Loan Shark: get the facts on private lending

by Glen | May 2, 2013 | News

: What you need to know about private lending

All private lenders are loan sharks! I’ve heard this statement many times from both borrowers and brokers who have not had such a positive experience with a private lender. I recently wrote and article in the Colorado Real Estate Journal focusing on this very statement. Below is an excerpt of the published article.

Before discussing the myths and realities about private lending and addressing the statement private lenders are “loan sharks”, it is important to define what exactly is private lending. If one were to ask five different people to define private lending, one would likely get five very different answers. Private lending is a niche product that many people are not fully familiar with.

Private Lending/Hard Money lending in its simplest form is a lender that makes a loan on a hard asset as collateral (this is where the term hard money lending comes from). A traditional lender when making loan decisions puts considerable weight on a borrower/properties debt to income ratio (debt service coverage ratio), current financials, tax returns, business plan, credit score, etc… In many cases, ratios must meet certain thresholds in order for a loan to get funded. With the recent credit crisis, the underwriting standards have become even more challenging for many borrowers therefore prohibiting them from obtaining conventional financing.

Private lending is radically different than traditional bank lending. A private lender loans up to 60% (typically but varies based on the lender) on the value of the property (residential or commercial real estate) without having to satisfy all the aforementioned metrics that a bank requires. As a result, private lenders are able to fund loans that do not fit traditional lending guidelines. They are also able to close loans very quickly (we have closed and funded loans in as quick as three days). How can a private lender not follow traditional guidelines and fund so quickly? The simple answer is that a private lender funds in cash and is not a bank and therefore not bound by various regulators.

At the beginning of the article I started with the statement: “private lenders are loan sharks”. This is the most common misconception about private lending because many people do not fully understand private lending and when it is best utilized. Private lenders like myself are in the business of providing financing when traditional sources don’t work for whatever reason. Although the rates are moderately higher than a traditional lender, the loan ultimately saves the borrower substantial money. In the two cases above (see article below for the details on the savings to borrowers) , both borrowers were destined to lose substantial money if they did not complete their financing quickly, the borrower in Frisco was facing a default rate of 38% along with further dings to his credit and the Denver attorney was facing a loss of over 150k in equity that was put into the property. The private loan saved each of these borrowers thousands of dollars. Although private lending is not used in every situation, private lending is an important tool for any real estate professional when conventional financing is not an option.

If you have any questions on private lending or hard money lending; feel free to post the question here and I will respond.

By Glen Weinberg

COO/Partner Fairview Commercial Lending

See the Original Article published in the Colorado Real Estate Journal: