Summary:
Financial services providers have extensive networks of clients.
These service providers, including accountants, enrolled agents, financial planners, insurance providers, stockbrokers, real estate agents, loan agents, lawyers, and escrow agents, bring their unique expertise to the table, making them an integral part of the process.
They provide an excellent referral base.
A salesperson may multiply their market share by developing relationships with these professionals.
By working with these professionals, the salesperson can multiply their market share and enhance their business. This mutual collaboration is a testament to the value and appreciation each party holds for the other’s role in the process.
Article:
How can you bring value to other professionals with large networks? How can you help them increase their earnings, expand their networks, and maintain a professional relationship with their clients?
Mortgage brokers and other financial service providers must be exact and perfect in their product knowledge and services. They must make their referral source transparent in the background with minimal intrusion and involvement.
Understanding the various loan types is crucial for a financial services provider. It empowers them to tap into their network of relationships as a referral source, benefiting their clients and enhancing their knowledge and expertise.
Their clients who own real estate may need a source of financing when their bank says "no.” That source for real estate loans is called private money or hard money financing. Private-party investors with capital to lend will invest in the loans as lenders, expecting a reasonable yield or return on their investment. A Borrower will offer the security of their real property through a recorded trust deed. Investors will lend money and receive a promissory note and a deed of trust as security to be held in personal possession. Typically, private money loans are relatively short-term, lasting years, whereas borrowers often need time to improve their financial position before obtaining a bank loan.
Brokers specializing in real estate-secured loans are a source of private money loans. They solicit borrowers needing loans and private investors with capital to lend. A prospective Borrower is prequalified to determine whether they have verifiable equity in real property. If the Borrower requests a loan, a due diligence process is initiated to compile a comprehensive package containing adequate documentation to present to private investors. This is done to assist the prospective investor in making an informed investment decision.
Reasons that borrowers prefer loans from private sources rather than banks may include the following:
Regulated bank institutions create excessive hassle and frustration
Speedy transactions require super quick closing, such as a week or two
Borrower credit problems such as payment history, unverifiable income stream, old foreclosures, write-downs, bankruptcy, divorce, judgment liens,
Partnership's breakdowns or dissolutions, tax liens, poor debt-coverage ratios
Property Condition: disrepair, excess vacancy, partially complete, fix-and-flips, ground-up construction, entitlements in process
Cashouts and subordinate financing are acceptable. Subordinate funding refers to a second mortgage or other junior lien on a property, not the primary loan, but in a subordinate recorded position. A Junior Lien can be a helpful option for borrowers who need additional funds but want to keep their first mortgage.
Business purpose: growth capital to improve the financial condition
Mortgage brokers serve as intermediaries, soliciting, qualifying, processing, and underwriting loan transactions. When a private investor funds the loan, the broker arranges for proper documentation and handles the closing process. Upon funding and closing the loan transaction, the broker usually becomes the servicing agent on behalf of the private money investor.
A thorough due diligence process (processing and underwriting) is completed to create a package of material disclosures that benefits both the Borrower and the prospective investor. The process involves several steps, each designed to ensure the viability and security of the investment.
Could you please complete a loan summary that explains the proposed transaction, including the loan-to-value ratio, collateral property, reason for borrowing, the Borrower's ability to repay, and an explanation of the investor yield?
Appraisal of real property from an independent, certified appraiser.
The loan application is completed by the Borrower, who explains the purpose of the loan.
Credit report
Escrow instructions and loan documents completed, including Borrower mortgage loan disclosure statement, with an itemization of estimated Borrower cost; lender’s instructions, promissory note, deed of trust, and related loan documents.
Preliminary title report
Financing options are not limited to specific property types. Whether it’s a single-family home, commercial space, industrial property, apartment complex, or vacant infill lot, loans are available to suit your needs. However, it’s essential to note that loans should be made for business purposes rather than consumer purposes.
Consumer vs Business Purpose:
What is a consumer-purpose and a business-purpose real estate loan?
Consumer-purpose loans are designed for personal, family, and household use, while business-purpose loans are intended for business-related expenses or investments. The key distinction is that business-purpose loans must be used for business activities, not personal use.
On the other hand, a business-purpose loan is a type of loan where the proceeds are primarily used for business purposes.
“Primarily” means greater than 50% of the net proceeds.
When borrowers seek a loan, they may find a lender who only offers business-purpose loans. In such cases, borrowers often construct a narrative to justify their loan as having a "business purpose”. Whether the narrative is legitimate or not, proper documentation ensures a secure and transparent lending process, instilling confidence.
Brokers will consider first- and second-lien position loans, with loan-to-value ratios generally at 65% or less, ensuring a minimum of 35% protective equity in the event of Borrower default.
Investor yields range from 9 to 11% annually, with interest paid from the Borrower's monthly loan payment.
This helps you to navigate the world of private money financing.