Private Lender by AAPL

A A P L ’ S ’2 5 - ’2 6 C O M M I T T E E A P P O I N T M E N T S

SPRING 2025

ADVOCACY FEDERAL BILL NEEDS YOUR SUPPORT

» PAGE 6

LENDER LIMELIGHT

HUMAN RESOURCES

One Final Detour

DEFINE YOUR CULTURE, ATTRACT TOP TALENT

» PAGE 80

OPERATIONS DEMYSTIFY BANK LOC DUE DILIGENCE

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FEATURING KEMRA NORSWORTHY

THE OFFICIAL MAGAZINE OF THE AMERICAN ASSOCIATION OF PRIVATE LENDERS

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CONTENTS CORNER OFFICE 5

Is it just me or is it way too loud in here?

Linda Hyde, AAPL

ADVOCACY 6

Federal Bill Needs Your Support American Association of Private Lenders

FUNDAMENTALS 8

Private Lender Master Class: Day 1 Terminology Anthony Geraci, Esq.,Stratus Financial

12

Foreclosure Should Be Your Last Resort Alan Tiongson, Constructive Capital

12 40 YOY Data Points to

Industry’s ‘Shrinking Pie’

Michael Fogliano and Sean

STRATEGY 46 Rate Model Strategy: Mind Your P’s John V. Santilli, Rehab Financial Group

COMMITTEE APPOINTMENTS 50 AAPL Launches ‘25‘26 Committees

LENDER LIMELIGHT 58 One Final Detour with Kemra Norsworthy

FRAUD

16 Buy or Hold? Local Developers

66 Spot (and Stop!) Real Estate Fraud Megan Castleton, Constructive Capital

Daren Blomquist, Auction.com

70 How to Combat Social Engineering

20 Competing Push/Pull Factors Signal

Faheem Inayat, Numerical Studio

Continued ‘Interesting Times’

Scott Ward, AAPL Education Committee

24 Bridge and DSCR Activity Surges Nema Daghbandan, Esq., Geraci LLP

36

Brace for a CRE Market Remix Sam Kaddah, Liquid Logics

84 Build HR Systems for Stability Elizabeth Morales, Applied Business Software

Morgan, Forecasa

MARKET Have the Answer

102

HUMAN RESOURCES 78 Define Your Culture, Attract Top Talent

Philip Feigenbaum, Huffman Associates LLC

HUMAN RESOURCES 90 Demystify Bank LOC Due Diligence

Mark Jury, Enterprise Bank & Trust

96 Mid-Construction Loans:

A Different Due Diligence Jill Duke and Keith Tibbles, Level Capital LLC

CASE STUDY 102 Fraud Unravels Property Rehab Susan Naftulin, Rehab Financial Group

104 Development Loan Sprouts Nature Lovers’ RV Park

Charles Farnsworth, 1892 Capital Partners

106 Ghosts Haunt Lending Deals Alex Buriak, Jet Lending

VENDOR GUIDE 112 Spring Guide

LAST CALL 114 Mindset Fuels Resilience Sarah Downey, Loanbidz.com SPRING 2025

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2 0 2 5

C O N F E R E N C E

2 0 2 5

C O N F E R E N C E

For More Information About Our Conferences & Events: Sierra Romagnoli, Event Manager | s.romagnoli@geracillp.com Ruby Boulanger, CMO | r.boulanger@geracillp.com (949) 379-2600 | www.geracicon.com

Corner Office

LINDA HYDE

President, AAPL

KAT HUNGERFORD

Is it just me or is it way too loud in here?

Executive Editor

CONTRIBUTORS

Daren Blomquist Alex Buriak Megan Castleton Nema Daghbandan Sarah Downey Jill Duke Charles Farnsworth Phil Feigenbaum Michael Fogliano Anthony Geraci Faheem Inayat Mark Jury Sam Kaddah Elizabeth Morales Sean Morgan Susan Naftulin John V. Santilli Keith Tibbles Alan Tiongson Scott Ward

COVER PHOTOGRAPHY Chris Cano

PRIVATE LENDER

Private Lender is published quarterly by the American Association of Private Lenders (AAPL). AAPL is not responsible for opinions or information presented as fact by authors or advertisers.

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Use of Private Lender content without the express permission of the American Association of Private Lenders is prohibited.

Interest rate fluctuations and compression. Economic

uncertainty. Trigger-shy capital. Tariffs, inflation, forecasted labor and supply shortages. Bird flu. Sophisticated fraud schemes. Technology advancements you’re not equipped to implement—but your competitor is.

Borrowers ghosting you. Co-worker drama. You missed a key detail in that file, and now the deal has gone to hell. Everyone else’s perfect lives on social media. The pithy argument you had with your partner. Never having enough time.

Breathe.

When things get too loud, it’s easy to get lost. It’s why we turn down the car radio when we’re trying to remember our next turn.

In our professional lives, the noise is rarely audible, and the solution is (dare I say) never the radio volume. So, how do you cut through noise to find your way through to what’s important?

Start by figuring out what’s important.

What is your top professional goal for this year? For your personal life? That’s your answer.

Now, what to do with that: The actions you take over the next hour, day, week, month, quarter should be in service to those goals. But don’t fall prey to hustle mentality. The message isn’t to grind more or to wear blinders against anything that doesn’t directly further your objective.

Instead, use your “what’s important” to turn down the volume and help you remember your turn.

Obsessing over a file because if you make another mistake, you’ll lose the borrower? Definitely noise. Writing a checklist or taking a brain break to give yourself fresh eyes? Siri says: Turn now.

Worrying about what your competitor is doing? Noise. Earmarking time to profile your best customer and engage marketing services to reach more like that? Siri says: Green lights ahead!

Our hope is that each issue of Private Lender serves up insight and guidance that helps pave a path toward your professional goals while serving up tools to tune out the noise. And, as always, if there’s something you’d like to see, let us know.

LINDA HYDE President, American Association of Private Lenders

www.aaplonline.com Copyright © 2025 American Association of Private Lenders. All rights reserved.

SPRING 2025

5

Advocacy

Federal Bill Needs Your Support Main Street Tax Certainty Act makes key tax deduction permanent.

AMERICAN ASSOCIATION OF PRIVATE LENDERS

T

he Main Street Tax Certainty Act (S.1706/H.R.4721) would make permanent Section 199A, a key tax deduction that as of now will sunset at the end of 2025. Section 199A allows individualand family-owned businesses organized as pass-throughs (S corporations, partnerships, and sole proprietorships) to take a 20% tax deduction on qualified business income.

Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business, excluding capital gains or losses, dividends, interest income, or income earned outside the U.S. More than 98% of AAPL’s membership is small businesses owned and operated by entrepreneurs. They rely on passthrough entities, including operating companies, funds, SPVs, and holding companies. Further, Section 199A’s REIT deduction has been paramount to capital formation for balance sheet lenders.

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PRIVATE LENDER BY AAPL

Business-purpose borrowers, private investors, and many ancillary professional and operational services also use Section 199A to maintain competitiveness. The sunset of this significant tax deduction will negatively impact not only those operating within our industry but also the worthy projects private lenders make possible: rehabilitation of our nation’s distressed housing stock, new construction, and community commercial development.

2 SUBMIT IT TO:

» YOUR MEMBERS IN CONGRESS » BILL SPONSORS AND CO-SPONSORS AAPL will remain focused on this bill as it progresses. If you have any questions regarding this issue, please contact our general counsel, Kevin Kim at k.kim@geracillp.com.

Making Section 199A a permanent part of the tax code will be a step toward muchneeded stability at a time when our nation’s small businesses continue to navigate market disruption and cost volatility.

AAPL has submitted letters to the act’s sponsors, Sen. Steve Daines and Rep. Lloyd Smucker, to encourage passage of the bill.

AAPL is the oldest and largest national organization representing the private lending profession. The association supports industry best practices by

SUPPORT 199A TODAY

providing educational resources, instill-

1

CUSTOMIZE THE SAMPLE LETTER UNDER

regulatory encroachment. Find more

THE “FURTHER READING” SIDEBAR

information at aaplonline.com.

ing oversight processes, and fighting

FURTHER READING & RESOURCES Bill Text S.1706

Sample Letter

H.R.4721

Find Your Rep

Bill Sponsors Sen. Daines (R-MT)

Rep. Smucker (R-PA)

Bill Co-Sponsors Senate (34)

House (194)

RE: Letter in SUPPORT of H.R. 4721 – Main Street Tax Certainty Act (Section 199A) Dear Senator Daines and Representative Smucker: We are writing you on behalf of the American Association of Private Lenders (“AAPL”), the nation’s largest and oldest trade association in the United States representing the interests of private lenders. Private lenders are small businesses that focus on providing financing to real estate investors and home builders. More than 98% of AAPL’s membership of over 800 companies are small businesses owned and operated by entrepreneurs.

AAPL strongly supports the introduction of your Main Street Tax Certainty Act of 2023, legislation to make permanent the 20-percent deduction for small- and individually-owned businesses (Section 199A).

