Solano Real Estate Scene: Private money, creative financing
Private money, hard money and creative financing have been a small but consistent and important part of my business over the past 40 years.
Private money is financing being done by a private lender and not an institutional one. Hard money can be found through private money lenders and institutional lenders and simply describes a loan that is primarily based on the collateral (the real estate equity). Creative financing was incredibly popular during my first seven or eight years in the business from 1979 to 1987 when institutional lenders were offering fixed-rate mortgages to their best customers at rates from 8 to 18 percent.
Realtors and loan officers had to utilize the art of creative financing back then because rates weren’t only high, qualifying for a mortgage was hard. The following are some examples of private financing.
In 1984, the real estate market in San Francisco and San Mateo County was weak and sellers had to offer incentives and creative terms to sell houses. I bought my first house in August 1984 on Horizon Way in Pacifica for $103,000 from a part-time Realtor who taught school in Pacifica for 30 years. He was a super nice guy who bought and sold houses part-time while teaching.
I assumed a first with Home Savings of $55,000 at 10 percent, assumed the second with Beneficial of $32,000 at 15 percent and the seller (George the teacher) carried a third mortgage for me of $33,000 at 10 percent. Please notice this adds up to a total of $120,000 because I convinced George that the only way I could afford the three payments along with the taxes and insurance was if he lent me an additional $17,000 to pay off my credit cards and loans.
This was a time when many real estate transactions involved buyers taking over low-rate mortgages that existed on the home they were buying. Some of these were formal assumptions but most were simply “subject to” transactions where the buyer and seller didn’t even involve or notify the mortgage company of the loan they were taking over. Banks hated this and eventually won a couple of lawsuits that allowed banks to enforce their “due on sale” clauses.
Another example of private creative financing today is a simple one that happens when grandma and grandpa sell their free-and-clear home to their grandson and carry the financing for him. They become the bank and maybe sell the house to their one and only grandson for a great price and carry the mortgage at an interest rate that is better than they would get in a low-rate savings account.
An example of hard money, which is very popular today and a big business in America, is high-interest-rate loans that can be done very fast for people who cannot get a better loan for one reason or another.
John Doe owns free-and-clear a 16-unit apartment building he inherited that is worth $2.5 million and desperately needs $500,000 for a new roof and earthquake retrofitting for his building. He makes $28,000 per month in rents but has a horrible credit rating and hasn’t filed his tax returns for a couple of years because he is a little bit disorganized and a procrastinator due to daily pot smoking.
This guy could get $1 million in a week and the hard-money lenders would be lined up around the block. The only thing they would require is an insurance binder, title insurance, the roof replacement and the government-required retrofit professionally completed to protect their collateral.
Five thousand words would not be enough to describe all the different variations of creative financing.
