May 14, 2019

Private Lending

Over the past year, we’ve seen a steady increase in the demand for private financing within subsets of our clientele.  

We like to think of private lenders as a reliable, common-sense tool within our toolkit of options. While private lending isn’t the right tool for all situations, it is sometimes the only tool that gets a job off the ground (literally)  – making it the right fit for some situations. 

 

What is private lending? 

  • Private lending is a short-term loan secured by real estate 
  • Private loans are typically short-term loans (6-24 months) 
  • They can be interest-only loans or amortized loans 
  • At the end of the term, the loan must be repaid in full which means a clear “exit” (strategy) needs to be in place

When should it be used? 

  • Private financing should only be used when more conventional financing is either not an option or not the right fit  
  • Fix & flips, land loans, construction loans, bruised credit, interim financing and quick approvals are the most common private lending situations 
  • Property types also play a key role; private lenders usually have more flexible policies about lending areas, property types and property usage than conventional lenders

How do you qualify? 

  • Lenders are primarily concerned with the amount of equity you have invested in the property 
  • The more equity you have, the better terms you’ll be offered 
  • Strong credit and consistent employment are less critical than demonstrating you have the resources to make loan payments, and a clear way to ultimately repay the loan by the end of its term (called the “exit strategy”) 
  • Private lenders will require a current appraisal of the property (as if the property were to be sold today) because their maximum loan is based on that value

What are common exit strategies? 

  • Renovate the property, then sell it (“fix and flip”) 
  • Renovate the property, then refinance it at a lower interest rate when renovations are complete (“fix and hold”) 
  • Sell the property 
  • Qualify for lower interest rate financing once credit/employment situation improves/stabilizes 
  • Qualify for construction financing 
  • Sell another property to pay out the loan 
  • Provide proof of a pending inheritance or settlement 
  • Normalize cash-flow/business operations which will allow for lower interest rate financing by end of loan term

What are the advantages of private lending? 

  • Fast approvals 
  • Fast funding (“money in your pocket”) 
  • Flexibility/a common-sense lending approach

What are the drawbacks of private lending? 

  • High interest rates – they should not be used as a long-term source of financing   


If you want to do a “fix and flip” or “fix and keep”, have bruised credit, need interim financing or require a construction mortgage…talk to us. We have access to multiple private lenders and can identify whether private lending is the right tool for you.  

 

You Dream It. We Finance It.