What Private Lending Is and How It Works
Private lending refers to real estate loans made by non-institutional lenders. These are not banks, credit unions, or government-sponsored entities. They are individuals with capital to deploy, private funds that pool investor money for lending, or companies that operate outside the traditional banking regulatory framework. The defining characteristic of private lending is that the capital comes from private sources rather than insured deposits, and the lending is not subject to the same regulatory requirements as bank lending.
This structure creates both the advantages and the risks that make private lending a topic worth understanding carefully. On the advantage side, private lenders can move quickly — closings in five to ten business days are common — and they can underwrite deals that do not fit conventional bank standards. A property that needs significant renovation before it qualifies for a conventional appraisal, or a borrower with a credit event in the past three years that disqualifies them from conventional financing, may find private lending is the practical path to closing a deal.
On the risk side, the lack of regulatory oversight means private lending operates with far less standardization and borrower protection than institutional lending. Interest rates of 12-15% are common, origination fees of 2-4 points are standard, and loan terms are typically short, ranging from 6 to 24 months. These terms can work economically when the deal is right. They can also create serious problems when a borrower takes a private loan without a realistic exit strategy or when unexpected delays push the project past the loan's maturity date.
Coventry Enterprises has reviewed hundreds of private lending situations across the Michigan real estate market and beyond. The pattern Jack Bodenstein identifies most consistently is not that private lending is inherently bad, but that borrowers often use it in situations where it does not make sense economically, or accept terms without understanding what they mean for their exit flexibility.
How Private Lending Differs from Traditional Mortgages
The differences between private lending and traditional mortgage financing extend beyond interest rates into the fundamental structure of how loans are made and governed. Understanding these structural differences is essential for any borrower evaluating a private loan offer.
Underwriting Standards
Traditional mortgages, particularly for residential properties, underwrite primarily on the borrower's ability to repay based on income, credit history, and debt-to-income ratio. Federal regulations require qualified mortgage standards for residential lending that mandate specific documentation and income verification. Private lenders underwrite primarily on the property's value and the loan-to-value ratio. A private lender looking at a $200,000 property may offer $140,000 (70% LTV) based almost entirely on the property value, with minimal attention to the borrower's income or credit history beyond basic fraud prevention. This is both the reason private loans are accessible to borrowers who cannot qualify conventionally and the reason the rates are higher — the lender is taking on more risk.
Speed of Closing
Conventional residential mortgages typically require 30-45 days to close due to federal disclosure requirements, mandatory waiting periods, and extensive underwriting processes. Commercial bank loans may take 60-90 days for complex deals. Private lenders, operating without these regulatory requirements, can close in 5-15 business days. For competitive acquisitions where a seller wants certainty of close, or for distressed property opportunities that require immediate action, this speed advantage is real and valuable.
Regulatory Protections
Residential borrowers in traditional mortgages have substantial federal and state regulatory protections. Required disclosures, cancellation rights, prohibited practices, and lending standards are all enforced through federal consumer protection law. Private lending to real estate investors — particularly for commercial or investment properties — operates largely outside this regulatory framework. Borrowers must rely on their own review, legal counsel, and independent consulting rather than regulatory protections to ensure they understand what they are agreeing to. This is one of the primary reasons Coventry Enterprises focuses on private lending review as a consulting service.
The Economics of Private Lending: When It Works and When It Does Not
Private lending makes economic sense when the deal margins justify the higher cost and when the exit strategy is realistic within the loan term. A straightforward example illustrates both sides of this calculation.
Consider a real estate investor who identifies a distressed property worth $180,000 in good condition, currently selling for $95,000. The investor needs $45,000 in renovation funds and a $65,000 acquisition loan — a total of $110,000 in financing. A private lender offers the full $110,000 at 13% interest for 12 months, with two points ($2,200) in origination fees. The interest cost for 12 months is approximately $14,300 and the origination fees are $2,200, for a total financing cost of about $16,500. If the renovated property sells for $175,000, the investor has made $175,000 minus $95,000 (purchase price) minus $45,000 (renovation) minus $16,500 (financing cost), yielding approximately $18,500 in profit on a 12-month project. The private loan made sense in this scenario because the deal margin justified the cost and the exit (sale) was realistic within the loan term.
Now change the scenario slightly. The renovation takes 16 months instead of 10, and the lender's 12-month loan has come due. The investor needs a 4-month extension. Extensions typically cost an additional 1-2 points and may carry a higher rate. The additional cost erodes the profit margin. If the market also softens during the renovation period and the sale price comes in at $160,000 instead of $175,000, the profit essentially disappears. Private lending economics require discipline about both the deal margin and the timeline assumptions.
Common Pitfalls in Private Lending Transactions
Coventry Enterprises has identified several recurring pitfalls in private lending transactions through years of loan review work. These are the most important problems to watch for when evaluating a private loan offer.
