It’s an all-too-familiar scenario in the real estate world. The perfect opportunity
to buy an asset crosses your client’s desk, but the deal must close within
a week. Your client needs a bridge loan fast to take advantage of the
opportunity, but no bank can possibly review a loan application and perform
its due diligence — let alone fund the deal — that quickly.
Speed could
be the difference between a successful transaction and derailing a lucrative
opportunity. This is where a private lender can help you, but there’s a caveat.
Private lenders generally promise quick closings. While “fast access to
cash” sounds great on paper, how can you know that a lender will deliver
on its promise?
Given that a lot is on the line when a
borrower needs fast funding, you must
look to a lender’s experience as the best
indicator of its ability to execute.
Understandably, your clients are hyper focused on execution.
Borrowers working under tight deadlines rely on private
lenders to secure and close a loan in days, not weeks
or months, like many banks or other traditional lenders. If a
lender can’t fulfill its end of the bargain, however, the borrower not only
loses their access to capital, but they also can lose the deal altogether.
Given that a lot is on the line when a borrower needs fast funding,
you must look to a lender’s experience as the best indicator of its ability
to execute. If the lender can’t demonstrate a proven track record
or healthy deal flow, or if they have no track record at all, it’s not worth
the risk — especially when your borrower’s deal depends on speed.
Funding variables
Even if a private lender has decades of experience closing loans, it
doesn’t mean it can close every loan. Several factors play a role in
whether a loan can be funded.
The first important variable is the lender’s service area. Many private
lenders operate regionally and will only lend in a few states. Loan
size is another consideration. Private lenders may have funding caps
that are much lower than the needed amount. Loan-to-value (LTV)
ratio is yet another variable. This percentage changes from lender to
lender, ranging from 40% to 80% LTV. Depending on the borrower’s
needs, an LTV ratio may be too low to obtain the necessary funding.
Certain private lenders also may prohibit use of the funds for bankruptcy
proceedings, to pay off an existing mortgage or for working
capital. Not every lender is willing to fund every deal either. A borrower
may need a lender that specializes in a certain property type,
such as raw land.
An international deal is another high-stakes scenario that many
lenders won’t do. The changing regulatory framework, language barriers
and the sheer distance between the borrower and the property
present enormous challenges to successful closings. Very few private
lenders have true hands-on experience with other countries and continents.
Choosing wisely
The process of choosing the right lender goes well beyond reading a
couple of reviews on the lender’s website. It involves a number of steps.
First, determine if the lender is a direct private lender. Some private
lenders source money from other lenders outside their organization.
They may have to get approval from third parties. This can add weeks
of review to your already tight deadline. They also may impose restrictions
on how much you can borrow and for what purpose the
money can be used.
A direct private lender doesn’t necessarily have those constraints.
These companies tend to be more flexible about allowing a broader
range of uses for the loan proceeds, as well as flexibility with the
LTV ratio and the loan size. Importantly, a direct lender’s immediate
access to funds means that borrowers don’t need to wait weeks for
review and acceptance.
Second, ask how long the lender has been in the industry. It’s not
uncommon for fly-by-night lending companies to spring from nowhere.
Your safest choice will be with a lender that has years, or even
decades, of experience.
Next, find out which deal types the
lender can fund. Certain properties,
such as raw land, can be more difficult
to finance than others. You need confirmation
from the start about whether
your deal type can be funded by that
lender. The best direct private lenders,
however, won’t be limited by deal type
and will be able to fund a loan based on
the merits of the deal itself. Direct lenders
tend to evaluate each opportunity
on a case-by-case basis.
Also, learn what the lender can do in house.
Not every lender has the staff at
hand to move quickly on a loan application.
Some lenders may not be as speedy
if they rely on in experienced teams to
perform due diligence, legal review or
funding. Ask the prospective private
lender which appraisers, attorneys and
other companies will be a part of the
loan process. The lender should have the
resources to back up its promise to fund
a deal successfully and on time.
You should ask if the lender operates
in the state where the project is located. Not every private lender has a national
presence. Those that operate regionally
may not have the knowledge or resources
to fund a loan in a specific state
or region. If they need to take additional
time to learn the laws or to locate a partner
in that region who can work with
them on the loan, that’s precious time
lost at the borrower’s expense.
Experience also is a must if a deal is
located abroad. International lending
presents significant challenges to lenders
and borrowers a like. Understanding
these challenges is essential to closing
loans for foreign real estate. If a borrower
partners with a lender that does not
have successful hands-on experience
closing loans in another country, the
entire deal can be put at risk.
Cost evaluations
Closing a loan in a week or two is a lot of hard work at breakneck speed. The loan process is often compressed into two or three days, within which all involved parties conduct the thorough due diligence necessary for a borrower to earn the lender’s full confidence. Lender fees cover the costs incurred by this process.
Although this expedited service costs more than with traditional mortgages, that doesn’t mean borrowers shouldn’t know what they are paying for. The borrower deserves complete transparency about the lender’s obligations and what the lender promises to deliver.
You should ensure that these fees are going directly to a private lender. Some mortgage brokers or other lenders may charge fees, but these are separate and distinct from the fees associated with the lender you’re working with. Ask who is receiving your borrower’s fee before they agree to pay.
Before signing on the dotted line, you and your client should read through all the documents to see what the fees are being used for. Are the lender’s obligations written clearly and in detail? Also, check on the borrower’s obligations, which spell out what they must do to ensure a lender can perform its job. Finally, verify which portion of the fees, if any, will be refunded if a loan can’t be secured.
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Not all private lenders are created equal. Don’t rely solely on recommendations or online research before signing a loan agreement. By obtaining important information about a lender’s experience, track record and areas of expertise, borrowers and brokers can know with confidence that the lender can deliver.
