Posted over 5 years ago

Pitfalls of Hard Money Lenders

Oftentimes, private lenders are suggested to borrowers who have poor credit or are unable to be approved by traditional public lenders like banks—but who are private lenders? Read more below to find out what you need to know before beginning the loan process with an alternative investor.

Alec was interested in a loan to fix up his property before adding it to the market, but he was having trouble being approved by his local credit union. Having gone to university and obtained a low paying job, his debt to income ratio was not one to be envied—or approved by banks. Needless to say, Alec was frustrated. As he began to pursue other options he realized he could turn to private investors, such as .

What Alec didn’t know was that his reliability as a borrower is just as important as his lender’s reliability. Unfortunately, Alec realized this when it was too late.

Who Are Private Money Lenders?

Private are individuals or companies who offer money fast. The terms of these loans are that they have to be paid back on a short term repayment period. This is usually within one year, but can sometimes be expanded. Private lenders are generally very transparent with their borrowers because they base the foundation of approval on the property’s potential value. This means they will generally be straightforward with you on a property or investment plan that has some major risk factors. Additionally, they will likely be willing to work with you on an extension if they find the risks can be reasonably taken care of. When Alec found a local private money lender, he was excited to immediately begin his proposed plans for renovations. What he didn’t consider was his lender’s reputability in contrast to his own.

What Are Risks of Private Money Lenders?

pose a variety of different risks. The first, notably, are the high interest rates and fees. Compared to traditional lenders, private lenders are expensive—the rates can be as high as five percent more. Many people, especially those fixing and flipping, determine that the speed outweighs the cost. If they are able to obtain money fast, they are able to flip a property with the highest potential. It’s not uncommon to be told to seek out a private money lender if you are having trouble qualifying for a loan. However, it is very common to for home renovators to turn to private lenders because of the speed and short repayment period, which falls right within the preferred timeline of fixer uppers. As Alec was learning about his options, it became clear that private lenders had a lot to offer, even with the risks. However, Alec’s potential lender had a history of pulling out of projects. Alec didn’t do any research into his lender, or research his lending history. So when Alec was ready to move forward with his plan—his lender wasn’t. Fortunately, Alec was able to move forward with another lender after looking over term agreements with a real estate attorney. There was mutual confidence between them both as lenders and borrowers and the property was able to be renovated quickly and successfully.

Dennis Dahlber Broker Ri CEO Level 4 Funding LLC Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
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Dennis Dahlberg Broker/RI/CEO

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.