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Learning the Private Money Lingo
To lend, borrow, or broker hard or private money, you need to speak its language. Here is a list of the common terms and definitions. Make sure you learn these so you can feel more confident in your hard or private money negotiations.
Aggressive Loan to Value - The loan amount divided by the property’s future value found through comps. Warning: Borrow money this way, but do not lend money this way!
Appraisal - A written professional opinion (certified) of the market value of a property or business whose market price is not easily determined. Usually required and requested by lending institutions when a property is financed.
Assignee - Individual to whom a title or property right has been transferred.
Balloon (bullet) Payment - The scheduled payment at the end of the loan term that is significantly larger than the previous payments.
Broker - An individual who acts as an intermediary between a buyer and seller for a fee or commission. Note: Check your state regulations for licensing laws and regulations.
Burn Rate - The amount of money injected into a company for operations above and beyond revenue – negative cash flow situation. If a company generates $200,000 in sales per month and spends $230,000 for operations costs, the burn rate is $30,000 per month.
Call - Demand for full payment of a loan. Similar to a balloon payment, however contractual conditions often trigger a call.
Clear Title - A title that is free of liens and legal questions of ownership of the property. Required to fund a loan.
Closing Costs - Fees and expenses over and above the price of the property incurred by the buyer and/or seller and usually include points, lender fees, attorney fees, title fees, escrow charges, etc.
Clouded Title - Any encumbrance or claim that might invalidate the property’s title. Unresolved questions in chain of title ownership.
Contingency - A condition that must be met in order for a contract to be legally binding. For example, one investment opportunity must sell before entering into a loan for a new property.
Deed - A legal document conveying title to a property.
Deed of Trust - The document used in some states instead of a mortgage. Title is conveyed to a trustee rather than to the borrower.
Escrow Account - A trust account held in the borrower’s name to pay obligations incurred during the loan funding process, such as property taxes, insurance, etc. Escrow agent is the neutral third party between the buyer, seller, realtor and lender.
Equity - The difference between what a property is worth (market value) and what is owed against that property (mortgage, hard money loan, etc).
Fees - A defined amount charged the borrower by a ../Lender for a privilege of obtaining a loan. (Caution: buyers beware.)
Fee Simple - Highest form of ownership in a piece of property and the type of residential (non-owner occupied) property Private Money Exchange prefers.
First Trust Deed (Lien Position) - The highest priority debt in the case of default. If a property or other type of collateral is used to back a debt, first lien debts are paid before all other debt holders.
Grant Deed - The most common type of deed. A grant deed conveys certain rights and guarantees, such as the assurance that the title has not already been granted to another individual. It must fulfill all the properties of a standard deed, and must also be signed in font of a notary.
Grantee - The recipient of a grant. (Buyer)
Grantor - The person from whom a grant is made or a trust is set up. (Seller/Lender)
Hard Money - It is financing commonly available from non bank sources. Sometimes known as "equity loans" and refers to non-conventional real estate loans. They are usually funded by private money sources and investors and typically not transferred to anyone else. This is often short term financing and available at higher rates with points normally charged up front.
Interest Only Payment - A non-amortized loan payment in which interest is due at regular intervals until maturity, when the full principal on the loan is due.
Inventory - Available liquid monies that have not been lent and remain a possible monthly payment liability.
LLC - Limited Liability Company. A type of company, authorized only in certain states, whose owners and managers receive the limited liability and tax benefits of an S Corporation without having to conform to the S corporation restrictions.
Lien - A legal claim against an asset which is used to secure a loan and which must be paid when the property is sold.
Loan to Value (LTV) - The ratio of the fair market value of an asset (property) to the value of the loan that will finance the purchase. LTV tells the lender if potential losses due to nonpayment may be recouped by selling the asset.
Margin - The face value of a loan minus the value of the pledged collateral.
Market Value - The price as determined dynamically by buyers and sellers in an open market.
Notice of Default - A formal notice (letter) to a borrower declaring that a default (non-payment) has occurred and that legal action may be taken. The notice the homeowner receives to indicate foreclosure proceedings are beginning.
Points - The commission fee charged by a lender. Each point equates to 1% of the loan amount.
Quit Claim Deed - A deed that transfers whatever interest or title a grantor may have, without warranty.
Rollover - Generally, a movement of funds from one investment to another.
Seasoned Funds - Money that has been in your possession for an extended period of time – not a gift. Generally funds are seasoned at 60 days.
Spread - Generally, the difference between any two prices.
Term - A period of time to which loan limits are set. The shorter the term, the higher the yield. For example, 120 days, 12 months, and 2 years.
Warranty - An agreement between a buyer and a seller of goods (property), detailing the conditions under which the seller will make repairs or fix problems without cost to the buyer.
Yield - The annual rate of return on an investment, expressed as a percentage.