The players involved with private loans (sometimes called hard money), are similar to those you would find in a traditional bank loan transaction; with slightly different roles. Let's look at who is involved in hard money lending transactions and why.
Hard Money | Private Money Lender (PML) This is a highly skilled entrepreneur who is your connection to private loans in which you’d like to invest. Think of the hard money lender/broker as the CEO of your loan transaction; guiding and directing the other players to meet your specified goals. The hard money lender will work with you to evaluate your investment preferences and will work to match you up with private loan investment opportunities that meet your criteria. Hard money lenders can be an excellent link to other professionals such as attorneys, CPAs, IRA custodians, etc that have specific knowledge in private note investing and hard money loan origination and can be a key component to your success. Let’s look at the various tasks coordinated by the hard money lender / broker: creating the borrower’s loan package, including the application, income, credit, and asset documents. gathering and reviewing title information as required. providing the borrower with applicable federal and state disclosures. ordering and reviewing an appraisal or other asset valuation on the property. coordinating title and escrow services. keeping you advised of the loan status. coordinating funds transfered from you or your custodian to the title or escrow company. determining the loan servicer and transferring information at the end of the transaction to the servicer. creating final loan documents and coordinating loan settlement or closing. providing and reviewing agreements between yourself as the investor and the PML. Borrower This is the entity or individual(s) that will borrow money against a real estate asset they own or are purchasing. Typically, the PML will communicate with the borrower(s) on your behalf. The attributes (credit history, asset reserves, business experience, etc.) of the borrower you prefer in your investments can be outlined with your PML to facilitate the best match for your investment preferences. In more sophisticated transactions, you may wish to have more involvement with the borrower which the PML will facilitate. Title Insurance Company/Escrow Company or Settlement Services Title and escrow go hand-in-hand, and in most western states would be performed by two different departments of the same company. In the eastern half of the US the role of the escrow company is referred to as settlement services and the task is performed or overseen by an attorney. Title Insurance Company – Provides a title report on the subject property being offered as collateral for the loan. This report is compiled by searching the county records for all information, liens, judgments, easements, etc against the property as well as the borrower and related entities. The PML will use this report to determine if the property can be insured. If it can, the transaction continues and the title company will issue an offer to issue a title policy in favor of the investor which will bind upon the recording of the loan security document. It is critical to work with an experienced attorney to draft and/or review instructions to title regarding the type of policy and endorsements you will require. Title insurance is not like homeowners insurance where all you have to select is the deductible and amount of coverage. There are many different types of title policies and many different endorsements available to go along with the title policy. Obtaining a title policy as an investor without endorsements is like driving a car without air in the tires. It is important to understand that title insurance is an indemnity policy and will protect you only if there is an actual loss that is covered under the policy. Escrow Company or Settlement Services Provider – Is a neutral 3rd party that collects and disburses the funds as directed by you, oversees the final signing of all applicable deeds and loan documents and records executed documents with the appropriate county office. It’s usually this company’s office where you and the borrower will sign final loan documents, also referred to as “closing” the loan. Appraiser A licensed professional who provides an appraisal report that includes an opinion of value on the subject property. This report is for the exclusive use of you and the PML and is not a matter of public record. Interestingly, an appraisal is not always required for a private money transaction. In many cases, you may visit the property and make the assessment yourself as to the value. In other cases you may ask for a “broker price opinion” or “BPO.” This is similar to an appraisal, but is an abbreviated statement of value from a local real estate broker’s perspective. BPOs are often less expensive than an appraisal, and if conducted by an experienced broker, are often a more accurate reflection of market value. Value is best determined by looking at multiple inputs; your own drive by, a professional appraisal, interviews with neighboring property owners, etc. Loan Servicer This is the entity that collects the monthly payment and remits funds to you if you choose not to service the loan yourself. The loan servicer may be the PML or one of the hard money lender's related entities, or a dedicated loan servicer hired by you. The loan servicer is responsible for all aspects of servicing the loan including sending the borrower periodic statements, year-end tax reports on interest paid, and if taxes and insurance are collected monthly as part of the payment, the loan servicer will escrow the funds and pay them as they are due. As you can see, each player has an important and distinct role in originating, processing and finalizing your loan investment transaction. The better you know the players and their roles, the more you can leverage their expertise and conclude a transaction that works best for you.