Home > Investing > Deal Analysis > 7 Reasons for Real Estate Investors to Choose Private Equity Based Lending
Deal AnalysisFinancingInvestingLending

7 Reasons for Real Estate Investors to Choose Private Equity Based Lending

Stronger Offers. With private lender funds, you can make stronger offers with quicker closings and eliminate financing contingencies with offers just as good as cash.  Real estate brokers present numerous offers to their clients and the strongest offers are accepted.  The strongest offer is not always the highest offer price though.  For instance, let’s assume you, as a seller, receive an offer from Tom, for $225,000 with a conventional financing contingency.  That same day Harry offers you a $220,000 cash offer, with no financing contingency, to close in two weeks.  Time is money.  Instead of accepting Tom’s offer and possibly wasting time, waiting (wondering) a month or two for Tom’s bank to provide a commitment, you may choose to take Harry’s lower priced, quick-closing private lender cash offer.  Subsequently, hard money from a private lender can be construed as cash and combined with a quick-closing can hold more negotiating power in your offers comparative to traditional buyers with conventional financing.

Quick and Uncomplicated Approvals. As mentioned in [a previous article] private money lenders do not use traditional underwriting when qualifying borrowers and their loans.  The lender will underwrite your loan with your “hard” asset as collateral, secured by a note and mortgage, typically for funding real estate transactions.  Don’t have an 800-credit score? That’s okay. They don’t rely as heavily on your debt coverage ratio, FICO credit score or your ability to repay, but those factors do carry some weight.

Small Deposits.  If you try to get a loan with traditional bank financing you will be required to put up to 30% down for a commercial loan, whereas private money lenders may only require you to put in 10% of the total project cost—again because they are secured by the asset’s equity via a mortgage.

Dealing with Lenny.  When you go through a private money lender to get your funding you typically keep dealing with that same individual throughout the life of the loan.  Most private money lenders do not have 3rd party servicing firms and even if they do, they rarely sell your note so you will continue to be dealing with your present lender.

Self Employed Loans.  Right now, if you go through a traditional conventional lender, due to Dodd Frank legislation, you must provide a slew of documents to prove you have the ability to repay your loan.  If you are self-employed it is oftentimes more difficult because of the nature of inconsistent income us business owners deal with.  There are plenty of benefits to owning your own business but getting a conventional loan, for a business purpose, is not as easy as it once was.  Private money lenders are less stringent when it comes to underwriting business owners and proving their income.  If the lender can be assured that the you have an exit strategy and they will be repaid you have a great chance of getting that loan.

Avoid Prepayment Penalties.  Most private money lenders have short term notes, 12-24 months, with no prepayment penalties.  Real estate investors appreciate these short term loans because they can get multiple loans from that same lender each year and keep “flipping” properties.  Conventional lenders do not like you flipping properties as they want to count on your interest for a longer term and they secure against this by adding in prepayment penalties.

Fix and Flip of Distressed Properties.  Oftentimes real estate investors need to buy a house that is currently not able to receive a certificate of occupancy.  Perhaps the roof is in bad shape or there are major structural issues.  If you have a valid business plan for acquiring, fixing and exiting this investment you can probably get a loan from a private money lender.  They may even base the value on the after repair value (ARV), thus giving you more leverage to increase your return on your flip.  Also, if you are getting ARV financing, the lender may allow you to borrow, more than the purchase price, to pay for rehab costs.  Conventional banks, on the other hand, do not like to lend funds on properties which are not ready to be occupied or have a vast amount of rehab that is needed.

A Perceived Downside.  One reason borrowers may not choose to go with a private money lender is cost.  They are oftentimes competitive with the open market though, especially when compared to other commercial rates given by banking institutions–and the lower the LTV the lower private money lenders can adjust your rate.  Yet, on average I would wager private money tends to be more expensive than conventional financing.  That said, if you could profit on a quick-buy, cash-offer and flip that property for a high return, the benefits far outweigh the cost—especially assuming a lot of your deals may be lost while making offers with traditional financing.  If the loan costs are still bothering you, you can always adjust your offer price to consider your financing costs.  Like any other business, you need to factor in your income, expenses and plan accordingly.

As you can see, there are many benefits associated with using private money to fund your real estate investments.  I believe there are many more benefits but I only covered a few.  Like all investments though you need to consider your ability to perform your investment.  Just because a private money lender’s loans are easy to get doesn’t mean they will not foreclose on you if you default.  Again, before you make your decision to invest, you need to gauge your acquisition, rehab and exit strategy in your business plan.  Knowing your business plan, capabilities, market and investment is a great indicator of your future success.

Please contact me if you have any questions I can assist you with.  

Here for your success.

Leave a Reply

Your email address will not be published. Required fields are marked *