What should I expect from a Private Lending Offer?

Question

Hello! I've been flipping for ~10 years now (just very slowly - 1-2 per year) and have done well on each one. I've taken the profits and invested them in 4 rentals (and a personal res) over the course of that time. The only problem is it's been a very slow process. I didn't mind taking my time before as I had been learning along the way and had my priorities elsewhere (other work). At this point I've worked out the kinks - know my market, have my crews set, know my costs and potential profits for my area. I'm at a point now where I am seeking outside funds to help speed up the process (I have lines of credit available but have reached a point where my debt to income allows no more lines on my rentals equity)

My questions are:

- When seeking outside funds from private lenders, what should I expect as far as conditions? Percentage of the profit or percentage rate of the borrowed money? Or both?

- Any recommendations on where to approach willing private lenders? How to approach them - with a breakdown of my past flips?

I want to give myself the best situation possible so I can manage more flips and turn the profits into rentals for myself and would love any opinions on the subject. Thanks in advance for any and all help!

John Herrick · Answer

Suggestion:Unlikely it occured to you:  Investigate UNSECURED credit lines. Not tied to property, based on credit score and credit profile (# credit cards, limits, length of relationship and % usage of total limit). You may do better with full docs- tax returns and a good financial statement, but some brokers have stated income programs. I do.  Great alternative to private lenders because you have total control over the funds--just write a check once funded. Contact me if I can help here, it's my primary business.

With respect to private lenders, a well thought out and documented package helps a lot:

1. Document your ARV/estimated sale price comparable sales,

2. Have a detailed total project cost breakdown including a reserve for unknown developments so you can accurately predict your costs and expected profit- and show your lender they are always protected.

3. Have a show-and-tell photographic coverage of the project in question plus successful previous projects that you can use to create credibility. Show that you've done it many times before. A picture is still worth a thousand words. Wonderful for sales!

Marketing: 1. you can subscribe to private lenders lists to approach; 2. Announce your availability at all types of real estate events. 3. Start talking to everyone you know, asking if they know anyone who's tired of the stock market losses (ask them how much THEY lost in the '08-'09 crash- average is 40%- rub it in,)  have a self directed IRA or other available funds that they'd like to invest in a secure, tried and true investment medium. Stress that the deed of trust is recorded against the property as a public lien. Let them know all funds pass through escrow, not your hands, and that their investment is title and fire insured. Stress how old an investment medium is, and if done right, is extremely secure (and yours is all of that). Remind them that banks do this kind of lending too, but you prefer the flexibility of a private loan relationship. You can have another investor own a  percentage of the loan to create extra comfort. If it makes any difference to them you can offer a personal guarantee and even a personal financial package including a credit report. They may want to start out by investing a smaller amount. Normally once they have a good experiience they'll open up much larger amounts and will be pressing you for more opportunities!  Just always take good care of their security position, and always pay on time.  Offer a lower rate if they want a monthly payment (6-75?) and a higher rate98-9%) if they let it accrue until sale or maturity date, then gets paid at sale. Usually they don't need the current income and will allow no monthly payment to get the higher yield. Easier for you.

You've just had a short course in trust deed loan sales. Hope it's helpful. Call me if you have further questions,

To your outstanding success! John L. Herrick

Jeff S. · Answer

Run the numbers, @Chad Jarrah.  As a flipper, it's almost never in your interest to partner and split the profits.  Most profit splits are 50/50.  Assuming you've found viable deals, and can turn a property around quickly, hard money costs won't come close to that.

Asking other flippers who they use might not work since many hold these close to the vest.  In my opinion, your best bet to find lenders is to attend some real estate clubs and Meetup.com is a good way to locate these.  Here you should find small mom and pop lenders that might loan their own money, to some large hard money lenders who run mortgage pools.  Talk to them all and ask them to explain their criteria.  Unlike conventional loans, these will be as varied as fingerprints.

You sound very experienced (and conservative).  We like going to lunch with our borrowers to get to know one another and build a relationship.  Some bring a list of prior properties, some before and after MLS listings, and with some we just drive around looking at their current or past flips.  It doesn't matter.  No need to be elaborate with fancy presentations.  I personally find that a turn off.  On the contrary, let your deals and experience do the talking. Larger lenders might not care about all of this anyway, so you'll have to decide what you're comfortable with.

I listed many questions you could ask a prospective lender here, and they're not just about interest and points.  Reliability, speed to close, LTV, repayment terms, and many others, including your overall comfort level will play into your decision about who to work with.  For this reason, I strongly recommend you keep a stable of lenders on a short list since some properties will be more suitable for some lenders than to others.

After a while, you'll naturally gravitate to some lenders more than others.  Honestly, with your background, your bigger problem will not be finding money but finding good deals.  Good question you posed here.

Jeff

Chad Jarrah · Answer

Thanks for the info @Lew Payne...I appreciate the info and numbers you provided. This helps to give me another prospective from a private lender.

@Jeff S...I agree. I would prefer to pay terms pre-determined on a loan than to split profits, especially with more risk involved on my end. And thanks for the list of questions - they will definitely come in handy.

Hello @John Herrick! I actually have an unsecured line of credit and it helps, but it just isn't enough to get the properties I would like and pay cash for them. Once I have a private lender lined up, I agree with providing photos of the progress - I feel I'd owe it to keep whoever I was borrowing from in the loop. And good strategy on using the comparison of using the security of the type of loan I am after, to that of stock market risk/returns.

Thank you all - much appreciated!

Lew Payne · Answer

I got into this purely by accident, the result of making a loan to an out-of-state flipper friend.  I now work with two flippers (each in a different state, and each a franchisee of HomeVestors of America - which means they pay roughly $5,000/month in franchise fees - so they're quite serious about this business).  Their average flip time is less than 90 days.

In essence (through an LLC), the following equivalent transaction takes place:  I supply 100% of the purchase price of the home, plus the estimated repair costs (in other words, more than 100% financing).  The "loan" is 14% APR (which amounts to barely 3.5% on a 90 day flip), zero monthly payments (not even interest payments), 2 points origination fee, and another 2 points if the term goes beyond 90 days, with a 6 month final term.

My flipper(s) keep the profits, which means they must be good at buying below market, computing remodel/rehab costs, and marketing quickly - else their profits suffer, not mine.  We are all comfortable with this arrangement - I get a fixed return and security (mortgage), whereas they assume more risk and reap commensurate rewards.

I am now averaging two (2) flips per month with them.

What should I expect from a Private Lending Offer?

Most Popular Reply