1.  Why Investors Use Private Money—Quick Recap

• Speed: Close in days, not weeks—critical for auctions, distress, or hot markets.
• Asset-Based Decisions: Emphasis on the collateral and exit plan, not just credit.
• Flexible Structures: Interest-only payments, short terms (6–24 months), rehab holdbacks, and creative collateral options.
• Bank Gaps: Funds projects banks avoid: heavy rehab, short seasoning, non-stabilized assets, or unconventional income.

2.  Case Study 1: Single‑Family Fix‑and‑Flip—Speed Wins the Deal

Scenario

• Purchase: $520,000 (REO; needed significant cosmetic + systems updates)
• Rehab budget: $85,000
• After‑Repair Value (ARV): ~$750,000
• Private loan: Capped to 70% of ARV; lender funded 85% of purchase + 100% of rehab, but capped at $525,000.
• Terms: 12‑months, 11.5% interest‑only, 2 points, interest reserve, and rehab draws with third-party inspections.
• Timeline: 5 months to renovate and sell.

Outcome (illustrative math)

• Sales: $740,000
• All‑in costs: ~$700,000 (purchase + rehab + points, interest, taxes/insurance, closing + broker fees)
• Net profit: ≈ $40,000
• Key: The investor won the bid by offering a 10-day close; a bank loan would likely have missed the window.

Takeaways

• A tight schedule and interest reserve smoothed cash flow during rehab.
• The cap to 70% of ARV protected the lender while giving the investor enough leverage to execute profitably.
• Profit was modest, but the speed of capital and certainty of close beat sitting on the sidelines.

3.  Case Study 2: 12‑Unit Value‑Add Reposition—Bridge to Agency Take‑Out

Scenario

• Purchase price: $2,400,000 (under‑managed, 20% vacancy, below‑market rents)
• Capex: $400,000 (unit turns, exterior, systems, curb appeal)
• Bridge loan: 65% As‑Is LTV at close; up to 75% of total cost via draws, 18-month term, 9.5% interest‑only, 1% exit fee, partial recourse with burn‑off at 1.25× DSCR.
• Business plan: Raise NOI by renovating units, stabilizing occupancy, and aligning rents to market.

Outcome (illustrative math)

• Stabilized NOI: ~$230,000
• Implied value @ 6.75% cap: ≈ $3.41M
• Agency refi: Proceeds paid off bridge, locked long-term fixed DSCR debt; investor created ~$600k+ in new equity after costs.

Takeaways

• Private bridge capital funded a non-stabilized asset that banks wouldn’t touch.
• The recourse burn‑off rewarded execution (DSCR target hit).
• Upfront clarity on exit fee, extensions, and draw process prevented mid-project surprises.

4.  Case Study 3: Infill SFR Construction—From Teardown to Sale

Scenario

• Land/teardown acquisition: $800,000
• Hard costs + soft costs: $500,000
• ARV: ~$1,700,000
• Construction loan: 65% LTC with 100% of hard costs funded via draws, not to exceed 70% of ARV; 12.25% interest, 3 points, interest reserve, builder’s risk required.
• Timeline: 12 months (permits/design already advanced).

Outcome (illustrative math)

• Sale price: $1,680,000
• All‑in: ~$1,520,000 (land + build + financing + fees)
• Profit: ≈ $160,000 before taxes.

Takeaways

• Builder’s risk insurance with the lender as loss payee is non-negotiable.
• Inspection-based draws plus 10% retainage kept the GC aligned and protected the lender.
• A well-documented scope and contingency budget helped avoid delays in reimbursements.

Note: Figures above are educational illustrations. Always model your numbers, including taxes, utilities, contingency, carrying costs, and transaction fees.

