“A private lender is simply an individual with substantial capital to loan you,” says Senna House Buyers Mat Trenchard. “You would be surprised how many individuals are out there looking to loan money they have saved. They will operate much like an HML [hard money lender], except typically you can get better rates and terms.”
Trenchard says private lenders may be more open to negotiating payment terms than hard money lenders are. They may even be willing to act as a partner on the deal and take a share of the profits in exchange for not charging interest.
“The key for the inexperienced flipper is to have confidence when negotiating,” Trenchard says. “They need to network and talk to other flippers about how much they are used to paying and know they can walk away. Don’t think because you couldn't come to an agreement with the first lender you talk to that you won't find the money for a deal.”
You can seek out private lenders at local real estate networking events. These individuals may charge 8% to 12%, plus zero to two points compared to a hard money lender’s 12% to 15% with two to five points, Trenchard says. Like a hard money lender or a bank, they will take a first position lien on the house.
How to Vet a Private Lender
Experienced professional flippers say the best way to measure a private lender you’re considering is to speak with other flippers—whom you’ll also find at real estate networking events—and ask if they have experience with those lenders. How quick was the turnaround? What pricing did they receive? How responsive was the lender? You can also ask for references and call them.
The worst-case scenario is usually that a deal falls through because the lender doesn’t provide the promised funding and the buyer loses his or her earnest money deposit. Another possibility is being surprised at the settlement table by unexpected lender fees. There is also the potential for legal battles over contract terms or a lender trying to catch a borrower in default so he can foreclose on the property. These are all good reasons to check out a lender before signing anything.
“That said, remember that in this kind of transaction, the lender is trading a bunch of money in exchange for some signed sheets of paper—loan documents. That’s not a bad deal for the borrower,” Machado says.
Online Private Lenders
Technically, a private lender is a friend, family member, or another individual who doesn’t make a business out of lending money but agrees to give you financing, says Brian Davis, co-founder of SparkRental and a real estate investor with 15 properties. Some companies may call themselves private lenders simply because they are privately owned. Like hard money lenders, you can also find them on the internet.
5 Arch Funding, based in Irvine, California, works with experienced flippers in 30 states. It offers single-digit interest rates for fix-and-flip loans.
Anchor Loans, a Calabasas, California–based company, can close deals on a wide array of property types at competitive interest rates in 46 states. Terms vary by state. In California, for example, loans are available with interest rates of 8% to 13%, depending on loan-to-value and borrower experience, with origination fees of 2% to 3% and loan terms of six to 12 months with no prepayment penalties. Flippers can borrow up to 70% of the home’s ARV. A down payment of at least 10% to 20% of the acquisition cost is required. Borrowers must have a proven track record of at least five flips in the previous 18 months. Anchor Loans will consider loans to qualified corporations and multi-member limited liability companies (LLC) with fewer than five flips. Funding can come through in two days to two weeks and typically takes one week, according to the company's website.