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Many investors start investing with limited or no funds, so finding and using other people's money (OPM) is critical to their success.
When we think of using OPM we associate it with borrowing from private or hard-money lenders.
These people provide short-term capital to finance purchases and are handsomely compensated for their lending money.
These are essentially bridge loans that allow investors to do deals.
In REO investing the whole aspect of using OPM has some different connotations.
The investor-buyer would ideally like to use the money of his end-buyer to close or he may borrow hard-money and then resell the property to his end-buyer.
Using his end-buyer's money will increase the investor's profit substantially so he must understand how to make this work.
The investor can disclose to the end-buyer what he contracted the property for and request that the end-buyer give him the money to close plus his profit at the time of the closing.
If the end-buyer agrees, the investor will have no money in the transaction and will make his profit immediately.
This is usually done by a Quitclaim Deed to the end-buyer or the transfer of the Beneficial Interest of a land trust.
If the profit margin is too large ($15,000+) the investor is usually better off to do a double closing even if the closing agent for the seller won't do it the same day.
In this case, the investor will have to borrow short-term hard money.
This is not transactional funding that uses funds for inter-day transactions only.
The double closing may take up to a week because the deed from the purchase of the REO should be recorded so the end-buyer knows the investor-seller legally owns the property.
The difference in private and hard-money is substantial.
The investor should try to find friends and family members who will loan their personal money for the transaction.
The investor's competition for their money is the then current Certificate of Deposit (CD) interest rate.
This may be as low as 2%, but when offered 10%, these private money investors will usually put up the money needed.
These private lenders are loaning not just on the interest rate they receive, but more on the trust they have in the borrower.
Hard-money borrowing costs can range from 3% to 5% of the principal to 12% to 15% interest on the money until the investor pays it back.
The interest rate is secondary as the closing points (3% to 5%) are where the hard-money lender makes his money.
Whether an investor uses private or hard-money to fund and sell an REO, he may also have deed restrictions as to the amount of the profit he can make (20% of the purchase price with FNMA) for the first 90 days, or a covenant that requires he not resell the property for a certain time period.
A thirty-day covenant is becoming more common place with national banks when an investor purchases a short sale.
The more successful an investor is, the more money he will need.
Always try to get money well ahead of when you need it and make sure you have alternatives if your primary lender changes his mind.
Hard-money lenders have been called predatory lenders because they often expect to take the property back in foreclosure and still make a profit.
Sometimes these professional lenders change the terms of the loan at the last minute and require the investor-buyer to split the profits with them.
Investors should know who they are working with before they get to the point of being dependent on any one source of OPM ("Other People's Money").
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