Real Life of a Private Lender

Investor Deal Diaries 66 Replies

Real Life of a Private Lender - Business Update Week #1

Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:

1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
2. You will see what DEALS get funded and why
3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

With these goals in mind, here's week #1:

MAKING GOOD LOANS

We have been approached by 2 borrowers regarding 2 deals:

1) A temple worth $250K and loan required is $60K. The borrower promised to pay $1,000/month.
2) A 3-unit property in a good part of Chicago; borrower claims ARV is $145K and total cost of the project is $92K. Borrower can put down 10%.

Here's our decision regarding these 2 loan applications:

1) Temple - NO DEAL. Who really knows the value of a temple? It's tempting but we have to stick with our underwriting guidelines of funding 1-4 units only. Why? Because 1-4 units are familiar to us (I have 11 years experience in buying, selling, leasing & rehabbing houses), and they're easy to sell and finance with a conventional loan in case the borrower fails to sell.
Next step: we will look for a commercial lender that can help this borrower.

2) 3-units - DEAL. The total loan required is $82,800 and if the ARV is correct, our Loan to Value is only 57% (this fits in nicely with our max LTV of 65%)
Next step: since the borrower is a beginner, we require him to prequalify first with our portfolio lender so our exit strategy is assured. Once he is prequalified and his numbers have been verified, we will definitely fund his deal.

Do our decisions make sense? Any comment or feedback specially from experienced lenders will be appreciated.

ORGANIZING FOR SUCCESS

My partner and I talked last Friday and finalized our Underwriting Guidelines (these help us decide whether or not we'll fund a deal), our Loan Application Form and our Loan Application Process. In the latter, we decided on who will do what so there will be no finger-pointing down the road as to who should have done what tasks - who is responsible is clear from the very beginning. We've also finalized our Loan Products and the interest rates and points we'll charge for each loan type.

RAISING CAPITAL

We don't need additional capital right now as we have plenty. However, as a wise investor pointed out: You have to dig the well way before you are thirsty. So, we are always raising capital. How do we do this? Networking with other real estate investors.
In raising money, I don't go in front of a room full of people and ask for money (nor do I pass out flyers saying I need money). That's asking for trouble with the SEC because you might be deemed as selling a security. Instead, I talk to people one-on-one and get to know them first. I find out what their goals and dreams are. I find out what help they need and I genuinely help them. I sometimes find resources for people and I refer them my dream team of real estate attorneys, title companies, investor-friendly real estate agents, contractors, lenders, etc. I don't even talk about my lending business or my real estate business. When I network with people, it's not about me - it's about the person I am talking with.
Then I follow up and build the relationship through constant communication. Coffee meetings, phone calls, etc. I am willing to be patient and invest the time. Months...even years of building relationships are all worth the investment. When you have a pre-existing relationship with someone and that someone invested money with you or lent you money, the SEC does not frown upon that.
I am willing to plant the seed of goodwill (through networking as I described above) and water it (through follow up and building the relationship). I might do this with 100 people and only 1 will invest with me eventually but if I've helped all 100, it's ALL worthwhile. Real estate investing and lending money is fun but what makes it even more fun and worthwhile is if you work with people you trust and like. In the end, real estate investing, lending or any business is about relationships.
So dig a lot of wells NOW and if you do it right, you will not be thirsty of capital :)

Do you have any questions or comments? Write them below.

Thank you Wendell. I enjoyed this post. I really appreciate the inspiration.

@Wendell De Guzman What's required for someone to pre-qualify, whether a newbie or someone w/ experience or a newbie working w/ someone w/ experience.

Thx ahead of time for your response.

Could you share more details on the loan you are providing? Is it a flip? Buy and old? Percentages? Etc... Thanks for posting this. I am working with a private investor to partner on some new construction and so far it is working well. 

Originally posted by @Michael Brummett :

Thank you Wendell. I enjoyed this post. I really appreciate the inspiration.

You're very welcome Michael.

Originally posted by @Crystal Smith :

@Wendell De Guzman What's required for someone to pre-qualify, whether a newbie or someone w/ experience or a newbie working w/ someone w/ experience.

Thx ahead of time for your response.

 Crystal, my portfolio lender will check, based on the borrower's credit, debt-to-income, etc. if the borrower can refinance the loan in 6 months. If the answer is YES, I will lend the money to a newbie because I know my exit is more or less assured. I will PM you the phone number of my portfolio lender.

Originally posted by @Keith Bloemendaal :

Could you share more details on the loan you are providing? Is it a flip? Buy and old? Percentages? Etc... Thanks for posting this. I am working with a private investor to partner on some new construction and so far it is working well. 

