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Private Real Estate Money: The 5 Advantages of Private Money over Hard Money Loans or Mortgage Loans

For assets investors there are varied edges and benefits to personal assets cash versus laborious cash loans or mortgage loans to fund your assets finance business.  Knowing the benefits will mean the distinction between creating a true estate deal work or losing an honest deal to your competitors.


As the credit-bubble continues to unwind, traditional sources of real estate financing are drying up and real estate investors need to find alternative sources of capital such as private real estate money.


Advantage 1: Speed and Cash Flow 

The ability to close a real estate deal in less than two weeks is a huge advantage over having to wait weeks or even months for a typical bank loan approval. The importance of speed cannot be overstated in a competitive market and quick cash gives you a big edge over other investors. 

Imagine if you are the seller and someone comes to you to buy your house and has a two or three month escrow period before closing plus several financing contingencies versus another investors who will close in two weeks with no contingences.  Not hard to tell which offer the seller will accept.  And the real power of this offer is the seller may accept a lower price to close quickly with no contingencies. 

So not only do you get the deal from the other investor, but you get it at a lower price.  The power of private real estate money is the ability to close quickly and drive better deals terms to your advantage. 

Advantage 2: Simple Paperwork

Have you ever gone to a closing on a traditional mortgage loan and had to sign 2 inches of paper work.  Now image going to closing and only signing two or three documents (yes that is not misprint). 

Private real estate money deals are incredible simple and the total paperwork is normally less than 10 pages and includes two or three simple documents.  The documents included in a private real estate money transaction are a mortgage (Deed of Trust), an installment note and possible a disclosure statement.  The only other required paper work is to name your lender on your property insurance as you would in any normal loan situation.

Advantage 3: You Control Terms and Conditions

One of the incredible advantages of a private real estate money transaction is you control the terms and conditions of the loan.  For example, you can offer a very short term loan of only 6 months if you know you are going to flip the property for quick profit.  Or you can offer a 5 or 10 year term if you plan on holding the property for a long term rental. 
You can also control the conditions of the loan such as not allowing a prepayment penalty for early prepayment.  Most normal mortgages and hard money loans require a 1% to 10% prepayment penalty to pay a loan off early.  With private lending transaction you control the conditions and can simply add a clause that allows an early prepayment without a penalty.  That can mean a huge savings down the road.

Advantage 4: Reduced Fees and Costs

Private real estate money is less costly than mortgage loans or hard money loans.  For example, most hard money loans can ultimately have total interest cost of 20% or greater by the time you factor in all the fees, points, interest and other costs.  Even mortgage loans can be very costly with fees and upfront points factored in and the high interest rates most investors must pay versus home owners.  Loans from private real estate money sources usually have no points and very few costs.  The total cost of most private loans is somewhere in the 9% to 15% range with little upfront or back-end fees.

Advantage 5: Flexibility 

Private real estate money provides tremendous flexibility for both you the borrower, but also for the private lender.  The private lender can invest small amounts of $5Free Reprint Articles,000 or less in deals or large amounts to fund larger apartments or commercial property purchases. You can also work with lenders to structure a term that fits the lenders needs. 


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Buying a Home Using a Lease Option

A lease option is an alternative solution for buying a house. This strategy is often offered through property owners and real estate investors as a way to obtain current market value for their property and to generate positive cash flow throughout the duration of the lease contract.

Entering into a lease option requires careful consideration. Buyers should consult with a lawyer to determine if this type of real estate contract is legal within their state of residence. It is always best to have contracts executed by attorneys. At the very least contracts should be reviewed to ensure they contain appropriate legalese and will hold up in court if necessary.

At minimum, lease purchase option agreements should include the purchase amount, installment payments and due dates, rate of interest, amount of money contributed toward the purchase price, maturity date, and default clause.

Lease-to-own contracts can be the perfect solution for individuals with less than perfect credit or those unable to provide sufficient down payments to qualify for bank financing. Instead, buyers provide ‘option’ money to the seller to secure the property and prevent sellers from placing it on the market.

Contracts are normally in place for a year or two and grant buyers time to rebuild credit. Buyers must strive to improve FICO scores to qualify for bank financing when contracts expire; otherwise they could lose vested funds or be sued for breach of contract.

Dependent on the type of lease agreement, contracts may also include a provision that allows buyers to bow-out of the purchase upon maturity date. Some states hold buyers legally responsible for purchase. Others allow sellers to retain option money and all funds designated for the purchase. Nearly all include a penalty if buyers default on contract terms. Penalties usually require buyers to remit lump sum payment to the seller.

Lease options can provide considerable flexibility as long as they comply with state law. Sellers can either lock-in the purchase price within the contract or require buyers to pay market value when the contract expires.

Once advantage of lease options is they allow buyers to have a portion of monthly rental money contributed toward the purchase price. This amount is usually between 10- and 25-percent, but will vary depending on the seller. If the monthly rent is RM1000 and sellers contribute 25-percent the buyer receives a purchase credit of RM250 per month.

One a lease option has been signed and notarized neither party can sell or rent the home without authorization from the other party. Tenants are prohibited from transferring lease agreements or renting the house to another tenant without written consent from the seller. Property owners are prohibited from selling the house unless tenants default on contract terms and provided with legal notice of default.

Prior to engaging in lease options it is crucial for buyers to engage in due diligence. This should include searching public records to ensure sellers have not entered into foreclosure, as well as obtaining property inspections and appraisals.

Sadly, mortgage fraud is rampant, so it is imperative for buyers to investigate sellers and verify they own the property and have the right to enter into a lease option. Taking time to investigate the seller and property can minimize risks and ensure a smooth transaction.

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