Attract private lenders: understand the three Cs.

As a private lender, I am often asked: ‘what are your terms?’, and the response is always: ‘it depends on the deal and the borrower’. So, what do private lenders look for? They typically look at the ‘three Cs’: character, competence and collateral. The three ‘Cs’ is a general concept for all types of lending, but I will discuss it in this blog with the point of view of a typical fix and flip or fix and rent loan.

• 1.Character

Real estate is known to have made quite a lot of self-made millionaires, but it has also broken quite a few people: foreclosure, bankruptcy, judgements, liens, criminal records review, all fall in the evaluation of character. Having one specific issue on your record does not necessarily mean you have bad character if you disclose it and the explanation is satisfactory to the lender. On the opposite spectrum, not disclosing issues that are later found out by the lender is a definite red flag.

• 2.Competence

Lenders like deals that go smoothly, well executed. Lenders don’t like to have to withhold draws because the repair are not satisfactory, or the project is not on schedule. The more passive the deal is for the lender, the happier the lender is.
Competence on real estate flip and rentals deals is essentially linked to experience. Having a clear package that shows the number of projects done and sold within schedule will go a long way to prove competence.

• 3.Collateral

The collateral is what the lender could take back if the loan went in default and the lender would foreclose. Lenders always have a sweet spot: some prefer lending on higher end assets, others on lower end assets. Based on their comfort levels, lenders will go higher on the loan to value (LTV) on certain assets rather than others.
For example, in our lending business in Houston, we are quite comfortable lending on higher LTV on assets bellow 200k. We will also lend on higher end properties, but we will more careful looking at the comparables and the days on market it takes to sale these properties.