Your legislation would provide certainty to the millions of S corporations, partnerships and sole proprietorships that rely on the Section 199A deduction to remain competitive both here and overseas. Individually- and family-owned businesses organized as pass-throughs are the backbone of the American economy. They employ the majority of private-sector workers and represent 95% of all businesses. They also make up the economic and social foundation for countless communities nationwide.

Without these businesses and the jobs they provide, many communities would face a more uncertain future of lower growth, fewer jobs, and more boarded-up buildings. Despite this, Section 199A is scheduled to sunset at the end of 2025, even as the businesses it supports continue to recover from the COVID-19 pandemic and the price hikes, labor shortages, and supply chain disruptions that followed.

Making the Section 199A deduction permanent will help Main Street during this very difficult time, leading to higher economic growth and more employment. Separate studies by economists Barro and Furman, the American Action Forum, and DeBacker and Kasher found that making the pass-through deduction permanent would result in significantly improved parity and lower rates for Main Street businesses.

The more quickly Congress acts to make Section 199A permanent, the sooner Main Street businesses will benefit. We appreciate your introduction of this important legislation and look forward to seeing it enacted.

Sincerely, Eddie Wilson, Chairman, AAPL; Linda Hyde, President, AAPL; Kevin Kim, AAPL General Counsel, Geraci LLP SPRING 2025

7

Fundamentals

Private Lender Master Class: Day 1 Terminology Build your business with foundational lessons on deal sourcing and structure, risk mitigation, and insider knowledge.

ANTHONY GERACI, ESQ., STRATUS FINANCIAL

P

rivate lending refers to nonbank loans provided by individuals, private equity funds, or lending companies to borrowers that need capital. These loans are commonly secured by real estate, but they can also extend to other asset classes. Unlike traditional banks, private lenders operate with greater flexibility, allowing them to structure deals based on unique borrower needs, risk profiles, and investment goals.

New lenders must first understand the different types of private lending structures. Here are the differences among some of the most common ones.

PRIVATE MONEY LOANS. These are short-

term, asset-backed loans real estate investors often use for fix-and-flip projects.

BRIDGE LOANS. Intended as temporary financing, bridge loans are used to “bridge” the gap until permanent funding is secured.

TRANSACTIONAL FUNDING. These are

short-duration loans used for quickturnaround real estate transactions.

CONSTRUCTION LOANS. Construction loans

are issued for real estate development, often requiring staged disbursements.

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PRIVATE LENDER BY AAPL

SERIES NOTE Each issue, we’ll break down key concepts, strategies, and best practices to help new lenders navigate this complex industry with confidence.

This column starts with the fundamentals—what private lending is, how it works, and why it’s a powerful investment tool.

Whether you’re just getting started or looking for a refresher, stay tuned as we explore the industry’s intricacies, one topic at a time.

COMMERCIAL LOANS. This is financing

provided for income-generating properties such as multifamily units, retail centers, and office buildings.

CONDUCTING DUE DILIGENCE Private lending is inherently risky, making thorough due diligence an

essential component of success.

Key areas of focus include: BORROWER EVALUATION. Although

private lenders rely less on credit scores than traditional banks do, evaluating a borrower’s history in real estate or business is vital. Assess creditworthiness, track record, and financial stability.

COLLATERAL VALUATION. Understand

the property or asset securing the loan.

Conducting an appraisal or broker price opinion (BPO) ensures the collateral is sufficient to mitigate potential losses.

EXIT STRATEGY ANALYSIS. The borrower’s

ability to repay the loan is paramount.

Whether through refinancing, selling the property, or other income sources, a clear exit strategy reduces lender risk.

TITLE AND LIEN SEARCH. Ensure the

property has a clear title with no undisclosed liens or encumbrances that could jeopardize the lender’s position.

LEGAL DOCUMENTATION. Work with

experienced attorneys or loan document generated solutions such as Lightning Docs to draft loan agreements, promissory notes, deeds of trust/mortgages, and personal guarantees to secure the lender’s interest.

MITIGATING RISKS Risk mitigation is a critical aspect of private lending. New lenders must adopt several strategies to safeguard their investments.

LOAN-TO-VALUE (LTV) RATIOS.

Conservative LTV ratios (e.g., 65-70%) provide a cushion in case of borrower default or market downturns.

RESERVES AND CONTINGENCY PLANS. Setting aside capital reserves allows lenders to manage unforeseen expenses, including legal fees in case of foreclosure.

DIVERSIFICATION. Avoid concentrating

DODD-FRANK ACT AND CONSUMER

all capital into a single loan or borrower.

Spreading investments across multiple loans reduces exposure to any one deal going bad.

PROTECTION. If you are lending to owner-

BORROWER GUARANTEES. Personal guarantees or cross-collateralization can offer additional security against loan defaults.

MARKET AWARENESS. Staying informed about real estate market trends, interest rate movements, and economic conditions helps lenders make informed lending decisions.

LOAN STRUCTURING AND PRICING Loan terms must align with market conditions and borrower needs while ensuring an attractive return for the lender.

Typical private lending structures include: INTEREST RATES. Rates typically range from

7-15% depending on risk level, collateral quality, and borrower experience.

POINTS AND FEES. Origination fees (often 1-3 points) generate upfront revenue for the lender.

PREPAYMENT PENALTIES. Prevent early loan

occupied properties (even if it is a bridge loan), additional compliance requirements may apply, including ability-to-repay rules.

LICENSING REQUIREMENTS. Some states

require lenders to hold a mortgage lending license, depending on loan type and borrower profile.

SECURITIES LAWS. Raising capital from investors to fund loans may trigger SEC compliance obligations.

Consulting with legal experts familiar with private lending laws ensures adherence to applicable regulations.

MANAGING LOAN SERVICING AND DEFAULT SCENARIOS Lenders can either service loans in-house or hire a third-party loan servicer. Effective loan servicing includes (1) timely collection of payments, (2) monitoring property condition and insurance compliance, (3) managing borrower communication, and (4) handling defaults and foreclosures.

consequences for missed payments, including late fees, acceleration clauses, and foreclosure proceedings.

In cases of borrower default, lenders must be prepared to initiate foreclosure proceedings, if necessary.

Understanding state-specific foreclosure laws (judicial vs. non-judicial) ensures an efficient recovery process.

REGULATORY CONSIDERATIONS

WHERE TO BEGIN

New lenders must ensure compliance with federal and state regulations governing private lending. Key regulatory aspects include:

Scaling a private lending operation may seem like a daunting task to new lenders.

But it’s doable. Countless lenders have launched successful businesses.

USURY LAWS. Each state has different

To start, attend private money lending shows so you can network and learn from established lenders. Search the AAPL Member Directory and try to

payoffs that could reduce expected returns.

DEFAULT CLAUSES. Clearly outline

maximum allowable interest rates; exceeding these limits can lead to legal consequences.

SPRING 2025

9

Fundamentals

meet some private lenders in the industry to see how they’re doing it. The industry is well-connected and small.

Network—and network often—with those whose businesses you want to emulate. Building relationships with real estate investors, brokers, attorneys, and other industry professionals creates deal flow opportunities.

Make technology your friend.

Use CRM systems and implement loan origination and servicing platforms to improve efficiency.

Virtual employees can be an advantage as you get started—they allow you to scale up or down as needed. Hiring right from the beginning also saves you from needing to do everything yourself. A good outsourced virtual employee is generally around $15 an hour, and services such as MOVE can manage these people for you, ensuring you get the success you’re looking for from the very beginning.

PRIVATE LENDER BY AAPL

ANTHONY GERACI, ESQ.

As CEO and cofounder of Stratus Financial and CEO of Geraci LLP, Anthony Geraci, Esq., followed his passion for aviation and obtained both his commercial

Continuous education is vital. Staying updated on industry trends, regulatory changes, and best practices will enhance your understanding and decision-making.

Start by getting involved with AAPL as early as you can; learn as much as you can.

pilot certificate and ground instructor

Finally, partnerships are a good way to reduce risk and enhance learning opportunities. Consider co-lending or syndicating deals with experienced lenders.

to several lending funds that have to-

Private lending offers lucrative opportunities but requires a disciplined approach to risk assessment, due diligence, and regulatory compliance.

By understanding market dynamics, structuring deals effectively, and staying informed, new lenders can position themselves for long-term success in this competitive space.

10

Joining industry associations like the American Association of Private Lenders (AAPL) offer invaluable support and guidance to those serious about building a sustainable private lending business.

Further, leveraging educational resources and networking with seasoned professionals will provide critical insights and practical strategies for success.

ratings in 2020. During his instruction, he recognized a lack of available funding in the space.

During the past 15 years, he has run financial funds and served as legal advisor taled more than $100 billion offered and more than $200 million raised through his law firm. Leveraging his securities background, Geraci has been instrumental in securing credit lines and starting capital-raising ventures to fund flight school loans for Stratus Financial.

