What is a Private Lender?
A private lender is an individual or a company who lends money to real estate investors to help fund investment properties. The difference between private lenders and institutional lenders is that the terms and loan characteristics are up to the individual private lender. Private lenders are often a great option for real estate investors in need of a flexible financing option. They are typically able to offer lower fees, easier access to funds, quick closings and generally provide a solution oriented experience when compared with larger financial institutions.
Things to Look for When Choosing a Private Lender
When searching for a private lender there are a few things you may want to ask and consider.
- Does the private lender fund loans using their own money? Some private lenders provide capital using their own funds, while some use capital partners who provide warehouse lines, or table funds on behalf of the private lender. In either case, the flexible terms, and speed of execution still exists.
- Does the private lender have flexibility if a borrower’s situation or property is unusual? This is dependent on each specific property and investor’s financial situation. Oftentimes private lenders offer unique deal structuring and can work with the investor on finding terms that work for all parties. Make sure the private lender you choose can provide this level of service if your situation requires atypical terms.
- How responsive is the private lender? If you find yourself waiting unreasonably long for a response, or have to consistently follow up with the lender, consider that a reflection of how the entire process will go. You want things to move as quickly and as seamlessly as possible, so working with a lender that respects your time and establishes a sense of urgency is very important.
- Can they offer low origination fees? Origination fees for private lenders vary based on a number of factors, including loan type, loan amount, the type of property, location and the borrower's current financial situation. Fees for private money lenders usually range from 1 to 5 points. It is important to find a private lender offering reasonable fees for what you’re asking for.
Why Should You Use a Private Lender?
As previously stated, private lenders can offer unique deal structurtings and are more likely to provide a painless process when compared with institutional lenders.
- Unfit for a conventional loan. If an investor is unable to qualify for bank financing, or a conventional loan, they would likely find a suitable financing option and be able to qualify for a loan with a private lender.
- In need of a quick closing. If a loan is needed quickly, a borrower would benefit from working with a private lender. A conventional loan may take 60 to 90 days, while private money loans are typically closed within 10 - 20 business days.
- Getting around credit challenges. A borrower may be in a situation where they are facing poor credit history and are in need of a loan that offers a way around that. Bridge loans are typically offered by private lenders and are a good option if this type of situation presents itself.
- Short-term capital needs or recapitalize a property. Bridge loans offer a short term solution to leverage existing equity to pay-off an equity partner, start a new project, or simply recapitalize liquidity. Working with an innovative private lender, allows you to maximize your existing equity and stay active with other real estate investment opportunities.
If you’re looking to quickly grow your portfolio and are able to take on a few extra costs in order to do so, private money lenders are a great option! Make sure you do your research and consider the points discussed in this article before moving forward with a lender.