Like any situation where there is a capital investment, private lenders are going to have certain expectations of you as the source of their eventual returns. The first and best thing you can do is to structure your agreements correctly the first time around. What I mean here is that the majority of challenges that arise with private lending relationships involve too much ‘best case scenario’ and too little of the real world. This can apply to both the repayment terms and also the timing and is easy to avoid.

I need to elaborate just a little on what I mentioned in the previous paragraph. Many private lending relationships can proceed without incident and this is of course the idea. When problems do arise, they are usually because the borrower needs more money or because they need more time in which to pay the lender back. These situations, when they do occur, are often because the borrower is trying too hard to accommodate a lender and suggests they ‘probably’ only need so much capital or ‘should’ be able to get a project done in so much time. It’s easy to see how this can happen and hopefully also why you want to avoid this.

My simple suggestions here are twofold. First, ask for more funding than you think you’ll need. If this means padding your budget a little bit, so be it. Extra expenses do come up with real estate projects and sometimes (in fact, all too often) they take longer than originally anticipated, increasing the necessary carrying costs. It’s always easier to ask for the extra funding up front, because the alternatives are either go back to the lender and ask for more money, or come up with it yourself. Neither situation is ideal, and asking for more money from a private lender on the same deal, could prove to be damaging to your relationship.

Timing is another issue to approach with caution when it comes to private lenders. Many will like the idea of getting a quick turnaround on their investment and may actually push for these short time frames (e.g. six months or less). It is tempting to go for this as an investor, thinking that a short time frame should work out OK. My suggestion is to stop right there and reconsider before going any further. Just like running out of money, having to approach your lenders to say you need more time could also be a relationship killer. However, let’s say that the worst did happen and you needed more time to pay back the lender. Put yourself in the private lenders shoes and determine how you would like to be treated. Consider drafting a formal business letter explaining the situation and respectfully requesting a restructure of the original note. I’ve had to do this before with one of my private lenders and it was surprisingly well received and accepted. I am now viewed with more professionalism and a greater sense of credibility because I was proactive and sought out a solution with plenty of time to spare on our original note agreement.

The solution here is simple. Anticipate as best you can, the realistic time frame you think will be necessary for your deal and then double it. Therefore, the likely worst-case scenario is that your project is completed (at least from your private lender’s point of view) on time, whereas the best-case scenario is that you’ll finish before a deadline.

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