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Why private money? Certainty of execution wins deals.

Today banks are often lending at interest rates that are in the low-to-mid 4% range. Naturally, all borrowers want these rates, and many borrowers with stabilized; cash-flowing properties can actually qualify for them. Therefore it goes without saying that no one actually wants to borrow from a private lender, no matter how smart, fast and reliable they may be ... even from a quality-focused private lender that offers pricing at the low end of the Private-Money-Rate spectrum (i.e., 9% or 10%).

Nevertheless in today's real estate universe, which perhaps can best be explained as being long on buyers with cash, and short on great buying opportunities, the truth is that certainty of execution trumps cheap money with respect to winning deals.

Pay cash if you are in a position to do so, and then finance your new acquisition with a bank later. However for those who are not in a position to pay cash, it may be more effective to close with private money first, and then approach banks and refinance later, once all the ducks are in a row.

Furthermore, since many of the most compelling buying opportunities are NOT for the properties that are already stabilized and fully cash-flowing, some imagination may be required to underwrite a loan on the deal.

The best buys are almost always the "hairy" deals where, beyond money, an opportunistic buyer needs to apply some combination of imagination, management or operational expertise ... what we can call the "special sauce", in order to unlock and begin to realize a property's hidden value.

While banks are a great choice to finance such deals once they have a year or two of historical stabilized cash flow to point to, we all know that most banks are not going to be interested in such deals on Day One.

Thus the role of the private bridge lender begins to come into focus: Buy it with a bridge loan, execute on your thesis and then refinance at a lower interest rate with a bank or (depending upon your business model and then-prevailing market conditions), skip the refi and sell for a nice profit.


A fair number of today's most compelling opportunities involve buying defaulted debt. While banks are a terrific choice to finance a cash-flowing, stabilized asset, they are not tremendously useful to those seeking to buy loans in foreclosure at a discount to face value, or for those seeking to buy a 90% completed project that requires both acquisition and completion dollars.

Those who are hunting this type of game (i.e., opportunistic buyers) should either have plenty of cash at their disposal or a good working relationship with a private lender capable of financing such debt acquisitions, especially as most of these transactions have a very short fuse, and must typically close in 30 days or less.

Cultivating such a relationship can pay huge dividends when opportunity strikes. Lenders will go out of their way to find a way to innovate and do deals with a borrower that they know and have come to trust.

As is true with nearly everything in life (restaurants, actors, lawyers, doctors, politicians, etc.), there are plenty of mediocre performers and only a handful of stars. Align yourself with an effective, dependable lender who can deliver the goods for you on short notice.

Other attractive deals may have Certificate of Occupancy issues creating a buying opportunity. Private lenders are often much more willing to close with a temporary C of O than banks, or to close in situations where value is being created because of a change of use (such as ground-floor apartments being converted to retail space).

Bridge loans are good for these transitional stages with the game plan calling for an eventual bank loan take-out once the issues have been resolved, and a permanent C of O has been obtained, etc.

When choosing a private lender, carefully review the lender's track record. Look at their focus and geographic preferences to be certain that your deal fits within the lender's typical comfort zone and that your loan request is part of their typical diet and not a stretch or an outlier for them.

Private lenders can usually handle adverse borrower history or information as long as there are compensating positive factors, and most importantly, if they are told about any issues up front.

Be straight about it: With today's electronic access to credit history and litigation records, lenders are likely to learn everything prior to the closing anyway.

If they don't learn it directly from their borrower then the relationship could end before it begins. The best approach is always for a borrower to be straightforward with the lender from the beginning about the partners' history and any property-level issues before signing the term sheet.

To conclude: The buyer that can close with certainty will always win more deals than the guy who can close with the lowest-rate mortgage.

You can always replace a bridge loan with a cheaper bank mortgage later (especially as most private loans have open prepayment after a short lock-out period), but you cannot necessarily get a second chance to get a compelling new deal under contract.

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Comment:Why private money? Certainty of execution wins deals.
Author:Winter, Greg
Publication:Real Estate Weekly
Date:Jan 5, 2011
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