How To Find And Approach Private Lenders For Flipping Houses

How To Find And Approach Private Lenders: The Ultimate Guide

Danny Johnson / 68 comments

I’ve received a lot of questions about how we fund our deals. The simple answer is with private lenders. Obviously, people aren’t happy with that answer alone. It doesn’t really explain anything. We only use one lender per property and work with a handful of different lenders. In this article, I am going to show you where to find private lenders and how to approach and build relationships with them by showing you how we did it.

What Are Private Lenders

Private lenders are people that lend money to investors so they can buy investment properties. Typically they are doing so to get better returns on their money than the stock market or other forms of investment have provided. The terms and details of each loan are up to the individual lender. In our experience, private lenders typically offer easier access to funds, lower interest rates and fees, and an all-around easier experience than typical financial institutions and hard money lenders.

Difference Between Private and Hard Money Lenders

The difference between private lenders and hard money lenders is basically just the terms each offers. Hard money lenders are named so due to the fact that their terms are usually much harder on us. The loan fees are usually several points (a point is 1% of the loan amount) and I have heard of some charging upwards of 7-8 points! Ouch! The interest rates are usually high as well. Typically, they charge between 15-18% interest rates. Many hard money lenders are in business to be just hard money lenders. Private lenders typically are just doing so for better return on their money as a side investment.

Where Do You Find Potential Private Lenders

When looking for private lenders, there are a couple of groups of people to consider:

Family and Friends With Money

The first is family and friends that have some money they might be willing to invest. Just make sure that you approach people that have enough to lend on a typical house that you would consider buying. You should only have one lender per property. There are also a couple things to consider when approaching this group for lending. You need to carefully consider the fact that the person that lends money for your deal may run into a unexpected problem and need to pull the money out of the deal. This is definitely something that needs to be considered and understood before proceeding. The other issue is that most people consider it a bad idea to work with family or friends. If a deal turns into a dud and you lose money, what are you going to do? Where does it leave your lender? Be careful with this. Even if you use an institutional lender, you should always repay your debts no matter what, but when working with family and friends the consequences could be much worse. We approached several family members and friends when we were getting started. All wanted to help, but most were too conservative to actually commit. This may be different now that we have been flipping houses for almost a decade successfully.

Private Lenders Already Lending To Investors

The other group to approach is the one that is more likely to agree to lend on your investment properties. This is the group of people that already lend money to investors for properties. These guys are perfect because they already know how good these types of investments can be and only need to be convinced that it is ok to lend to ‘you’. You won’t be selling them so much on the deals as you will be selling yourself. I’ll explain how to do this in a later section. There are several ways to find these lenders:

    1. Ask other investors for lenders they use or know of.The difficulty here is that most investors don’t want to share their private lenders because of the limited funds available from each. You never know though, you might get lucky. If you don’t ever ask, you will never find one. Keep a spreadsheet with names and numbers of potential lenders, their contact info, who recommended them, and their terms.

 

  1. Do some investigating.This is what we did and I feel this is the single best way to find potential lenders for your real estate investment deals.Here’s what you do:
      1. Scour the MLS for recently sold REO’s (bank –owned foreclosures) and other fixer upper properties that were likely bought by investors. If you don’t have access, ask a Realtor to do this for you or let you use their system, with their supervision. You should have a good Realtor on your team anyway. Search for more recent sales. Within the past 6 months should be fine. It is important to find lenders that are actively lending. Your search should include areas that you are interested in investing in because the lender will have already shown an interest in lending in that area.
      1. Find the ones that were sold with a loan. You will probably have to check your county records (most are online now) to see if there was a deed of trust or warranty deed with vendor’s lien filed for the property for the recent sale. The recorded docs should have a name for the lender and the address where the original document was sent after being recorded. Write down this info.You will start to see some of them appear again and again. These are the real prime suspects. You will want to try your best to work with these guys.
      1. You should also keep track of the names and addresses of people that bought investment properties and paid cash. These are a good source of investors to birddog leads or wholesale houses to. Keep track of the area the house was bought in for each investor. You now know they like that area.