A founding member of EO (Entrepreneurs Organization) Inland Empire and founder and vice chairman of the American Association of Private Lenders (AAPL), Geraci keeps his finger on the pulse of the financial industry.

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SPRING 2025

11

Fundamentals

Foreclosure Should Be Your Last Resort When working with real estate investors in today’s market, implementing alternate default remedies will save both you and your borrower money and time.

ALAN TIONGSON, CONSTRUCTIVE CAPITAL

A

s mortgage delinquency and rental vacancy rates in the U.S. continue to rise year over year, the effects are being felt across the private lending industry—impacting originators, servicers, asset managers, secondary marketers, and borrowers alike. Coupled with a slight uptick in unemployment and the rising cost of living, investment property owners may face greater challenges in rent collection, potentially leading to missed mortgage payments.

For lenders and investors in businesspurpose loans, understanding the various loss mitigation options and their respective advantages and disadvantages is crucial.

Depending on your borrower’s situation (i.e., facing a short-term or long-term hardship), you may evaluate various strategies to help them cure the delinquency, including modifications, forbearances, and deferments.

In instances where the borrower cannot afford any modification or repayment plan, you have three primary options: foreclosure, deed in lieu, or short sale.

FORECLOSURES There are two basic types of foreclosure: (1) judicial, where the foreclosure proceeds through the court system and (2) nonjudicial, 12

PRIVATE LENDER BY AAPL

foreclosures outside the court system.

These processes are determined by state law (which can vary from state to state) and by the terms of the mortgage itself.

For business-purpose loans, you typically initiate the foreclosure process once a loan reaches more than 60 days delinquency.

Initiating foreclosure typically entails filing a formal complaint against the borrower (if judicial) or notice of intent to foreclose (if nonjudicial). On the one hand, the foreclosure process produces removal of subordinate liens from title while continuing to seek deficiency judgment against the borrower. On the other hand, the costs associated with the process combined with the unpredictable timeline to foreclose are significant disadvantages.

According to a year-end 2024 foreclosure report from ATTOM Data Solutions, the average number of days for a foreclosure in the United States was 762 days in the fourth quarter of 2024. The same report also showed that the following states took considerably longer to complete:

» » HAWAII: 2,505 DAYS » NEW YORK: 2,099 DAYS » WISCONSIN: 1,989 DAYS » NEVADA: 1,750 DAYS LOUISIANA: 3,015 DAYS

During the time required to complete a foreclosure, the subject property remains exposed to deterioration, vandalism, and damage that could severely impact the property’s value and recoverability.

Additionally, you are burdened with the costs associated with maintaining property taxes and potentially force placing insurance coverage on the asset.

Work closely with your servicer and/ or property preservation team to ensure occupancy is verified before initiating the foreclosure process. If the property is found vacant, work quickly to secure it to prevent damage from occurring. Regular, monthly inspections (even if exterior only) are critical during foreclosure. You should also obtain updated valuations every six months to better estimate potential loss, foreclosure bids, or negotiations with the defaulted borrower through a deed in lieu or short sale.

DEED IN LIEU A deed in lieu of foreclosure (DIL) is an agreement between a defaulted borrower and the lender to voluntarily transfer property ownership back to the lender. Through a DIL, the borrower is ultimately surrendering their rights to

the subject property to avoid foreclosure, which could simultaneously discharge them from any further loan obligations.

Like other loss mitigation options, a DIL application would need to be reviewed and approved by the borrower and lender.

For you, the lender, the review process is rather straightforward: (1) evaluating the borrower’s hardship or inability to reinstate/maintain payments by verifying current liquidity (financial statements), (2) obtaining an updated valuation of the subject property, and (3) obtaining an updated title search to ensure there is no material title defect(s) or subordinate lien(s). The main advantage is that both you and the borrower will not only avoid the incremental legal cost of foreclosure but also significantly reduce the amount of time spent on the foreclosure process.

That said, DIL agreements have potential drawbacks. You are still tasked with securing or preserving the property, ongoing costs associated with property taxes and insurance, and the eventual marketing and liquidation of the property as REO. Mid-construction fix-and-flip properties are even more problematic. Costs to complete the remaining repairs to bring the property to marketable condition, for example, could be significant. Having a reliable resource to accurately estimate and complete construction as well as an appraiser versed in construction and estimating future after-repair value is helpful.

SHORT SALE A short sale occurs when a defaulted borrower sells the subject property to another party for less than the total mortgage debt owed. In these situations, you agree to accept the sales proceeds in exchange for releasing your lien on SPRING 2025

13

Fundamentals

the property as well as any deficiency balance that results following the sale.

Although you are accepting less than the owed amount to settle the debt, you are more likely to agree to the short sale to avoid larger losses by continuing with foreclosure, eventually maintaining and preserving the property just to ultimately resell it for a statistically 20-40% lower price than the typical short sale offer.

Like the DIL process, you should obtain necessary hardship information from the borrower to prove their current inability to reinstate or maintain payments. To better estimate the total amount of the shortfall/loss, you would typically want to review a preliminary settlement statement to determine the current purchase price and what the net payoff amount would be after closing costs and commissions.

Updated property valuations would also be obtained during this review process to ensure the current purchase offer is within an acceptable range of the property’s current market value. You would likely complete due diligence on the prospective buyer to prove they are qualified by obtaining proof of funds and that the agreement between seller-buyer is a true, arms-length transaction (if the buyer is an entity, obtain articles of incorporation, operating agreement, bylaws, etc.).

Although more complex and comprehensive compared to a DIL, a short sale could be a more favorable loss mitigation option since it immediately liquidates the property into cash proceeds, circumventing the ongoing carrying costs of maintaining and preserving the property while REO, and having to still market and negotiate the eventual sale of the property themselves.

For borrowers, benefits include a less significant impact on their credit report, avoiding a costly foreclosure process, 14

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You can project loss if you have an estimated value of the subject property, total debt owed, estimated legal costs, and timeline (months).” and potentially releasing them from any further financial obligation for the mortgage. However, since you could forgive the deficiency balance with a short sale, a borrower’s taxes could be affected when reported as a debt cancellation on a 1099-C form. Debt cancellation can be treated as taxable income.

THE INVESTOR PERSPECTIVE The investor perspective is not much different from yours as a lender. Investors that purchase business-purpose loans typically show higher preference for short sales over DILs when comparing nonretention options. Foreclosure is the absolute last option, especially if the property lies in a judicial state due to the higher cost and prolonged timelines to complete the process.

An investor’s decision making is dependent primarily on the amount of the principal owed, the state in which the property is located and the results obtained from completing a cost-estimate (while considering timeline) associated with each loss mitigation option. The investor then proceeds with the option that leads to the best overall recovery.

Many cost-comparison tools and calculators exist online, so you can project loss if you have an estimated value of the subject property, total debt owed, estimated legal costs, and timeline (months).

Understanding mortgage-loss mitigation options is crucial for you to appropriately manage risk and minimize losses when faced with borrower default. Although a borrower’s hardship may be temporary, for those with long-term issues, a DIL or short sale may be potential non-retention options that avoid foreclosure.

ALAN TIONGSON

Alan Tiongson has more than 17 years in investment property lending with roles in origination, credit analysis, processing, underwriting, developing/ overseeing lending operations, servicing, and portfolio/asset management.

Before joining the Constructive team, Tiongson was the director of servicing and asset management with Finance of America Commercial. At Constructive, he oversees the secondary marketing and asset management teams, maintaining relationships with investors and overseeing the overall performance of the portfolio.

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SPRING 2025

15

Market

Buy or Hold? Local Developers Have the Answer Bidding activity at foreclosure auctions provides early clues to 2025’s real estate market winners and losers.

DAREN BLOMQUIST, AUCTION.COM

B

idding trends at foreclosure auctions in late 2024 indicate which local markets are likely to see gains or losses in retail home prices in 2025.

“Higher home prices with an inevitable price drop coming in the near future,” speculated an Auction.com buyer from Indiana in a January 2025 survey. “(I am) spending less because prices will drop and [it] makes no sense to buy when you know prices will drop even further.”

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In aggregate, the bidding behavior of distressed property auction buyers like this one help signal which markets are likely to “win” in 2025 and which markets are in danger of seeing a slowdown in home sales and home prices.

accurately predicting what their local market will look like about three to six months in the future—the typical time it takes them to renovate distressed properties and return them to the retail market as resales or rentals.

That’s because the local community developers who are the biggest buyers at distressed property auctions know their local markets as well as or better than anyone. Their success hinges on

“Going into the New Year, I do feel that the market will improve and as such if the home can be bought at a reasonable price, I’m a buyer,” wrote an Auction.com buyer from Texas in the January survey.

