Over the last few years at PeerStreet, we’ve worked with hundreds of private money lenders, big and small. This breadth of experience has given us an eye-opening view on trends and patterns between the most efficient private money lenders—those who consistently process more loans and grow year after year—and lenders who grow more slowly, working through the same growth challenges every year.
There’s no difference in the risk profiles of these two types of lenders; both make high-quality loans.
We’ve distilled the top five strategies utilized by more efficient, successful private money lenders. We hope these strategies help you focus on what matters most in growing your private lending business.
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1. Align Credit Requirements with Your Funding Source (Many Lenders Get This Completely Wrong)
When private lenders look to add more capital to fuel their lending, they may have to adapt their lending requirements to conform to the credit boxes, underwriting guidelines, and processes of that capital source or line of credit.
Loans that fit the capital partner’s credit box sail through with the best pricing and few or no delays, ensuring you have happy clients.
For example, in the past, you may not have run a credit check on your borrower. When working with a new source of capital, that might be a requirement—even though you’re making an asset-backed loan.
If you start working consistently with an outside source of capital, the best way to maximize profits and minimize stress is to rework your loan parameters and underwriting processes to ensure your loans fit the source’s credit box and underwriting guidelines from the start, avoiding potentially frustrating back-and-forth issues.
2. Standardize Processes for Faster Growth (And Be More Aggressive on Points and Fees)
One private money lender we work with lends more than $10 million a month with a full-time staff of only five people.
The lender is able to do this because they’ve standardized all of their processes—from borrower qualification through closing. They know what kinds of loans they will and won’t issue, and rarely deviate from the strict guidelines they’ve set for themselves (devised, in this case, to best match PeerStreet’s for even more efficiency).
By doing this, they could be more aggressive on points and fees, capturing more revenue for themselves. More impactfully, they can compete on speed and secure more deals by funding faster. More loan volume is better business, and more overall revenue adds to the bottom line faster than haggling over 25bps on the same number of loans.
There are a few specifics to keep in mind when standardizing your processes:
Know Your Loan Buyer’s Underwriting Guidelines
To speed up the entire purchase process, ensure you know all the underwriting guidelines of your loan buyer, including all the documentation you’ll need to submit a complete loan file. Then double-check the borrower’s information to ensure every document matches exactly.
Use Standardized Tools
Most loan buyers have a standard set of tools and templates they use over and over again, but if you don’t, this is an easy way to streamline your process and ensure you won’t have to go back to your borrower for more information later.
At PeerStreet, we have a set of standard tools we provide to lenders who work with us. They include:
- Borrower track record document (for fix and flip loans)
- Loan application
- Borrower loan documents
- Intercreditor form template
- Borrower contact information template
- Lien waiver
- Construction budget template
- Draw request form (pictured below)
Use Approved Vendors to Speed Things Up
Using approved vendors doesn’t guarantee approval, but it does expedite the underwriting process by saving time when making a funding decision. These vendors typically include:
- Credit repositories
- Flood certification providers
- Background check providers
- Environmental screen providers
3. Avoid Pitfalls that Create Additional Work
To maximize your time and make your staff as efficient as possible, ensure your underwriting process includes steps to avoid some of the most common snags that can occur when selling a loan.
A great idea is to keep track of the questions your capital partner asks for each loan. You may begin to see a pattern, for example, if you continually forget the ISAOA language or you haven’t stated if the borrower is a US citizen, you can add this to your personal checklist and remember to get documentation prior to submitting the loan.
Watch out for Title Exceptions
Over the last few years, we’ve seen an increase in the inclusion of general exception clauses on title documents. These are broad exceptions that vary by state but are intended to exclude the title company’s liability in various situations.
For lenders seeking to fund their loan, it’s common for such exceptions to be removed from the title prior to funding approval.
PeerStreet has a title checklist specific to residential, commercial, and multifamily loans. We suggest sending over a copy of that checklist with your title order so you don’t have to go back after the fact to have changes made to your title documents.
Ensure Entity Documents Are Legally Binding
If you’re lending to an entity instead of an individual, pay close attention to the entity documents to ensure they make sense. If you’re lending to an LLC, for example, that means looking at the entity’s LLC documents to see who is authorized to do business on the entity’s behalf, and who is a required signatory to make sure that person is signing.
Another common issue with LLC entities is when the stated business purpose is unrelated to real estate. If this is the case, the borrower will be asked for an amendment which could take days. To avoid this, LLCs can have a broad business purpose, such as “Any and all lawful activities.”
A little reading goes a long way in ensuring loan docs don’t need to be redrawn.
Review Appraisals Prior to Submission
Sometimes lenders submit loans to their capital source without reviewing the details of the appraisal. For example, they’ll neglect to look at the value of comparable properties, where value is significantly higher or lower than other comps in the area. In some cases, this can actually kill a deal.
Many capital providers will only use the lowest value submitted. Make sure the comps bracket the subject property, that the comps are within 3 miles of the subject property, and the comps are similar to the subject (or that appropriate adjustments have been made). You can prevent valuation issues by spending just a few minutes reviewing the report before submitting your loan.
4. Understand the Loan Buyer’s Draw Process
Once a loan with construction reserves is purchased, all that’s left is the actual draw process that will enable the reimbursement of construction money to the borrower.
Knowing how this works (and expected turnaround times) will help you plan your activities and manage your borrower’s expectations.
For example, at PeerStreet, if we have all the appropriate information submitted with the draw request (the inspection report, lien releases, invoices, receipts, title endorsements, or date downs), we can often wire funds the same day.
If not, the draw can be delayed by hours or days. It’s important that you know exactly what’s required to eliminate unexpected delays, and satisfied borrowers will come back to you for their next loan.
5. Manage Expectations for Turnaround Times with Borrowers
In the fix and flip industry, you’ll meet plenty of borrowers who want their funding and want it now, so managing expectations with borrowers is key.
Underwriting times vary greatly depending on the completeness of the file and the type of deal (single-family, multifamily, or commercial). Diligence can take as few as two days for simple single-family residential loans, to many weeks for commercial real estate loans, or loans that are missing key supporting documents.
Understand your capital partner’s timelines and make sure to communicate them clearly to your borrower. By doing this, you will reduce stress, keep your borrowers happy, and reduce the amount of time spent micro-managing your capital partner to rush things. It’s a much kinder, gentler approach to selling loans.
Day-to-Day Efficiency Equals Steady Growth
As we’ve seen with many of the lenders we work with, becoming more efficient is one of the key levers lenders have to increase the volume of loans they process every month.
Often, that means working with funding sources outside of your network of personal contacts. Almost invariably, it means understanding the requirements of both your loan buyer and your funding source, standardizing your processes, crossing the t’s and dotting the i’s in your paperwork, and proactively managing client expectations.
By following these five proven strategies, you’ll be sure to grow your efficiency, better positioning yourself to issue more loans with fewer slowdowns—and grow revenue as a result.
Want to see how partnering with PeerStreet can help grow your private lending business?