Making Contact With A Potential Private Money Lender

Once you’ve created a list of potential private money lenders, you will need to find a way to contact them. Our preferred method is to write a letter to them. The letter usually just states that I am an investor in the area and I am looking for people interested in receiving a good return on their money, secured by real estate. You should also briefly mention how you found them and why you decided to contact them. This is usually something they are curious about anyway. I’ve found that many of them will actually consider it a good sign that you are a true go-getter and have what it takes. The letter goes on to mention that they should call me so that we can discuss it further. As far as SEC guidelines goes, you should be fine as long as you don’t use words like “guarantee” and talk about any specific deal in the letter. You also need to stick with using one lender per deal (no comingling of funds). Just be general about your discussion of providing a better return on their money and to call so that you can discuss it further. When they call, try to make small talk and ask if they have been lending on investment properties for a while. Try to set up a lunch meeting with them so that you can talk more in depth about what you are looking for.

Your First Meeting

This is where I want to mention the importance of your level of confidence. It is of utmost importance that you exude confidence and make it appear that they need you more than you need them. You should try to make it seem like you are interviewing them and that the acceptance to work together is up to you. This might take a little work, but makes all the difference in the world. To help you with this, just consider the fact that you will (if you want to) be offering them 10% interest on their money AND it will be secured with real estate that is worth a lot more than how much they are lending. THIS IS AWESOME AND YOU NEED TO UNDERSTAND THAT IT IS. They should consider themselves lucky that you are offering this to them. Don’t ever doubt that. You should obviously be at a point where you have educated yourself on real estate investing and flipping houses. Do not attempt to meet potential lenders before having done so. You are asking them to lend large sums of money and you’d better know what you are talking about.

Things To Bring

    1. Business Plan – You should have a business plan, even if it just describes what types of properties you buy, that you intend to improve them through rehab, you sell with the help of a Realtor, etc. Just the basic process of buying and then selling and what types of profit margins you look for. What kinds of things will cause you to walk away from a house purchase.Maybe some insight into the real estate market in your area to show that you keep up with it.

 

    1. If you’ve done some deals be sure to have some before and after rehab pictures and as many details you can provide about timelines and the numbers for the deals. Lenders love this. It shows that as you are prepared and it shows them exactly what will be happening with the money they lend.

 

    1. If you have not done any deals, try to arrive with some potential deals and your analysis for each. I will talk about what we did before we had done any deals in a later section.

 

    1. Money to pay for their meal. You’d think this would be obvious…

 

How Their Money Is Secured

To help them feel safer with the investment, make sure to let them know that their loan will be secured with a first lien deed of trust. Some lenders will want a personal guarantee if you buy your properties using an entity such as an LLC. I’m certainly trustworthy enough to make sure that my debts are paid even if things go sour, so I do not hesitate to give them this. Your title company should be able to have an attorney draw these up for each loan. You will want to buy your properties far below market value. We suggest at least 70% of market value minus cost of repairs. This should be explained to the potential lenders to help them understand that if they did have to take the property back, they would have an asset that is valued quite a bit above what they had into it.

What Terms We Usually Get

This is another time where you need to remember how good of a deal you are offering them. If they ask for a certain interest rate and points, NEGOTIATE WITH THEM. I have a feeling that they actually like to see this. Trust me. They want to know that you are a real businessman or woman. This gets back into you being the one that is controlling the situation. The terms that we typically get are 10% interest with “interest only” monthly payments and a 1 point loan fee. The loan is usually for 9-12 months with 1 point being required for an extension (though this should not be needed). We get loans to cover the purchase, repair costs, and sometimes the payments as well.

What We Did Before Having Done Deals

When we started, we would have had a hard time approaching private lenders to work with. It can be done and should not be considered impossible. Realistically, it is best to work with a money partner or work with hard money lenders. There are national hard money lenders but I feel it would probably be better to work with local ones. One of the benefits to working with hard money lenders or money partners (that are also investors) is that they may keep you from investing in a bad deal. If no one wants to put their money into the deal, it probably isn’t a deal. We started by working with a money partner. He was our mentor and had been investing in real estate for around 20 years. We did all of the work, including finding the deals, negotiating the deals, rehabbing the houses (using contractors), selling the houses and the whole nine yards and he put up the money. We split profits 50/50. This was great when we started because the only thing we risked was our time. No money out of our pockets (except for some marketing expenses). I highly recommend this method of getting started. You really limit your risk.

