Jeffrey Tesch is managing director of RCN Capital LLC, a national, direct private
lender. He is responsible for day-to-day operations at RCN, including sales-
growth initiatives, underwriting review with compliance oversight, and
leadership of senior-level strategic planning. Since RCN’s inception, Tesch has
personally underwritten over 1,800 loans and overseen more than $375 million
in originations. He also is a member of the American Association of Private Lenders’ Ethics
Advisory Committee. Reach Tesch at firstname.lastname@example.org.
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How compensation works
Private lenders typically offer referral programs specifically for originators and
brokers. The amount of compensation earned depends on the referring originator’s level of involvement and the loan scenario. Some prefer to have minimal
involvement, while others like to stay more heavily involved throughout the process. It’s just that simple.
Originators new to the process who are looking to get a feel for private lending,
or those who have booming residential business and don’t have time to deal with
private loans, may want to just make a straight referral and hand off their borrowers
to a private lender. Once the deal closes, these hands-off originators will earn a point
on the loan balance. A check will be cut for them right at the closing.
Those originators who want to remain actively involved will need to control the
deal. The originator acts as liaison between the lender and borrower and will collect
documents, put the loan package together and guide the borrower through to closing. In this instance, the originators can expect to split the points at closing with the
Most private lenders also guarantee broker protection, which just means the lender pays the broker fee. Both lender origination fees and the fees that are earned by
the referring originator are disclosed on the commitment letter up front. These fees
should never come as a surprise to the borrower.
Broker fees are memorialized on the HUD-1 Settlement Statement for most private lending transactions on residential properties, as well as in a transaction-specific
agreement. There is no ambiguity. Whatever fee is stated in those documents is what
the originator will receive, and a check is sent directly to the originator at closing.
Private loans will not work for everyone, but they can be a financial game-changer for
self-employed borrowers or those with poor credit. Although private lenders focus
mainly on the asset, they will evaluate the borrower. If the deal makes sense, however, it will get done. It usually comes down to income, credit and equity.
A borrower could have a 600 FICO credit score, for example, but if that borrower
owns several fully leased rental properties free and clear and shows solid cash
reserves, that is a deal a private lender would do all day long. When a borrower
has two out of the three criteria — income, credit, equity — a private lender will
typically do that deal. It only becomes a problem if the borrower only has one.
One of the first questions your borrowers will need to answer is how they plan to
pay back the private lender. Most loans are short-term — usually six to 24 months —
so a lender is going to want to know the borrower’s exit strategy.
Experience and background also are important. Private lenders want to be sure the
borrowers know what they are doing. As entertaining as late night HGTV shows are,
they don’t provide real-world experience for fix-and-flips.
Existing leases also can factor into qualifying for a loan because they show good,
solid income upfront. These are more common when you have a borrower that is
looking to buy a multifamily property or small apartment complex.
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Residential mortgage originators have a unique opportunity to grow and expand
their business through a creative funding source that is less dependent on interest
rates and less restricted by regulation. So rather than disregard private lending as
cumbersome, complex or out of reach, originators should embrace the chance to
expand their business in today’s tight market. There is money to be made by offering
more than just traditional forms of bank financing, especially in the world of residential real estate investing. n