 Keith, I do the same - both fix-n-flip and fix-n-rent situations. I prefer the former but I am flexible unlike a hard money lender. 

As this forum thread is not in the Marketplace, I cannot give you loan rate & terms information on this forum. I will PM you.

Thank [email protected] De Guzman !!

I'm very excited to follow this thread.

This post has been removed.

Do our decisions make sense? Yes

I totally agree on Temple loan request.

Good stuff, I really appreciate the inside look at the process involved. It's motivating me to get my details clear and stay focused on the better deals out there. 

Chad Zaback

Awesome post Mr. De Guzman. More importantly, an awesome business paradigm based on ethical practices and using the wisdom of 'seed' planting. Can't wait to get to Chicago and link up. God bless.

- John

@Wendell De Guzman  I don't think that I ever really thought about deals from a lenders perspective before.   Thanks for helping to shift my perspective around.  

Do you spend as much time getting to know borrowers as you do investors?

Real Life of a Private Lender - Business Update Week #2

Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
2. You will see what DEALS get funded and why
3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

With these goals in mind, here's week #2:

MAKING GOOD LOANS
We have been approached by a borrower from Cincinnati, Ohio about this deal:
Property is worth $250K
Acquisition: $145K  (this is the loan amount needed)
The borrower has a buyer lined up for $168K but his buyer needs a bank loan. The borrower needs the $145K at the most for 60 days or while his buyer is getting qualified for financing. The buyer's bank requires the seller to have the deed to the property before they will lend money to the buyer. Hence, the borrower needs to borrow $145K. Here's our decision regarding this loan application:

YES IT'S A DEAL - Lenders always take risk into account and we want to mitigage the risk as much as possible. This loan is worth doing because the LTV is good ($145K/$250K = 0.58). There's a buyer lined up so we have an exit strategy that is well defined. So, the only risk is if the buyer does not get qualified. Hence, in addition to ordering an appraisal to verify the market value of the property, we'll talk to the underwriter of the bank of the buyer to be sure that he will be able to get financing. If there's a higher than 75% chance that the buyer will get approved, we'll likely fund the loan.

My business partner and I are still deciding on the interest rate we're going to charge for a short-term loan like this. Most likely to make it worth our while, we'll charge 4 points upfront and zero interest and balloon payment in 60 days. That's an annualized yield of 24%. Not bad. To protect ourselves, we'll get a first lien mortgage on the property so if the buyer cannot buy, we can foreclose.

Does our decision make sense? Any comment or feedback specially from experienced lenders will be appreciated.

ORGANIZING FOR SUCCESS
BPers from all across the country asked me for loans. Unfortunately, right now we only lend money in 3 cities (and within a 1-hour driving distance from each city). These are:
Chicago, Illinois;
Cincinnati, Ohio; and
Ft Myers, Florida
Why only these cities? We have business partners we trust in these cities and we know these markets (and have bought, sold, rehabbed, leased and managed properties in these markets).

RAISING CAPITAL
One way we're exploring raising more capital is through business credit cards. We can take advantage of promotions for 0% credit card interest rate. My business partner has excellent credit. We got a referral about a company that handles the searching and application for business credit cards with 0% promotional interest rate. I am very interested because we can get between $50K to $100K in extra capital at 0% interest on year 1. The upfront cost is $2,500. I was skeptical of these business credit cards with 0% interest but I got someone raving about it and has gotten $82,000 from it so I am suspending my skepticism and will try it out.

Do you have any questions or comments? Write them below.

" We got a referral about a company that handles the searching and application for business credit cards with 0% promotional interest rate. I am very interested because we can get between $50K to $100K in extra capital at 0% interest on year 1. "

Keep us posted on this process.

Thank You

Originally posted by @Jenkins Ramon :

" We got a referral about a company that handles the searching and application for business credit cards with 0% promotional interest rate. I am very interested because we can get between $50K to $100K in extra capital at 0% interest on year 1. "

Keep us posted on this process.

Thank You

 Yes Jenkins. I sure will. The process will take about 45-60 days to get approved for the 0% business credit card. If they truly deliver, I will probably even invite them to our Lender-Get-Togethers.

@Wendell De Guzman I appreciate your posts. I have been considering raising some capital to do some lending on fix and flip projects in Wisconsin. From the limited research I have done, based on lending to non owner occupants, it appears that there is little licensing requirements. I certainly need to research more and talk with some legal professionals, but was wondering what types of licensing requirements, or otherwise, you need for HML in Illinois.

Originally posted by @Scott Graves :

@Wendell De Guzman I appreciate your posts. I have been considering raising some capital to do some lending on fix and flip projects in Wisconsin. From the limited research I have done, based on lending to non owner occupants, it appears that there is little licensing requirements. I certainly need to research more and talk with some legal professionals, but was wondering what types of licensing requirements, or otherwise, you need for HML in Illinois.

