Over the past year, we’ve seen a steady increase in the demand for private financing within subsets of our clientele.
We like to think of private lenders as a reliable, common-sense tool within our toolkit of options. While private lending isn’t the right tool for all situations, it is sometimes the only tool that gets a job off the ground (literally) – making it the right fit for some situations.
What is private lending?
- Private lending is a short-term loan secured by real estate
- Private loans are typically short-term loans (6-24 months)
- They can be interest-only loans or amortized loans
- At the end of the term, the loan must be repaid in full which means a clear “exit” (strategy) needs to be in place
When should it be used?
- Private financing should only be used when more conventional financing is either not an option or not the right fit
- Fix & flips, land loans, construction loans, bruised credit, interim financing and quick approvals are the most common private lending situations
- Property types also play a key role; private lenders usually have more flexible policies about lending areas, property types and property usage than conventional lenders
How do you qualify?
- Lenders are primarily concerned with the amount of equity you have invested in the property
- The more equity you have, the better terms you’ll be offered
- Strong credit and consistent employment are less critical than demonstrating you have the resources to make loan payments, and a clear way to ultimately repay the loan by the end of its term (called the “exit strategy”)
- Private lenders will require a current appraisal of the property (as if the property were to be sold today) because their maximum loan is based on that value
What are common exit strategies?
- Renovate the property, then sell it (“fix and flip”)
- Renovate the property, then refinance it at a lower interest rate when renovations are complete (“fix and hold”)
- Sell the property
- Qualify for lower interest rate financing once credit/employment situation improves/stabilizes
- Qualify for construction financing
- Sell another property to pay out the loan
- Provide proof of a pending inheritance or settlement
- Normalize cash-flow/business operations which will allow for lower interest rate financing by end of loan term
What are the advantages of private lending?
- Fast approvals
- Fast funding (“money in your pocket”)
- Flexibility/a common-sense lending approach
What are the drawbacks of private lending?
- High interest rates – they should not be used as a long-term source of financing
If you want to do a “fix and flip” or “fix and keep”, have bruised credit, need interim financing or require a construction mortgage…talk to us. We have access to multiple private lenders and can identify whether private lending is the right tool for you.
You Dream It. We Finance It.