Overview:

In real estate finance, one principle stands above the rest: skin in the game. This term refers to the borrower’s financial investment in a transaction. It’s not just a buzzword—it’s a critical risk management factor for lenders.

What Does Skin in the Game Mean?

When a borrower invests their capital into a property purchase, they share in the financial risk. This alignment of interests gives lenders confidence that the borrower is committed to the success of the project. If the borrower has little or nothing to lose, the risk of default skyrockets.

A Real-World Example

Consider this scenario:
A borrower, John, approaches a lender with what he calls a “once-in-a-lifetime” opportunity. He wants to buy a vacant 3,000 sq. ft. commercial property for $1.2 million ($400 per sq. ft.). John believes the property is worth $1,300 per sq. ft., so in his mind, he’s already sitting on a huge profit.

John’s pitch includes:

• Optimism about San Francisco’s economic recovery.
• Belief in the growth of AI start-ups needing office space.
• Market metrics to justify his bullish outlook.

Sounds promising, right? Here’s the catch: John wants a 100% loan. No down payment. No personal capital at risk.

Why Lenders Say No

Lenders are not in the business of becoming silent partners. If John contributes nothing, he can walk away at the first sign of trouble, leaving the lender with distressed property. That’s why lenders require a substantial capital infusion—typically 20–30% of the purchase price. This ensures the borrower has something to lose, which dramatically reduces default risk.

Key Takeaways

• Skin in the game = commitment. A borrower with equity invested is less likely to default.
• Lenders protect themselves by requiring down payments. This isn’t greed—it’s risk management.
• Borrowers benefit too. Having equity in a deal can lead to better loan terms and stronger negotiating power.

Bottom line: If you’re entering a real estate transaction, understand that your financial stake is not optional; it’s essential. It signals confidence, reduces risk, and aligns your interests with those of your lender.