In most cases all the people who touch your loan could easily pull together their own rec basketball team. Ok, bad metaphor. But you get what we mean. While you may only ever deal personally with the private money lender and a few other individuals, 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.
Here are the rolls that play party in your loan. Scroll down to learn more about each one.
The private money lender
Private money lenders are your connection to private and/or hard money loans. Above all, the private lender is the loan originator, directing the other parties involved to help you close the loan.
Generally speaking private money lenders can also be an excellent resource to find other professionals. This many include attorneys, certified public accountants, IRA custodians and others who have specific knowledge in real estate investing and private lending.
A hard money lender typically will:
- Research and complete extensive due diligence on you and the property
- Create your loan package, which includes the application, income, credit and asset documents.
- Gather and review title information
- Provide you with federal and state disclosures
- Order and review an appraisal or other asset valuation for the property
- Coordinate title and escrow services
- Coordinate funds transferred from the private investors to the title or escrow company
- Determine the loan servicer and transfer information to that servicer (if it isn’t the private lender themselves)
- Create final loan documents
- Coordinate loan settlement and/or closing
- Providing and review agreements between all parties
- And more!
The borrower (you!)
Typically, you will be acting as yourself (your name on the loan documents) or an LLC or other entity. Find out more about why a borrower may choose to purchase property through an LLC or other entity. To make the loan happen, you’ll need to provide documentation and background about both yourself and the property. You, the private lender, and the private investor are the people with the most stake in a deal.
The private investor
A private investor provides the money for your loan. In some cases, this could be your hard money lender providing personal funds. However, in most cases, it will be an outside entity or individual.
Beyond the already-convoluted nature of real estate law, private money loan transactions add another layer of complexity. As a result, you will want to know the kind of attorney to consult depending on the type of advice you need.
The specific nature of this expertise and specialization can make finding an attorney difficult. With this in mind, if you’re not able to ask the other loan parties you can begin by consulting the state bar association.
The title company
The title company compiles a title report for the property offered as collateral for the loan. They search county records for: all information, liens, judgments, easements, etc. against the property as well as you and your related entities. The title company will also use this report to determine if it is eligible for title insurance. If it is, the title company will make an offer to issue a title insurance policy. This policy then binds upon the recording of the loan security document.
There are two kinds of title insurance: owner and lender. Both policies insure their respective insureds against financial loss that result from issues with a property title or invalid/unenforceable loans.
It is critical to work with an experienced attorney to review the title policy and endorsements. Title insurance is not like one-size-fits-all homeowner’s insurance. Rather, there are many different types of title policies and endorsements which change what happens if there is a loss covered under the policy.
The escrow company
Title and escrow usually go together, and in most of the western U.S. would be performed by two departments in the same company. In the eastern half of the U.S., the role of the escrow company is referred to as settlement services. Settlement services are in turn performed or overseen by an attorney.
The escrow company is a neutral third party that:
- Collects and disburses the funds as directed by the private investor.
- Oversees the final signing of all applicable deeds and loan documents.
- Records executed documents with the appropriate county office.
The appraiser is a licensed professional who provides a report that includes an opinion of value on the subject property. This report is for the private lender’s exclusive use and is not a matter of public record. However, you may request to receive a copy of the report.
An appraisal is not always required for a private money transaction. In many cases, the private lender will visit the property and make the value assessment themselves. Sometimes the private lender will ask a local real estate broker for a broker price opinion or BPO. It’s like an appraisal, but less expensive and more abbreviated. They can also be a more accurate reflection of market value. Finally, the lender may create an Automated Valuation Model (AVM) by crunching public data using specialized software to arrive at a value opinion.
The loan servicer
This is the entity that collects your monthly payment. They may be your hard money lender, the private investor, or a third-party loan servicing company. The loan servicer is responsible for:
- Sending you statements
- Issuing year-end tax reports on interest, escrow paid toward taxes, and insurance rolled into your payment.