How Do You Make Private Lending a Win-Win?

Question

Hey BP crew! I’ve been digging into private money lately—trying to wrap my head around how investors and lenders make these deals a win-win. What’s one thing you’ve learned (the hard way or not) about structuring a loan or partnership that really clicked for you? Maybe it’s a term you swear by, a deal that surprised you, or just a tip for keeping things smooth. I’d love to hear your experiences—hoping to soak up some wisdom as I figure out my next steps!

Jeff S. · Answer

We only lend to experienced rehabbers who have been doing this full-time and locally. Our process is to initially get to know them face-to-face, by meeting a few times over lunch or dinner and even walking a few of their properties. Since we only lend our own hard-earned money, this gives us the confidence that they are the kind of people with whom we want to do business—and vice versa.

Most people are good people, but occasionally, we meet a stinker. We don’t consider the higher fees on a deal or two as the “win.” The long-term relationship, with those we genuinely like, over dozens of deals, is where we make our money. What a shock that these are our most valuable borrowers. The property is always a close second, and the borrower must always make money.

I attended a real estate club recently where they played “Shark Tank.” Here, four major lenders sat at the front of the room, and potential borrowers presented their scenarios. I thought it interesting that none of the lenders seemed to care that some of the borrowers would obviously lose money on the property they presented. I even asked this of the panel but only got evasive replies. It was one of the most interesting REI clubs I’ve attended and very telling.

We make it clear to all borrowers up front that we will only lend if we are confident they will make a fair profit. Since we hold our loans, their profit is the only way we get paid back. We have strict financial criteria we use to ensure this and can prove time and again that our criteria work. It’s not perfect—“stuff” always happens—but the most important part of any loan is that the borrower makes a fair profit. If they make money, we make money, and I know we’ve talked more borrowers out of deals than we’ve approved loans.

Doug Smith · Answer

As a lender that has also personally invested in many properties, I think both sides can get too greedy. You can also add realtors and wholesalers into that statement. I think we as lenders need to remember that we have a vested interest in making sure an investor is successful. If the investor is successful, they'll come back again and again. In many instances, parties to a transaction try to hit a home run in one deal instead of remembering that they'll do better in the long run by taking care of the other people in the transaction. That doesn't mean that we'll sacrifice to the point where we lose money, but we always remember that the deal has to work for everyone. That's how long-term relationships are made. That's my tip for this thread.

Chris Seveney · Answer

Want to know the best way to have a win-win in private lending---> do not give someone a loan who does not deserve it.

We buy defaulted debt and I cannot tell you how many deals we are seeing right now to people who have never flipped a property and the numbers from the outset never worked, it also does not go into people without experience, its people with experience but attempting to work out of state or in other markets.

But many of the programs are broker driven where everyone gets fees upfront and pushes the loan down the line to an institution. So for me, its best to give a loan that will succeed to someone who is qualified. 8/10 loans we see are passed on because the deal does not work but the investor will continue to seek someone to tell them yes.

Brad Heaps · Answer

Hey Christian-  I understand the higher costs associated with private or hard money can be a mental roadblock when it comes to investing.  The win part for the lender is obviously the higher fees they get.  The win for the investor is the "no red tape" that banks have to put you through.  For the investor, it's usually much more seamless, lower doc process.  I agree with the above comment regarding the relationship you will build with a lender.  Once your first loan is done, and you are happy with the lender, the second loan (and so on) will be even easier as they already know you.  We've had clients that just call us with their next project and we can process the loan with very little from them.  I would say to jump on a call with a lender and make sure that they communicate effectively with you and you feel they are transparent.  Communication is key, especially as information is passed back and forth and time is of the essence in these matters.  Good luck with your search and reach out if we can answer questions for you.

Jacob Sherman · Answer

It really depends on the scenarios and experience of your borrower

How Do You Make Private Lending a Win-Win?

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