How NOT to Start Conversation with a Private Lender

Hard money lenders have significant discretion in choosing whom to lend to. Unlike traditional banks or financial institutions that have strict lending criteria and standardized underwriting processes, hard money lenders are private individuals or smaller-size companies that operate with more flexibility. The decision to lend to a particular borrower depends on the transaction itself. Among key elements of this transaction are its overall profitability, the strength of the collateral, and the risk involved in a particular rehab project. These are the tangible aspects best measured by math and underwriting formulas such as loan-to-cost ratio.

The intangible aspect of the transaction is how a private lender feels about a particular borrower. It often goes beyond the borrower’s self-professed experience and focuses on how this borrower communicates and presents herself. A borrower’s initial conversation with a private lender sets the tone for the future relationship and significantly influences the decision-making process. Today, instead of advising you how to put your best foot forward with a private lender, I want to start with some examples of what NO to do during this initial conversation.

Being Arrogant

It’s hard to be pompous while asking to borrow money, but some of our applicants manage to do it. These applicants often introduce themselves by the title, as in “This is Mr. Smith calling about your financing options.” Interestingly, Mr. Smith’s love for the titles does not transfer to the others, and he continues to call them by their first name. I guess the purpose of that sales trick is to make everyone else feel insignificant compared to the magnificent Mr. Smith. Mr. Smith has loads of money invested in really cool stuff, so he is low on cash now, which is why he is blessing us with his potential business. The deal Mr. Smith is asking to fund is so awesome that virtually no underwriting is required. Mr. Smith typically ends his speech with: “It’s no brainer, so let’s do it!”

Mr. Smith might be an extreme example, but you rarely score points by being arrogant with your hard money lender.  Arrogance is often perceived as overconfidence or a lack of humility. Lenders assess not only a deal’s financial aspects but also the borrower’s character and reliability. Arrogant behavior can raise concerns about whether you are open to feedback and learning from others.

In addition, obtaining a hard money loan often involves negotiation and collaboration. Being arrogant can create an adversarial atmosphere, making it more challenging to reach mutually beneficial terms. For this reason, it’s never a good idea to start on an adversarial note or attempt to muscle your private lender into a loan that they are inherently not interested in.

Being Argumentative

Being argumentative is closely related to being arrogant but presents itself in a different way. An argumentative borrower is typically unhappy with the lender’s terms and underwriting criteria and wants to convince the lender that they “got it all wrong.” They often view themselves as benevolent educators who will teach a lender whom to lend, how much, and on what terms. They often appeal to other “better” lenders with more flexible underwriting criteria, lower pricing, and generally superior everything. With so many better choices abounding, you would think they would have already found a great source to fund their business, and yet they insist on staying on the phone and badgering you to fund their deal on the terms they need.

Being argumentative is geometrically opposite to being a good negotiator. Successful negotiation is not about being confrontational but about finding mutually beneficial solutions. It’s also about empathy for the concerns and perspectives of others, including the lender. Understanding the lender’s position is crucial for building a trusting and successful working relationship. A successful negotiator leads with mutual respect, understanding of each other’s goals, and clear communication, while a poor negotiator dwells in negativity, bullying, and accusations. You can read more about how to negotiate with a private lender here.

“Fast Talkers” Withholding Key Information

Transparency and honesty are essential when dealing with private lenders. Providing complete and accurate information builds trust, contributes to a smoother loan approval process, and helps establish a positive and professional relationship with the lender. Yet, some borrowers think that they can exaggerate favorable information and strategically omit less favorable information to convince their lenders to approve their hard money loans. This type of borrower often talks so fast that it seems they have three cups of espresso in one setting. It’s often challenging to steer the conversation in a particular direction because this type of borrower does not like answering direct questions. Instead, they gallop through the story they want to tell as fast as possible, avoiding any concrete answers.

Of course, talking speed alone is not a foolproof indicator of deception. However, according to psychologists, speaking quickly is often associated with lying due to the cognitive processes involved. It might be because deception can induce stress, and individuals may unconsciously try to get through the conversation quickly to alleviate discomfort. Or it might be because lying often requires more mental effort than telling the truth. Individuals may speak rapidly to keep up with their thoughts and to minimize the cognitive load associated with fabricating a story or omitting its elements. What is important for those individuals to understand is that any misrepresentation will most likely be caught during the underwriting process, regardless of whether they speak slowly or fast. It’s truly in the borrower’s best interest to provide a complete and accurate picture of your project to save time and money and, most importantly, build your reputation.

Sounding Desperate

This is the group of borrowers that I have most compassion for. Life has its ups and downs, and there is nothing wrong with thinking creatively when trying to improve your financial situation. However, when a borrower wants to invest in real estate as a last resort or, as one of our applicants called it, to “finally get a break,” you know they are digging themselves in rather than digging themselves out.

When adverse events negatively impact your life and finances, be it a divorce, job loss, or unethical vendors, you might want to slow down to reflect on those experiences and take steps to mitigate their impact. You might not be in the right state of mind or financial position to take on more responsibility and debt. You will most likely be better served by fixing your credit, paying your existing debt, increasing your reserves or getting a stable job.

Sharing a list of misfortunes that befell you might raise concerns about your ability to manage the project successfully, avoid delays and repay the loan on time. Lenders prefer working with confident, well-prepared borrowers, who have a clear strategy. Desperation can cast doubt on your ability to execute the rehab successfully. It can also lead lenders to question the viability of your project.

Summary

Private lenders want to work with real estate investors who inspire trust. Come across as arrogant, argumentative, desperate, or hiding something and it will raise questions about your professionalism and competence, potentially affecting the lender’s confidence in your ability to manage the loan responsibly. It’s essential to present a well-thought-out plan and demonstrate that you have carefully considered the risks and challenges associated with the investment.

By fostering a positive and respectful interaction, you increase the likelihood of securing the loan and building a professional relationship with the hard money lender. Remember, a successful transaction is not just about the financials but also the quality of the working relationship. By presenting yourself as a knowledgeable, confident, and professional borrower, you increase the likelihood of securing favorable terms and building a positive relationship with the private lender.