Working with private lenders has allowed me to scale my real estate investment business faster by leveraging OPM. An established history with private lenders has let me get deals done that would never have come to fruition otherwise.

But there are pain points. My gosh, have there been pain points. Here’s what I wish lenders would take to heart about how they run their businesses.

Pain Point 1
Lack of Follow Through
As any good real estate investor or private lender knows, time is of the essence. When I purchase a property, one of the largest advantages I can offer a distressed seller is that I act fast—pay cash, close quick. Quick turnaround keeps my business afloat, so I look for lenders who can fund deals within 7 to 10 business days. If you tell me this is how you roll, that’s how your process needs to work. All too often I find that “7 to 10 days” means “only perfect, blue-sky scenarios that never happen in reality.”

As an example, a fellow real estate investor referred me to a private lender with the highest accolade you can give: investor-friendly. The lender advertised fast money with the ability to roll the note into a longer product for rentals.

My property had just gone under contract, set to close in 17 days. The property was in a highly appreciating and desirable neighborhood, in great condition and with a repair budget of less than $10,000. The property was in an area with low days on market, so our exit strategy was to fix-and-flip. Based on comps, our profit would be right around $45,000. We had a hot property, and we knew it.

Eight days before closing I still had not heard back from the lender about the closing’s status or approval. When I followed up, I hit Problem No. 1. They said I had to be preapproved for their conventional funding before doing the hard money funding!

Hello! As a real estate investor, I can’t remember the last time I was able to qualify for conventional lending. I don’t even try anymore. Had they been upfront about their process, I would have immediately moved on to another private lender contact.

Later that day, I received a preapproval letter, along with this response: “You need to understand I’ve been sick and barely limping by.” Had the private lender communicated the circumstances (a one-sentence email would have done me just fine), I would have—once again—found another lender with whom to close my deal. That’s Problem No. 2.

Time passes. Three days before my closing, the lender finally sends out the appraiser. The lender tells me it will not be an issue getting the appraisal turned around quickly. Usually when I hear this, I think same day or next day and that the lender has done other due diligence on the property so that the appraisal is almost icing. Shame on me for assuming, because this is—you guessed it—the start of Problem No. 3.

Less than 24 hours before closing, the appraisal comes in. It’s $20,000 less than what the lender and my own 15+ years of experience as a real estate broker and investor led me to expect. (A typo? I still think it had to be a typo.) The lender took the appraisal as gold and would not work with me. There was no time to dispute it, and the seller would not extend closing because the backup offer was higher than mine.

At less than 24 hours to closing, there was no time to find another lender. I terminated the contract and lost my earnest money, plus an expected $45,000 in profit. Oh, I could have still used the lender, but it would have meant bringing $50,000 to the table instead of the agreed-upon $23,000. My bottom line would likely have looked OK even with the additional funds. But I had hit Problem No. 4: I was no longer willing to do business with this lender.

While the unexpected can and will happen, the sum is that this was a lender who was not remotely prepared to fulfill their 7- to 10-day closing promise. At any point in the process, the lender should have had the follow-through that would have allowed the deal to either move forward or let me find a new lender. Fast closings require a buttoned-up process, clear and tactful communication if there are delays, and some flexibility if there are otherwise overwhelming details that point to profit all around.

Pain Point 2
No Big-Picture View
When I have the time, I’ll shop my deals to multiple private lenders. Right now, I’m working with three private money lenders who each calculate points and interest payments a bit differently, but their end results differ by pennies. With terms so similar across lenders, it’s not pennies that are going to impact my decision. The working relationship certainly will though.

Sometimes I’ll work with people who have capital—generally via self-directed IRAs—but who are new to private lending. While showing one such potential lender how profit is calculated, I took the traditional approach of rounding up or down to minimize errors since funds were being paid back to multiple investors. The new lender’s biggest gripe?

“8% of $20,000 is $1,600 per year or 133.33. You have it down as $132 so it’s short each month. That’s $5.94 loss of funds over the duration of the 18-month loan.”

While the new lender gets a pass— at least he’s detail-oriented and conscientious!—I’ve run into similar issues with experienced lenders who miss the forest for the trees. When all else is similar, I’ll choose a lender who won’t bring a deal to a grinding halt over pennies.

Pain Point 3
Money-Grubbing at Term Renewals
We’re all in the business of making money. I don’t begrudge lenders their points. But one practice that makes me grind my teeth is charging excessive points at term renewal. Yes, I know that you offer 12-month term and six-month term loan products. There was a reason I chose six months: I didn’t think I’d need 12 [tongue-in-cheek]. But when my six-month note suddenly needs another 60-90 days, making me pay more than I would have on your 12-month loan product feels like money-grubbing. (Because it is.)

While some fee makes sense (1/2 point anyone?), duplicating the original 1-2 points does not, as you don’t have the original underwriting and operational costs to consider. When the circumstances warrant, it may also make sense to just extend the note on the same payment terms, charging points and/or higher interest only if the real estate investor surpasses the extension expiration date.

It’s hard for me to bring repeat business or build relationships with lenders who charge excessively at renewals, because they have proven there’s no such thing in their world.

Pain Point 4
Nickel-and-Diming Me
If I am paying 2 points and 10-12% or higher for your money, please roll your fees into a lump sum. While I recognize that this amounts to the same thing to my bottom line, seeing a long column of fees on the settlement statement or loan origination sheet feels like nickel and diming. Banks do it because they must. That’s why I prefer private lenders—you have more freedom in how you go about things. Additionally, this freedom would allow a lender to do one better: pay your own fees from the points.

As an example, if you are a self-directed IRA account holder using your capital to fund private loans, if I’m paying 2 points up front, I would ask that you pay the $30 wire fee.

Perception is everything, and lenders who charge fee upon fee seem less on the up-and-up than lenders who keep fees to a minimum.

Pain Point 5
Not Letting Me Build Trust
Like many real estate investors, I am a relationship-seeker. There’s nothing worse than demonstrating to a lender that you know what you’re doing, think you’ve given them everything they need and then have them tell you there’s one more thing. Then one more thing. Then one more thing—until I feel nitpicked half to death.

As an example, I was approached by a self-directed IRA account holder who had money he was looking to lend but had not done so before. I educated him on the risks and rewards of lending and the best methods to go about it. I provided several private lender references as well.

In addition to all the standard documents private lenders use to protect their funds, he wanted a legal document that guaranteed him his money back. While some of this was his inexperience, it’s also demonstrative of the kind of person who should not be a lender: I bent over backward for him, but he was never going to trust me enough—or extend me the same courtesy.

Then there are the lenders with whom I’ll successfully complete a deal, bring another one to the table, and who will still treat me like they don’t know me from Adam. If I went through the trenches with you, unless it went horribly and was all my fault, that should count for something. If you know my experience and that my judgement is solid, be willing to look at me and the deal through that lens, rather than the microscope you use for an unknown (and possibly badly equipped) investor.