How Do Private Lenders Evaluate Deals?

There are various private money lenders and real estate loan products available, as well as an extensive list of criteria that private lenders may use to evaluate the potential merits of any particular deal. This article will cover the key factors typically taken into account by private lenders when assessing loan applications, so you can be better prepared to apply for the capital needed to make your project come to life. You’ll save yourself a lot of time and headaches if you know what a lender cares about when going into a transaction and how they make decisions. We show you three critical criteria:

Whether it’s worth it: the time value of money

The time value of money is why investors invest and is a core principle of finance that, due to its obviousness, is easy to overthink. This concept means that money loses its value as time passes due to inflation and other economic forces. That said, private money lenders must determine if it’s worth it to lend money to real estate investors today or wait until economic conditions are more favorable to realize higher returns. The idea is that money you have now has potential earning capacity between now and later. 

The private lender will use a time value of money calculation to decide between competing loans. This calculation considers the lender’s average rate of return (their opportunity cost) over a given time, their anticipated cash flow, and the cash flow’s timing. The formulas can vary from lender to lender, so that we won’t get into them here.

Whether you’ll repay: your credit and capacity

This includes evaluating your credit score and credit history, and the current factors in your life that may contribute to the likelihood of you defaulting on the loan process.

If you know you have bad credit or your current circumstances look shaky on paper, the best thing you can do for your chances is be honest and direct about it. If you can offer an explanation that helps mitigate negative factors, provide the lender with documentation to support it. If a lender has a solid basis for believing that these issues will not affect your ability to repay the loan, it can go a long way toward helping your costs.

What they get if you don’t pay: your collateral

Private lenders will use a combination of appraisal, broker price opinion, automated valuation model, and even personally visiting the property and surrounding neighborhood to determine an exact dollar figure of the subject property and any other collateral.

After the lender has determined your collateral’s value, they will weigh it against your other loan factors to determine the loan value they are willing to extend.

Conclusion

We have presented you three key factors lenders use to assess loan applications but remember that there may be more factors that determine whether a private lender will approve your deal. Understanding what these lenders are looking for and accordingly preparing increases your chances of getting the real estate funding you need to close on your investment property. If you have questions about how to get started with private lending or would like help evaluating a potential deal, our team at RE Investor News is here to help. Contact us today!

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