Scotsman Guide > Commercial > July 2005 > Article

 Enter your e-mail address and password below.


Forgot your password? New User? Register Now.
   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2005

Private money lenders see things differently

Most brokers and borrowers distinguish between private money lenders and conventional institutional lenders based on two factors: speed and cost of capital. Private money lending has a high cost of capital but can move quickly, and conventional institutional lending has a low cost of capital and typically is much slower.

Although correct, this comparison is not truly indicative of the differences between private money lenders and conventional institutional lenders. Gaining a better understanding of just how different they are will enable you to prepare your loan-request package and moreover, prepare your client for borrowing from a private money lender. Here are a few other comparisons that show how private money lenders see things differently.

Real estate vs. banking expertise

First and foremost, private money lenders are real-estate people in the business of lending. They understand the business of real-estate investment, development and financing much better than they do securitization, swap rates and defeasance. They are more interested in your proposed business plan than with extensive financial modeling. Although the economics of a deal are important, these lenders see as equally important that your proposed plan is thorough, well-researched and above all, reasonable.

Loan ratios vs. overall risk analysis

Private money lenders generally have flexible parameters regarding loan-to-cost and loan-to-value ratios. They have the ability to structure a deal outside conventional lending parameters and spend more time analyzing risk than manipulating numbers to fit the necessary template for presentation to a loan committee. This does not necessarily mean they tolerate more risk than conventional lenders. It usually means they assess the risk differently and structure deals designed to mitigate those risks.

Credit vs. character and experience

By nature, short-term, opportunistic real estate deals are dynamic. For better and sometimes for worse, private money loans are subject to the same constant change as the real-estate deal itself. As such, it is important to private money lenders that borrowers are of good character (honest, reliable, responsible and accountable) and have the necessary experience to foresee change and adapt accordingly.

Private money lenders are not interested in borrowers’ FICO scores, nor are they overly concerned that borrowers’ recent tax returns might be on extension. They are more concerned about whether the borrowers are prudent businesspeople who make good decisions and have reasonable expectations.

Short-term exit strategy vs. long-term repayment

Above all else, private money lenders are interested in being repaid. Contrary to popular belief, they do not want to own the borrowers’ property. Unlike conventional lenders, they are focused on the exit strategy — who is likely to pay them off in the short term and allow them to exit the deal. They are not focused on how or if borrowers can make 240 consecutive mortgage  payments on time and in full for the next 20 years.

Two exit strategies are the norm for private money lenders. First, borrowers will refinance with a conventional lender once they have used their private money loan to better position their projects. Second, they will sell the property to repay the private money loan. In fact, many private money lenders will actually underwrite a loan transaction backward to ensure that there will be another lender in position to pay them off at some point.

Instinct vs. third-party reports

Private money lenders often use existing third-party reports, visit each property themselves, directly conduct due diligence and generally do their own appraisal review and valuation research. This method is the antithesis to that of conventional lenders.

In addition, private money lenders use local market knowledge, experience and instinct to assist them in assessing loan transactions. They consider lending to be more an art than a science, so they don’t rely on templates, spreadsheets or economic indicators to make their lending decisions. They gather the facts, determine the reliability of these facts and then do a “gut check.”

The most-successful private money lenders rely on an indefinable instinct for determining good deals. This characteristic is perhaps the most-distinguishable difference between private money lenders and conventional financial institutions.

Flat organizational structure vs. hierarchy

“Lean, mean and flat as a board” best describe the majority of private-money-lending organizations. With hands-on principals who can make decisions within minutes, these lenders tend to be fast, flexible and efficient. Private money lenders can fund deals in less than 30 days.

Conversely, most conventional lenders need that long to put their internal loan request package together and order a new appraisal from the Member Appraisal Institute (MAI) that may take another three to four weeks.

Direct vs. limited loan-serving access

After closing a deal with private lenders, you normally can expect to deal with one or two people who will handle all of your needs from payments to draw requests and loan modifications. Private lenders view loan extensions, loan modifications, partial reconveyances, restructuring and recasting of loans as a normal course of business. To that end, they are accessible and responsive to borrowers’ post-closing needs.

Flexible vs. set financing terms

The most-significant thing private money lenders see differently from conventional, institutional lenders is the pricing and structuring of loan transactions. Private money lenders can deliver capital for opportunistic real-estate transactions in many structures in any combination of terms and conditions.

The following list of typical terms further distinguishes private money lending from conventional institutional lending:

  • Fixed interest rates
  • No prepayment penalty; no yield maintenance
  • As much as 100 percent loan-to-cost
  • As much as 90 percent loan-to-value
  • Use of existing third-party reports
  • MAI appraisals not required
  • Financing for un-entitled land
  • Second-lien-position loans
  • Loans secured by partnership interests
  • Interest-only payments; accrual of interest payments
  • Waiver of personal guarantee


•  •  •

There is no “box” or set guidelines when it comes to negotiating terms and conditions with private money lenders. They consider that each deal warrants terms designed to allow borrowers to efficiently and expeditiously affect their business plan and reap the rewards of their hard work.


Fins A Lender Post a Loan
Residential Find a Lender Commercial Find a Lender
Scotsman Guide Digital Magazine

Related Articles



© 2019 Scotsman Guide Media. All Rights Reserved.  Terms of Use  |  Privacy Policy