Evaluating a Potential Loan: The Deal

This must be an actual deal with contracts and supporting documents. If you do not have the documentation you do not have a deal. You have a dream. That is OK. All deals start in the dream stage. By all means share your dream, your plan, with other investors. If you are serious you may want to share it with private lenders when you see them at your REIA meeting. This could help to raise a lender’s perception of your character and capacity. If you have gained my attention I may ask you in a couple months how your deal is coming along. If the deal didn’t develop, that is alright but it is much better if you can tell me that it funded and what your progress has been. It is even better if you can tell me that this deal is wrapping up and you are looking for funding for the next deal. The best way to secure private funding is to get the private lenders interested in working with you. Show some progress and they will notice. I know some guys, who call themselves investors, who have been talking to me (and everyone else in the room) about the same dream at every REIA meeting for over a year and a half. They have never gotten further than the dream stage and if they ever do it is unlikely they will convince any lenders who have already heard their story to fund their deals. They have simply blown any bit of credibility they ever had.

If you are seeking to finance the purchase of a piece of real estate you must have an accepted, signed purchase agreement. Anything less is a dream if you are inexperienced. A dream may be perceived as a plan if you have a good record of completing deals successfully. However, no one will lend on a plan. It takes time to evaluate deals and it is not worth putting the time in on a deal that does not have the basic agreements in place.

Now, assuming you have the documents proving you have a deal. Is it a good deal? Do you have documentation of comparable sales in the neighborhood? How about an appraisal? (If you are just starting out your opinion of value may not be enough. A real estate agent’s opinion, unless I know and respect them, may not be helpful and could actually hurt if that is all you are relying on. In SE Mich. one can get a brief desktop appraisal for under $100 by a licensed appraiser. Put that in your proposal and your credibility will increase greatly. Of course, I am most likely to lend on a project in an area that I know well enough to value myself.) Do you have an estimate of the repairs? Are the estimates competitive? Remember, I have done this before. I will check your estimates before I fund your deal.

Can you tell me, clearly and succinctly why you need money, how much you need, what you are going to do with it, how long you will need it, how you will pay it back, and why I should be interested? What is your exit plan and why do you think your plan will work? Have you done something similar before? Have you worked with others who have done this before? What if something goes wrong? Do you have a backup plan? Better yet, do you have a couple? The less experience you have the more thought I want to see put into the backup plan. Ideally, I want to lend to experienced investors with multiple backup plans but I will consider lending to someone with less experience if they can convince me they are credible and they compensate me for the much greater risk.

For example: assume you have found a home that you can buy at a very competitive price, fix up and resell. You have researched the area and there have been many sales at a price that will afford you a nice profit. You have a couple estimates of the repair costs and even if the repairs go over budget there is lots of room to profit. You rehab it and put it on the market but it doesn’t sell. Something is wrong. You are not getting any offers. Could you rent this home and still make the payments on the loan? Are you sure? Do you know what rents are in this neighborhood? If so, that may be a sufficient backup plan. Can you think of any others?