What Rates And Terms Should You Expect From Your Private Lender?

Question

Different forms of this question are posted frequently and the answer to the title question is the same as the answer to many real estate questions—it depends. To answer this question we must have a common understanding on some terms that are not well defined. When I say “private lender” I mean someone who is not a professional lender. They are often a friend, a family member or an acquaintance (a co-worker, mail carrier, doctor, etc.). They may be willing to lend, may even be excited at the prospect of earning a higher rate by lending but they do not make their living as lenders. They do not have to make loans to survive. I contrast that with hard money lenders. These are lenders who are in business to loan money and must do so in order to stay in business.

Hard money lenders will often have websites that will outline the basic parameters under which they will lend: rate, term (length of loan), loan to value (LTV) ratio, amount, etc. They are likely to be willing to spend a little time discussing their parameters ahead of the time the borrower needs the loan and if the borrower brings a deal that meets their parameters they are likely to be able to fund. They may not be able to quote a firm interest rate or terms because the final details may be largely dependent upon the details of the property which secures the loan.

Private lenders won’t have websites and may not even know what terms will be acceptable to them. Many inexperienced lenders may not have thought much about what is possible. They are relying on you, the borrower, to make the proposal and to protect them. You may find someone who has funds earning 1% in a bank (can a 1% return really be classified as earning?) who will be thrilled if you offer them 7%. They may be nervous about accepting an offer of 10% interest as it may seem risky. An offer of 18% may scare them into not accepting your deal—they may think it is a scam.

There is a hybrid type of lender you may run into here on BP. They are experienced private lenders. These are people lending their own funds but they know lending or real estate and, sometimes, both. An 18% interest rate won’t scare them—they may demand it and get it regularly. They probably won’t have websites and though they may hint that they lend (sometimes they give large hints) they will not do any serious advertising. They will have target interest rates and terms that they are comfortable extending and will probably be willing to discuss those in general terms. They are not likely to be interested in single digit returns but they may be quite flexible on length of the loan, whether payments are necessary during the rehab, the LTV or other parameters. These are still not professionals—they do not need to make any loans. The property will be very important to them but so will the way you approach them. Do you appear to be an experienced professional or a part time amateur?

This may have been better suited to a blog entry but I thought it might be more likely to stimulate a discussion here. What do you think?

Jeff S. · Answer

Of course this completely skirts what most everyone is really asking for; a true asset based lender.  That is, someone who will loan solely on the value or potential value of the property without regard to the borrowers financial position, credit, or even background and experience. Private lenders are all over the map on this and, in my view, that's a good thing.

Like institutional lenders, some asset based lenders ask for years of tax records, credit reports, current bank statements, appraisals, a long track record, and on and on and on.  Others simply want to ensure that there is enough equity in the property to protect themselves if a deal goes bad.  The paperwork and time to close here can be minimal. I know lenders that don't care if the borrower will make money, are less critical with their evaluations, and therefore loan at relatively low LTV's.  These lenders can be very accommodating with the inexperienced.  Of course there's always the venerable (vulnerable?) Aunt Edna, who's only loaning because you're related and she trusts you.

All of this is what makes the world go round.  You can't judge or generalize, though some do.

A few here want to be seen as speaking for everyone and authoritatively post about what lenders expect, what paperwork you'll need, maximum LTV's, lowest subordinate positions, etc.  What they are really pointing to are their own terms and they do a disservice, in my view, to those that don't understand there is no such thing as a "standard loan" on this side of the business.   You have to search and ask.

Asset based loan terms and expectations are as different as thumbprints.  If anyone looks hard enough, there's probably a perfect lender/borrower combination for every deal, assuming both are sensible.

Will Barnard · Answer

Finally, someone else who understands the difference between private and hard money lenders and posts about it. So often I have commented on this very thing and have explained the difference between a private and HML there are also lots of HMLs that are calling themselves private money just as a marketing tool.

Rant over, great post and you are correct, the answer is always going to be . . .  It depends. One answer was 12%, I often pay that amount and I also often pay 10%. I would suggest that any lender or borrower make sure that they stay within the legal usury limits of each state law and in the cases where you are willing to borrow at a higher rate than the usury limit, protect your private lender by taking the necessary additional steps to not create a usurious loan. Typically this is done by involving a licensed loan broker who facilitates the loan. I have also, on many occasions, wrote the note at the usury limit (10% here in CA) and then paid the lender the balance 2% on my hand shake. It is my reputation that allows this to happen, but in all honesty, the only risk in that case to the lender is the 2%, so if I did not honor my word! they are not out that much. Clearly I would always honor my word for a multitude of reasons, the obvious being my word is my bond, but the main reason is that it would never ever be worth losing a good private lender and your reputation over trying to save a tiny % on the loan!

Jeff S. · Answer

It's not worth getting hung up or ranting over the difference between what lenders call themselves.  Some here have their own definitions and feel strongly about them. This seems to be a BP thing.

