The biggest difference boils down to the information they use to make their lending decisions. Institutional lenders are typically “hard equity lenders”, meaning they make their lending decisions based largely on the property itself. Alternatively, private lenders make their lending decisions based on whatever factors they see fit, including nearly any aspect of your life, any component of the investment project, or a combination of both.

As such, private lenders tend to operate as “relationship lenders”, because their relationship with the borrower often factors into their decision. Essentially, private lenders have the freedom to choose to lend their money to whomever they want, but they typically make their decisions based on indicators like the borrower’s experience, income, capital, credit, and other personal or professional credentials, while also factoring the property into consideration as well.

These two very different methods of determining “worthy” borrowers result in other key differences as well. Most institutional lenders require inspections, surveys, and appraisals, because they are using the property as their deciding factor. These additional steps are costly, but they are also time-consuming and can cause a myriad of problems in a real estate investment transaction.

Further differences could be seen as part of the overall borrowing experience; a borrower will never get the chance to negotiate with the true decision-maker of a lending institution, but a borrower can sit face to face with a private lender almost anytime! Plus, even if the transaction goes silky smooth, funding through traditional institutions takes at least 15 days, and most often takes 30 to 45 days. Meanwhile, we can fund a loan in as little as 7 days!