FIGURE 1. LIKELY MARKET WINNERS BASED ON ANNUAL DEMAND INCREASE AT AUCTION QUANTITY

PRICE

(Sales Rate)

(Bid-To-Value Ratio)

Providence-Warwick, RI-MA

3%

10%

Dayton, OH

27%

2%

Akron, OH

55%

15%

Washington-Arlington-Alexandria, DC-VA-MD-WV

17%

3%

Richmond, VA

12%

4%

Cleveland-Elyria, OH

29%

11%

Indianapolis-Carmel-Anderson, IN

38%

4%

Louisville/Jefferson County, KY-IN

25%

7%

Baltimore-Columbia-Towson, MD

15%

3%

Oklahoma City, OK

12%

9%

Canton-Massillon, OH

7%

24%

Portland-Vancouver-Hillsboro, OR-WA

21%

29%

New York-Newark-Jersey City, NY-NJ-PA

12%

2%

Milwaukee-Waukesha-West Allis, WI

19%

5%

Virginia Beach-Norfolk-Newport News, VA-NC

0%

6%

Tulsa, OK

17%

4%

Peoria, IL

12%

3%

New Orleans-Metairie, LA

13%

11%

108%

36%

MARKET

The key auction bidding behavior metrics that signal likely local market winners and losers in 2025 are the sales rate at foreclosure auction—the share of auction properties that sell—and the ratio of winning bid to estimated after-repair value at auction.

The sales rate indicates quantity demand from local community developers—the quantity buyers are willing to buy. The winning bid-tovalue ratio indicates price demand from local community developers—the price buyers are willing to pay.

Wichita, KS

MARKETS MOST LIKELY TO WIN

parts of the Midwest, with a few notable exceptions such as Portland, Oregon, and New Orleans (see Fig. 1).

Markets likely to win in 2025 are those in which both the quantity demand and the price demand rose in the fourth quarter of 2024 compared to a year ago, ordered by highest to lowest quantity demand.

“High demand for turnkey properties in the D.C. metropolitan area,” wrote one survey respondent from Maryland.

“The high interest rates will drastically effect marketability though.”

Of 63 local markets analyzed in the Auction.com data, 19 (30%) fit the category of likely winners in 2025, primarily markets in the Northeast and Rust Belt and

MARKETS IN DANGER OF A DOWNTURN Conversely, markets in danger of a housing downturn in 2025 were those in

which both quantity demand and price demand declined in fourth quarter 2024 compared to a year ago, ordered by the lowest to highest quantity demand.

Out of the 63 local markets analyzed, 16 (25%) fit the category of likely losers in 2025, primarily markets in the Southeast and Sun Belt, although there were several notable exceptions (see Fig. 2).

“Cost of goods to rehab are up so need better spread,” wrote one survey respondent from Texas.

SPRING 2025

17

Market

The signals for 2025 were less clear in the remaining 28 markets analyzed, with quantity demand and price demand going in opposite directions in fourth quarter 2024.

QUANTITY

PRICE

(Sales Rate)

(Bid-To-Value Ratio)

Minneapolis-St. Paul-Bloomington, MN-WI

-11%

-11%

HEADWINDS AND TAILWINDS

Pittsburgh, PA

-22%

-31%

This aligns somewhat with the results of the Auction.com buyer survey, which shows that local community developers buying distressed properties at auction still view market conditions as more of a headwind than a tailwind for their real estate investing activity.

Baton Rouge, LA

-9%

0%

Tampa-St. Petersburg-Clearwater, FL

-38%

-22%

Detroit-Warren-Dearborn, MI

-3%

-9%

Orlando-Kissimmee-Sanford, FL

-7%

-7%

Killeen-Temple, TX

-43%

-21%

Miami-Fort Lauderdale-West Palm Beach, FL

-31%

-8%

San Antonio-New Braunfels, TX

-19%

-5%

Dallas-Fort Worth-Arlington, TX

-20%

-4%

Las Vegas-Henderson-Paradise, NV

-13%

-4%

Nashville-Davidson-Murfreesboro-Franklin, TN

-17%

-6%

Los Angeles-Long Beach-Anaheim, CA

-25%

-10%

Atlanta-Sandy Springs-Roswell, GA

-10%

0%

Buffalo-Cheektowaga-Niagara Falls, NY

0%

-4%

Sacramento-Roseville-Arden-Arcade, CA

-4%

-9%

Twenty-four percent of survey respondents said market conditions are making them more willing to buy while 35% said market conditions are making them less willing to buy. The remaining 41% said market conditions are not impacting their willingness to buy.

Buyers surveyed cited higher acquisition costs, higher rehab costs, and unfavorable mortgage rates as the top three market conditions making them less willing to buy distressed properties at auction.

“Number 1 is interest rates affecting my holding costs and mortgage,” wrote one survey respondent from Maryland, who said market conditions are making him less willing to buy. “I buy properties at auction, fix them up, then rent them out, and refinance them into a mortgage and hold the property, so interest rates (are) everything to me. “However, if I get a good purchase price, I can deal with high interest rates,” he added.

Lower prices may offer the best opportunity for buyers to increase their purchases at auction. Given recent guidance from the Federal Reserve, the prospect of dropping mortgage rates in 2025 is becoming more unlikely.

Threats of tariffs and deportations 18

FIGURE 2. LIKELY MARKET DOWNTURNS BASED ON ANNUAL DEMAND DECREASE AT AUCTION

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MARKET

from the Trump administration point to rising renovation costs, both for materials and labor.

“More affordable and cheaper homes will help increase bidding,” wrote one survey respondent from Texas, who said market conditions are making him less willing to buy.

On the other side of the coin, a strong fix-and-flip market, low retail inventory, and lower acquisition costs were the top three market conditions making buyers more willing to buy distressed properties at auction.

“The price of everything has increased, including foreclosures,” wrote one

survey respondent from Maine, who said market conditions have not impacted his willingness to buy. “However, as long as profit margins stay the same, it doesn’t affect me much.”

The fix-and-flip market has been waning in many parts of the country due to slowing home price appreciation and low inventory of distressed properties available for value-add investing. But that’s not as much the case in many Northeast and Rust Belt markets where home price appreciation is outperforming the national average and where more distressed, value-add buying opportunities tend to be.

FIGURE 3. JANUARY 2025 RETAIL HOUSING INVENTORY BY METRO

HOME PRICES AND FORECLOSURE INVENTORY According to data from the ICE Mortgage Monitor Report published in February 2025, the top five markets for fastest annual home price appreciation in December 2024 were all in the Northeast or Rust Belt: Buffalo, New York; Hartford, Connecticut; Providence, Rhode Island; Cleveland, Ohio; and Detroit, Michigan.

“My investing strategy is always powered by market value fluctuations, builder costs, and inventory,” wrote one survey respondent from Nevada, who said market conditions are not impacting her willingness to buy.

Meanwhile, according to Auction. com data, four of the top five markets with the highest volume of properties brought to foreclosure auction in fourth quarter 2024 were in the Northeast

or Rust Belt: New York, Chicago, Dallas, Detroit, and Philadelphia.

DAREN BLOMQUIST

“I’m finding more foreclosure properties on which to bid,” wrote one survey respondent from New York, who said market conditions are making her more willing to buy.

A similar regional pattern shows up in retail market inventory (see Fig. 3). Although retail market inventory is rising in most markets across the country, it’s not rising as rapidly in many parts of the Northeast and Rust Belt. Data from Realtor.com shows that among metro areas with at least 2,500 active listings in January 2025, those with the biggest annual increase in listing inventory were Denver, Las Vegas, Tucson, San Diego, and Naples, Florida.

Metros with the smallest increase in active listing inventory were New York, Boston, Cleveland, Chicago, and Minneapolis.

Daren Blomquist is vice president of market economics at Auction.com, analyzing and forecasting complex data trends to provide value to the platform’s buyers and sellers.

Blomquist’s analysis has been cited by thousands of media outlets nationwide, including all major news networks and publications such as The Wall Street Journal, The New York Times, and USA Today. He has appeared on many national network broadcasts, including CBS, ABC, CNN, CNBC, FOX Business, and Bloomberg.

SPRING 2025

19

Market

Competing Push/ Pull Factors Signal Continued ‘Interesting Times’ Scrutinize the market’s big themes and dependencies to develop your game plan for the second half of 2025.

SCOTT WARD, AAPL EDUCATION COMMITTEE

S

o much can be said about the investment world and capital market volatility during the last 24 months. As we move further into 2025, some harsh realities about the investment world and capital market volatility are becoming even clearer.

Here’s what to keep an eye on.

HIGHER COST OF CAPITAL The days of fix-and-flip loans at 4.25% for a 600 FICO client with little experience are over. Private lenders are back to pricing their loans based on risk, exit, and market conditions for a property’s location. With interest rates still fluctuating and inflation pressures persisting, many lenders are keeping rates high. Even borrowers who used to get 8-10% interest rates just six to nine months ago are now seeing 11.5-12.75% or more on properties in “riskier” locations with unique asset classes and lukewarm exit plans. This is now squeezing profit margins.

20

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STRICTER UNDERWRITING & LOWER LTVS Lenders are tightening their guidelines, reducing Loan-to-Value (LTV) ratios, and demanding more skin in the game. That’s not a surprise. This has been common over the years in changing markets and election years. But many investors who relied on 80-90% LTV funding are now seeing max LTVs closer to 65-75%, forcing them to bring more cash to deals. It appears as if liquidity, exit, and experience (not necessarily in that order) are back—and back for the long term.

