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.
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.