What Rates And Terms Should You Expect From Your Private Lender?

    The answer to the title question is the same as the answer to many real estate questions—it depends. To answer this question we must have a common understanding on some terms that are not well defined. When I say “private lender” I mean someone who is not a professional lender. They are often a friend, a family member or an acquaintance (a co-worker, mail carrier, doctor, etc.). They may be willing to lend, may even be excited at the prospect of earning a higher rate by lending but they do not make their living as lenders. They do not have to make loans to survive. I contrast that with "hard money" lenders. These are lenders who are in business to loan money and must do so in order to stay in business.

     Hard money lenders will often have websites that will outline the basic parameters under which they will lend, rate, term (length of loan), loan to value (LTV) ratio, amount, etc. They are likely to be willing to spend a little time discussing their parameters ahead of the time the borrower needs the loan and if the borrower brings a deal that meets their parameters they are likely to be able to fund. They may not be able to quote a firm interest rate or terms because the final details will be largely dependent upon the details of the property which secures the loan.

     Private lenders won’t have websites and may not even know what terms will be acceptable to them. Many inexperienced lenders may not have thought much about what is possible. They are relying on you, the borrower, to make the proposal and to protect them. You may find someone who has funds earning 1% in a bank (can a 1% return really be classified as earning?) who will be thrilled if you offer them 7%. They may be nervous about accepting an offer of 10% interest as it may seem risky. An offer of 18% may scare them into not accepting your deal—they may think it is a scam.

     There is a hybrid type of lender you may run into here on BP or at REIA meetings. They are experienced private lenders. These are people lending their own funds but they know lending or real estate and, sometimes, both. An 18% interest rate won’t scare them—they may demand it and get it regularly. They probably won’t have websites and though they may hint that they lend (sometimes they give large hints) they will not do any serious advertising. They will have target interest rates and terms that they are comfortable extending and will probably be willing to discuss those in general, but again, they will not be able to give you specific parameters until you have a specific deal locked up. They are not likely to be interested in single digit returns but they may be quite flexible on length of the loan, whether payments are necessary during the rehab, the LTV or other parameters. These are still not professionals—they do not need to make any loans. The property will be very important to them but so will the way you approach them. Do you appear to be an experienced professional or a part time amateur?

     Have I answered your questions regarding this topic? What do you think?