Private Lenders Help Residential Developers

Private Lenders Help Residential Developers

January 13th, 2017: In the world of residential development, a private money loan is a loan given to the investor and secured by real estate. As one of the more popular conventional bank loan alternatives, it can be secured by either a first or second mortgage.

How Does the Private Lending Process Work?

In reality, the process is very simple—it comes down to just a few steps.

  • When a developer identifies an undervalued property, he or she approaches a private lender and borrows the money for the property.
  • The developer employs the loan proceeds to reposition or renovate the property. This process may take a few months, depending on the project size.
  • The developer lists and sells the property or obtains a conventional bank loan. At closing of either the sale or the loan, the lender gets back the principal and any interest owed.

The goal of the borrower is to use the private loan for short-term projects where the time and due-diligence required of a bank loan are impractical. The borrower receives the necessary capital quickly, and the lender earns a substantial return given the holding period of the loan. Both sides should mutually benefit from the transaction.

What Are the Benefits to the Private Lender?

A private money lender takes the place of a bank—providing a loan faster than a traditional commercial or residential loan. Private lending generates income from interest and fees that provide strong returns over what are typically short borrowing periods. Private lenders can provide a service for residential developers, who may have trouble obtaining a short-term loan for certain types of properties or projects.

The Benefits of Private Money Lending to a Residential Developer

First and foremost, a private money lender can help expedite a transaction. Many homes that a residential developer would be interested in purchasing require a quick close. Standard bank loans take at least 30 days, if not longer, to close. Having access to fast cash allows the developer to negotiate the best possible price for a piece of property and reduce the sellers risk of a deal falling apart due to lack of financing. Sellers are more likely to take a developer’s all-cash offer than a competitor’s offer contingent on obtaining financing.

Another significant benefit to using a private money lender over conventional bank loan alternatives is that the guidelines for bank financing often impose onerous underwriting standards on borrowers. For instance, these rules, often set by bank regulators or corporate guidelines, can limit the number of investment properties a single developer can acquire. Finally, since many properties require extensive renovations, a private lender can easily allocate funds for not only the purchase price but also improvements, carrying costs, and reselling expenses.

Protection for Lenders

While private money lenders provide capital quickly and to projects overlooked by traditional banks, the private lender should still engage in basic underwriting processes and obtain the following documents to secure their loan’s collateral:

  • Promissory Note – Collateral for the investment capital.
  • Mortgage or Deed of Trust – This is a publicly filed document that secures the loan with real estate.
  • Hazard Insurance Policy – In case there was a fire or other natural disaster, this protects the property.

Understanding private lending and other conventional bank loan alternatives is simpler than you probably imagined. If you would like more information about the process, contact us at Worth Avenue Capital today. We look forward to helping you with your next big investment.