Some news stories are harsh on private money lenders. They depict them as avaricious grabbers who are love latching onto your property when you default. The truth is that few of us want your property. We want you to get your building and succeed and we want to be assured that we have made the right choice in investing in you.
On the other hand, most of us do tend to foreclose more quickly than a bank if three’s a breach in the promissory note or mortgage / deed of trust. Private money loans are almost always loans for business purposes and commercial loans have fewer of the consumer regulations that residential loans possess. You may want to consider hiring a qualified legal advisor to review the documents and guide you with the decision-making.
Lenders, too, can, and do, foreclose on a variety of reasons. Borrowers commonly think that their lender will only grab the property if they fail to make payment but your lenders may foreclose on issues that have nothing to do with the monthly bill and their foreclosures tend to be faster and more unpredictable than those of the banks.
In order to appreciate why this is so, it may help you to know something of our business.
We loan you money from our own pockets but because few of us are sufficiently wreath to plunk out thousands of dollars to not one but several individuals and for not one but several loans we persuade private investors to join us. So if you want a loan for a certain property, you’re not just selling your pitch to the manager of the lending company but you’re also indirectly hoping to woo the other experienced loan professional too. Both are looking for an added return on their capital. Put another way: The future of their capital is tied to performance on your loan which is why they demand a higher return and upfront costs and which is also why they take quick and prompt action if any part of their contract is breached.
Private investors could persuade their partners to rapidly foreclose for any number of reasons.
Knowing these reasons could help you decide whether you want to proceed with the loan.
Reasons Private Money Lenders Could Foreclose
Payment – This is the most common reason. You are simply too late with your payment.
Balloon – repayments follow a monthly schedule with one humungous balloon payment once your loan reaches maturity – i.e. at the end of the term. Many allow for repayments to be spread out (or to be ‘amortized’) over a longer period of time, such as 30 years to allow for lower payments, but ask for a balloon payment (a lump sum) prior to that. The lender may foreclose if you don’t make the balloon payment when agreed.
Maturity Date – The maturity date is the date your loan is due. Bridge loans tend to be shorter than those of hard money loans usually extending from a few months to a year. Bridge loans are often used for commercial property or investment property and are short-term loans. Hard money loans, on the other hand, are also often applied for when the borrower finds himself in a distressed financial situation such as imminent foreclosure proceedings.
Call – Some note provisions allow the lender to review the financial condition of the borrower based on a variety of covenants included in the loan documents. If the lender determines the borrower’s financial conditions have deteriorated since he applied for the loan, those covenants allow the lender to foreclose earlier than agreed upon.
Waste – Some promissory documents include provision that allow the lender foreclose if the value of the property is deteriorated due to borrower failing to maintain or repair the property.
Illegal transfer – This is also known as a “due-on-sale” clause where you deed the property to another person without informing the lender. In this case, the act is seen as a ‘sale’ and the lender queries that repay your loan in full regardless of the maturity date.
Prepayment Penalty – A lender may impose a prepayment penalty if a loan is paid off before it is due. This is usually because the lender incurs costs when making a loan and will build these costs into the borrower’s payments over the life of the loan. When a borrower pays the loan off early, the lender tries to recoup some of its costs through a prepayment penalty. Hard money loans frequently incorporate this penalty because the private investor wants a commitment from the lender and borrower that the funds provided will be used over a specified period of time.
In short, investors in private money are not after your property. That’s the last thing that they want. Their main concern is for you to follow through on your promises. Since huge sums of money are involved, the moment they sniff a misstep they’re likely to promptly stop the loan in its track and foreclose.
How can you prevent that? Help them protect their funds and those of their partners’. Keep to the latter of your loan agreement by paying on time and keep on top of imminent balloon payments and maturity dates. Most important carefully read your loan documents and make sure you understand and can comfortably achieve the loan covenants. Most terms are negotiable in a private money transaction for hard money loans.
Note: You may want to see if your private investor has any extra conditions for foreclosure that he or she may append to the above.