Conclusion

Now that you know how to find and approach private money lenders you can start saving yourself tons of interest and fees that you may have been paying using hard money lenders. Get out there and start building relationships and kick your investing up a notch. Thanks for visiting the blog. Danny Google+

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68 awesome responses to “How To Find And Approach Private Lenders: The Ultimate Guide”

  1. logan on

    I really appreciate this post and all the other ones, your a monster help!

  2. logan on

    Thankyou! just wanted to let you know I came across your site about a week ago and am playing catch up reading all your posts, they’re great and a life saver. I have been trying to break into RE investing for a while now and with all this info and your help it seems that I cant fail now, so thanks again!
    P.S. I might be reaching out in the future for some advice if your open to help

  3. Wade on

    Great info again Danny. I just got a mentor earlier this month and we’re doing something similar to what you did when you started, except we haven’t yet talked about him funding any flips. In the case that he isn’t, do you feel it would be smart and ethical to use my mentor/partner’s experience on any potential private money lenders as a crutch for my lack of experience?

    P.S. I’m currently on Chapter 8 of Secrets of Power Negotiating. It almost makes me WANT to go negotiate with a car dealership just for practice. Great recommendation!

  4. Brooks on

    Great article Danny, thanks. Our last renovation was at 15% — we’re just about to close and have owned it at 15 months (rented for the last 7 months) — talk about some juice!!
    My past business partner actually prefers 50/50 partnerships due to the lack of risk and financial burden – and I don’t blame him – there can be a lot of pressure when the clock is ticking on a loan

  5. Carol on

    Hi, Danny!
    Great site! Thanks for sharing everything. How do your lenders deal with the SAFE act? What special statements/clauses do they put in the contracts with you?

  6. Litia Niumeitolu on

    Thank you Danny, yes, it was very helpful.

  7. Clement on

    Simply put …Great info! Saw the short video version on goodfaithinvesting…loved the detailed version here.
    Thankd

  8. Brooks on

    Does your county records site provide you with transactions and if it had a mortgage included? The only way that I know to do this is to look at the MLS ”terms sold” and look for Conventional, Cash, etc. (but of course cash isn’t always cash — there might be a lender involved!) or to pay for the information from a data provider.

    My other thoughts: the way that I’ve done research in the past is to research investors (typically have an LLC, etc.) and look them up and see what deals they’ve done — and if they’re borrowing money, the lender shows up — but this has tended to be the ”professional” lenders.
    Thoughts?

    Also, if you created some sort of buyer organizer, you could easily track the potential buyers that you find and track where they buy properties, etc. : )

  9. jeff R on

    Great info Danny.
    I really appreciate the great info.I just found your site a week or two ago and cant wait to finish/getting caught up on rerading your blogs/updates.
    Ive been studying/learning/webinaring(if thats a word)for a while now,and your site is a very fresh,new insight into the investing world.So far its awesome.Especially your private money section.It was very clear and down to earth and right to the point.
    I look forward to getting caught up on your site every day.Thanks

    Jeff R

  10. Bryce on

    Awesome post.

    Disclaimer: I don’t want to pry into your finances, so feel free to ignore this question. I understand your reason for not wanting to use your own money to fund deals, but is there a point where you would consider doing so? You’ve been operating successfully in this business for a long time, and given the numbers you write about I would guess you have a decent chunk saved up. Is there a number where any amount over that number you would be okay reinvesting in your business (ie funding flips yourself)? Assuming you have a bunch saved up, it would seem pretty tough to generate 10%+ with less risk than flipping (your own flips).

    I guess a tangent to this question is what vehicles do you invest your savings in? Thanks and again sorry if this question is too personal.

  11. Meghan on

    Great site and very informative, I have to say one of the most thorough sources I’ve seen on flipping. I’m a Realtor in Las Vegas, but I really want to flip and have for a long time. It’s kind of intimidating to just get started even though we have a little cash, it’s not really enough to fund an entire deal, it’s encouraging to know you do this with other people’s money. The mentor is the most appealing to me to have an experienced set of eyes on the deals until I get more comfortable. How did you get connected with your mentor? Was it someone you already knew? Also, do you ever buy properties listed in the MLS or from trustee sales?

  12. william (Bill ) Hall on

    Danny,
    I wanted to let you know that I have been doing research on private lending. I found that you can write a letter to potential investors to let them know what you are doing, BUT you better not make an offer until you have made at least 3 contacts and a period of 30 day have gone by before you make an offer of any kind to anyone. After 30 days you can then give a potential investor an offer. You need to have a Private Placement Memorandum (PPM) for the Fed. and a Small Corporation Offering Registration (SCOR) for the state if you are planning on using a rate of return in your offers.