There is no "official" definition or difference between a hard money lender, a private money lender, and now your new term, Jeff, an "experienced" private money lender (which I really like because it perfectly fits me and my wife).  The operative term is simply "lender" and they are all just non-institutional, in this case.  I know this bugs the hell out of some on this board.  All fall under the same applicable laws and all require the same basic paperwork. The rest, as noted, is marketing.

According to the BP definition, it seems the implication is that for a private lender, like your grandmother for example, it's ok to be much less formal with the rules.  Not true.  Alternately, I think potential borrowers here use the term because they believe they will get a better deal.  Maybe true.  And then there are those who believe hard money lenders are trying to soften their broken image by using a softer squishier term.  I'm sure this is true.

So?

It doesn't matter what you put in front of "lender."  More important is that anyone who lends money to anyone scrupulously follows their state and federal law. Even grandma is not exempt here, and it doesn't matter what she or anyone else wants to call her.  There are not two (now three?) sets of laws.  Improperly originated loans can be very difficult to enforce no matter what you or anyone else titles you.

This argument is much ado about nothing but can be a dangerous diversion to those who think they can either get away with something or get something for much less than it's worth.  People die, deals go bad.  Neither a judge, the IRS, nor an aggressive opposing council, will care that the money came from your Aunt Edna or a large HML on Wilshire Blvd.

Neil Aggarwal · Answer

This discussion seems spot on to me.  Thank you for the write-up.

Brian Gibbons · Answer

OPM or other People's Money is a joint venture or private lender if you want to be in this game along time you under promise and over deliver or UPOD

I love using private lenders with free and clear minor rehabs, at about 10%, payable in three or four months.

Say I borrow 10,000, I pay the full 10% even though I only use the money for four months

The private lender is making about 30 to 40% a year by constantly recycling the money

There is a ton of IRA money out there that people can start a self directed IRA

I like trustetc.com and penscotrust.com

@Dmitriy Fomichenko

Might want to respond to this

Jeff Rabinowitz · Answer

Absolutely @Jeff S. Again, I couldn't agree more. Lenders also make different deals with different borrowers or on different types of projects with the same borrower. I am fortunate to have one partner (borrower) with whom I have done more than 6 deals--all were profitable and I was paid as agreed on all. (That is not quite true. The offer to pay me according to the terms was made on all the deals but I volunteered a small discount on one deal because I knew it was a tight one for my partner. This is not just about money but relationships.) When this partner calls me about a new project we may sometimes talk for a while just to catch up. The discussion about the deal generally takes less than 5 minutes. If I have the funds available I am almost always willing to extend them with the same terms as the last deal. I know my partner keeps up with his geographic area and knows how to buy well enough to make the deal profitable for both of us. He is always willing to commit some personal funds to the deal--it saves him funding expenses and ensures my participation. (He earns much more than I and he should.) I have forgotten to ask him for comps before agreeing to a deal though I do eventually put those in my files.     I have another partner with whom I have done multiple deals and who always performs but the relationship has not yet (I believe it will) progressed to the point of the first partner. This partner is willing to do deals with less profit potential than the first (there is still a healthy margin or I would not participate). Recently, he proposed a deal where the profit looked smaller than I was comfortable with. I believe in this rehabber so I agreed to the deal with a larger participation of the rehabber's own funds in the deal. Instead of going forward on those terms on a thin deal he found another deal where I was happy to fund the way I had previously.      I did not partner with either of these investors on these terms on our first deals. I asked for much more documention in the beginning. (As I recall, both of these partners were quite willing to provide much more documentation than I asked for). They prove themselves by repeatedly doing profitable deals with me and with several other partners in the area whom I know. (Do you think your money partners don't know who the other money partners in the area are?) It is much easier to gauge the risk of a venture when the skill level, the commitment, and the business ethics of your partners are known. Then, all that is left is to form a financial plan that is appropriate and do the project.

Jeff Rabinowitz · Answer

Nice, @Jeff S. I think it is even more important to protect the inexperienced, especially your family and friends, by filing the proper paperwork. They do not know how to defend themselves and the consequences of a mistake can cost much more than money in these instances.I am glad you like the term experienced private lender. These definitions get so screwed up. Many people here use hard money lender versus soft money lender which is completely wrong. (On one post where they used this  I asked if an "experienced private lender" would be semi-soft which I thought a bit more acceptable than semi-erect.) For all of you out there who confuse this. A hard money lender is not called a hard money lender because their terms are hard (though they may be). A hard money lender is called a hard money lender because they lend hard money which means actual money, real money. In days of yore this would have meant gold or silver. Of course, any non-institutional lender is lending hard money.

Darren Eady · Answer

To give the really short answer, probably 12%, if it is an asset based loan (not looking at your credit or your income).  Most private lenders that offer a lower rate, make up the difference in fees and you still pay about 12%.  After lending over $200 million this way and selling those loans as mortgage notes, this is what I've found is the happy medium for borrower and investor.

Dmitriy Fomichenko · Answer

@Brian Gibbons

thanks for the mention!

Many of our clients lend out of their Solo(K)s, and I also done it several times. What I see is the range from 8-15% plus 0-3 points (depending on the terms). Some lend out directly, some use brokers.

What Rates And Terms Should You Expect From Your Private Lender?

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