The Benefits of Using a Private Lender
The myriad of details and the paperwork associated with construction funding, from land acquisition to bridge loans and interim financing, is sometimes enough to make contractors want to seek another line of work.
However, there can be an option for savvy builders, developers and investors. Hard money lenders are able, in many cases, to cut through the reams of paperwork and extensive underwriting requirements of commercial banks and major established lenders, compressing the timeline for approvals and simplifying the verification and approval process.
Flexible and Fast
A private lender is not bound by the same rules and regulations as a commercial bank; often a streamlined application process can be used to facilitate a decision. Although similar financial documentation may be expected, there are some essential differences:
- A private hard money lender has more flexibility regarding down payment and terms;
- Minimal paperwork is required because the loan is not subject to regulation by governmental authorities;
- Outside underwriting is not required
- Loan specifics can be altered to reflect special situations and designed to reflect the specific needs of both lender and borrower.
In some ways, private lenders are like having access to a line of credit. Simple bridge loans allow a quick closing on time-sensitive deals — a major advantage. Private lenders are usually able to close and fund within a matter of days, and personal attention is a hallmark of the process. While financial strength is an advantage, a stellar credit rating is not necessarily a determinant. Private hard-money lenders are also apt to be forgiving about past credit blips, with demonstrated current responsibility.
The viability of any project, whether it’s new construction or renovation, is judged on its unique merits. Even without a surplus of cash or a long track record, solo investors and fix and flip newcomers can build on a portfolio of successful projects in order to secure loans.
Finding a Secure Source of Funding
Building that track record takes time, and is an important consideration. If you are new to the business, it’s not impossible to secure private financing, but your chances will improve as you build your portfolio.
There are several ways to build a portfolio of success:
- Don’t be shy about telling friends and family what you do and what your needs are. You never know who will be a friend of a friend.
- Use social media to showcase your before and after pictures.
- Place testimonials on your website.
- Prepare for every project in a professional manner, with complete specs, cost estimates, projections and documentation.
- Finally, be entirely realistic, rather than overly optimistic.
Prepare a Lender Package
If you are a newcomer to fix and flip, or if you have only a few investment properties, the best thing you can do to enhance your reputation is to build a history of your work. Include documentation of any previous loans from traditional lenders, along with closing papers that show final payoffs. Include your company’s P&L sheets on pertinent projects, as well as current personal and business financials.
List references, both personal and business-related, and previous clients.
Create a picture book or a visual presentation of your projects, but keep it brief and factual.
Then, any time you have a need for acquisition financing, a bridge loan or a rehab package, a construction loan for yourself or for a client, or (down the road) a land development loan or financing for commercial property, you will have a step up to the world of private financing approvals.
Chances are you won’t have private lenders calling you to ask how much money you need, but you will be able to plead your case with little effort when the need arises.
Private lenders have a need to invest their money in ways that will benefit them. Make yourself and your product attractive, and you should have little trouble establishing your business as a good risk and yourself as a business person to be trusted.