Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
For you "private lenders" what mistakes have you made? I'm wondering if private lenders are 1. willing to disclose mistakes and 2. what they did to correct it, if they did at all.
I just read about private lending, the lender claimed to be a private lender and not lending to non-owner occupied, leased properties, leads be to think they meant owner occupied.....then claimed to be in the business of lending. So, is there a mistake there?
Then, there was a comment about charging loan fees (or points) on a private loan, is that another mistake for a private lender?
The biggest mistake I've made is not analyzing the borrowers deal, and making sure there is enough reserves (which they resent I'm sure). I now have a spreadsheet that calculates rehabber (borrower) profit and cash they need. If borrower is not going to make a profit, I say it right up front. Saying no, by the way, was very hard for me, but I've learned. You can't imagine how many rehabbers think they have a deal but don't.
If the deal is bad for the borrower, it's a disaster for me. I know everybody thinks the lender makes a killing if borrower defaults, that's just not true. The last thing I want is to fix the borrowers mess. I want a borrower that is successful every single time so I can lend deal after deal after deal and not be involved in the rehab, at all. Unfortunately, I had to foreclose recently, I rushed around and finally found a local rehabber and sold the loan to him a few days before the scheduled trustee sale. He, I'm sure, will make a good profit, me, I'm glad to have my principal back. If I wanted to be a rehabber, I'd be a rehabber, not a lender. Driving to the rehab site every day, being sticky hot, listening to contractor bs lies, dealing with blood sucking government officials, historical societies, standing in line at HD, owner liability ... need I say more.
This is a great thread by the way, BP tends to focus on the greedy lender, but there are two sides to that story.
Another thing I've noticed: Everybody should be concerned about costs, if you aren't your not a good business person, plain and simple. On the other side of that same coin is the person that is overly concerned about fees and loan amount. When a potential borrower starts drilling down on fees and wants 100% of the purchase price and 100% of the rehab costs, and simply doesn't understand why that doesn't work for the lender, I just want to run ... that to me is a clear sign of a beginner. I have never had a successful rehabber drill down on the stuff, never.
Being on the lender side of the rei fence, the difference between a beginner and experience is as big as barn door. I smacks you up side the head in the first few minutes of the conversation.
FANTASTIC THREAD! Thanks all for sharing. We've only done 5 deals but its amazing how many times we've re-written our company docs (e.g., parameters/terms doc) as a result of lessons learned and information sharing from people we meet. Big things to remember with private funding we've experienced are:
1) Established businesses are better to work with than new investors. That's not to say that established businesses don't get into trouble or that new businesses always run into issues, but from a private funding piece its always easier to work with established companies/investors who bring experience and their lessons learned to the table. We tend to also format the deals with newer investors to protect us more so maybe having them bring more skin into the game or taking a profit split (10 or 20%) along with our fee.
2) The first deal is the toughest deal with a new business. Making sure your equities and the requested businesses' equities are covered is always tough. Having an open mind at first and always thinking about a professional relationship/win-win attitude is important. However, if you are representing investors...their protection and equities should always be your priority. Never give in to a business if it means it will hurt you and your investors down the line.
3) Get to know who you are working with. Most Private Funding Lenders/HMLs don't require the paperwork a traditional lender requires (e.g., bank statements, credit report, appraisal). Not to say you can't ask for that stuff, but that's why investors tend to like working with Private funding businesses and HMLs. Not to mention the fact that the money is usually readily available. But, that doesn't mean you can't get to know the individual(s) you are working with. Maybe go out for coffee, or lunch, or dinner. You can tell a person's character when you have more exposure to them and then determine whether they have character or are a "character."
4) Due Diligence. Trust in important but never the end all be all. We work with close friends and family but we still do our due diligence by looking at CMAs or contacting our POCs in the markets our deals are in to ensure things like ARVs or statement of work numbers. Create a checklist and make sure you walk through the due diligence items. Things like....Workers Comp, Insurance on the property, review closing docs...etc....Feel free to check out our website (under the Private funding tab) for more due diligence items to think about.
5) Collateral. Always protect yourself and your investors. Collateral is insurance if something goes wrong....and remember....something will always go wrong (or at least you should be prepared for it).
6) Lastly is paperwork, paperwork, paperwork. Its okay to have a verbal agreement at first but make sure when you are executing the plan its in writing. Make sure you are happy with the way things read and recommend changes as you see fit.
That's my 2 cents (okay maybe more like 4 cents). Thanks again for the opportunity to share and see you all in BP land.
@Will Barnard 1. I bought a property off of auction.com and they insisted on using a title company way up in northern Ohio near Cleveland, "Omega title," to be exact. I am down in Dayton. Never heard of the title company till the transaction was conducted.
2. Read up on using transactional financing for wholesaling. Is it a risky business and can it be done with no money out of pocket?
A risky business to who, you as the borrower or the lender? Sure you can use TF to wholesale your deal, but you need to have enough room to allow for the costs of financing and the double closing costs.
Risk ranges on circumstances and can be mitigated, so that blanket question is almost impossible to answer.