Trust. The Final Frontier.

    OK. You’re looking to close a loan with a private lender. (Just to be clear, I am considering a private lender to be a person who does not loan money for a living. It may be someone who has loaned money a few times before or, perhaps, this will be their first deal. It is very likely a family member, a work colleague, or an acquaintance who is inclined to help you and is intrigued with the idea of earning an above market rate while doing so.) I will assume that you’ve found a good deal and that the lender will be well secured. What is the ingredient that will move you from talking about a deal to receiving a check? If you’ve noticed the title you have probably guessed—it is trust.

      If your lender is a family member you should have a great advantage. If you are near the point of discussing a commitment it is most likely that they trust you already. Heck, grandma might just consider the loan a gift if it doesn’t work out. For most others (even grandma if you are asking for a large check) you are going to need the lender’s trust. They have looked at your numbers. They may have checked the comparables on the property, they may not have. Private lenders are concerned about the figures but they may not have the capability nor desire to dig too deeply into the numbers. If they are going to move forward they must trust you. If they already do it is your job to not raise doubt, to not convince them they may be mistaken. If they are not quite to the point where they trust you it is incumbent on you to provide the last bit they need. The easiest way to convince the lender to trust you is to show that you trust them.

     Let me demonstrate with a couple examples. These are composites though I have encountered aspects of these scenarios several times:

     Some potential borrowers should have an easy path to a commitment. I have seen them at meetings, spoken with them several times, know details of some of their deals, know they are doing well, I may even know a couple of their previous lenders. It would be easy for me to verify the information I need to go forward. I want to do business with this type of person. When I ask for comparable properties I get them promptly but there is an omission. The address of the subject property is left off. Thinking it is just an error, I contact the potential borrower. It turns out they are not comfortable revealing the address until the terms of any deal are worked out…it isn’t that they don’t trust me…it is… STOP. It is exactly that they don’t trust me. They think that by revealing the address that I might swoop in and steal their prize or that I might give the lead to another colleague. Perhaps, you’ve been burned before but think…you are asking me for a large check. If you don’t trust me don’t you think you are communicating that? Even if I wanted to go forward, how can I make any reasonable analysis of your deal without the address? How likely do you think I am to write a large check for someone who doesn’t trust me?

     Another type of potential borrower is the one who has a unique business plan that they can’t reveal. Really? You want to borrow money but you won’t reveal how you are going to use it until you have the check? I understand that sometimes there are innovations but, frankly, I have no desire to be on the leading edge of anything. Lending is something I do occasionally, when there is a good fit. If your system is so top secret that you can’t reveal it you should demand a confidentiality agreement before you solicit funds. Actually, don’t bother. I have had people take that approach before. I won’t sign the confidentiality agreement. That will kill the deal right there. Again, if you can’t trust me, the feeling is probably mutual.

      The successful borrower in a private transaction is often one who is open about their plan and their numbers. They encourage questions and answer them honestly. They probably share more details than they need to. If they are inexperienced they are open about that. They show they understand inexperience is a significance risk but that they have completed training, have done detailed research, have consulted with experts or are seeking them out, have partnered with contractors or other investors who are experienced, or have committed a significant amount of their own funds to the deal. They demonstrate that they are looking for a partner and will appreciate when they find one. They show that they trust the lender and generate trust in return. Completing the deal on time and as agreed will further the trust between lender and borrower and could lead to many successful transactions.