Return to the basics of price, product, place, and promotion to set rates that balance your operations against a competitive market.

For more than three years, mortgage rates have remained above 6.5%, inverted yield curves threaten the economy, and a lack of housing availability challenge real estate investors and lenders in ways the private lending space has never experienced. You may have watched some of your peers change their business strategies—or exit the business altogether. To survive, you need a plan, solid discipline, and a bit of luck.

Warren Buffet’s No. 1 rule is “never lose money.” Rule No. 2 is “never forget rule No. 1.” Certainly, Buffet has made his share of mistakes, and so will you. But with discipline and at least a strategy, you may be able to build something sustainable that has the potential for significant growth.

As you develop your strategy, you must consider the 4 Ps of business marketing: price, product, place, and promotion. These four principles are interconnected and relevant, no matter a company’s size.

Pricing

Begin by analyzing and forecasting key financial elements such as the cost of your capital, operational costs, loan losses, desired profit margins, and the maximum price customers are willing to pay.

Regardless of your role—whether it involves capital markets, raising capital, selling loans, managing rate swings, or a combination of these tasks—the function is essential. Options such as securitizations, gains on sale, and fragmented loan investments may vary, but there is one commonality: managing the spread between customer pricing, payments to investors, and your bottom line (net profit).

A real estate investor’s willingness to meet your asking price suggests they recognize the value of your company, account executives, and products equivalent to the financial outlay you are asking them to make. If they do not see this value, you will be forced to compete solely on price, a practice that is typically not sustainable for long-term business success.

Larger private lending companies have already done the work. Ultimately, you are pricing for risk. The big-time analysts, rating agencies, and your peers in larger companies continually help investors in real estate securities make better decisions faster. Those with more than three years of real estate investment experience, a FICO score credit above 700, properties in the most desirable geography, and low lowest leverage are your best customers.

Roll out the red carpet for these prospects. Everyone behind them is a notch higher in the risk category and should be priced accordingly.

For example, you will often see bumps in pricing for those requesting new construction loans versus fix-and-flip/hold types of loans. Why? Because the cleanest and easiest loans to process, originate, and get paid off in the shortest amount of time are the best customers.

An important aspect of pricing strategy is knowing the strengths and limitations of your competitors. Armed with this knowledge, you can effectively showcase your team’s value while setting prices that meet both your financial requirements and your customers’ desires.

Ask yourself: “What is your USP (Unique Selling Proposition)?” Many of your responses will be along the lines of  “I am a direct lender” or “We have tons of capital to deploy.”

Although those features are advantageous and can help you carve out a niche, it’s important to consider how they compare to your competitors’ offerings or the actual benefits they provide to customers. Simply having abundant capital or being a direct lender doesn’t translate to a true benefit for your customer if it’s just a “me too” feature among peers.

Where do you outshine your peers? Consider some of the following as you determine your USP:

Speed to Close

FICO Bands

Customer Service (Front Facing & Backend)

Product Types

Distribution Channels (e.g., Retail, Broker, Correspondent)

Pricing: Rate, Points, Other Monetary Aspects

Technology

Loan Amounts

Terms

Dutch vs. Non-Dutch Interest Accrual

Leverage/LTC/LTV

Documentation Requirements

Property Types

Draw Process

Valuation & Inspection Process

… the list can go on and on!

Products

What product(s) do you offer? Are you knowledgeable about them, and can you sell them?

It sounds basic, but with private lending becoming a larger part of real estate capital, it is easy to fall into the trap of trying to be everything to everyone—but being good at nothing. Private lending has historically been the Wild West when it comes to the creative ways loans can be structured. The securitization market is forcing many lenders to at least consider offering products that conform to the defined credit boxes rating agencies are comfortable with taking to market. Still, the products you offer must reflect the resources you have and what you are good at providing.

How has your product offering changed during the past three years? Many lenders have shifted toward stabilized bridge loans because “there’s no way rates will stay this high, this long.” Or was it DSCR loans? Or was it ground up? Did you run away from Airbnb? Or was it mixed use? Or multifamily?

Being nimble and meeting market demands is prudent, but never forget your niche and which products you are best at originating. Sticking with the products you excel at can become part of your company’s brand. Developing a great product brand offers customers value beyond just the monetary price alone.

Place

Place is where and how your customers can obtain financing from you. Will you offer a more personal approach with a boots-on-the-ground sales force? Maintain a call center? Or will you offer a hybrid? Will you use brokers or operate directly with investors?

Your decisions about distribution channels and your marketing strategies for reaching borrowers help you determine how and where to prioritize offering your product. Smaller private lenders lend within their local areas and then expand their footprint once they’ve seen predictable results. Larger lenders leverage internal and external business analysts to identify the loans performing the best geographically, making the most revenue, and offering the widest pricing spread.

Marketing & Sales

You must align marketing and sales for better closing results. Promotional efforts assist with building recognition, action, and acceptance of your product. When you promote your product well, you build loyalty, a competitive edge, and value—all of which make your pricing more acceptable. Sometimes, for example, you may use promotional pricing discounts to enter a market, gain market share, and obtain customer satisfaction to scale the company.

Your decisions about where and how to sell your products—and at what price—depend heavily on the consumer’s behavior, thinking, and decision-making process. Every customer typically evaluates the quality of the product and justifies the cost. They need evidence your company and account executive are trustworthy before agreeing to a purchase. Leveraging the right promotional strategies and establishing a USP that highlights your competitive advantages helps support the buying process.

Interconnectedness

Developing the right pricing model involves more than just the economics. Sure, the financial aspects are important, but everything starts with having enough sales to sustain an ongoing lending business—no matter your company’s size.

The source and cost of your capital can significantly influence both opportunities and constraints. Your choice of product, along with its features and benefits, help determine your company’s scalability. Your growth potential or limitations will depend on the channels and locations where you choose to market and distribute your product. Selecting the right promotional strategies and distribution channels can increase your chances of winning more “yeses” from customers.

For all private lenders, maintaining discipline and taking time to develop and monitor a pricing strategy is considered best practice.