How to break into private lending

Question

Hello,
I would like to get more involved in private lending but am not too sure how to go about it. I have done two loans in the past (both successful), but those have been to acquaintances and they just happened to come my way. I recently moved to Central Texas, and am looking to do local loans here. I have attended a local RE group and offered my services, but I did not find any qualified borrowers. I will try that approach some more, of course, but is there a better way to go about it? I have never used a broker, I suppose I am open to the idea, but I'm not even sure where to find one. I'm nervous to go through anyone, because that's just one more level of abstraction between my money and what it's actually being used for, but a broker of repute would be alright. Does anyone have any advice for someone trying to crack into this lucrative business? Are brokers a good move for a novice, or should I just do everything myself, provided I can find people to lend to? Thanks a lot for any help at all.

Jake

Bill Gulley · Answer

Well, this isn't 1995!

Making a couple loans to those you know is "private lending".

Going out to REI meetings and publicly seeking borrowers is absolutely not private lending, it is commercial lending. You are then, basically a "hard money lender".

The term, private lending, is anchored in SEC regulations as exceptions to SEC requirements, also in commercial and mortgage brokerage requirements, lending to someone you have a past or current business relationship with, someone known to you where your relationship did not arise from your solicitations for a borrower.

A real estate attorney, specializes in real estate and they may well know how to pull a boiler plate note and deed of trust, they may know how to exchange cash through an escrow account, have a borrower sign and file the note and deed of trust to secure your funds.

I seriously doubt they know laws pertaining to the advertising (which includes the solicitation of loans) origination, processing, qualifying borrowers as to ability to pay, predatory lending and loan servicing matters, the reason for my opinion is that lending is not real estate, it's banking and finance.

Before you hit the streets, you need to obtain the proper licenses. You're in luck, because compared to residential lending, getting set up as a commercial lender is a cake walk.

Why ensure you're compliant with lending laws? Because if you are not, you can easily lose every dime in your loan as well as being fined in addition to your loss. License requirements can begin at a municipal level with a business license and go to state licensing under your state banking authority or department of finance. Every state will have license requirements for a lender, if anyone tells you otherwise, they are wrong, there may be exceptions, but commercial lending is regulated in all states.

Commercial lending has much less regulatory oversight, than consumer lending, but it is not without compliance requirements as it was with some guy writing a check for a loan twenty years ago or even five years ago.

A broker, like Ann B. can keep you out of trouble and save your investment from being lost, a broker may utilize individuals who have funds to make loans without that investor being under license or regulatory issues, you're simply an investor. I assume you're an accredited investor as defined under SEC regulations, that can make a difference in a broker dealing with you.

There are other ways to fund a project other than by lending, becoming a partner is easier and it can be more profitable than being in the shoes of a lender. I assume that you have a general business knowledge, being familiar with partnerships and business entities, going this route, in Texas, you could use a Series LLC and admit members doing projects and do your lending through the Operating Agreement with title to any RE being in the LLC assigned to that member under their "series cell", going this route is not lending per se under banking or lending requirements and your RE attorney can probably accomplish this with fewer complications than getting into the finance arena.

You may be limited to the number of members admitted acting as a finance conduit, but you can form separate LLCs as well.

Another suggestion is to look into "Transactional Funding" simply lending at a closing where your immediate repayment is sitting in escrow from a transaction that is to follow your making a loan, there can be zero risks if done properly as your funds are never disbursed unless good funds are available to pay you off. This is also more "under the radar" but may require a license as well.

Licensing may be as simple as a registration, simply informing the state that you exist, they may require a financial statement or a bond, in this area, experience may not be required.

Regardless, there are pitfalls in commercial lending, it's not just a matter of having the money to lend. Best way to get your feet wet is to get with a broker. I also suggest you not advertise or solicit borrowers until you have covered your legal bases and know what you can and can not say in offering money to lend. Good luck! :)

Peter Spiro · Answer

Jake, the first thing I would do is post my company name in the Private Lender directory of Bigger Pockets. When I did that, I literally got a call the next day from someone who had seen it there. Some other things that have worked for me are:

* Create a web site and place an ad using Google Adwords

* Post on the real estate sites of LinkedIn

* Start a newsletter; talk about the successful loans you have already done and what type of borrowers you are looking for.