5. How to Find, Vet, and Negotiate with Private Lenders (Borrower’s Playbook): This section is a comprehensive guide that will walk you through the entire process of engaging with private lenders, from sourcing them to negotiating the terms of the loan.

a.  Sourcing Lenders

• Local deal ecosystem: Title/escrow officers, appraisers, real estate attorneys, mortgage brokers, and experienced investors often know active, reputable lenders.
• Investor communities: Local REIAs, builder associations, and small‑balance debt conferences.
• Track record over ads: Prioritize lenders with verifiable closings in your asset class and geography.

b.  Credential & Capacity Checks

• Licensing & compliance: Confirm any required state licensing/registration (lender or broker). Investment/business‑purpose loans are treated differently than consumer/owner-occupied credit; laws vary by state—consult counsel.
• Proof of funds/capital stack: Ask how they fund (balance sheet, warehouse line, fractional note investors) and request POF for your deal size.
• Servicing & draws: Who services the loan? What’s the SLA for posting payments and scheduling draw inspections?

c.  Term Sheet Essentials (Get It in Writing)

• Leverage: Max LTV/LTC/ARV and whether rehab is held back in draws.
• Economics: Rate, points, exit fee, extension options/fees, default interest, late fees, minimum interest (if any).
• Structure: Interest‑only vs. amortizing, interest reserve, recourse vs. non-recourse, cross-collateralization terms, partial release provisions (for subdivisions/condos).
• Valuation & diligence: Full appraisal vs. BPO, required scope of work, contractor credentials, contingency %, permits.
• Timeline: Underwriting milestones, appraisal order, clear‑to‑close target, rate/term lock duration.

d. Collateral & Risk Controls

• Title & lien position: First‑position deed of trust/mortgage with lender’s title policy; cure rights and assignment of rents.
• Insurance: Hazard/builder’s risk naming lender as mortgagee/loss payee; verify coverage amounts and effective dates through COI.
• Construction safeguards: Independent inspections, lien waivers, potential retainage, and a transparent change‑order process.
• Documentation: Promissory note, deed of trust/mortgage, personal and/or carve-out guarantees, construction loan agreement, draw schedule, and, if applicable, UCC filings.

e.  Negotiation Levers (What’s Actually Flexible)

• Points vs. rate trade-offs: You can often tighten points with strong sponsorship or repeat volume.
• Extension certainty: Pre-negotiate extensions (fee + months) to reduce refinance or sale timing risk.
• Interest reserve sizing: Calibrate to your realistic timeline to avoid mid-project cash strain.
• Recourse burn-offs: Tie recourse to milestones (e.g., achieving DSCR or COO).
• Partial releases: If selling in phases, specify release prices and mechanics upfront.

f.  Red Flags—Walk if You See These

• Large “application” or “due diligence” fees before underwriting has begun or before you receive a signed, detailed term sheet.
• Requests to wire funds to personal accounts or avoidance of title/escrow.
• Too‑good leverage (e.g., >80% of ARV) with vague appraisal/draw standards.
• “No appraisal, no documents” marketing on larger balances.
• Last-minute term changes unexplained by new information discovered in underwriting.
• Unwillingness to provide references or verifiable closing history.

g.  Packaging Your Deal (So Lenders Say Yes Fast)

• Executive summary: Purchase terms, timeline, exit, and sponsor bio with track record.
• Numbers that pencil: Budget, ARV support (comps), schedule, and sensitivity analysis.
• Scope & team: GC agreement, permits plan, insurance binder, and draw schedule.
• Reporting rhythm: Commit to monthly progress photos and budget‑vs‑actual to build trust (and better pricing next time).

6.  Tips If You’re Becoming the Lender (Brief)

• Underwrite the asset and the operator. Require a clear exit, a realistic budget, and contingency.
• Control the cash. Use draws against documented progress; consider retainage.
• Price to risk. Align rate, points, and recourse with leverage, complexity, and sponsor depth.
• Protect your lien. First position, title insurance, assignment of rents, and appropriate insurance endorsements.
• Service well. Fast communication and predictable draws keep projects on schedule—and reduce defaults.

Important: Regulations differ by state and loan type. For licensing, usury, disclosures, and business‑purpose certifications, consult knowledgeable counsel in your jurisdiction.

Bottom Line

Private money isn’t a replacement for bank debt—it’s a precision tool. Use it when speed, flexibility, or asset condition make bank financing impractical. If you package your deal professionally and vet lenders rigorously, private capital can help you capture opportunities, create equity, and scale your portfolio—without getting trapped by red tape.