Is there a risk with private investors when purchasing a home

Is there a risk in asking a private investor to finance a new custom built home for someone? I went through a divorce and my credit is a little lower than needed.

2 Answers

Well, the biggest risks I have seen are interest rates significantly above market levels (which are often justified in risky credit situations) and financing that is only short term (perhaps a 3 or 5 year balloon payment). Most private investors are not willing to commit their money for a 30 year term, so they require buyers to pay off the loan (in theory as their credit improves) in a relatively short period of time. If the home doesn't gain equity, or the credit doesn't improve, or employment/income situation changes, it can sometimes be hard to fulfill the obligation to refinance, which could trigger a foreclosure in extreme cases. One question I'd ask is whether you need a custom built home at this stage in your life, given your credit situation. Not telling you what to do, just a thought. Thanks, Ted

There's a reason that this kind of financing is called "hard money." Ordinarily, you're looking at an interest rate of 10 to 18 percent. Expect to be charged some substantial upfront fees as well -- typically four or five points. And plan to make a very large down payment -- 30 percent or more.

The reason for these onerous terms? Hard money lenders go into a deal expecting you to default, and so they get their profit upfront and they make sure that there is enough equity to cover the loan if they have to foreclose.

In fact, some hard money scammers specialize in "loan to own" schemes, in which they lend money at such harsh terms that borrowers inevitably end up in foreclosure and lose the property.

Honestly, if you were my client, I'd do my best to talk you out of this purchase until your credit was clean and you were successfully managing your debts. This could otherwise end very badly.