    There may be a different way to go about this, but this is what has come from my personal research. I spent about 10k (most lawyers wanted to charge me 30k OR higher) to have my SCOR and PPM completed. This also included an Executive Summary that I can hand out, so the investors have an idea of what I am doing, without going into the actual offer before the 3 contacts and the 30 days are up. The SEC is wide awake in this area, so please let your blogers know to be sure what they are doing before they send the first letter.
    My rule is: No Lawyer – No mail or offer.
    – The lawyer I used is no longer available as he is sick.

    I hope this helps,

    Bill

  13. Bill Walston on

    Bill, could you cite where you found the info on 30 days? I’m familiar with what is commonly called the “45 day rule” which requires three contacts (one which must be by phone or in person) before presenting your offer. This, of course, applies only to folks that are outside of your existing network. And so far pretty much all of my deals have been done without either a PPM or SCOR. I usually use only one (at most two) private money partners per deal though, so that might explain why it’s not been necessary to go to the added expense. I like to keep things simple. It seems Danny does too, since he advocates “one person per deal” and not “co-mingling funds” as well.

  14. Bill Walston on

    GREAT post Danny. You have really broken down finding private lenders to a “step-by-step” that is simple to follow. And you are spot on with your charge to “get out there and start building relationships.” That’s what is key in finding your private money partners – relationships :)

  15. william (Bill ) Hall on

    Hi Bill,

    Iam happy to help with what my attorneys have taught me.

    I always use two attorneys just to make sure. Both attorneys have agreed that the time frame is 30 days. I have not been told anything about a 45 day rule.

    If you are going to work inside your network, some states require that friends and family be sent a notice filing…BEFORE you ask them to invest. You must have a PPM if you are asking people outside your friends and family. The number of friends and family in NC is 12, not sure about other states. You can check the SEC website or call, they are very helpful.

    You can have as many people invest on one house as you wish, as long as they are all aware that the 1st investor has a first mortgage and the second has a second mortgage, as so on.

    If you are going to only have one investor on one house, then you still need to have a PPM. If you want to advertise your offer with an interest rate to peak interest, then you must have a SCOR? – 2, 3, or 4 people on one property has nothing to do with co-mingling of funds.

    I like simple as much as anyone, and i dont have money to waste. After 9 months of research, i made the choice to keep my life out of trouble with the SEC. I kept my expenses down by calling the SEC for their help.

    Your first call should be to the SEC. They really do want to help. What they dont like is not following their rules.

    I hope this helps,

    Bill

  16. william (Bill ) Hall on

    correction: the number of friends and family you can ask in NC in one year is 24, not 12.

  17. Meghan on

    Do you think there’s any other downside to using hard money lenders (other than the obvious raping and pillaging on fees) to get started? I’ve got access to a couple where the points are about 3-6% and rates of 9.5-15%. I know this is high, but if I figure those fees into the deal and it still makes sense, I’m thinking it would at least help me cut my teeth…?

  18. Erby on

    Hey Danny, do you use your private lenders for deals that you wholesale? If so what kind of conditions do you have with your lender since the loan is short like 30days or less?

  19. Fred on

    Hi Denny,

    Very informative post. Tons of great info especially for beginner.By doing this for over 10years have you ever lost money on deal?
    And if you did what exacty happened,where mistake being made?

    Thanks,

    Fred

  20. FRED on

    Thank you Danny

  21. Phil Gonzalez on

    Hey Danny, I just came across your site this evening researching. I am a beginner and have been researching for a while now. What you are doing for us beginners thank you and please keep doing. What would be the avg amount of money needed to start your first deal.

    Thank you,
    Phil

  22. David on

    Hello Danny Great Site!
    I am a true noob to property investing. I have been doing a lot of reading to gain a better understanding of the investing process prior to digging in and this is how I found your site. I was hoping for a little clarification of the private loan repayment process you mentioned…..

    “”The terms that we typically get are 10% interest with “interest only” monthly payments and a 1 point loan fee. The loan is usually for 9-12 months with 1 point being required for an extension (though this should not be needed). We get loans to cover the purchase, repair costs, and sometimes the payments as well.””

