Top 5 Keys to Understanding Private Lending

Private lending is the absolute key to unlocking the door to successfully completing real estate deals. Why would you want to use a private lender? You are able to get money from individuals more easily, more cheaply and on better terms than you can from institutions. In real estate, where you may only need short-term money, the door to borrowing from institutions may be locked. What do we mean by private lending? Private lenders are individuals who will loan money on a one-to-one basis, often from their retirement accounts, for various types of investments. Borrowers sometimes secure more than one loan for their projects if the first private lender is willing to make the loan but doesn‘t have enough liquid cash to provide the entire amount needed. The demand for private money outweighs the availability, unless you know how to look for it. However, you have to make sure that you are careful in how you work with private lending. If you do it wrong, you are going to screw things up and will have a host of problems and chaos.

1. Know the Lender’s Concerns – There are three main things that are important for lenders in a private lending scenario:

  • They want a smooth, simple transaction – be sure you can easily and clearly explain the purpose of the loan.
  • They want to make sure the principle, the amount of money they are loaning, is going to be adequately protected.
  • They want to know their rate of return – a function of both points and time; their overall return after legal fees, title work and lost opportunities.

How will the principal be protected? How will the principal be paid back? What is the anticipated profit? When will that be paid? Is there enough profit to make it worthwhile for both the lender and the borrower? The lender‘s job is to ask those questions.

The lender needs to vet the borrower and make sure this deal will happen. If you as a borrower can address those concerns up front and outline the deal in detail, before the private lender even has to ask, you take a load off his or her shoulders. Prove on paper that the deal makes sense, that it will perform and that it will close.

2. Know the Title Company’s Concerns - Whether you are the borrower or the lender in any private lending transaction, think carefully about the terms and respect the people that are instituting those terms. The title company is responsible for coordinating the transfer of property and the exchange of funds, and will want:

  • Money to be wired to them or brought by way of a cashier‘s check, bank check or certified funds.
  • Closing instructions from the private lender.
  • Escrow instructions signed by all the parties involved (how they need to execute their tasks, handle the money and what their duties and responsibilities are for each party to the transaction.) The closing instructions will come from the lender, who is indicating under what terms they‘ll release their funds so that the transaction can go forward.

3. Knowing the Attorney’s Concerns – Most of the time, the responsibility of getting the correct paperwork in place for a privately funded transaction is going to fall upon the private lender and the private lender‘s attorney. Private lenders need to make sure that they have an attorney who understands these types of transactions; they are different. Anything and everything can be negotiated, and the attorney needs to understand what was worked out between the borrower and the lender.

  • Loan and Real Estate Documents – Promissory note, mortgage, deed.
  • Payment Documents – Closing instructions, projected payment history, accurate payment schedule and loan history.
  • Business Documents – Personal guarantee, business-to-business agreements.

5. Knowing the Private Borrower’s Concerns – All private lenders should understand the issues that borrowers have to consider. They need access to the money. They wouldn‘t be looking to borrow money if they didn‘t need it, and they generally need it relatively quickly and easily. So access to money is their first concern. Are they getting access to someone with money to loan, and is that access something that can be responsive to their needs?

  • Borrowers want a smooth, simple transaction.
  • The money is there and can easily be applied to the task at hand.
  • Borrower’s need to understand the private lender’s terms.
  • Set up a win-win situation.

6. Putting Private Money into Motion – “He who has the gold makes the rules.” Private lenders make an important contribution to real estate investing. They make it possible. If you want to make a lot of money, you need to know how a private lender fits into the mechanics of your deal.

  • Understanding do’s and don’ts of advertising for private money.
  • Long-term or rehab deals.
  • Quick turn or “flip” deals.

Here I’ve really just touched on what is involved in private lending for real estate investing. It is an integral part of successful investing, and if you know how to navigate the world of private lending, you’ll have access to a wider range of investing opportunities.

To learn more about private lending, or to kick your own real estate investing efforts into high gear, click here .

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