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Your presentation to the lender should include as much supporting documentation as possible. Ideally, you should be able to provide recent pictures of the property, copies of borrowers’ financial statements and tax returns, as well as copies of appraisals, environmental reports or surveys. You do not need to have all of these items before contacting potential private lenders, but try to provide as much as possible.
If you take the time to understand and target your presentation to the lender’s needs, you will have a better chance of getting your loan approved or at least getting it advanced to the next level.
Selecting the right lender
Selecting a private lender is one of the most-important decisions in the process. But the selection is not as difficult as it may first appear if you have prepared yourself. The key is to match the loan request with the most appropriate lender.
Choose your lender carefully because all other factors will be irrelevant unless you choose one you can trust and that you believe will perform. Consider these key factors when choosing a private lender:
Lending philosophy: Some private lenders take a “loan-to-own” approach and hope to get the property back so they can sell it and realize a gain. Others want to be well-secured but are primarily interested in earning a return on the loan through the interest rate and points.
Fee structure: Be aware that some private lenders charge upfront fees that may or may not be refundable if the loan does not close. These fees vary but may include an underwriting fee, a documentation fee or a commitment fee. You should be wary of nonrefundable upfront fees not directly associated with or in addition to the lender’s actual costs to review and document the transaction.
General parameters: You must first determine that your loan request fits within a lender’s loan size and term parameters. The product type and lien position associated with the request must also meet the lender’s guidelines. For example, some private lenders will not do second deeds of trust or land or hotel loans. Profit participation and exit fees are also important pricing factors to consider.
Underwriting: Ensuring that a loan request fits within a lender’s underwriting standards is an important part of the selection process. Each lender has different views on such issues as LTV versus loan to cost, the nature of the borrowers’ equity and the removal of borrower equity from the deal. Also keep in mind that each lender has different policies concerning appraisals, surveys, environmental reports and other requirements.
Source of funds: The private lender’s source of funds often dictates the types of loans that a lender can do, as well as how quickly loans can close. Many hard-money lenders function by matching a loan request with an investor or group of investors. Issues can arise if the lender does not have an available investor or if that investor is not willing to fund a loan on requested terms. Funding a loan request can be delayed if each individual investor needs to see the property and approve the transaction. Some private lenders have a standing pool of capital. In this type of structure, individual investor approval is not needed and often the process can be expedited.
Using the value-added approach to partner with a private lender does not take as much time and energy as it might appear. The value that you add to the process will increase your ability to structure loan requests and give you enhanced credibility with lenders.
Less time will be wasted chasing deals that have little merit or working with unreasonable borrowers. You will be able to focus on getting better deals and getting them funded by quality lenders. This means you will make more money by getting more deals closed and getting them closed more quickly and efficiently. You will have gained the competitive advantage.
Bret L. Berglund, president and principal, Western Capital Partners LLC
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