67

How To Find And Approach Private Lenders: The Ultimate Guide

How To Find And Approach Private Lenders For Flipping Houses

by Danny Johnson

I’ve received a lot of questions about how we fund our deals. The simple answer is with private lenders. Obviously, people aren’t happy with that answer alone. It doesn’t really explain anything. We only use one lender per property and work with a handful of different lenders. In this article, I am going to show you where to find private lenders and how to approach and build relationships with them by showing you how we did it.

What Are Private Lenders

Private lenders are people that lend money to investors so they can buy investment properties. Typically they are doing so to get better returns on their money than the stock market or other forms of investment have provided. The terms and details of each loan are up to the individual lender. In our experience, private lenders typically offer easier access to funds, lower interest rates and fees, and an all-around easier experience than typical financial institutions and hard money lenders.

Difference Between Private and Hard Money Lenders

The difference between private lenders and hard money lenders is basically just the terms each offers. Hard money lenders are named so due to the fact that their terms are usually much harder on us. The loan fees are usually several points (a point is 1% of the loan amount) and I have heard of some charging upwards of 7-8 points! Ouch! The interest rates are usually high as well. Typically, they charge between 15-18% interest rates. Many hard money lenders are in business to be just hard money lenders. Private lenders typically are just doing so for better return on their money as a side investment.

Where Do You Find Potential Private Lenders

When looking for private lenders, there are a couple of groups of people to consider:

Family and Friends With Money

The first is family and friends that have some money they might be willing to invest. Just make sure that you approach people that have enough to lend on a typical house that you would consider buying. You should only have one lender per property. There are also a couple things to consider when approaching this group for lending. You need to carefully consider the fact that the person that lends money for your deal may run into a unexpected problem and need to pull the money out of the deal. This is definitely something that needs to be considered and understood before proceeding. The other issue is that most people consider it a bad idea to work with family or friends. If a deal turns into a dud and you lose money, what are you going to do? Where does it leave your lender? Be careful with this. Even if you use an institutional lender, you should always repay your debts no matter what, but when working with family and friends the consequences could be much worse. We approached several family members and friends when we were getting started. All wanted to help, but most were too conservative to actually commit. This may be different now that we have been flipping houses for almost a decade successfully.

Private Lenders Already Lending To Investors

The other group to approach is the one that is more likely to agree to lend on your investment properties. This is the group of people that already lend money to investors for properties. These guys are perfect because they already know how good these types of investments can be and only need to be convinced that it is ok to lend to ‘you’. You won’t be selling them so much on the deals as you will be selling yourself. I’ll explain how to do this in a later section. There are several ways to find these lenders:

    1. Ask other investors for lenders they use or know of.The difficulty here is that most investors don’t want to share their private lenders because of the limited funds available from each. You never know though, you might get lucky. If you don’t ever ask, you will never find one. Keep a spreadsheet with names and numbers of potential lenders, their contact info, who recommended them, and their terms.

 

  1. Do some investigating.This is what we did and I feel this is the single best way to find potential lenders for your real estate investment deals.Here’s what you do:
      1. Scour the MLS for recently sold REO’s (bank –owned foreclosures) and other fixer upper properties that were likely bought by investors. If you don’t have access, ask a Realtor to do this for you or let you use their system, with their supervision. You should have a good Realtor on your team anyway. Search for more recent sales. Within the past 6 months should be fine. It is important to find lenders that are actively lending. Your search should include areas that you are interested in investing in because the lender will have already shown an interest in lending in that area.
      1. Find the ones that were sold with a loan. You will probably have to check your county records (most are online now) to see if there was a deed of trust or warranty deed with vendor’s lien filed for the property for the recent sale. The recorded docs should have a name for the lender and the address where the original document was sent after being recorded. Write down this info.You will start to see some of them appear again and again. These are the real prime suspects. You will want to try your best to work with these guys.
      1. You should also keep track of the names and addresses of people that bought investment properties and paid cash. These are a good source of investors to birddog leads or wholesale houses to. Keep track of the area the house was bought in for each investor. You now know they like that area.