    Okay if I am understanding correctly
    Generic example I will use a $100,000 note @ 12 months

    100,000 note
    -1,000 (1 pt loan fee)
    99,000 note @ 10% interest =9,900 total interest
    9,900 / 12 mo “interest only” payments 825 a month??
    or is a 1 point loan fee added to make the deal or am I way off base with all of the figures?

    Thanks in advance for lining me out. I am glad I found your site you have very useful information keep up the good work!
    Now back to reading next up week three…
    David

  23. Tracy on

    Just wondering how it works with placing the offer on the home. Can you still offer “Cash” on the house and then assign a lender at closing?
    Tracy

  24. @buyhousescheap on

    Hey Danny,What type of terms do offer your PL weather its a rehab deal or a 30 day wholesale flip? When doing wholesale deals unless I can assign it quickly I usually have to wait and do a double close. Not to mention how when it’s a possible big pay day and your hoping you can hurry up and get it closed before another investor goes to the seller with a supposedly better offer and you possibly lose the deal.

  25. @buyhousescheap on

    Disregard the last statement Danny. Went back and read the post over and saw where you mentioned your terms when dealing with PLs. Thanks.

  26. Steve on

    Danny, I just started reading your site. Now when you use the investors, the money you are asking them to put, does it include the cost of repairs?

  27. Steve on

    Danny,

    This may sound like a dumb question. However when you go look at a property, do you already have funding lined up or worry about that after you have made an offer? I only ask, because I have a home I would like to go see, but have not secured funding yet. I have a friend who has used a Hard Money lender before that is an option for me.
    thanks

  28. Larry on

    Wow: What good info. Thank you very much.

  29. Armando on

    100,000 note
    1,000 loan fee is paid at closing
    100,000 note @ 10% interest = 10,000 interest if held over the entire 12 months
    Payments are $833.33 (10,000 / 12)

    So the amount of interest paid is determined by how long you have the loan for?
    So if the loan was only held 6 months, you would only payout 5,000 interest?
    If so how can you calculate monthly interest payments, the length of term is a set figure, i.e 12mo, but the actual time you have the loan can vary.

  30. Jennifer Eoff on

    I loved the site. Just a few questions. I have had a carhauling business for many years. I decided to sell the truck and rest for a year. We did and now we are having trouble finding a loan for the $75,000 we need to get the next truck. I have never been late on truck payments, but have a poor personal credit history from medical. I only have $7000.00 down. But if I find a private lender then they would earn over $20,000.00 in 2 years. Even if I just had a co-signor I could get the loan. The company that we had the last two trucks through had problems with others last year and that messed it up for people that paid like us. We are used to paying $4,000.00 a month for a truck payment. So $3,000.00 will be nothing. Where should I go to find help???? Oh and they gave us letters of recommendation for our history.

  31. Tom on

    Could you explain the ins and outs of non-refundable earnest money in an assignment
    agreement?

  32. Tom on

    Danny,
    Just to be complete, I assume that if the deal closes, the wholesaler/assignor keeps the non-refundale earnest money in addition to his assignment fee. Am I correct in this assumption? Thanks in advance.

  33. jenny on

    Hi Danny,

    I want to build and flip a house since I have knowledge and trades in the construction industry. I do not have the income to back it up so I asked my brother to back me up as my financial partner. He agreed to do it and we are trying to figure out the right way to start the process so there are not any misunderstandings. He can either get a construction loan for the process and put down the initial 20% and pay the interest only payments each draw or pay out of his own pocket. If he did the construction loan what is a standard rate of return for private lenders for their initial down payment investment if the construction loan is at 4.6 APR? Do you pay a rate of return to him for the down payment or just split the profits evenly in the end since we are already paying 4.6 APR to the bank? Would that rate of return be the same for him if he were just loaning it out of his own pocket without any bank financing? Thanks for your help.

  34. @buyhousescheap on

    Hey Danny, did you ever go back and discuss how to go about acquiring private money even when you have not done a deal? have been working on getting private lenders for potential deals but whenever the question comes up about how many deals have you done and the answer is none they tend to not be interested at that point.

  35. Ken Williams on

    I you haven’t got to the point in your real estate business where you need private money yet, you probably have really deep pockets or are paying too much for the money you’re currently using. Do yourself and your family a favor and read this now while it’s still important to you.