It's natural for the fledgling investor to rely upon institutional lenders for mortgage money with which to buy houses. Banks and mortgage loans abound in good times. Lenders besiege investors with offerings of attractive loans at low interest rates. All people have to do is to arrange a loan or line of credit secured by their personal residence or other assets, then go out and find a house to buy. The problems with this is two-fold:
1. With each new loan, their FICO score drops a little and they become less and less attractive to institutional lenders. One day, they'll find that they can't borrow enough to buy the next house; hence the number of houses they can buy is limited.
2. When hard times come and borrowers can't make payments, the lender can't cut them any slack. This is because their lender has borrowed the money lent to them. It can't make it's own payments without their payments, so it has to be pretty inflexible.
By way of contrast, if investors borrowed from long term private investors who lent their own funds, in difficult periods, private investors would probably be a lot more lenient and understanding. This is primarily due to the fact that they don't want to own — and have to manage — the mortgaged collateral. They aren't beholden to a higher lender, nor hemmed in by regulations that institutional lenders must abide by. Who might these private lenders be?
In previous blogs, I've described lenders who would be attracted by extraordinary yields on fairly short term loans; but there are others who prefer to lend money on a house at competitive rates than to lend it to banks at low rates to be re-loaned to others. Who are these investors? How can they be contacted? When low-rate loans are easy to get at banks, buyers usually prefer to use institutional financing, and sellers prefer being paid in cash. But when the bank loan-window is closed, investors can't buy and sellers can't sell. It is at this point that the most obvious long term motivated lender is the person selling a property.
Speculators who buy and sell houses solely for profit are usually highly leveraged and hard to deal with. Home-owners are quite different. They don't sell their homes capriciously; absent of crushing debt, they usually have a good reason for selling other than merely making money. When the lender is the seller, its primary focus is on selling the house and quickly moving on with its plans. Most home-sellers (and commission brokers) focus on the price they want to get, and less interested in terms; unless they need cash to pay the broker and/or to buy their next home. Once there's enough cash in the deal to pay these necessary costs, often they can be persuaded to carry creative financing for the balance of the money.