you a rejection.
Banks are very wary of making real estate home loans for investment purposes. New laws concerning "flipping" have created more paperwork for the banking industry. If you finance a purchase through a regular bank and you are able to resell quickly at a substantially higher price, your deal can get "flagged", requiring additional appraisals and slowing down the financing process for your buyer. You are much less likely to run into this problem if you use a private lender that specializes in rehab loans, simply because they have a better understanding of the system.
Want more reasons? Private funders can offer pre-approval on a real estate investment loan. They can provide a "proof of funds" letter, so that when you approach a seller and make an offer, you have proof that your offer is real, that you are not wasting the seller's time and that you can close quickly. To most motivated sellers, closing quickly is a very big deal. They will often agree to far less than their original asking price if they know that they can get out of the property faster.
What we have provided here is just a brief look at the advantage of choosing a private lender over a commercial bank for rehab projects. Choosing the right lender for your real estate loans can increase your profits, the number of deals that you can complete, improve your cash flow and more. You might want to learn a little more about the unique options that private lenders offer before you start your next project.
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