TIGHTER LIQUIDITY Many investors who took on high-interest loans between 2022 and 2024 and have had a tough time completing projects are now struggling to refinance or exit profitably.

This is leading to increased defaults due to maturity dates not being met and projects not at the point for one lender to take on the project (short of the minimum percentage completion to qualify for a

new loan). This is making private lenders more cautious, restricting the availability of capital for new deals in the ground-up construction and major rehab space.

FALLING PROPERTY VALUES Some markets are experiencing declining property values. Yes, as has always been true in investment real estate, location is everything; however, certain locations are feeling the hammer more than others.

As the markets in these metros flatten, it is harder for investors to exit at a profit.

Rental rates are cooling off as many people relocate to better job creation corridors.

Lenders are more hesitant to fund deals in risky markets, making capital harder to secure. A good idea is to ask your lender upfront, “Is this a flagged market for you, and what is the reduction for the flag?” This one question will save you days, maybe even weeks, of wasted time if the “math isn’t mathing.”

INCREASED COMPETITION Lenders are cherry-picking only the best deals (nothing new here), leaving less-experienced investors struggling to secure funding. Some underwriting guidelines have become so tight it would be easier to ask a conventional bank for a full doc loan with a seven-day close.

UPTICK IN REGULATORY/COMPLIANCE More states are increasing regulations around private lending, requiring specific licensing and lending practices as well as more detailed disclosures. Some lenders are skirting the rules, but borrowers who don’t verify their lender’s legitimacy may end up in legally risky situations. An unsophisticated borrower can get left at the altar by engaging with a bad actor who SPRING 2025

21

Market

is playing outside of the lines and is only concerned with a 2-point commission check. Re-trades at the closing table, and last-minute deal fall out is so much more common now with fly-by-night “ brokers” and wanna be “lenders.”

HARDER EXITS FOR BRRRR INVESTORS The Buy, Rehab, Rent, Refinance, Repeat (BRRRR) strategy is becoming more challenging as exit banks and DSCR lenders tighten cash-out refinancing and leverage requirements. Investors looking to refinance private loans are facing higher interest rates, reduced cash-out percentages, and fewer exit strategies, delaying their ability to access profits before a sale or refinance.

A RISE IN FRAUD Fraud is on the uptick. The fraud of today is so much more advanced than it was even a few years ago. Advances in technology make digitally falsifying documents, bank statements, appraisals, deposits, and other items easier. Although underwriters are diligent about sussing out these frauds, the additional scrutiny takes more time, creates more questions, and adds extra hoops to jump through. This is the new normal— one in which clients and brokers must be ready to answer the hard questions and have documents ready for clarification.

PREDATORY “LENDERS” AND LOAN-TO-OWN PLOYS They’re back! Some bad actors are once again structuring deals/loans with hidden clauses, unrealistic balloon payments, or accelerated default interest rates. They hope the borrower defaults, so they can take over the property and then finish it themselves for a larger profit. Borrowers 22

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As we all know, our industry is a teetertotter at times. One month there are deals everywhere but limited capital; the next month, lending houses are begging for “good deals” and no one is answering the phone.” who don’t fully understand the terms are at risk of losing their deals to these predators.

FEWER LENDERS Some private lenders (more than not) rely on capital from hedge funds or institutional investors. Many of those funds are pulling back due to rising defaults and risk concerns. A solid number of these hedge funds and institutional lenders are also rescoping their concentration limits to certain loan types and locations. This means fewer lenders are offering loans (or not as many in a certain investment focus), making it harder for investors to get capital when they need it. One month a lender may be searching aggressively for a multifamily 1-4 and the next month may not be taking any. This is the new normal, so if it happens, don’t be overly surprised.

As we all know, our industry is a teetertotter at times. One month there are deals everywhere but limited capital; the next month, lending houses are begging for “good deals” and no one is answering the phone.

This list offers a realistic view of 2025, emphasizing the importance of writing solid paper, managing risk in unproven markets with unproven borrowers, and prioritizing client experience alongside a

solid exit strategy. Private lending is shifting back to fundamental business principles and disciplined operations. Lenders, funds, and borrowers who specialize in localized markets will be best positioned to thrive in the cycles ahead.

SCOTT WARD

Throughout his extensive 25-year career, Scott Ward has successfully underwritten and closed thousands of private money residential, commercial, and raw land investment loans. Ward has several equity funds specifically focused on investment property throughout many verticals (all non-owner occupied) covering 11 different states.

He is a panel speaker for real estate equity investments and commercial development properties as well as an AAPL Certified Fund Manager and a current member of the AAPL Education Committee.

For investors who break the mold.

NREIG has redefined the boundaries of insurance for real estate investments. Our program delivers customizable solutions for properties in any phase of occupancy, including a force-placed alternative for lenders.

Know your interest is adequately protected.

Visit NREIG.com/AAPL25 to learn more or refer a borrower.

SPRING 2025

23

Market

Bridge and DSCR Activity Surges Driven by strong secondary market conditions, bridge and DSCR loan originations grew rapidly in 2024, setting the stage for continued momentum in 2025.

NEMA DAGHBANDAN, ESQ., GERACI LLP

D

uring the last six years, Lightning Docs, a platform built for private lenders to generate their short-term (bridge, fixand-flip, construction, etc.) and long term rental (DSCR) loan documents

24

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and the official loan documents of the American Association of Private Lenders, has been used for more than 92,000 loans totaling over $49 billion in loan origination, including usage by more than half of the nation’s top 50 private

lenders. In January 2025, there were a total of 4,272 loan transactions totaling more than $2 billion in origination. All the transactions are done by private lenders, providing unique transparency for an industry that tends to be opaque.

DEFINITIONS AND METHODOLOGY A bridge loan is any loan with a

considered to be for construction

duration of 36 months or less utilizing

purposes, a full 38% of bridge loans

interest-only payments for the duration

generated in 2024 did not contain any

of the term and containing a balloon

holdback or reserves for construction.

payment at the end of the loan. Bridge

DSCR loans are 30-year term loans se-

loans are commonly referred to as

cured by rental properties. DSCR stands

residential transition loans, fix-and-flip,

for Debt Service Coverage Ratio, which

non-owner occupied, hard money, or in

identifies that the primary underwriting

other terms that describe a short-term

for these loans is done by dividing the

loan generally secured by a residential

monthly net operating income of the

property for investment purposes.

property by the monthly debt service.

In 2024, Lightning Docs users gener-

In 2024, Lightning Docs users gener-

ated more than 20,000 bridge loans.

ated more than 17,000 DSCR loans

Although bridge loans are generally

across 50 unique private lenders.

This article provides private lenders with data-driven insights, including competitive benchmarking analysis to understand meaningful trends in private lending activity to make sure your business retains its competitive edge in an evolving marketplace.

EXPANSIVE GROWTH IN BRIDGE AND DSCR In 2024 we witnessed a dynamic shift in business-purpose lending.

According to data aggregator Forecasa, the top 100 private lenders in the United States increased their loan volumes by 25.3% in 2024 (increasing by approximately 27,000 total loan transactions year-over-year for a total of more than 133,000 loan transactions).

Twenty-two percent of the top private lenders’ volumes decreased year-overyear, while the remaining 78% increased.

Lightning Docs users experienced a dramatic growth of 31% year-over-year increase in bridge loan volumes, driven by favorable secondary market conditions.

DSCR loan volume, on the other hand, increased an incredible 52% year over year across all Lightning Docs users, with dramatic growth in the third and fourth quarters, reflecting the resilience of the product even in uncertain economic conditions.

As we moved into January 2025, a typically slow month for our industry, these trends surprisingly continued. Bridge loan volumes increased 51% year over year SPRING 2025

25

Market

when comparing January 2024 to January 2025—and an astounding 123% for DSCR loans during the same time period.

FIGURE 1. YEAR-OVER-YEAR ANALYSIS OF BRIDGE LOAN VOLUMES

BRIDGE LOAN ANALYSIS LOAN VOLUMES. When tracking the same

125 users who started using the system to make bridge loans on or prior to January 1, 2023 through December 31, 2024, there was an uptick of 31% yearover-year growth. The first quarter saw the softest growth, with a 25% year-overyear increase; the remaining quarters saw consistent growth from 31-33% (see Fig. 1).

INTEREST RATES AND LOAN AMOUNTS.

Bridge loan interest rates decreased for the eighth time in the last nine months, dropping 73 basis points since January of last year. The revival of the 2024 loan securitization market, including the first rated loan securitizations, is widely credited for the reduction in interest rates. Average loan amounts increased from $583,060 in January 2024 to $667,527 in December, but saw them drop back down to $634,321 in early 2025.

