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It Costs What?!- When using private money for construction loans makes sense.

Maybe you’re new to private money, or are used to borrowing from banks for your development and construction loans. But there are times when using private money, sometimes referred to as “hard money”, makes sense. Look, it’s just a tool. Think of your work shed at home, where you keep your tools. There are drills, hammers, rakes, screwdrivers, etc. Each tool serves a certain purpose, and they don’t get used interchangeably at will. I mean, you wouldn’t try to drive in a screw with a hammer would you? So in that metaphorical tool shed of lending options, private money, which tends to cost more than bank money, is just a powerful tool – to be used as needed. Like a sledgehammer, for example. Not used every time, but when you need it, boy does it come in handy!

Commercial construction loans are used to fund the construction, renovation, or expansion of a structure. When opposed to personal loans or mortgages, these loans typically have shorter terms (i.e. the time allocated to repay the amount borrowed). The financing is based on the estimated value of the completed project.

Here are some examples of times when using private money for development or construction loans makes sense.

Construction Loans
  1. You need higher leverage than a bank will give you.
  2. You need to close faster than a bank can close.
  3. There’s some “hair” on your deal.
  4. It’s too speculative for a bank.
  5. You just don’t want the headache.

You need higher leverage than a bank will give you.

Most commonly, banks will lend up to 60% of the cost of construction. Which means you either need to bring in the cash to cover the difference, or go out and raise the money from equity partners (often friends and family) to cover the rest. However, often private money is able to replace some of that required cash by lending higher leverage or what’s referred to as a higher loan to cost. It’s not uncommon to get a loan which covers up to as much as 95% of the cost from a private lender. Thus, greatly reducing the need for that extra cash.

You need to close faster than a bank can close.

The current average time it takes for a bank to underwrite a construction loan is between 60 and 90 days. Sure, there are exceptions to that, but as a whole, that’s pretty consistent. So let’s say you have a property under contract and your contract is about to expire. Or, your deadline to pull permits is coming up. Or you have partners who are itching to get out. I can think of dozens of reasons why closing in short order is necessary, or at least useful. The fastest loan we’ve ever closed was in 24 hours. That’s not typical, but with private money – closing a loan in under 30 days is very doable. So in the time it takes the bank to start underwriting your file, you’ve already closed your loan and started working on your project. Time is money, so they say.

There’s some “hair” on your deal.

That’s industry lingo for “extenuating circumstances”. It simply means there’s something special, unique, or challenging about your deal that makes it fall outside of conventional norms or standards, and for that reason it will require manual underwriting or someone willing to listen to your story and open to understanding why in spite of whatever challenges – it’s still a good deal. Some examples of “hair” might be – you had a bankruptcy in the past (maybe caused by 2008); the seller carried back part of the acquisition cost; the county hasn’t approved your permits yet, but you’re in final redlines. Banks aren’t particular good at this. They have rigid underwriting boxes, and don’t like to take on loans which appear too risky or fall outside those guidelines. Ultimately, that loan officer doesn’t want to have to explain the “story” to their boss, or worse yet, run the risk of getting an “I told you so” later if the loan goes bad. So in exchange for taking that risk, listening to your story, understanding the value of the project – private lenders charge a little more for their service or capital. But if it gets the deal done, it should be worth it.

It’s too speculative (risky) for a bank.

Maybe you want to build a hotel. At the time of this writing, that’s not a super popular idea, since the pandemic of 2020 wiped out the hospitality industry. Or perhaps it’s a luxury spec home in the mountains, a subdivision development, large land deal, or a specialty use building (think swim school, or marijuana grow facility). The list of possibilities is endless. Banks like to hit fastballs down the center. Any curves or sliders, and well, you probably won’t make the cut. Private money, on the other hand, is comfortable with speculative investments. Let’s face it – higher risk = higher reward. That works for you, and the lender.

You just don’t want the headache.

OK, banks are great. Hey, I keep my money in one myself! But easy to work with, fast, willing to listen, eager to help, ready to think outside of the box – none of those are phrases I use to describe the institution that holds my money. Probably not you either. Sometimes when you’re a developer or builder, you just want to GO! You don’t want to deal with slow underwriting processes, or wait to get your loan closed, or have to give everything but a DNA sample to qualify, or have your construction draws and inspections take weeks to get funded, or have something happen like a pandemic and the bank decides they don’t want any loans for “X” type of asset on their books anymore, and they sell you off to someone else. All that to say, sometimes you just want to take the path of least resistance, and you’re willing to pay a little more for it. Or, it’s easy to see how the cost offsets the time you’ll lose by doing things the conventional way.

If any of those scenarios are something you can identify with, and you’d like to discuss your project or deal with us, we’d love to hear it. We pride ourselves on being creative, and helpful, and fast. When’s the last time your bank was any of those things? Especially on development or construction loans.

So slip on over to our Who We Are page at, and reach out any time.

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