Building Your Own Private Lending Firm
An In-Depth Guide to Providing Fix-and-Flip Loans for Investment Properties
by Jeffrey Tesch
T he fix-and-flip industry has become increasingly appealing to hard-mon- ey lenders in the last decade. The federal government has made it so difficult for the average creditor to get a tradition- al loan that buyers are clamoring for private funding. To put it simply, private money is in demand now more than ever. For those who have wondered what it’s like to start a private lending firm, I’ve created a comprehensive overview of what I believe are the most crucial aspects of a lending firm. It’s a great time to get into this business. START LOCAL, THEN GROW RCN Capital started out local, making loans no more than 100 miles away from our headquarters. While we always knew we wanted to develop into the national brand we are today, we recognized the numerous advantages inherent to working within your own community. Even if you plan to lend beyond your home state, I’d advise you to keep this point in mind. Proximity is key. The housing industry enjoys no exception to Murphy’s Law. The fact is doubly true for develop- ing businesses. You’ll want to be close enough to your properties and clients so that if something goes wrong, you can feasibly get there in a day. It’s much easier to maintain situational awareness of your clients’ properties when they’re close to your own facility. If you do choose to start taking on national clients from the get-go, you’ll have to contend with a myriad of laws, regulations and markets unique to each state or municipality. For instance, you must comply with each state’s licensing
cides if the deal is worth pursuing. The lead might check off all our boxes, but if, say, the borrower plans on moving into the property, we drop that client quickly. If there’s anything I’ve learned in six years of successful operation it’s this: stick to investment properties, either non-owner-occupied residential or commercial. You never want to lend money to a customer who will end up moving into the property. It is vital in this business to under- stand which investments are worth- while and which aren’t a good fit. If the investment is a match, we email the loan application and a request for documenta- tion. From there, underwriting and due diligence are taken care of. If this process continues without fault, we send out a checklist and finalize closing procedures. I want to emphasize that this is only a rough sketch of our process. Your own business can and will operate successful- ly with its own idiosyncrasies as long as you focus on the principles. VET YOUR BORROWERS, COVER YOURSELF If I could emphasize just one point for following up with prospective buyers, I’d say this: make sure your clients have an exit strategy. The first question your loan officer should be asking any prospective client is, “How are you going to pay us back?” The answer to this question will inform the qualification process, letting you tailor the amount and conditions of the loan to your liking. If your clients are not going to make money, don’t lend to them. This might sound like an obvious tip, but it’s a mantra you should chant to
requirements before you can begin lend- ing within their lines. Red tape aside, each market is different. A loan rate that is successful in Ohio may not fly on the East Coast. Navigating these disparities can be tricky; I advise you stick to a uni- form environment while you learn your craft. A denser, more manageable spread of properties will give you the time to iron out the kinks in your own business plan while you establish the procedures, networks and experience you can then bring to national clients. BEFRIEND AN APPRAISAL AND INSPECTION COMPANY It’s important to develop a trusting, professional relationship with a network of real estate service providers sooner rather than later. The risks of a compro- mised evaluation greatly increase when unverified, independent contractors are brought onto the scene. For example, there’s always the risk the appraiser you found on the third page of a Google search knows your investor. Not good. In addition, you’re not going to have time to personally oversee the appraisal and inspection of each one of your properties as your private lending business expands. Simple pictures from your investors won’t cut it. A strong network will give you the eyes and ears you’ll need to suc- ceed in this environment. DEVELOP YOUR PROCESS, BUILD YOUR TEAM Here’s a condensed version of our process at RCN Capital. We receive a lead, which is immediately routed to our pre-qualification specialist, who de-
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