Funding Your Closing

Funding Your Closing

In my previous email, I spoke about double closings and described them as two, separate, independent, fully-funded, stand-alone real estate closings.  Quite frankly, I was pleasantly surprised at the amount of feedback and questions I received, including more than one person asking if I knew the name of a title insurance company or underwriter that would approve of dry closings.  Sorry, I do not, and if you are doing dry closings with such a title company, I recommend you cease doing business with them immediately, as they are clearly running afoul of the underwriting guidelines from their title insurance underwriter.  If they are bending the rules there, they are probably bending the rules elsewhere.

Another interesting question I received in detail from a client of mine was regarding the difference between a private lender and a hard-money lender.  I try not to use those terms interchangeably, but sometimes do. 

A hard-money lender is a sophisticated person who is in the business of lending money to real estate investors who need it based solely upon the merit of the asset being lent upon.  While a wise hard-money lender will also consider the character, credit score and financial status of the borrower, the reality is that it is the asset which is the main security point for most hard-money lending.

A private lender is someone who is lending based upon relationships and deal potential rather than upon an asset.  A private lender may or may not be in the business of lending money per se.  An investor/private lender (like me) is in the business of putting together good deals.  A civilian private lender is someone who is not an active or regular investor/lender.  They are often unaware of all the possibilities for getting into the business of lending money.  Rather, they are seeking to work with someone they believe, like, know and trust so they can put their money to work with that individual instead of leaving it sit in a bank account earning a disheartening rate of interest of approximately 1%.

The civilian private lender is attracted to the idea of earning four times what the bank is paying, and they would be aghast and scared away at the notion of someone lending money on real estate trying to make more than 10% on their money.

While many people use the terms interchangeably, that is how I differentiate between a hard-money lender and a private lender.  I believe, however, that if you want to be a successful investor, you need to have relationships with both.  The more resources and quality relationships you are able to develop, the better when it comes to accessing capital and liquidity.

In response to another question from one of my clients, if I had to draw a line of distinction where a civilian private lender ends and a hard-money lender begins, I would put the line somewhere as it relates to the interest.  Once the interest rate starts to get north of 9%, it would look more and more like a hard-money loan.  The hard-money lender is typically focused on the collateral.  The private lender is focused on the relationship.

A final distinction I would draw between a hard-money lender and a civilian private lender is that the hard-money lender has a specific deadline for when they want their money back, and a private lender does not have that same specific deadline.  Yes, there is a maturity date in the note, and quite often there is language in the note talking about a reasonable extension should both parties agree. The distinction may be confusing to many, since people like me do relationship-based investments in which my lent money often earns more than 18%, but I hope this was helpful. I look forward to continuing this series on closings and funding.