Understanding Private Money: An Interview with a Private Lender, Part 1

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There seems to be a lot of curiosity, myth, and maybe even ignorance when it comes to private lenders. So, hoping to shed some light on the subject, I had a candid conversation with a private lender with whom I’ve worked with, and respect. She did not want to have all of her information listed because she doesn’t want to get bombarded with phone calls. So, I will just refer to her as Patty. Patty does want to hear from good investors, however, and I’ll tell you how to get in touch with her later.

Patty has been lending for about 10 years. She is unique in the industry because she is a trained lawyer with extensive construction experience. The money she lends is mostly her own, but she does use some money from friends and family, on occasion. When you borrow money from her she drafts all of the loan documents and the deed of trust herself; there is no third party lawyer involved, except for the title company’s lawyer. She is literally a one stop shop for a private loan. She’s the broker, the underwriter, the lender, stockholders, board, loan officer, inspector, and lawyer all wrapped up into one. She doesn’t like middlemen and she likes to know the borrower and the project.

The Loans

Patty prefers short-term loans, meaning they pay off within six months to a year. She does mostly residential projects, but the only thing she will not touch is owner occupied loans. She usually has several million dollars committed at any given time but hers is still a small operation. Most of her projects will be under $500,000. Patty’s terms vary greatly based on the deal (like most private lenders), however, the terms on an average deal will likely be in around 15% annual interest rate with 5 points and $1500 in additional fees for things like doc prep, legal, inspection, etc. (she calls those junk fees).

The Very Best Terms:

Patty told me her very best terms would probably be around 12% annual interest rate with 3.5 points, and no additional fees.

How do you get those terms?

Well, you’d better have your act together! In general the loan to value ratio has to be superb. You need to have your own money in the deal and you need a good down payment on the purchase price as well as having the fix up money. Patty has a lot of horror stories about what investors have done with borrowed construction money.

Hard Money Requirements
You need a plan–a realistic plan, and you need an accurate, realistic budget. She prefers to see that a professional contractor has been hired to do the repairs. An investor who has a full time job should not be planning to remodel a flip project on the side; it’s a lot of work and time, and time is money. And, finally, you need an aggressive marketing strategy. Too many real estate investors think their work is done once the fix up is complete.

The Borrowers:

Patty says she gets at least one call per day from an investor looking for her money. She does not advertise. Most of her borrowers find her through word of mouth. In order for her to take a call serious the investor needs a ratified contract on a local property. The investor should have a basic presentable package put together, with a plan, a budget, a rough schedule and contractor license number. Unless the purchase price is really out of this world, then the investor will need to have verifiable funds for the down payment and rehab costs, or she will take a note on another property to collateralize a deal. Experience does help. Take the time to put together a resume of sorts. Patty likes to see HUD-1’s from previous deals for the purchase and the sale.

Working with Patty

If you are an experienced or aspiring real estate investor and you have a good deal in the Northern Virginia area or in Washington D.C. then Patty might be the perfect lender for you. You can email your project details to Patty at ahrswhisperer [a][t] yahoo [dot] com; experienced rehabbers would benefit most from working with a lender like Patty.

How to Approach this Lender or Any Other One

It is impossible to generalize about private lenders. They are as different as humans can be. Your pitch might work great on one lender but fall flat with another. So you need to work hard and find a variety of lenders. You have to build ongoing relationships with them, and you have to know the individual tastes of each lender.

If you approach Patty, you need solid numbers. She doesn’t like brokers and she doesn’t like pushy salesman. Use your private lender as a resource. Send your project detail as described above, with solid numbers, a good plan, and a reputable team (contractor, manager, salesperson.) Let the numbers speak for themselves. The lenders have been doing this for a while — they have seen how deals can go bad. If the lender doesn’t like the deal, don’t try to push it down their throat. Take a step back and consider what they are telling you. They just might be saving you from yourself.

Insight and Wisdom

Patty told me that it’s very rare to have a deal go according to plan. In fact, she says that in the 10 years she’s been lending, only 3 loans have paid off on time. You can hear the frustration in her voice when she talks about how most of her deals play out. She’s come to think that 3 months behind schedule is just on schedule now. Many of her projects are going six months over schedule.

Investors are running out of money before the repairs are done, so they start cutting corners. Home inspectors are finding problems because the work is poor and the investor does not want do what is necessary to keep the deal alive, which is shell out more time and money to fix the problems. Those situations leave Patty having to either bring in more money to do the repairs or foreclose on the property, two bad options. It’s much easier to cough up the extra money to get the deal done, but its not good business practice.

Finding Local Private Lenders
For investors seeking lenders, Patty advises that you do your homework. Look in your local newspaper under finance, for people advertising money to lend. Look in Craigslist.com. You will likely hit a lot of dead ends but these are the best place to start in your hunt for money. However, she warns woud-be borrowers to be very suspicious of any lender demanding excess upfront money for a loan commitment. Any commitment fee over about $200 should be a big red flag. Be just as thorough on you lender search and due diligence as you are on your property and the odds are you’ll be very successful.

Photo Credit: AMagill

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.