What is Private Lender?
Private money loans are usually secured by a note or deed of trust for real estate transactions. Private lenders have their own lending qualifications with guidelines that apply to all applicants regardless of race, sex, ethnic background, etc.
Private lending, also known as hard money lending, can charge high interest rates and require more money down because borrowers benefit from the non-institutional lending standards. Also, private lenders will lend on properties that banks won’t lend on, i.e. distressed properties. It is common in a private loan to see interest rates in the teens with down payments of 40%-50%.
Example of a Private Lender
You will typically see private loans issued for the exact amount of time needed to buy, repair and sell a property. Take a fix and flip plan for example, where a foreclosed property is listed at $100,000. As far as the condition of the property goes: the slab of foundation is cracked and the roof needs to be replaced for the property to be considered quality again. A fix and flip investor is looking at anywhere between $15,000 to $25,000 worth of work in repairs, as is. The investor in this example may see promise in a property such as this, because after $25,000 to $30,000 in repairs are completed, the property could sell for $200,000. A private lender in this example may agree to this plan and issue a $135,000 loan.
Let's assume the investor has the repairs done right away and turns around to sell the property in three months, we're looking at a breakdown of:
- Loan Amount: $165,000
- Acquisition price: $120,000
- Repairs: $45,000
- Loan costs (including miscellaneous fees): $9,000
- Selling costs : $11,000
- Final sales price: $235,000
- Net to investor: $45,000
The private lender is almost always focused on the outcome of the deal, so the investor’s plan and exit strategy are very important. Like the investor, the private lender is concerned with repayment and profit, which is why private lenders may not concern themselves with credit scores or other traditional lending criteria.
Private lending and private lenders tend to focus on nontraditional lending criteria when issuing a private loan. If an applicant or potential investor has a good plan of execution, this may be the driving factor behind a loan approval. Private lenders are also very popular in the distressed property sector. Fix and flip real estate deals, that banks won’t touch, give private lenders a portion of the lending market for that niche investor to capitalize on. If you are interested in investing in a fix and flip real estate investment, or require short term funding for a real estate investment, use of a private lender may be right for you. It is important you shop around when looking for the right private lender, as lending criteria varies with interest rates and required money down.