“Do Private Lenders Give You Rehab Money at Closing?”

In a recent SIIC coaching call, someone asked an interesting question that I actually hear a lot. This is a great question that I know we’ve touched on from time to time but have never addressed in detail, so I thought I’d do that here.

By the way, did you know we do coaching calls especially for our SIIC members? If you’d like to check out SIIC and see if it’s a good fit for you, here’s a special offer that also includes 4 of our products for free. Check it out.

An important question

Here’s the question that came from Monique.

“When you get a private lender to fund your deal, is it true that you leave the closing with the rehab part of the deal in hand? What I mean is, the cost of the rehab? Can you explain how that works when private lenders fund your deals? Do you have to keep going back to them for a little money when doing your rehab? Or do you get everything at closing so the sale price is received to pay the seller and also the money for the rehab?”

Patrick’s thoughts…

With private money, you can structure loans so that you receive all the cash you need to do the deal when you close.

I’ve had only one scenario with a lender who was a little skeptical because it was a larger renovation. So for that particular deal, he wanted the loan structured so that the renovation budget was paid out in three draws. I don’t remember the exact specifics of the structure, but I’ve always been one who will lean over backward to please the person who’s funding the deal for me. I try to suit my investment opportunities to the goals and needs of the investor. So I agreed to his terms. But that’s happened only once.

All costs covered

Every other private lender that I’ve ever worked with – and even hard money lenders – whatever cost I needed to borrow was paid out to me. This included enough to pay the purchase price, the closing costs, the renovation in the back end, holding costs, and even marketing costs. Bottom line, this refers to all costs associated with the deal. The private lender will stroke the check and send it directly to whoever is doing the closing.

The lender will not disburse the funds to you, but will write the check or wire the money, straight to the closing attorney or title company. At closing, you’ll get the settlement statement and all the rest of the paperwork. You’ll walk out with the check for the balance of the loan after the purchase price and closing costs are taken out.

For the newer investor

For the newer investor just starting out, it might not be a bad idea to structure the rehab part of the loan in separate draws.

Borrowing money is serious business and it needs to be treated as such. You certainly don’t want to take those funds from closing and toss them into your personal bank account, then just swipe away whenever, without keeping careful records. If you do, you could find yourself in a position where you don’t want to be.

My advice is to always be accountable to your lenders. So maybe having a draw system isn’t a bad idea in the early days, so you can show your lender where you’re at with the rehab process. This could turn out to be a good rapport-building method as you begin a relationship with your private lender. Then later, after trust is built, you can ask for all the money at closing.

JP chimes in…

It’s good to keep in mind that, in essence, all of what Patrick has mentioned is negotiable. In other words, any of that is possible.

Every private lender I’ve ever used – and you have to remember I haven’t done a lot of rehabs – I got the money for the property purchase, the closing costs and the rehab expenses, all at closing. I then had full control of the funds.

Higher rates

I was talking to a private lender just the other day about this very thing. (This is not someone who I’ve used – just an acquaintance.) This lender said if the numbers make sense, he’s willing to write that check at closing and hand it to the rehabber so that they can use it as they see fit. However, this is riskier for him, so he’s going to charge more.

This means the investor is going to pay a higher interest rate and will have to pay more in points with this lender. Whereas, the lender will charge a lower interest rate and fewer points if the investor is willing to set up a draw system and let the lender be involved in deciding when the draws are made. This will be based on certain milestones in the rehab project.

Summing up

So there you have it. Now you have a clearer picture of exactly how a private loan can be set up. The main thing to remember is that your private investor is a valuable member of your investing business team. Learn what works best with him or her, and strive to keep the relationship on good terms. You want this relationship to last for a long time!

Your input please

Leave your comments below and let us know your experiences in structuring loans with your private lenders. We want to hear from you.