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As you may well know by now, private money funding is one of several options you have for funding a commercial real estate deal. The real trick is to know where to find such funding, and then to know how to lock it in so you can properly use it. I’ve used my share of private money over the years and what I’ve found is that private lending success comes from two key things: how you present yourself and how you present the deal.
Presenting yourself to a private lender needs to revolve around your professionalism and your commitment to the types of deals you do. For this reason, a simple summary proposal is a nice touch, when you first begin visiting with a particular lender. In such a proposal, you can provide snippets of your business philosophy, history, experience, etc. You can also show examples of how you would handle a particular deal, giving a lending prospect a quick idea of what it is like to do business with you.
There are several ways to put together a summary proposal and there are a similar number of things you could call it. The bottom line is that if your business is worth telling people about, it’s also worth putting in writing, and a person looking to learn more about you is less likely to want to read a full-blown business plan that is less relevant to their immediate interests.
Once you have gathered some interest from private lenders (not to understate the importance of this step), the next step is to actually present a deal to them when one comes your way. How you do this will be very important, given that your credibility with a seller will be somewhat dependent on your ability to not only attract funding, but also have it when you need it most.
When putting a project summary together, remember the key components that are important to you when you evaluate a commercial deal for your own business. First, there is the price tag, which should be competitive, relative to market value. Second, there are the market conditions, which should show some stability and also signs of good future growth. Last, there is of course the property’s cash flow, which should be acceptable to all parties involved. Once the basic elements of a deal are in place, then you can really dive in and start negotiating the terms of use for a private lender’s funds.
Don’t ever forget that using private money is serious business, so make sure you have a good team in place to support your efforts, and be sure to treat a private lender’s funds as carefully as you would your own. These two things can really simplify the use of private money and open key doors of opportunity for your commercial real estate business.
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Huntsville, AL .. August 28-30 2009
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The federal reserve lowered it’s interest rate to zero, using its nuclear option to help us get out of this struggling economy. If this doesn’t work, is the end near? Not necessarily, part two of the Fed’s plan is to start buying bad debt to take the strangle hold off of lenders so we can get money circulating back into the economy again.
Does this mean our interest rates are going to be lower for the deals we are about to do? Unfortunately Virgina, there is no Santa Claus, you see, there are three types of lenders who will give us money to do our deals; local banks, national banks and conduits.
Local banks have the highest interest rates and shorter amortization schedules, thus higher payments, which gives us lower cash flow. National lenders sell their loans to Fannie Mae and Freddie Mac, more about them in a minute. Conduit lenders are the institutions on Wall Street. These are the guys who got us in this mess in the first place!! Not only that, they all are pretty much out of business at this point.
Because of this, Freddie Mac and Fannie Mae have no competition. They used to be kept in check by competing with the Conduits. The interest rates on commercial properties are based on the 10 year treasury note, the difference between the interest rate we are charged and the 10 year treasury note is called “the spread”.
It used to be the spread was only 1.75 – 2 points higher than the note, the conduits were usually 2 – 2.25. A little higher than Freddie and Fannie but they were much more aggressive in their lending practices (this is what got them in trouble). With no competition, Fannie and Freddie are setting their spreads at 3 points and more off of the 10 year treasury.
Rates will remain about the same…hovering around the 6% range for the next six months or so, the good news is, they are not going up….raising interest rates means rising cap rates which means a loss in value.
Hopefully the lower rates and the Fed buying bad debt will lube the economy and get consumers spending again, soon!
Hey, it’s a great time to be a buyer of real estate, this window of opportunity comes around every 15 years or so…don’t miss this one!
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