With new stricter lending requirements in place at most banks and traditional lending institutions, it’s not surprising that we’re beginning to see a rise in the number of private lenders stepping in to fill the gap. What is private lending? It’s exactly what you might expect; a person or partnership willing to lend money on real estate deals. The good news is that their standards are likely to be less stringent than your local bank. The bad news (not really) is that they do still have SOME standards.
The reality of today’s housing market is that prices are low. REALLY low. The problem is that, in the wake of the foreclosure crisis, most lenders have upped their down payments requirements a lot. What used to be a five percent down loan might now easily require a 25 percent down payment. It’s easy to see why real estate buyers are highly interested in private money sources. But what are these private lenders looking for when you approach them with a deal you’re interested in?
The answer is it depends. It depends on the type of property investing – rehab, flipping, new construction, multi-family, commercial, or residential income producing. While some private lenders make low loan to value loans based on the property value, others want to see the same basic information that a bank would. The one idea to keep in mind is they are looking for proof of your ability to repay the entire debt, not just survive the payment schedule.
Expect that a legitimate private lender (which means NOT a loan shark) will want to verify income, cash assets, liabilities, and he or she will probably run a credit check. If all this sounds formidable, keep in mind that they are not a bank and will not likely scrutinize your records with the same standard a loan officer would apply. Depending upon the transaction, a private lender might want to see a business plan, and if you’re a business entity like an LLC, expect he’ll want to glance through your organizational documents.
All this should not scare you away from approaching a private lender. On the contrary, it shows a level of professionalism that you should appreciate. Now get out there and circumvent the traditional lending process.
The Commercial Investing Center Team
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