Private Lenders and Risk
Private lenders may look for several red flags in real estate transactions that could signal potential problems or risks. Some common red flags that private lenders may consider include:
- Low borrower credit score: A low credit score may indicate that the borrower has a history of financial mismanagement or difficulty meeting financial obligations. Don’t let this stop you from applying. Some private lenders may look at other factors to outweigh past issues on your credit report. Don’t be afraid to ask questions about what they need to see change and over what time period.
- Inadequate down payment: If the borrower is not putting enough money down on the property, it could suggest that they do not have sufficient financial resources to handle the transaction. This is where partnering with your network or negotiating better terms with the seller come into play. Ask your lender if there are other options with creative financing that they might be open to considering.
- Overpriced property: If the borrower is paying more than market value for the property, it could indicate that the investment may not be profitable. Remember that you have to know your numbers and have conviction on what the numbers are telling you. Not every lender will see your vision and that’s OK, but you must make sure your numbers make sense.
- Poor property condition: If the property is in poor condition or requires extensive repairs, it could indicate that the borrower may have difficulty completing the project or may not be able to sell the property for a profit. As a wholesaler or fix/flip investor, you do want a profitable project to work with, but can these issue be fixed within your budget and plan?
- Incomplete or inaccurate documentation: If the borrower provides incomplete or inaccurate documentation, it could suggest that they are not organized or are attempting to hide information that could affect the transaction.
- Lack of a clear exit strategy: If the borrower does not have a clear plan for how they will exit the investment, it could suggest that they are not experienced in real estate investing or have not fully thought through the transaction.
Overall, private lenders will want to carefully evaluate all aspects of a potential real estate transaction to determine whether it is a good investment opportunity.
Red flags may not necessarily mean that a loan application will be denied, however, they may prompt additional scrutiny or require the borrower to provide additional information or documentation.