How Do Private Lenders Rate for Funding Real Estate Deals?

Among investors, funding real estate deals is ranked the #1 problem. Here’s an alternative to traditional bank loans that doesn’t involve asking your family for a loan.

If you’re new to the real estate game, or even if you’ve been at it for a while, you’re probably curious about where to get the best loan program for funding real estate deals. Should you go the conventional route and try the big banks? How about a nice, cheap FHA loan? No? Okay, how about having a transactional funding deal in your back pocket? Or establishing a relationship with a hard money lender? To find out where to get the best funding, read on.

The Biggest Problem Facing Property Investors

The number one problem most flippers have is not they they’re not motivated. It’s not that they’re not hungry for success. It’s not that they’re lazy or they don’t know some smart strategies, or that they’re not savvy enough. In fact, just the opposite is true. They are typically smart, highly motivated, hungry, and absolutely ready for a change and a chance to make some serious money. The number one problem these investors have is they can’t get the funding they need to make the deals.

Types of Real Estate Loans

Let’s take a look at the current types of loans you can get for a buy, fix, and flip deal. This analysis really tells the story, and reveals why private money makes the most sense. Here’s a look at the most common types of loans:

• Conventional Loans: Conventional banks like to decline investment lending. If they do decide to give you the money, they make you put 20% down and make you pay for the rehab yourself, out of your own pocket.

• FHA, 203K, and Fannie Mae Loans: These organizations only lend to owner-occupant. You can’t make money flipping houses if you’re going to buy and move into the house.

• Transactional Funding: This is “Dough for a Day”. Banks don’t accept Proof of Funds letters from Transactional Funders. They don’t want to lend you funds so you can buy and flip a property in the same day. They want to milk you for the next 30 years, not for just one day.

• Hard Money Lenders: They will finance properties that need a lot of repairs. The problem is hard money lenders are credit lenders. Meaning they put a lot of weight on your credit standing before they’ll make the loan. You must have at least a 680 credit score, you must provide tax returns, bank statements, paycheck stubs, and you must put 20% down. In addition, you must pay your closing costs, fees and points out of your own pocket. So you must have the money in the bank to put down. And it cannot be private money. There are also pre-payment penalties, so if you flip it too quickly, you are penalized.

• Private Lenders: Private lenders are asset-based. Meaning they want good deals that offer them a high yield and they’re not too concerned with your credit. You should plan on paying your private lender about 12-15% fixed return. The only problem is private lenders are hard to find. Sometimes you have to talk to hundreds of private lenders to get one to lend you the money you need. This can be difficult especially when you’re just starting out. Some private lenders only want to lend to people with experience. Some private lenders only want to fund a percentage of the deal and they want you to fund the rest.

The Good News

There are one or two excellent asset-based private lenders out there that understand that the deal is more important than your credit report. In fact, if the deal is solid enough, they will lend you up to 100% of the funds you need to do the deal, even if you have poor credit. They will, however, take your character into consideration. If you’re trying to do the right thing but you’ve run into trouble, that’s fine. But if you’re a habitual deadbeat who doesn’t show any inclination to pay people back, it will raise a red flag.

Guidance and Advance Notice

In addition to lending funds based on the deal and not your credit, the top companies will also offer you guidance on a deal, and they’ll even tell you if they will provide funding before you initiate the deal. Meaning you will know in advance if you will get the funding BEFORE you commit to the deal.

The Takeaway

The takeaway from all this is not to despair. Help is out there if you know where to find it. That’s right, help to get most or all of the funding you need, help by not putting too much weight on your credit standing, and help and guidance before you do the deal. That’s a whole lot of help when you didn’t think there was any.

About the Author Josh Cantwell of www.StrategicRealEstateCoach.com recently released a video called “Banks are the Enemy” which reveals how banks not only contributed to the financial meltdown of 2008, but also are determined to stand in the way of property investors who want to change their lives by winning their financial freedom. Watch the video here: http://strategicfreedomfunding.com/blog/ and find out what you need to know about your alternatives to bank funding of real estate deals.