If approached by a private individual to finance a real estate acquisition, should you? Private lending has been around for centuries so it’s not anything new. For those who have in fact financed private deals in the past there was no doubt a bit of trepidation with your first project. Even though the returnsbuyer profile were attractive and the numbers made sense there may have been a bit of “too good to be true” floating around.

Yet once the initial project was completed and the investment returned with an attractive interest rate, the investor often times sought to find potential projects for others and finance the transaction instead of buying and selling. If you have experience with real estate or have professionals who help evaluate them for you, finding a buyer is your next step. What should you look for in a buyer?

Private money means you can place a loan on most any project for anyone. Private lenders can specialize in hard money that caters to those with damaged credit or past financial problems, lend only to well qualified individuals or anything in between. In general, buyers with poor credit will pay higher rates compared to those with excellent credit. Yet as a private lender, you want the returns, you don’t want the property through foreclosure. That means finding buyers with good credit.

Buyers must also have their own funds to use as a down payment. These funds should be from the borrower’s own accounts and not from any future equity the property will acquire once the project is complete. A solid buyer will have at least 30 to 35 percent available for a down payment in addition to closing costs.

Why would someone need a private loan if they have good credit and strong assets? Because the property is in such poor shape no traditional bank will place a loan on it, at least in its current condition. Private lenders provide the seed funds needed to turn a distressed property into a saleable one, one that can easily qualify for traditional lending.