What is a Private Real Estate Lender?

Direct Private Real Estate Lender

What is a private lender?

When we know the exact answer, we will let you know. There is a fine line between the various terms, and they are used interchangeably by different people.

We tend to think of it this way: a private lender provides money for real estate investors that most likely can obtain loans from a bank, but want more flexibility and speed than a bank can offer. (Please email me if you find a bank that actually closes in less than 14 days.)

Private lenders typically fit into two categories: local wealthy individuals making a few direct loans a year to investors they personally know, or organizations that do this full time. Often, your local lender that knows you personally might be slightly more flexible and maybe cheaper, but he might only have the ability to have 1-2 loans out with you at any time. If you find a good professional lender, they should be able to have many more loans with you and the ability to lend millions to each client.

Finally, the big difference when you find a quality direct lender is that they can be much more flexible in structuring and closing transactions than a bank. A vacant property or a REO purchase is actually viewed favorably because of the value created in re-positioning the property. A bank might run from this because they can’t explain it to their credit committee or regulator.

So what is the difference between a private lender and a hard money lender?

Hard money is not our favorite term, but we inherited it from the industry. The term hard money originates from the fact that lenders were lending against a “hard asset”. This can also be called an “Asset Backed Lender”. A Lender looks solely at the property they are lending against and generally relies almost entirely on the Loan to Value ratio. The Borrower’s income / credit is merely a secondary consideration. In the heyday, almost no hard money lenders asked for documents, but many of them are no longer in business. Some lenders still have no-doc programs; however, they typically charge very high interest rates and large upfront points. Look at our more detailed post of What is a Hard Money Lender (link). (FYI: We consider ourselves primarily a private lender for more seasoned real estate investors with selective asset backed programs. i.e We do look at your experience, tax returns, assets and credit, so that we can provide lower rates and fees to people that are more qualified).

So where do you begin when looking for a private lender. Here are a few questions to ask and items to be careful of:

How to find a direct private lender:

  • Real estate broker recommendations
  • Local Real Estate Clubs
  • Asking family and friends
  • There are trade organizations such as American Association of Private Lenders that should have vetted firms (We are a member of this organization)

Questions to ask:

  • Are you a direct lender or do you work with brokers?
  • Do you have the available funds to close this loan or is there a limited amount of funds you have to lend this month?
  • Can you explain all your fees?
  • When will you issue a written term sheet or commitment letter?

Things to be careful of:

  • Be very careful of online directories.
  • Many are just lead generation sites and sell your name and information to brokers
  • Large application fees or upfront money that is requested prior to issuing a term sheet and only accepting checks without the ability to accept credit cards
  • Anyone that uses  gmail, aol or any non-corporate email
  • Check that they have a working website with a phone number and address
  • Someone that says they are a direct lender but:
    • Asks you to fill out an application without a logo or contact information
    • Asks you to fill out different forms with very similar information
    • Needs an excessive amount of time to get back to you or
      • Typically these are signs you are working with a broker

The shift in the Real Estate market has been significant in the past decade and the ways of doing business are constantly evolving. If you’re interested in learning more about private lending or looking for creative ways to finance your next deal, please contact us or fill out our pre-qualifying application.

 

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