A private money loan is one that is issued to a borrower in order to finance and repair a property that currently does not meet industry standards. When a property is in what is considered a distressed condition, a traditional lender will not place a loan on the property. A private lender, on the other hand, such as ABO Capital, can review a potential purchase and make the decision to go ahead and fund the deal based upon the buyer’s strategy.
For example, let’s say a bank has foreclosed on a property and could not sell it at an auction. The property is then returned to what is referred to as a lender’s REO department. REO stands for Real Estate Owned and is the division within the company that manages and markets foreclosed properties. One of the more common reasons a bank could not sell the property is due to its current condition. Potential buyers could inspect the property and determine there is simply too much work to be done in order to make a profit upon sale.
However, a private lender is in business to do just that – finance an acquisition along with funds needed to make repairs and bring the property back to a saleable condition. The “fix” part is when the buyers inspect the property along with a licensed contractor to determine what all needs to be done, how much it will cost and how long it will take to complete the repairs. The “flip” part of the equation is knowing how long it will take to sell the property and who will buy the finished project.
Developers know how important it is to present a private lender with a solid fix and flip strategy. The private lender reviews the price, how much the improvements will cost and what the final value would be based upon a fully rehabilitated property, as compared to what similar properties are currently selling for in the area where the property is located. The buyers provide the private lender with all of this information in order for the private lender to make a decision. The buyers can provide an “As Repaired” value of the property which is the projected value of the home once all repairs have been made. The private lender will also order its own appraisal based upon the information and documentation submitted.
Experienced developers who buy and repair real estate typically know in advance who will have an interest in the home once completed. Many times, the developer will also include a copy of a sales contract showing the subject property already has a preapproved buyer in place. With this information, the private lender sees a clear “fix and flip” strategy that makes sense and is documented with third party information. For example, the private lender sees how much profit will be made once the home has sold and there is a buyer who has already signed a sales contract and issued an earnest money deposit. If the deal makes sense and the private lender agrees with the proposal, the private loan can be approved.