How Does Private Lending Work?
Simplified Bank Business Model
First, how does your bank make money? Let’s talk through your banks business model. Let’s say you, your family or your company has funds that you want to save or invest – You can do your bank and deposit the funds. The bank in return gives you a return for your investment. In our example, let’s use 3% return on our funds because that is about what CDs are currently paying.
The bank can’t just put the money in the vault and forget about it. They take your money and loan it out to at to another one of their customers at a higher rate - let let 7%.
The bank profits 4% on your money for just acting as a middle man.
People often wonder why real estate investment groups don’t go directly to a bank to get access to funds to buy real estate properties. Real estate investment companies certainly can do that in some situations but there are some drawbacks to working with banks. Let’s Introduce Private Lending…
Private Lending Cuts out the Middleman (the Bank)
By cutting out the bank as shown above real estate investment companies are ablve to act quickly when opportunties arise.
Then Banks move slowly – Our sellers need to
move quickly. But when our sellers are facing foreclosure, or have already made five extra house payments on a vacant house, they need us to move quickly.
This is a very competitive market – Access to cash allows us to buy quickly and at a discount
Also, when you are in a very competitive market, you need to have quick access to cash to be able to buy houses quickly, or else you lose the best deals to other investors; AND with access to cash, you can offer the seller a lower amount of ALL CASH, as opposed to some cash now and some later – they will take my offer and I get the house if I can pay cash.
Banks will not lend money in certain situations – e.g. No carpet or no air conditioner = No Loan
Banks will not lend money on a house without certain things in the house – something as simple as missing carpet over an unfinished floor, or if there is no furnace – which can be replaced in a rehab – won’t pass muster with the bank’s approval process
In future posts I will explain the more benefits to both the investor and the real estate company.
General | Todd G. Durand | August 7, 2009