Traditionally, finding real estate opportunities has been challenging; however, in today’s real estate market, it has become the easiest aspect to real estate investing. Foreclosures are on every street, REOs (bank owned) are at all-time highs, and motivated sellers seem to be everywhere. Anyone who is willing to put in a little effort can find more deals than they can handle. But what about funding the deal? This can be an investor’s nightmare.

Lenders have been going bankrupt in record numbers this past year. The list of lenders on the out-of-business list not only includes numerous sub-prime lenders, but many traditional lenders as well. The remaining lenders have modified their lending criteria to the point that it is very difficult for most people to get a loan. This is especially true for a real estate investor.

Have you tried to get a loan from a bank recently? Full documentation loans with large down payments are now the norm for investors. Gone are the days of “no doc” loans and low or no down payment loans. Additionally, the time it takes to receive loan approval has gone from long to very long. If you need money quickly in order to close a deal, you will most likely be out of luck using traditional bank financing.

The basic sources of funding for most real estate investors include:

• Traditional banks and finance companies
• Mortgage brokers
• Hard-money lenders
• Home equity lines of credit
• Savings
• Credit cards
• Partners
• Business loans
• Private lenders

Especially in today’s market, it’s important for investors to have power team members who are capable of leading them to private lenders. Many successful real estate investors use private lenders to fund their deals, thus simplifying their business transactions.

It is necessary to understand the difference between private lenders and hard-money lenders. Many times these words are used interchangeably, but they are two completely different categories. Hard-money lenders are many times called private lenders because they are private individuals who lend money. They are in the business of lending money, and they control the terms of the loan and who they lend to. They prepare the documentation needed to complete the loan and they make sure that they are protected with mortgages or trust deeds. Hard-money lenders are an important part of the power team, but they are usually expensive, and are becoming more cautious, requiring more documentation from the investor and sometimes requiring the investor to have some of his or her own money in the game.

True private lenders are individuals who are not in the lending business, and may not have loaned money before. They could be neighbors, your doctor, your dentist, family members (be careful there), co-workers, friends—almost anyone! It could be the guy down the street who you don’t know yet, but who has a $500,000 IRA or 401k and is scared to death of the stock market. Private lenders are everywhere. As investors, we just need to find them and let them know we have a great business opportunity for them that will yield a good return on the money they invest.

When we find potential private lenders, we must educate them about real estate investing, show them what we are doing, and offer them an opportunity to share in the wealth. We will talk about how to cultivate these relationships shortly, but first, here is a list of the advantages of working with private lenders:

• No long qualifying process to get a loan
• No loan-to-value (LTV) limits
• No documentation required
• Quick access to funds
• No personal money in the deal
• Get excess funds for all fix and rehab expenses
• No points just to originate the loan
• You negotiate the interest rate
• No prepayment penalties
• No appraisal required
• No credit check
• Loans don’t show on your credit report
• Quick closing
• No payments until the project is completed (sold or rented)
• The ability to negotiate bigger discounts on properties based on cash offers and quick closings
• Increased confidence in making offers, since you know you can fund the deal

Now you can see the importance of having several private lenders on your team.
The private lender solves most of your funding challenges. But how do we find private lenders, especially since many have no idea that they can be private lenders? It takes a little effort, but your efforts will pay off. Here is a partial list of ways to attract private lenders:

1. Advertise yourself by word of mouth. Ask yourself this question: If you were accused of being a real estate investor, would there be enough evidence to convict you? Many new investors spend a lot of time finding properties and making offers, but fail to let the world know what they are doing. Let everyone know that you are in the real estate investing business and are looking for financial associates to help you expand your business. Many people with money would love to be in the real estate investing business, but don’t have the know-how nor the time, but you do. Just open your mouth and tell people what you are doing.

2. Run simple ads in the local paper. “Real estate investor looking for financial associates to help expand thriving real estate business. Please call Joe Investor at 1-800-SUCCESS.” When you get the calls from interested parties, arrange a time to meet them face-to-face to describe what you are doing. In your meeting, remember that you are selling yourself. Let the investor know that you are working with a large team of individuals who are experts in the various aspects of real estate investing. Once you have done a few deals, you can create a “credibility book” with certificates from the real estate education classes that you have attended, testimonials from those you have done business with, and before-and-after pictures of homes you have rehabbed. Pictures go a long way in building your credibility.

When someone shows interest in working with you, get information as to how much they would be willing to invest and let them know that you will add them to your growing list of private lenders. When you get a project under contract, contact all your lenders with the details. The first lender to commit to the project gets the deal.

3. Another technique to attract potential investors is to hold a luncheon. You
can obtain a list of certificate of deposit (CD) holders from a list broker and mail out postcards or run an ad in the paper. Ads and postcards could say something like, “Discouraged by low CD rates? Free lunch seminar May 4th, Somerset Hills Country Club. Call Joe Investor at 1-800-SUCCESS for a reservation.”

Build credibility by having the luncheon at a nice location. When people check in at the luncheon, hand them your credibility package with your bio and before-and-after pictures of some of your rehab projects. During the presentation, have a power point or some good overheads that tell your story and what you have to offer. Spend most of your time telling them “WIIFT” (what’s in it for them). Remember, you are not asking them for a loan, you are offering them an investment opportunity. Toward the end of the presentation, direct them back to the credibility package and have them take out the interest form and fill it out. Try to get an interest form from everyone, even if they are not interested now, and also ask for referrals. You can generate lots of good leads in just one luncheon.

There are many different ways to attract private lenders. Be creative. Talk to your doctor and dentist. Talk to everyone you know. Even family members can become your financial associates, but let them come to you. Use caution when involving friends and family.

When dealing with private investors, remember that you are the expert. Unlike every other lender out there who will protect themselves with the proper paper work, you need to make sure that your investors are protected with the proper mortgage notes, mortgages, and trust deeds.

Make sure that everything is in writing and everyone knows the terms of the deal so that there will be no surprises down the road. Agree up front on interest rates, payback periods, estimated rehab time, etc. Have backup exit strategies just in case “Plan A” runs into trouble.

Each successful deal you complete with your investors will build their confidence level, leaving them anxious to work with you again. Develop relationships with several private lenders, and you will no longer have any funding problems. If money is no longer an issue, how many deals can you do this year?