 Scott, we are private lenders not HMLs.

@Wendell De Guzman  

Wendell. I was using HML more as a generic term meaning that you are lending against a hard asset. You are not a conventional lender. I understand the difference between what most people refer to as a private lender and a hard money lender. The question was related to what type of infrastructure (licensing, biz entity, etc.) do you feel like you need to have in order to do the type of lending you are pursuing.

@Scott Graves  , thanks for clarifying.

1) entity - LLC

2) licensing - none (this is state specific so check in your state)

Real Life of a Private Lender - Business Update Week #3

Alright BP Nation, as promised, I am giving you guys a peek into what happens in the week of a private lender. By doing this, my hope is that:
1. You will understand the psychology or what goes in the mind of a private lender (e.g., how they look at risks)
2. You will see what DEALS get funded and why
3. You will see the BORROWER profile that gets funded and why; NO personal info will be shared of course; and finally
4. You will learn how private lenders RAISE CAPITAL (and what you can and cannot do when raising money)

With these goals in mind, here's week #3:
MAKING GOOD LOANS
I have been approached by a borrower from Chicago IL about this deal:
Property is worth $180K
Acquisition: $0 - JV with the owner (50/50 after paying repairs and expenses)
Repairs Needed: $90,000
Borrower is a newbie and will have ZERO skin in the game (no downpayment, no earnest money)
DECISION: NO DEAL - The borrower has no rehab experience and no skin in the game (and has nothing financially to lose if this deal goes south). Here are the problems when dealing with a newbie:
1) Even experienced rehabbers encounter repair overruns. A newbie will likely encounter the same (if not worse). A rehab of $90K can easily become $110K or $120K. At that point, there's essentially no profit from the deal (by the time you factor in the holding costs, marketing & selling costs, etc).
2) Holding time could spiral out of control - the newbie has no experience gauging buyer-interest and no experience in negotiation. He could let a good buyer walk away because of a few thousand dollars and in the end he will be losing tens of thousands. And since the borrower has no skin in the game - who ends up eating up these losses - me, the private lender.
Bottomline: there's too much risk. Had the rehab amount is $20K, and if he has at least $10K as skin in the game, then maybe I will lend money to a newbie.But with the high repair amount, a newbie investor with no skin in the game, it's not worth it!

Now, the only way for me to take this deal on is a Joint Venture where I essentially manage & control everything (and therefore will have the majority of the deal and majority of the profits). But, after studying this potential JV-partner's character, I decided to NOT even do a JV with him. There are too many good deals out there to deal with someone I can't trust.

Does my decision make sense? Any comment or feedback specially from experienced lenders will be appreciated.

ORGANIZING FOR SUCCESS
My partner suggested we look for experienced hard money brokers so they will do the work of vetting deals and borrowers. Makes sense. The so-called "hard money lenders" you encounter are not really the lenders themselves - they are brokers. They get paid from the points they charge. These brokers get their money from private lenders like me. We, on the other hand, get paid based on the spread - the difference between the interest we charge and the interest we pay (assuming we are using other people's money in addition to our own).

RAISING CAPITAL
One way we're going to raise capital is through friends and family. We have several people in mind we're going to talk with. When you have a "prior relationship" with a potential investor, you don't go through the SEC issue of "selling a security". When you go in front of a REIA group and you solicit for investors or lenders, that could be construed as selling a security and against the law. So do NOT do that.

Do you have any questions or comments? Write them below.

Originally posted by @Wendell De Guzman :

 Scott, we are private lenders not HMLs.

@Wendell De Guzman, so what's the difference between a Hard Money Lender and a Private Lender?

Great posts! If you don't mind me asking who do you use as a portfolio lender and are they national as I see you focus on three different cities? What do they lend up to for LTV? Thank you Wendall! I sometimes need to refer clients to a portfolio lender and I currently only know of one national portfolio lender. If I am unable to assist my clients, I like to try and refer them to someone who can assist them.

Medium prime lendingJerry Padilla, Prime Lending | [email protected] | 585‑204‑6923 | https://lo.primelending.com/jerry.padilla | NY Lender # NMLS #1084877

Great thread! I've only used conventional or VA loans, and sub2 on my deals. I have enjoyed reading about the process you use to approve a loan, or not. Does a title company handle most of the details of a transaction for you? Such as preparing documents, generating interest rates, transferring money from you and interest/points back to you? Or do you use some other service to move funds? Could you, say, fund kitchen table closings? You are not working in my current area, but I am curious about the inner workings. Thanks!

Kerry Baird, UR Home Investments | http://www.urhomeinvestments.com