ASSET-BASED LENDERS

A Peek at Their Cards

What More Do You Need to Know About How They Operate?

Asset-based lenders (also known as hard and private money real estate lenders) are in the game of lending money for one reason only: to profit. Their goal is to work on behalf of the individuals and institutions that entrust them with their capital that is, in turn, loaned to you, the real estate investor. The lender is charged with deploying that capital and putting it to use to make a profit for those who provide the money to loan. Lenders are always working in the best interest of their investors/capital partners, because without them, they have no money to loan.

How Asset-Based Lenders Make Money and How It Works to Fund Your Deal

Each lender you approach for funding works differently. Though all lenders have regulations they must follow, they set their own rates, terms, and underwriting guidelines within the parameters of the law. It’s incumbent on you to find the best match between the lender and your property and project.

Despite the fact that lenders are really on the side of their capital partners, it’s important to remember that the lender needs you, too. Without real estate investors, a lender’s business model is one-sided. Lenders may have capital, but without you and your willingness to work with the terms, guidelines, and conditions they require, it’s no more effective than the cash stashed under Granny’s mattress. It earns them nothing.

Key Areas Where Asset-Based Lenders and Their Capital Partners Make Money

It’s important to remember there are two key players at the table that stand to profit from the proceeds of your loan. First, there’s the capital investor who has provided the funds to loan; this investor’s profit (in general) comes from the interest earned during the loan period. Capital investors may also profit from origination points. These are percentages charged to you up front for the opportunity to get your property funded.

Of course, these are just generalities; each lender and each capital investor sets terms that meet their particular objectives, and there may be other profit centers not mentioned here. Typically, you as the real estate investor will never have contact with the capital partner and, in fact, will have no knowledge of who is actually backing your loan with cash.

Second, there’s the entity that you work with to fund your deal. This lender makes money a number of ways. One way is origination points (as already mentioned); the lender may also profit from servicing fees. Servicing fees are fees charged to you that pay for the work to service your loan: everything from processing payments to closing the loan when it is repaid in full.

Lenders also make money if and when they sell your note to another entity. There are also a number of other fees a lender may charge, so be sure to review any offer to fund your property and inquire about every fee. In general, though certainly not in every case, the lender does not profit from interest rates; the interest is usually paid to the capital partners as compensation for loaning their cash. But there are always exceptions.

It’s also important to note that the lender is the middle man and, as such, bears a huge responsibility for loaning the capital effectively so that earnings are maximized. Chapter 12, “Inside the Mind of Asset-Based Lenders,” discussed what a lender looks for from you as the borrower. Asset-based lenders can be an invaluable piece of the puzzle for the real estate investor.

Getting to know the ins and outs of asset-based loans and lenders is critical. It pays to talk to as many lenders as possible. Get referrals from other investors and use online sources to get multiple lenders competing to fund your deal. Know that fees can be negotiated, and don’t get so caught up in the need to fund a property that you don’t negotiate better terms. If you know how to get great deals on properties, you should also know how to get deals on your funding.

TAKEAWAYS

What are the most important things for real estate investors to understand about asset-based lenders?