Inadequate Exit Strategy Analysis
The most common private lending mistake is accepting a loan without a realistic, well-analyzed exit strategy. "I'll refinance into conventional financing in 12 months" requires that the property will qualify for conventional financing in 12 months (it may not if renovation is incomplete), that the borrower will qualify for conventional financing at that time (credit or income changes can affect this), and that conventional financing rates and terms at that future date will make the refinance viable. Each of these assumptions deserves examination before accepting a private loan that depends on them.
Underestimating Total Cost
Borrowers focus on the interest rate but sometimes underestimate the total cost including origination points, monthly interest on the full loan balance for the entire term, extension costs if needed, and any other fees. A $300,000 private loan at 13% for 18 months with 3 origination points costs approximately $58,500 in interest plus $9,000 in points — a total financing cost of $67,500 before any extensions or additional fees. This full cost calculation needs to be part of any deal analysis that justifies using private capital.
Balloon Payment Timing Mismatches
Private loans almost always have balloon payments at maturity. If the investment strategy requires 18 months to execute and the loan term is 12 months, the mismatch creates a problem at month 12 that the investor was not adequately prepared for. Coventry Enterprises reviews private loan terms specifically to identify timeline mismatches between the loan structure and the investment strategy.
Lender Qualification
Not all private lenders are equally reliable. Some private lenders have inconsistent track records on funding draws, honoring extension provisions, or providing clear communication when problems arise. Independent research on a private lender's reputation and track record is a reasonable precaution for any significant private lending transaction.
How to Review a Private Loan Offer: The Coventry Enterprises Framework
When Coventry Enterprises reviews a private loan offer, the analysis covers several specific areas that together provide a complete picture of what the borrower is accepting.
The total cost calculation comes first. Interest rate times loan balance times term in years, plus origination points, plus any other fees, gives the total cost of the loan under the base case scenario. Extension costs under a plausible delay scenario are also calculated to show what the loan costs if the timeline slips.
The exit strategy analysis comes second. What is the specific plan for repaying this loan at maturity? If it is a sale, what price and what is the realistic market evidence for that price? If it is a refinance, does the borrower currently qualify for the refinancing product they are planning to use, and will the property qualify? If it is a longer-term hold financed by a future conventional loan, what needs to be true about the property and the borrower's finances at that future date?
The loan terms analysis covers prepayment provisions, extension options, default provisions, and any other loan agreement elements that affect the borrower's flexibility and risk exposure. The toxic loans page provides additional context on specific provisions that deserve careful review in any private loan agreement.
Learn more about related topics on the capital solutions page, or review how private lending fits into the broader loan types landscape. For a consultation on a specific private lending offer, reach out through the contact page.
Frequently Asked Questions About Private Lending
Is private lending regulated?
Private lending for commercial and investment real estate is largely unregulated at the federal level. Some state laws impose licensing requirements on private lenders operating within their borders, and usury laws may cap interest rates in some states. However, the comprehensive federal consumer protection framework that governs residential mortgages does not apply to most private real estate lending. Borrowers must do their own due diligence rather than relying on regulatory protections.
What LTV do private lenders typically allow?
Most private lenders limit lending to 65-75% of the property's "as-is" value, meaning the current value rather than the projected after-repair value. Some lenders offer higher LTV loans, but these typically carry even higher rates and fees. For fix-and-flip projects, some private lenders will lend based on a percentage of the after-repair value, but this typically comes with significant additional documentation requirements and sometimes staged funding tied to renovation milestones.
How do I find legitimate private lenders?
Coventry Enterprises does not refer borrowers to specific lenders, but legitimate private lenders are found through real estate investor networks, referrals from experienced investors, and real estate investment associations. Vetting a private lender should include verifying their track record with past borrowers, understanding their funding source and capital reliability, and reviewing their standard loan documents before committing to any transaction.
What happens if I cannot pay off a private loan at maturity?
If you cannot pay off a private loan at maturity and the lender does not agree to an extension, you are in default. The lender can begin foreclosure proceedings. Private lenders move faster in foreclosure situations than institutional lenders in many cases, because they are less subject to regulatory requirements around loss mitigation. Having a backup plan for loan repayment — a guaranteed sale contract, a refinancing commitment letter — is an important risk management tool for any private loan with a near-term maturity. Jack Bodenstein and the Coventry Enterprises team discuss these risk scenarios as a standard part of any private loan consultation.
Can Coventry Enterprises help me evaluate private lender offers?
Yes. Private lending review is a core part of the Coventry Enterprises consulting practice. The firm reviews private loan term sheets and agreements, calculates total costs, analyzes exit strategy realism, and identifies any provisions that create disproportionate risk for the borrower. Given the lack of regulatory protection in this market, independent review is particularly valuable before committing to a private loan. Contact the firm through the consultation page to discuss your specific situation.