I hear so many people who are talking with money lenders immediately talk about the interest they are willing to pay. Two things to consider--first, it might be best to start the conversation by asking the lender what type of return the lender is looking for, not what you are willing to pay. The rate might be less than what you planned on offering. Second, a loan isn't just about the interest rate. It's about the terms and the risk. Be prepared to discuss both items. Are you paying interest only, are you paying the interest monthly…are there points, etc. In terms of risk, present what you have done to mitigate (not eliminate) the risk in a quick fashion for cocktail party conversations. It might sound like, "Our lenders always have first position Deed of Trusts, just like a bank has when you get a mortgage for your house. We buy at significant discounts, so there's immediate equity to mitigate the risk of a drop in the market…" Put yourself in the lender's shoes. Are you more concerned about the interest rate, or the risk of losing the money you are investing?
@Adam Schneider , Thanks for this post. I particularly liked your positioning of "We buy homes at a discount so there's immediate equity to mitigate the risk of a drop in the market".
In your experience, what are the 3 top objections you see private money lenders give people who are looking to borrow funds for a deal?
Thank you for the compliment regarding the wording…there's much that people in the industry take for granted, and I try to remember that we should present the value-add components of our niche of the industry.
Private money lenders want to protect their assets--the biggest fears are some combination of trust in the borrower, worst-case scenario regarding the rehab, and worst case scenario regarding the market.
I'm looking at a deal where I would be the private money lender right now that is out of my area. I'm concerned because I don't want to have to foreclose and then deal with asset disposition of this particular property. If the same property were in my local market, I'd have no concern about it because I know exactly how I'd move the property. That's with me being in the business. For an investor who isn't in the business, that person REALLY doesn't want to be stuck holding the property.
What are your thoughts?