* Get business cards made to hand out at REIA meetings

Good luck.

-Pete Spiro

Ann Bellamy · Answer

Then I'm with Bill Worsley, contact the hard money lenders in your area.  Some may have funds, some may broker your money out, some may broker your money in a fractionalized loan.

I do a ton of marketing in the REIA's, but the problem with that is you get mostly newbie's.  Not to say you won't find the experienced guys there too, you will, but they frequently already have sources lower than typical hard money rates.

If you find a good hard money broker, that can also work, but be very careful, I'm not a fan of most brokers.  Be sure to ask if they represent the borrower or you.

Bill Worsley · Answer

@Jake Cardillo, working with a reputable broker in my opinion is an excellent way to better understand the many nuances of private lending.  What you don't know will hurt you, and there are many ways you can part with your hard earned capital if you do not have the experience needed to properly underwrite, document, and service a private mortgage note.

Trust me... lessons learned in the school of lending hard knocks!

Much wisdom can be gained by placing your money with and learning from an established hard money/private money broker in your market.  A good broker will have a well thought out underwriting process, a strong understanding of the legal environment in Texas, and an established network of borrowers looking for loans.

I have someone I'd recommend based in the Austin market in terms of a reputable broker.  Feel free to PM me for more info.

Steve Babiak · Answer

This may sound a bit odd, but it seems you are looking to build a list of buyers.  There is a sticky post in the wholesaling forum that gives a bunch of methods for doing that.

Then we have these threads to also help with how to lend:

http://www.biggerpockets.com/forums/49/topics/18862-how-to-become-a-private-lender

http://www.biggerpockets.com/forums/50/topics/74335-how-to-become-a-hard-money-lender

Chuck W. · Answer

I am trying to get an idea what to offer a private investor for his money. I want to be fair with him, since I believe in long term relationships. I have been reading 10%-12% interest rate. I typically need money for less than 6 months. I am willing to put between 25% to 50% of my own money into a deal. Would I offer to pay points ?

Cheryl C. · Answer

Back when I used to go to auctions at the court house there was always the same HML at every sale.  He passed out his card to every buyer.  All the investors knew him.  I never needed HM but that guy was at every sale.  Also, the Attorney that owns the title company I use has a list of people/companies that do hard money - one is his brother!  Also, agents that work with investors could add you to their list.

Jake Cardillo · Answer

Scott Pirrie, Thanks also for your input. I'm just starting to contact some locals now and I'm waiting for them to call me back after I've left message. 
I'm going to try to attack this from multiple angles. I'm going to continue to throw my name in the hat at local REI meetings and will also see what I can get with local lenders. I'll keep you guys updated as to my progress.

Jake Cardillo · Answer

Everyone, 
Thanks very much for your feedback. I truly appreciate it.  Ann Bellamy, I apologize for my lack of clarity. My goal is to lend to investors - Specifically, people whose exit plans are to buy and flip, buy, rehab and flip, or investors looking for bridge loans until they can get traditional financing etc. When I used the term 'unqualified' earlier, I wasn't speaking to the prospective's credit scores or any traditional metric of credit-worthiness. I just did not have any confidence in what they were doing (because they themselves didn't know, they didn't get the concept of needing first lien on a property in order to lend). This is not to say that I'm an expert, because I'm certainly a neophyte, I'm simply trying to illustrate what I meant by 'unqualified'. I've been lurking on this forum for a little while, and I always find your posts very helpful and informative. Again, I appreciate your reply.

Bill Worsley, Thanks for your input. I really appreciate it. I relied on a friend who is a RE lawyer last time to take care of the legal documents, escrow, etc. He did a fantastic job, and I did learn a ton, but of course he can't practice law in Texas. I'll shoot you a PM.

Steve Babiak. Thanks for the links on how to lend. I had found one of them previously but the thread that I saw for the first time proved very useful.

Ann Bellamy · Answer

Jake Cardillo, if you are trying to do residential lending to "qualified borrowers", that's an entirely different thing than what Scott Pirrie is talking about.  So first you need to give us more information on what you're trying to do.

Residential lending to homeowners?
Rehab lending to rehabbers?
Or something else entirely?

How to break into private lending

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