When segmenting interest rates, it becomes clear that market participants must understand their local market to make pricing determinations. For example, in January 2025, the national average interest rate for bridge loans was 10.83%. However, most interest rates varied between 9-12.99%, with only 35.7% of loans between 10-10.99% (see Fig. 2).

LOCATION, LOCATION, LOCATION. For private

lenders interested in benchmarking against their peers, the location of property is still the dominant driver determining average loan amounts and average interest rates.

When reviewing the top ten bridge loan markets in the fourth quarter of 2024, you 26

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FIGURE 2. BRIDGE INTEREST RATES, JANUARY 2025

FIGURE 3. TOP BRIDGE MARKET ACTIVITY OCTOBER 2024

NOVEMBER 2024

DECEMEBER 2024

COUNTY

RATE

AMOUNT

# LOANS

RATE

AMOUNT

# LOANS

RATE

AMOUNT

# LOANS

Los Angeles, CA

11.06%

$1,185,367

187

10.97%

$1,107,894

140

10.95%

$1,083,777

154

San Diego, CA

10.81%

$904,933

95

10.94%

$957,237

107

10.55%

$1,141,180

106

Cook, IL

11.13%

$370,511

50

11.29%

$463,419

67

11.17%

$478,642

70

Miami-Dade, FL

10.65%

$860,727

40

10.46%

$759,501

29

10.67%

$906,077

40

Orange, CA

11.99%

$860,657

30

10.99%

$1,136,673

30

10.94%

$968,544

36

Philadelphia, PA

11.23%

$241,649

27

11.39%

$476,554

36

10.88%

$246,904

23

Harris, TX

10.57%

$513,131

33

10.70%

$634,864

28

10.16%

$568,709

22

Santa Clara, CA

10.27%

$1,624,363

28

10.16%

$1,311,185

29

10.21%

$1,399,001

25

Lee, FL

10.93%

$297,252

29

10.62%

$280,616

31

11.03%

$258,922

19

Dallas, TX

10.96%

$594,194

28

10.67%

$700,079

24

10.15%

$659,780

21

will find a full 100-basis point spread in December, based upon where the lender is making loans (see Fig. 3). Interestingly, states such as Texas consistently provide lower interest rates than markets such as California, even though the loan transaction sizes in California are generally much larger.

BEST INTEREST RATE ENVIRONMENTS. Where

FIGURE 4. COUNTIES >10.92% NATIONAL AVERAGE WITH >20 LOANS, Q4 2024 COUNTY, STATE

RATE

AMOUNT

Orange, CA

11.28%

Sacramento, CA

COUNTY, STATE

RATE

AMOUNT

$987,369

Wayne, MI

12.38%

$253,983

11.21%

$520,035

Taylor, TX

12.00%

$192,982

San Bernardino, CA 11.14%

$595,619

Bronx, NY

11.95%

$1,348,406

Santa Barbara, CA 11.09%

$990,182

Clark, NV

11.60%

$995,130

Los Angeles, CA

11.00%

$1,132,722

Jefferson, AL

11.40%

$404,514

San Joaquin, CA

10.98%

$410,807

Cuyahoga, OH

11.32%

$236,110

are the best opportunities? For those seeking the greatest rates of return, there were a total of 25 different high-volume counties that provided a better-thanaverage national interest rate of 10.92% in fourth quarter 2024 (see Fig. 4).

Polk, FL

11.24%

$355,569

Cook, IL

11.20%

$438,776

Duval, FL

11.16%

$335,263

Philadelphia, PA

11.20%

$341,386

LARGEST LOAN BALANCES. Because many

Hillsborough, FL

11.06%

$620,012

Hawaii, HA

11.04%

$505,458

DeKalb, GA

11.24%

$473,298

Maricopa, AZ

11.00%

$998,986

Fulton, GA

11.23%

$443,986

Marion, IN

11.00%

$237,554

Suffolk, MA

11.33%

$1,818,524

Jackson, MO

10.97%

$249,439

Middlesex, MA

11.12%

$1,315,133

loan originators sell their loans and their primary source of revenue is the fee income derived from loan transactions, many lenders seek states with the largest loan balances and, thus, origination fees.

It’s likely no surprise these amounts are

SPRING 2025

27

Market

FIGURE 5. STATES WITH AVERAGE BRIDGE LOAN BALANCES ABOVE $500K, Q4 2024

concentrated on the West coast and in the Northeast, with states such as California and Washington just shy of $1,000,000 average transaction sizes and states such as New York, Massachusetts, Nevada, and Utah all coming in above $1,000,000 on average (see Fig. 5).

Private lenders maintained consistent focus on their top markets year over year, with the top eight states remaining unchanged from 2023 to 2024. Ohio and Pennsylvania rounded out the top ten, swapping positions between the two years.

When looking at the data from January 2025, California, Florida and Texas remain the top three with an uptick in volume in Indiana and New Jersey, while Illinois, Georgia, and Ohio dropped (see Fig. 6).

Although there was notable movement among active MSAs in 2024, the top six markets remained largely 28

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FIGURE 6. TOP BRIDGE STATES BY VOLUME 2023

2024

2025 (THROUGH JANUARY)

California

California

California

Florida

Florida

Florida

Texas

Texas

Texas

Illinois

Illinois

New Jersey

↑3

Georgia

Georgia

Illinois

↓1

North Carolina

North Carolina

North Carolina

New Jersey

New Jersey

Indiana

Massachusetts

Massachusetts

Massachusetts

Pennsylvania

Ohio

Georgia

Ohio

Pennsylvania

Pennsylvania

unchanged, with Los Angeles County maintaining a commanding lead. Early

↑11

↓4

data from 2025 indicates that the top three markets have held steady so far (see Fig. 7).

FIGURE 7. MOST ACTIVE BRIDGE COUNTIES BY VOLUME 2023

2024

TOTAL LOANS

Los Angeles, CA

Los Angeles, CA

Cook, IL

San Diego, CA

↑1

947

San Diego, CA

Cook, IL

↓1

684

Miami-Dade, FL

Orange, CA

↑1

402

Orange, CA

Miami-Dade, FL

↓1

394

Dallas, TX

Dallas, TX

Riverside, CA

Fulton, GA

Lee, FL

Lee, FL

Philadelphia, PA

Santa Clara, CA

↑15

255

Fulton, GA

Riverside, CA

↓3

246

1,690

287 ↑3

274 273

For private lenders interested in benchmarking against their peers, the location of property is still the dominant driver determining average loan amounts and average interest rate.”

SPRING 2025

29

Market

DSCR LOAN ANALYSIS

FIGURE 8. YEAR-OVER-YEAR ANALYSIS OF DSCR LOAN VOLUMES

LOAN VOLUMES. When tracking the same 33 users who started using Lightning Docs to make DSCR loans on or prior to January 1, 2023 through December 31, 2024, there was a huge increase of 52% in year-over-year growth, with an astounding 92% year-over-year growth in fourth quarter 2024 (see Fig. 8).

INTEREST RATES AND LOAN AMOUNTS. DSCR

interest rates increased for the third straight month in January 2025 after a steady decrease throughout the first 10 months of 2024. Like bridge loans, favorable secondary market conditions in 2024 provided an advantageous market for real estate investors as rates fell far more than typical benchmarking indexes would normally suggest.

Similar to bridge loans, DSCR loan amounts increased throughout the year from an average national loan balance of $270,300 in January to $312,465 in December; however, average volumes declined to $281,048 in January 2025 (see Fig. 9).

Unlike bridge loans, the DSCR loan market shows less diversification in interest rates. In January 2025, nearly 64% of loans were written between 7–7.99%, with a quarter of the market above 8%, while the sub-seven percent market has continued to shrink (see Fig. 10).

LOCATION, LOCATION, LOCATION (STILL).

Location still matters in the context of DSCR lenders in both loan amounts and average interest rates. Interestingly, certain markets such as Duval County, Florida, where Jacksonville is located, provide generally below-market interest rates and lower loan balances, whereas markets such as Essex County, New Jersey, where Newark is located, tend to provide above-average market interest rates and almost twice the national average for loan balances (see Fig. 11).

30

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FIGURE 10. DSCR INTEREST RATES, JANUARY 2025

FIGURE 9. DSCR LOAN RATES AND AVERAGE LOAN AMOUNTS

FIGURE 11. TOP DSCR MARKET ACTIVITY OCTOBER 2024 COUNTY

NOVEMBER 2024

DECEMEBER 2024

RATE

AMOUNT

# LOANS

RATE

AMOUNT

# LOANS

RATE

AMOUNT

# LOANS

Cuyahoga, OH

7.34%

$127,341

72

7.41%

$127,157

60

7.74%

$120,153

61

Philadelphia, PA

7.17%

$241,283

60

7.35%

$260,083

56

7.69%

$305,978

55

Cook, IL

7.37%

$325,083

45

7.56%

$343,749

45

7.59%

$337,191

58

Essex, NJ

6.72%

$648,259

32

7.20%

$629,719

37

7.50%

$667,983

68

Wayne, MI

7.33%

$138,776

35

7.52%

$107,944

46

7.71%

$131,483

48

St. Louis, MO

7.02%

$129,355

26

7.02%

$162,569

50

7.54%

$104,710

48

Miami-Dade, FL

6.87%

$449,543

34

7.11%

$447,427

39

7.33%

$409,573

40

Los Angeles, CA

7.10%

$975,613

34

7.71%

$844,613

22

7.32%

$869,181

47

Harris, TX

6.99%

$315,386

38

7.41%

$348,640

22

7.29%

$311,032

40

Duval, FL

6.86%

$174,405

35

7.29%

$172,183

22

7.02%

$188,808

18

SPRING 2025

31

Market

For DSCR lenders, 2024 brought significant changes in where lending activity occurred compared to 2023—quite different from their bridge lender counterparts. The most notable change was California, which became the seventh largest DSCR market in 2024. In early 2025, Ohio and Texas started strong. Missouri also entered the top 10 and North Carolina dropped out (see Fig. 12).

