Why we use private money lenders
What I’m about to tell you may come as a shock, but I have only applied for a mortgage through a bank one time in my life… and I was denied. To make that fact more interesting, you should know that it happened in February of 2020.
I have to tell you I was little surprised myself. It happened as Ashley and I were expecting baby No. 3 and were looking for a place with more room for our new addition. It just so happened that we had a flip we were in the process of finishing, and it could provide us with the extra space. Our plan was to buy it from our flip company at a discount, still giving the flip company a profit but also affording us plenty of equity to make the loan better.
We approached a mortgage broker we had used to qualify many of our buyers in the past. She noticed my credit score was high and said we should be good to go.
But we got denied.
The reason was, according to our mortgage broker, that our tax return made it look like we didn’t make much income.
You see, rental properties afford many write-offs for a real estate investor that lowers their taxable income. That doesn’t mean the income didn’t exist. What it means is the IRS allows for many deductions, such as depreciation, that lower a landlord’s bottom line on their tax return. So, even though we had consistent income and a great credit score, because of the nature of our business and how it manifested on our tax returns, we were considered too much of risk.
I had to laugh. Especially since we already owned that house and have been buying houses consistently for both personal and investment purposes since 2010.
Now, you may be asking yourself how in the world we have been able to do that if we can’t qualify for a loan. I have talked to you at length about using creative deal structuring to buy houses. But another thing that has made it possible has been the use of private money lenders.
A private money lender is a normal person who has funds they would like to invest and grow at a rate better than what money market, CD and other saving accounts offer. And when I say, “a normal person,” I mean they come from all sorts of backgrounds. We have lenders with jobs that range from secretary to pilots, mechanic, utility worker and small business owner, just to name a few. One time, we did a deal in a trailer park where the next door neighbor became a lender for us.
There are lots of reasons why I love using private money lenders. The biggest is that they use their heads to evaluate a deal as opposed to relying on policy and procedure that may not be one size fits all. (like the one that disqualified us from that mortgage).
Speed and ease of use are huge. Let me give you two instances. Once we had a REO property under contract that Bank Of America owned. They were dragging their feet until I got a call from them saying they wanted to close the next day. I wasn’t sure we could get funds there in time with such short notice, but I told them I would try. I called my pilot lender as he was prepping a plane to fly to Germany. He said he wasn’t sure it could be done either, but he would check. Ten minutes later, I get a text saying we were good to go. And sure enough, we closed the next day.
That’s fast.
The other instance happened when we were supposed to be selling a house and we needed a payoff from our lender. My lenders and I wait until we have a closing date and time set before we calculate a payoff because closings are often postponed. On this house, we were supposed to close on a Wednesday, but my agent told me Monday that the buyers still had not gotten the clear to close from their lender.
Tuesday evening, however, I got a text from my agent saying we would in fact close on Wednesday. I was able to contact my lender, get a payoff drafted and sent before our closing attorney made it into the office the next day. You just can’t do things that quickly with banks, and that’s one of the many reasons why I love my private money lenders.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.