The 3 Crucial Factors a Private Lender Evaluates in a Borrower

Tuesday, June 20, 2023

Primary Blog/The 3 Crucial Factors a Private Lender Evaluates in a Borrower

Every morning, I look at myself in the mirror, ensuring there's no "CHUMP" written in bold letters on my forehead.
After 55 years, I've yet to wake up with such a disconcerting surprise.

However, it seems that some people approach life as though that very word is etched on their foreheads.

Typically, it's those who approach me for loans that don't quite add up.
Their proposals lack sensibility, their credit histories suggest a lack of commitment to timely repayments, or worse, they engage in outright deception.

For all you budding investors out there, and as a friendly reminder for the seasoned pros, here are a few key considerations to bear in mind when seeking to borrow money from a private lender.

1) Conservative Estimates from the Start

When someone submits a property proposal, I can swiftly discern if their estimates are realistic or not.

Please refrain from telling me that the After Repair Value is $410,000 when sources like Zillow, RealQuest, or Trulia suggest it's valued at $285,000.

After all, I're going to request an Appraisal or a Broker's Price Opinion (BPO) eventually, so let's set the right tone from the beginning.

Otherwise, it's merely a waste of our time.
You can't pull the wool over my eyes too easily (at this point, anyway).

2) Willingness to Fulfill Commitments

We will scrutinize your credit history, not solely for your credit score but primarily to gauge your willingness to repay... on time!

Allow me to share a recent anecdote: years ago, a broker presented a loan for my consideration.
On paper, it seemed promising; the borrower boasted a net-monthly income of approximately $26,000 from about 80 apartment units, while my loan's monthly payment was a manageable $2750. However, as I examined the borrower's credit report, I noticed a recurring pattern of 30 to 60 days of delinquency in paying a $800 BMW installment.

This was a significant red flag.

If he didn't prioritize paying his car loan on time when he had the means to do so, why would he treat our loan any differently?

I lost confidence in his commitment and promptly declined the loan, as any responsible lender should.

3) A Well-Defined Plan

So, you're eager to dive into the world of real estate rehabbing, and you're in need of financing.

That's fantastic; a multitude of private lenders exist for this sole purpose.

Do you have a solid deal with substantial profit potential, and are you investing your own funds in the venture? Excellent! However, if you lack a clear plan, that's a different story.

Fresh out of the seminar circuit, many new investors and rehabbers are enthusiastic but also uncertain.
The learning curve can be steep, and the best way to conquer it is by diving into your first deal.

When I converse with potential borrowers in this category, I inquire about their financial resources, potential partners, and their project plans.
More often than not, they regurgitate seminar teachings without a genuine understanding of what's required.
If you want us to fund your loan, you must demonstrate a clear grasp of the project's necessities.

Without that clarity, we won't proceed with the loan.

You need to collaborate with someone who has deep experience — someone with a proven track record.

Real estate is fundamentally about time, experience, and money.
If you lack the latter, you must build extensive relationships with those who possess these traits. Those are the individuals I prefer to work with.

Conclusion: Better Be Prepared Than Sorry

When seeking financing from a private lender, remember these three vital factors:

  • ​Provide conservative estimates
  • ​Exhibit a strong commitment to timely repayments
  • ​Have a well-defined plan

With these elements in place, your path to success in real estate investing becomes considerably smoother.

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Hi, I Am Roger King

Founder REI Accelerator

With The REI Accelerator - Founders Group, you're not just learning real estate; you're scripting your success story... One property at a time.

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