OTHER NOTABLE TRENDS TIGHTENING SPREADS. The increase in

secondary market activity and the reduction in the Fed monetary policy has influenced both bridge and DSCR interest rates. What is particularly fascinating is the spreads between 10-year treasuries and the average

FIGURE 12. TOP DSCR STATES BY VOLUME 2023

2024

2025 (THROUGH JANUARY)

Pennsylvania

Pennsylvania

Ohio

↑2

Texas

Florida

Texas

↑2

Florida

Ohio

Florida

↓1

New Jersey

Texas

Pennsylvania

↓3

Ohio

New Jersey

New Jersey

Illinois

Illinois

New York

North Carolina

California

California

New York

New York

Georgia

↑2

Maryland

North Carolina

Illinois

↓3

Indiana

Georgia

Missouri

↑1

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FIGURE 13. BRIDGE AND DSCR VERSUS INDEXES

national DSCR rate tightened dramatically throughout 2024 and into early 2025.

For context, the year began with average DSCR rates of 8.3%, while 10-year treasuries averaged 4.06% with a spread of 424 basis points. Fast forward to January 2025 and the 10-year had increased to 4.63% even though the DSCR rates were down to 7.69%, resulting in a 306-basis-point spread between the 10-year and average DSCR rates.

Investors appear to be more comfortable with the risks associated with this product as the spreads continue to tighten (see Fig. 13).

CONSISTENT TRANSACTION FEES. For bridge

and DSCR lenders, transaction fees have remained mostly unchanged in 2024, with most lenders charging a little over 2 points for both DSCR and bridge transactions.

Other transaction costs range from an average of $900-$1,300 for document fees, $1,000-$1,300 processing fees, and $1,300-$1,500 underwriting fees.

The data from 2024 and early 2025 paints a clear picture of a rapidly evolving

private lending market. Bridge and DSCR loan volumes surged, with DSCR loans experiencing particularly dramatic growth in the second half of the year. Interest rates saw a downward trend, largely driven by improved secondary market conditions, while spreads between DSCR rates and 10-year treasuries tightened significantly.

As we look ahead, private lenders must remain agile, leveraging data-driven insights to navigate market shifts. With spreads tightening, regional disparities in pricing, and sustained demand for both bridge and DSCR loans, staying informed will be critical to maintaining a competitive edge.

Lightning Docs will continue to provide transparency and benchmarking insights for private lenders in an industry that historically lacks meaningful loan-level data. By understanding these trends, lenders can optimize pricing strategies, identify emerging markets, and position themselves for continued success in 2025 and beyond.

NEMA DAGHBANDAN, ESQ.

Nema Daghbandan, Esq. is the founder and chief executive officer of Lightning Docs, a proprietary cloud-based software that produces attorney-grade business-purpose mortgage loan documents nationally for short-term bridge, construction, and other temporary financing, and term financing typically associated with DSCR rental loans.

Lightning Docs is the official loan documents of the American Association of Private Lenders, the oldest and largest national private lender association.

The documents are considered the gold standard for business-purpose loan documents.

SPRING 2025

33

Market

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Enroll online at aaplonline.com/courses for $349.

34

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SPRING 2025

35

Market

Brace for a CRE Market Remix Rising delinquencies, stricter lending conditions, and declining property valuations are reshaping the commercial real estate landscape.

SAM KADDAH, LIQUID LOGICS

T

he commercial real estate (CRE) lending market, including both traditional and private lending sectors, is facing significant challenges in 2025. Delinquency rates have surged, rising from 0.77% to 1.18% year over year, marking a 53% increase. This translates into an additional $12.3 billion in delinquent loans across 2024 and 2025, out of an estimated $3 trillion in outstanding CRE loan balances. A critical factor exacerbating this trend is that approximately onethird of these loans are set to mature between 2024 and 2025, contributing to heightened credit tightening by banks and institutional lenders.

36

PRIVATE LENDER BY AAPL

In the private lending sector, CRE lending remains broadly defined, encompassing various property types and loan purposes. Properties range from multifamily units (five or more units), small commercial assets, and mixed-use developments to specialty-use real estate.

Likewise, loan purposes vary, including ground-up construction, debt-service coverage ratio (DSCR) loans, and cashout refinancing for reinvestment into unrelated ventures. A survey of nonbank bridge lenders projects more than $250 billion in loan originations in 2025, reflecting a 22% year-over-year increase.

However, the reliability of this survey

NOTE The data cited in this article comes from the Liquid Logics platform and covers the period from January 1, 2023, to December 31, 2024. It includes all CRE loan purposes for multifamily, mixed-use, and commercial properties, with a total loan volume of $2.15 billion.

is uncertain due to the potential for double counting, as many borrowers shop multiple lenders for financing.

Adding to market strain, recent wildfire losses in the Greater Los Angeles area have impacted an estimated 430 commercial and multifamily properties, totaling $1.8 billion in damages. This has further stressed an already volatile lending environment.

including family office capital and hybrid debt-equity arrangements, particularly for larger projects. These alternative solutions, while effective for some, introduce additional complexities in structuring deals and assessing long-term viability.

CREATIVE FINANCING STRATEGIES

RISK AND FRAUD IN CRE LENDING

With credit markets tightening, borrowers in 2025 are encountering greater difficulty securing capital at competitive rates.

Traditional financing sources, with limited exceptions, demand higher yields, while banks remain cautious in extending CRE loans. Consequently, private lenders have stepped in to fill the financing gap, albeit with stricter lending requirements. Borrowers must now demonstrate increased liquidity and provide additional collateral, often in the form of cross-collateralized properties.

As project timelines extend beyond initial expectations and the number of delinquent loans rises, a new trend has emerged: Borrowers struggling to refinance are resorting to restructuring transactions through newly created entities and non-arm’s-length sales to secure fresh financing. In some instances, private lenders knowingly engage in these practices to mask potential balance sheet delinquencies.

The underwriting process has become increasingly rigorous, requiring in-depth feasibility studies and extended due diligence periods. Some borrowers have turned to alternative financing structures,

The proliferation of fraudulent schemes— including the creation of “straw man” LLCs—has made it increasingly difficult for institutional capital to trust private lenders. This lack of transparency is causing major institutions to divest from the sector. In fourth quarter 2024 alone, financial institutions off-loaded

approximately $500 million in CRE loan portfolios, highlighting their retreat from an increasingly opaque lending environment.

PROPERTY TYPES AT RISK The commercial real estate landscape is experiencing notable shifts in demand, requiring private lenders to exercise heightened scrutiny. Previously highgrowth sectors, such as warehouse and distribution center conversions (which surged from 2020 to 2023 due to e-commerce expansion), are now in decline.

A significant indicator of this trend is Amazon’s decision to cancel plans for 42 warehouse facilities totaling 25 million square feet and to delay the opening of 21 additional locations. Furthermore, the company has subleased at least 10 million square feet of existing warehouse space to manage operational costs.

Given these developments, private lenders must reassess the long-term viability of loans tied to warehouse and distribution properties, ensuring SPRING 2025

37

Market

borrowers maintain sufficient cash flow to service their debt obligations.

Shifts in consumer behavior, supply chain disruptions, and evolving market conditions have led to decreased demand for warehouse space. The overbuilding of logistics centers during the e-commerce boom of 2020-2023 has now resulted in an oversupply, forcing landlords to offer aggressive lease incentives to attract tenants.

DECLINING OFFICE SPACE VALUATIONS By early 2024, the U.S. office market reached an all-time high of one billion square feet of vacant space. Vacancy rates surpassed 15% in several major metropolitan areas, with Class B and C office buildings facing the most significant downturn. In contrast, Class A office spaces continued to attract relatively stronger demand. The sustained oversupply led to downward pressure on rental prices and resulted in financial distress for both landlords and lenders. Consequently, office property valuations are projected to decline by at least 25% in 2025, directly linked to occupancy rates and DSCR ratios.

The rise of hybrid work models has further diminished demand for office spaces, particularly in central business districts.

