Private Lender Pros & Cons?

Question

looking at Private Lender's to fund property.  What are pros and cons?  Is 1% fee typical?  Things to look out for?  how do I verify I wont get burned?

Andres Saias · Answer

Hello Laura,

Private lending can be an attractive option for funding property investments, offering certain advantages and considerations. Here are the pros and cons to keep in mind:

Pros of Private Lending:

• Faster Approval and Funding: Private lenders often have more streamlined processes, allowing for quick loan approvals and funding compared to conventional mortgages. This can be crucial when time is of the essence in securing a property.
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• Flexible Terms: Private lenders typically offer more flexibility in terms compared to traditional banks. They can tailor loan terms to fit specific investment scenarios, including repayment schedules, interest rates, and collateral requirements.
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• Accessibility: Private lenders are often more willing to work with individuals who may not meet the strict criteria of conventional lenders. This opens up opportunities for real estate investors who may have a less-than-perfect credit history or unique investment strategies.
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• Less Stringent Documentation: Private lenders generally require less documentation compared to traditional lenders. This reduces the paperwork burden and speeds up the loan application process.

Cons of Private Lending:

• Higher Interest Rates: Private lenders may charge higher interest rates compared to conventional mortgages. The increased risk associated with private lending and the potential for faster approvals contributes to these higher rates.
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• Shorter Loan Terms: Private loans typically have shorter repayment periods, often ranging from a few months to a few years. This shorter timeframe can increase the pressure on borrowers to secure alternative financing or exit strategies.
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• Higher Fees: While there is no fixed industry standard, private lenders may charge additional fees, including loan origination fees or administrative costs. The 1% fee you mentioned is not uncommon, but it can vary depending on the lender and the specific terms of the loan. Direct Lenders usually charge between 1%-2%. 
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• Limited Consumer Protections: Private lending falls outside the regulatory framework that governs traditional mortgage lenders. Consequently, borrowers may have fewer legal protections and recourse in case of disputes or fraudulent practices.

Verifying Private Lenders:

To mitigate risks and ensure you don't get burned, it's essential to conduct thorough due diligence. Here are a few steps to consider:

• Research the Lender: Look for reviews, testimonials, and online presence of the private lender you're considering. Check their track record, experience, and reputation within the real estate investment community.
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• Seek Recommendations: Ask for recommendations from fellow investors, real estate professionals, or local real estate investment associations. Their insights can provide valuable information on reputable private lenders.
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• Verify Credentials: Check if the lender is licensed or registered with relevant regulatory bodies, such as state financial authorities or associations for private lenders. This verification can offer some level of assurance regarding their credibility and adherence to industry standards.
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• Conduct In-Person or Virtual Meetings: Whenever possible, arrange meetings or video conferences with potential lenders to establish a personal connection. This allows you to assess their professionalism, expertise, and willingness to address your concerns.

Remember, every private lending arrangement is unique, so it's crucial to review all terms, conditions, and risks associated with a specific lender before proceeding. Consulting with a qualified Mortgage broker might be a great help.

If you have any other questions or need a broker referral DM me. As a private lender, I work with several good ones.

Eugene Neal · Answer

If you are looking for a Private Lender/ Hard Money Lender then the average fee is between 1% and 3%. It is based on the down payment, experience, and credit score. The only out-of-pocket expense is for the appraisal. Also, if you are looking to add rehab funds then they are issued on a draw basis. Let me know if you have any other questions.

Eliott Elias · Answer

This depends on what type of loan you are requesting. Most private loans are short term with very high interest rates

Chris Seveney · Answer

@Laura Hildreth

1% is a good deal

Things to look for right off bat

1. If their email is gmail or yahoo (or like aol and not a business with a website) run away

2. They want any money upfront

Mike Klarman · Answer

Laura, deciphering who "really" is a private lender and who is not is tricky.  All depends what you consider private money to be.

Obviously someone's personal money qualifies, but how about pooled money from many investors?  Cause a lot of HMLs are just that.  A few big investors with big bucks back these HMLs.  It's technically their private money.

I feel like people look for Private Money cause they are looking to circumvent the loan process and kind of "negotiate" terms with a private money lender.  That is never gonna happen.  Most private lenders want to work with experienced investors only, why take a flyer on a new investor when you can get in bed with guys who do 30 houses a year?  Nobody gets excited by a one off, you want volume.  Don't sneeze at HML, just sayin.

Laura Hildreth · Answer

Thank you for your reply!  I actually found a few on privatelenders.com

Is that the same advice?

Mason Liu · Answer

Hey Laura,

In this case, I'm assuming by "Private Lender" you are referring to individuals who you know on a personal level that would be willing to lend you money in exchange for a interest payment.

Pros is that it probably will be cheaper than Hard Money Loans 9/10 times. With the latter, you can expect to pay 2-3 points upfront and 10-12% interest in today's market. Con is that if the private money lender has never done this before or does not have experience in REI, they may be a lot more apprehensive about the whole process and may involve themselves way more than you'd like.

Fee upfront will always be different from person to person. I've seen some PMLs be 8-10% with no points up front. I've also seen some that included points but a lower rate.

Make sure you draft an appropriate legal operating agreement. You can allow the PML to have a first position lien on the property in case you default, but beyond that clearly state the role and responsibilities of each party as well as the payouts so everyone is on the same page. This is your first line of defense. From that standpoint, I would also say make sure you have contingency plans in case any PML is not able to come up with the money when you have a property under contract, as that may put you at risk of not being able to perform on the purchase.

Private Lender Pros & Cons?

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