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With over 5 million people having lost their homes in the past 3 years, and many millions more who have lost jobs and income and seen their credit ratings shot to heck, the question rises over and over, Is Private Party Financing “PPF” i.e. “Hard Money” an appropriate loan for real estate buyers?
The short answer is yes. More now than ever. While there are scenarios that lend themselves to PPF better than others. A growing portion of real estate sales will be financed with some version of PPF. There are of course various categories of PPF, that come up.
1. Seller Carry “WRAP” financing. - This is typically a case where the seller does not need the equity upon sale, or has no equity and is able to sell the home at a price that will eventually get the out of ownership without the buyer needing conventional financing at time of initial sale. The carry period for these can be anywhere from 2 years to 5 or more.
2. Lease w/ an Option to Buy. - This is in fact a type of private party financing of a sale yet to be determined. The structure can even be recognized in some cases as a “financing” for IRS tax purposes. Thus giving the Lease Option Buyer the rights to take a tax write off as an interest deduction. (Check with you CPA or Tax Advisor before trying this one.).
3. Asset Based or Private Party Financing. Better know as “Hard Money”. This is the area that I have become most interested in recently. While it is certainly nothing new, the growth of this type lending and the opportunities it opens up have become significant. Below I will illustrate how well it fills the void in particular for those with recent short sales, foreclosures, B/K’s, and other credit issues. What makes PPF financing attractive is that the lender is typically looking to the equity in the property and some measure of income or appreciation and profit from sale of the property. In simple terms, the PPF lender is your financing partner in the transaction. You should consider them as such. Hence, like you, they are investing their funds into something they reasonably anticipate to make a profit from and if necessary will in fact take possession of the property to liquidate there position if necessary. This is what brings to mind the term hard money. A bit of a misnomer to me, but a reminder that they will look to the property for exit strategy if necessary.
Let me illustrate an example that my office is currently working in that shows why the PPF terms not only make sense to do the deal, but make it fun again instead of having to deal with FNMA and FHA lenders and underwriters. The following example assumes an investor purchasing a single family detached home for investment income and appreciation.
Acquisition Scenario #1 – Conventional
Purchase Price: - $145,000
Down Payment: 43,000 (30%)
1st TD Loan Amt: $102,000 (70%)
P&I Payment: 579/mo (@5.5% fixed)
Tax & Ins 145
HOA Fee: 150
Total Housing: 869/mo
Rental Amt: 1,500/mo
Assumed Selling Price: $205,000 (3-5 year hold
5 Year Hold Rate of Return “IRR” : 26%
Cash on Cash annual Coupon Rate: 4.5%
*(Complete Financial Analysis available on request.)
Acquisition Scenario #2 – Private Party Financing “PPF”
Purchase Price: - $145,000
Down Payment: 43,000 (30%)
1st TD Loan Amt: $102,000 (70%)
P&I Payment: 1,062/mo Year 1 (Interest Only @ 12.5%)
P&I Payment 579/mo Years 2+ (Prin & Int @ 5.5%)
Tax&Ins 145
HOA Fee: 150
Total Housing: 1,375/mo
Rental Amt: 1,500/mo
Assumed Selling Price: $205,000 (3-5 year hold)
5 Year Hold Rate of Return “IRR” : 23%
Cash on Cash annual Coupon Rate: 1.0% yr 1, and 4-5% subsequent years
*(Complete Financial Analysis available on request.)
This analysis compares a typical conventional financed purchase as non-owner occupied vs. a Private Party Financing. The PPF financing assumes a refinance in 12 months to conventional rates after stabilization of rent and full loan qualifying. The investment assumes we purchase the property for a 3-5 year investment horizon or beyond.
The net effect seen in the Internal Rate of Return “IRR” or Investment Managers Return for the hold period is reduced from 26% down to 23% when we use PPF. And while this is a reduction of the investment real return, the flexibility of private party funds can not be over emphasized. The benefits range from quicker, easier funding, easier qualifying, relaxed credit standards (for clients with short sales, B/K’s, foreclosures in the last 36 months!), no concerns about junior financing (2nd td’s, mattress money, etc), easier appraisal process, and in most cases lower closing costs aside from points paid. Thus my analysis, over and over is that 25% of investment purchases and some lesser percentage of owner occupied purchases are better financed with Private Party Funds “PPF”, other wise known as Hard Money. Most importantly, YOU GET THE DEAL DONE!
There are many lenders available these days who provide Private Party or Hard Money loans. The one I have find over and over that provides attractive good pricing, fees, loan to value as high as 70-80%!, funding in 5-10 days, and just good service is a company out of San Diego called Thor Financial, Inc. Attached is a marketing flyer which talks a little about them. You can also visit their web site at http://www.thorfinancial.com/ . I know the President, Brock VandenBerg from our previous work together at Key Bank and can tell you he is a straight up guy interested in lending on reasonable investments at reasonable terms. Thor Financial has substantial funds to invest and is aggressively looking for the right investments.
For more information on Thor Financial loan programs or to pre-underwrite your transaction, email me here or call me directly to help you assess your transaction or desire to find and finance the investment that may be right for your portfolio and retirement planning.
Dave Van Waldick
Principal/Broker
P: 760.599.1261
Western Mortgage
Western Realty Advisors
Office: 701 Palomar Airport Rd., #300 Carlsbad CA 92011
CA DRE. Lic#01065844
NMLS#304870 / Co. #345616
President 2011 - San Diego Chapter - California Association of Mortgage Professional “SD-CAMP”. http://www.sd-camp.org/
"Home Buyer pre-Approvals" http://www.eprequal.com/, ePrequal.com, LLC is trademarked.
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