Making Contact With A Potential Private Money Lender

Once you’ve created a list of potential private money lenders, you will need to find a way to contact them. Our preferred method is to write a letter to them. The letter usually just states that I am an investor in the area and I am looking for people interested in receiving a good return on their money, secured by real estate. You should also briefly mention how you found them and why you decided to contact them. This is usually something they are curious about anyway. I’ve found that many of them will actually consider it a good sign that you are a true go-getter and have what it takes. The letter goes on to mention that they should call me so that we can discuss it further. As far as SEC guidelines goes, you should be fine as long as you don’t use words like “guarantee” and talk about any specific deal in the letter. You also need to stick with using one lender per deal (no comingling of funds). Just be general about your discussion of providing a better return on their money and to call so that you can discuss it further. When they call, try to make small talk and ask if they have been lending on investment properties for a while. Try to set up a lunch meeting with them so that you can talk more in depth about what you are looking for.

Your First Meeting

This is where I want to mention the importance of your level of confidence. It is of utmost importance that you exude confidence and make it appear that they need you more than you need them. You should try to make it seem like you are interviewing them and that the acceptance to work together is up to you. This might take a little work, but makes all the difference in the world. To help you with this, just consider the fact that you will (if you want to) be offering them 10% interest on their money AND it will be secured with real estate that is worth a lot more than how much they are lending. THIS IS AWESOME AND YOU NEED TO UNDERSTAND THAT IT IS. They should consider themselves lucky that you are offering this to them. Don’t ever doubt that. You should obviously be at a point where you have educated yourself on real estate investing and flipping houses. Do not attempt to meet potential lenders before having done so. You are asking them to lend large sums of money and you’d better know what you are talking about.

Things To Bring

    1. Business Plan – You should have a business plan, even if it just describes what types of properties you buy, that you intend to improve them through rehab, you sell with the help of a Realtor, etc. Just the basic process of buying and then selling and what types of profit margins you look for. What kinds of things will cause you to walk away from a house purchase.Maybe some insight into the real estate market in your area to show that you keep up with it.

 

    1. If you’ve done some deals be sure to have some before and after rehab pictures and as many details you can provide about timelines and the numbers for the deals. Lenders love this. It shows that as you are prepared and it shows them exactly what will be happening with the money they lend.

 

    1. If you have not done any deals, try to arrive with some potential deals and your analysis for each. I will talk about what we did before we had done any deals in a later section.

 

    1. Money to pay for their meal. You’d think this would be obvious…

 

How Their Money Is Secured

To help them feel safer with the investment, make sure to let them know that their loan will be secured with a first lien deed of trust. Some lenders will want a personal guarantee if you buy your properties using an entity such as an LLC. I’m certainly trustworthy enough to make sure that my debts are paid even if things go sour, so I do not hesitate to give them this. Your title company should be able to have an attorney draw these up for each loan. You will want to buy your properties far below market value. We suggest at least 70% of market value minus cost of repairs. This should be explained to the potential lenders to help them understand that if they did have to take the property back, they would have an asset that is valued quite a bit above what they had into it.

What Terms We Usually Get

This is another time where you need to remember how good of a deal you are offering them. If they ask for a certain interest rate and points, NEGOTIATE WITH THEM. I have a feeling that they actually like to see this. Trust me. They want to know that you are a real businessman or woman. This gets back into you being the one that is controlling the situation. The terms that we typically get are 10% interest with “interest only” monthly payments and a 1 point loan fee. The loan is usually for 9-12 months with 1 point being required for an extension (though this should not be needed). We get loans to cover the purchase, repair costs, and sometimes the payments as well.

What We Did Before Having Done Deals

When we started, we would have had a hard time approaching private lenders to work with. It can be done and should not be considered impossible. Realistically, it is best to work with a money partner or work with hard money lenders. There are national hard money lenders but I feel it would probably be better to work with local ones. One of the benefits to working with hard money lenders or money partners (that are also investors) is that they may keep you from investing in a bad deal. If no one wants to put their money into the deal, it probably isn’t a deal. We started by working with a money partner. He was our mentor and had been investing in real estate for around 20 years. We did all of the work, including finding the deals, negotiating the deals, rehabbing the houses (using contractors), selling the houses and the whole nine yards and he put up the money. We split profits 50/50. This was great when we started because the only thing we risked was our time. No money out of our pockets (except for some marketing expenses). I highly recommend this method of getting started. You really limit your risk.

Conclusion

Now that you know how to find and approach private money lenders you can start saving yourself tons of interest and fees that you may have been paying using hard money lenders. Get out there and start building relationships and kick your investing up a notch. Thanks for visiting the blog. Danny Google+

Get the EBook and REO Interview FREE

If you enjoyed this post, please share it!

{ 64 comments… read them below or add one }

Leave a Comment

{ 3 trackbacks }

Previous post:

Next post: