The real estate correction in the Arizona investment property market has presented many opportunities for small residential investors, to large commercial investors and developers seeking distressed prices on qualified assets.
The common denominators in successfully closing distressed opportunities are relationships and having access to capital. Without access to capital and quality relationships to access distressed opportunities, obtaining profitable assets is very difficult. Private money lenders are a key component in not only the Arizona real estate investment property market, but all across the country.
Private money lenders are able to offer the capital necessary to fund opportunities, as well as contacts to potential deals. The main function of private money lenders is to supply the capital necessary to close a real estate transaction, or supply capital to investors or individuals using real estate as collateral.
The BuyersUtopia network has private money that also comes in an equity position to offer more flexibility.
The private money investor will make a preferred equity investment in the property as opposed to a loan. As such, it may not require a personal guarantee from the partner nor are decisions based on personal credit scores. In this scenario an equity partner provides 100% financing for the acquisition and rehab of residential properties purchased for investment purposes.
Investors will want to know how the equity partner makes money and what percentage of the profit is allocated to the equity partner
What is common is for the equity partner to earn a preferred return on the capital invested in each transaction. To achievetargeted IRR for this investment strategy, it’s common to see a 10% preferred rate of return, along with a split of the profits for the equity partner. The split is typically based upon a number of factors, including experience, amount of cash contributed by the client, length of holding period (i.e., how long the capital is outstanding), and size of transaction. Each deal is priced and negotiated on a case-by-case basis.
Since transactions are funded based upon the merits of each deal, it is imperative that the equity source perform the necessary due diligence on each transaction (e.g., valuation, market analysis, title history, etc.). To cover the costs associated with this due diligence, investors will typically pay a fee from $500-$1000 which is used to pay for the appraisal and property inspection. In addition to this due diligence fee, the Client is responsible for the property insurance, which must be for a minimum of six months, paid in full at, or prior to closing.
In more traditional private hard money situations opposed to private money equity situations the most common safe guard hard money lenders use to protect themselves, is to take the first deed of trust on a property. The first deed of trust gives control to whoever has equitable title, so if borrower is in default, the pledged asset would become the property of the first deed of trust holder, or the hard money lender.
Hard money & Private lenders are an option after banks, loans are not regulated and done on the lender’s terms. The non-regulation also allows them to structure deals very uniquely that can only be done through private sources, but this money doesn’t come cheap. It is common for borrowers to pay several points (percent) upfront, or on the back, as well as double figure interest rates.
There are several private money lending options in Arizona, but carefully choosing who borrowers work with and trust is a must. A lot of brokers pose as lenders, which can lead to wasted time.
There are brokers in the Phoenix Arizona area who are real and do bring value through negotiation and relationships, but verifying their track record is important. If a daisy chain is involved and the so called money lenders turn out to be investors themselves sourcing deals, prospective borrowers could find their deal swept from beneath their feet.
Working with a professional source and using the proper contracts to protect themselves will allow borrowers to source money for deals that make sense, but are lacking the cash needed to successfully close.
To learn more about private lending opportunities in the Arizona market, or inquire about potential capital for your opportunity, contact us today.
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