Private Lender Perspectives: Basics

by Paul Bernard - Residential Equity Partners, LLC.
October 19, 2013

The complexities of real estate transactions are often too overwhelming to consider all at once. I hope to clarify the main points here using a few words and an accompanying diagram. This is written within the context of a short-term residential renovation project where the entire process takes only 3 or 4 months.

To get started, the subject property must be located, contact made with the owner and a suitable purchase price and terms agreed upon. The importance of this very critical step cannot be understated. Buying at the right price sets the stage for the entire project and can assure profits or lock in losses. I used our company initials "REP" in the role of the developer in the diagrams below. Please see our other post regarding "Players" in the real estate investment arena.

The next major step is securing funding from either your own internal cash and credit lines or from a lender. The diagram below illustrates the critical role of the title company as the central repository of the purchase agreement, earnest money, funding documents and the money from the lender. The title company will follow the instructions in the original purchase agreement and pay off the existing loans, pay off and effect release of liens and prepare the deed for the new owner. The title company also receives or creates the trust deed and prepares all of these documents to be recorded. On closing day, the money changes hands, the deed is recorded and the obligations of the new buyer to the new lender become enforceable. 

Closing day marks the end of the purchase but signals the very beginning of the physical work on the property. Now with the title to the property in the name of the developer, the rehab work can begin. This is the time when the builder gets to work. Most residential renovation jobs start with permits, plans and staging at the job site. The first major effort that can be seen at the property is the demolition. Here, all the parts of the building and grounds that need to be removed are removed and either recycled or discarded. Residential property demolition is usually completed in a few days. The next 4 to 6 weeks encompass a very intense, but carefully managed renovation which often includes new floors, paint, appliances, lighting, cabinets, counters and upgrades to major systems.

Marketing efforts start in earnest during the final week or so of the renovation and end with a new buyer and the property going under contract for sale. The diagram below is almost the reverse of the purchase process above. Notice the promissory note pay-off and cancellation of the mortgage. This is where the private lender is re-paid the principal and any accumulated but unpaid interest. The title company again plays a critical role in this transaction as can be seen below.

Now, let's look at the entire process in a single diagram. Most residential renovation projects can be completed in about 3 to 4 months. The main steps are as follows:

1. Buy at the right price in a hot market
2. Do a fantastic job on the refresh
3. Professionally market the refreshed property
4. Sell at a fair price

. . . . . then repeat

Please visit our website to learn more about our firm and how we operate in the dynamic world of residential real estate. http://www.ResidentialEquityPartnersLLC.com