Many companies are opting for flexible lease agreements or downsizing their footprints, exacerbating the financial strain on landlords. Additionally, efforts to convert vacant office buildings into residential or mixed-use developments are facing regulatory and zoning challenges, slowing the pace of adaptation in major cities.

EVOLVING FRAUD TACTICS IN CRE LENDING Advancements in artificial intelligence (AI) have facilitated increasingly sophisticated fraudulent practices in CRE lending. AI-generated documentation, including falsified bank statements, lease 38

PRIVATE LENDER BY AAPL

agreements, and purchase records, is being leveraged to fabricate a convincing paper trail for distressed loans. This has led to a rise in multilayered fraudulent transactions, wherein borrowers inflate occupancy rates and property values to secure refinancing. Straw man leases and artificially inflated rental agreements have become more prevalent, further complicating risk assessment for lenders.

Moreover, fraudulent actors utilize shell companies and layered entities to disguise true ownership and financial conditions.

This practice makes it difficult for lenders to accurately assess risk and has led to increased scrutiny from regulatory bodies.

In response, some financial institutions are implementing advanced AI-driven fraud detection tools to analyze transaction patterns and detect inconsistencies.

REGULATORY AND MARKET RESPONSES Regulators are increasingly focusing on transparency in commercial real estate transactions. Financial institutions are being urged to adopt stricter due diligence measures, and some lenders are enhancing their fraud detection frameworks to mitigate risks. The Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN) are both ramping up oversight, requiring greater disclosure of ownership structures and funding sources.

Meanwhile, the Federal Reserve’s monetary policy decisions continue to influence lending conditions. Interest rates remain a key factor in CRE financing, with higher rates limiting refinancing options and exacerbating financial strain on borrowers with maturing loans. Given the likelihood of continued economic volatility, lenders must remain adaptable and proactive in their risk management strategies.

THE ROAD AHEAD The commercial real estate lending market faces a confluence of challenges, including rising delinquencies, stricter lending conditions, and declining property valuations. Traditional lenders continue to retreat, allowing private lenders to bridge financing gaps, albeit with increased exposure. Borrowers are employing creative financing solutions, but fraudulent activities and opaque transactions are eroding transparency.

Moving forward, lenders must enhance due diligence efforts, strengthen risk assessment protocols, and adopt technological solutions to detect fraudulent documentation. The evolving landscape necessitates a cautious and strategic approach to mitigate potential losses. Additionally, regulatory oversight and market adaptability will play crucial roles in shaping the future of commercial real estate financing, ensuring a more stable and transparent lending environment.

SAM KADDAH

Sam Kaddah is the president and CEO of Liquid Logics. With his broad background in complex environments, he is skilled in building consensus, producing results, and streamlining operations. His career is characterized by leadership that meets objectives, efficiencies, and revenue while maintaining quality. Liquid Logics provides fintech and NextGen SaaS for the private equity lending space.

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Market

METHODOLOGY Forecasa collects, cleans, and analyzes residential real estate data from county land records, standardizing party names and terminology for an accu-

YOY Data Points to Industry’s ‘Shrinking Pie’

rate view of market activity.

The nation’s top ten private lenders originated nearly a quarter of all

Forecasa defines a “private lender”

residential volume, even as the number of lenders grew 15 percent.

as a mortgage originator that provides specific types of loans to

MICHAEL FOGLIANO AND SEAN MORGAN, FORECASA

residential investors. These include short-term fix-and-flip or bridge loans, 30-year rental loans/DSCR, ground-up construction loans, and multifamily loans. The company reviews the transactions to verify the lenders classified as ”private lenders” are truly private lenders.

Although other lenders may offer these products, Forecasa categorizes them separately (e.g., conventional, non-QM, etc.) to maintain clarity.

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PRIVATE LENDER BY AAPL

S

everal key trends shaped the 2024 private lending market. Among these were shifts in origination volume, loan sizes, geographic distribution, lender competition, and product mix.

This article addresses each of these trends. Private lenders can use Forecasa’s data-driven insights to navigate a rapidly evolving market and make informed strategic decisions.

CUMULATIVE ORIGINATION VOLUME Mortgage origination volume peaked in 2022. However, rising interest rates and inflation in 2023 led to a sharp decline in borrower demand, bringing origination volume to its lowest level in four years (see Fig. 1).

Lenders too were more cautious given the economic uncertainty. Although loan

FIGURE 1. LOAN ORIGINATION VOLUME (BILLIONS)

FIGURE 2. AVERAGE LOAN SIZE originations still have not returned to 2022 levels, there has been a recovery in demand compared to 2023. Throughout the four-year period, loan sizes have remained relatively stable (see Fig. 2).

GEOGRAPHIC TRENDS In 2024, Alabama saw the largest growth in market share (33%) relative to all other states. Across the U.S., 90 MSAs had at least 500 private lending mortgage originations. When measuring market share of the Top 200 MSAs, most don’t see a change in market share by +/-15%, but two of the top five largest growing MSAs were in Alabama.

The five MSAs with the largest growth in market share in 2024 compared to 2023 were: 1

BIRMINGHAM, ALABAMA METRO AREA (68%)

2 WICHITA, KANSAS METRO AREA (51%)

3 MACON-BIBB COUNTY, GEORGIA METRO AREA (37%)

4 MONTGOMERY, ALABAMA METRO AREA (35%)

5 WINSTON-SALEM, NORTH CAROLINA METRO AREA (30%)

The five MSAs that saw the largest decrease in market share in 2024 compared to 2023 were: 1

SACRAMENTO-ROSEVILLE-FOLSOM, CALIFORNIA METRO AREA (-21%)

SPRING 2025

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Market

2 SANTA ROSA-PETALUMA, CALIFORNIA METRO AREA (-21%)

FIGURE 3. PRIVATE LENDING ORIGINATIONS: TOP 10 VS. REST OF MARKET

3 KILLEEN-TEMPLE, TEXAS METRO AREA (-21%)

4 SAN FRANCISCO-OAKLAND-FREMONT, CALIFORNIA METRO AREA (-16%)

5 FAYETTEVILLE, NORTH CAROLINA EMTRO AREA (-15%)

Although not represented at the MSA level, Oregon saw the largest decline in market share among states (-13%).

PRIVATE LENDER CONCENTRATION Kiavi has maintained its lead in private lending mortgage originations, originating 7.9% of all private lending mortgages.

Of the top 200 MSAs, Kiavi was a topfive lender in 144 of them. The next closest private lender was RCN Capital (top five in 54 of the top 200 MSAs).

The concentration of top players has remained consistent over the last four years, with the top 10 private lenders making up anywhere from 22-24% of all originations (see Fig. 3).

ENTRANTS/EXITS Although the biggest lenders continued to have a strong presence in the market, many new and local lenders entered the market and established themselves. In 2024, 10,136 unique private lenders originated a mortgage. This is an increase from 2023, when we saw 8,709 private lenders, but the net gain came with a large mix of entrants and exits. Compared to 2023, there were 3,347 “new entrants”— lenders that did not originate in 2023 but did in 2024; and there were 1,920 “exits”—lenders that originated in 2023 but did not in 2024.

Figure 4 illustrates the origination volume in 2024 of those 10,034 lenders (volume data not available for 102 lenders).

42

PRIVATE LENDER BY AAPL

FIGURE 4. 2024 UNIQUE PRIVATE LENDER ORIGINATION VOLUME ORIGINATION VOLUME

NUMBER OF LENDERS

Greater Than $100M

261

$50M – $100M

201

Less Than $50M

9,572

FIGURE 5. ACTIVE BORROWERS AND LENDER LOYALTY

The concentration of top players has remained consistent over the last four years, with the top 10 private lenders making up anywhere from 22-24% of all originations.”

RTL VS. DSCR With the rise in interest rates over the last few years, RTL loans have become much more common among private lenders. In 2024, there was a 65% increase in RTL loans from 2021, the year before interest rates began to rise. Additionally, the average loan size increased 14%, from $451,000 to $512,000. The increase in DSCR originations has not been as large (9%), with the average loan size decreasing 12%, from $407,000 to $357,000.

LENDER LOYALTY Forecasa looked at every borrower with at least five private lending loans within a year. In 2024, of the borrowers that had at least five loans, nearly two-thirds (63%) used more than one lender and 37% used the same lender for all their loans. Since 2021, this loyalty has decreased year over year. Active borrowers are increasingly using more than one lender (see Fig. 5).

This data shows that borrowers are increasingly willing to shop around for the best deal. With the rise in interest rates, borrowers are more price-focused and motivated to seek out new lenders.

As a result, lenders may offer incentives for borrowers to switch or lower fees to acquire a new customer. Ultimately, this leads to a more competitive market with more options for borrowers.

CAPITAL MARKET ANALYSIS Many private lenders originate loans and then immediately assign/sell the loan to a note buyer (i.e., aggregators, institutional buyers, insurance companies, regional banks). Figure 6 shows the ratio of private lending loans originated to

FIGURE 6. PRIVATE LOAN ORIGINATIONS TO PRIVATE LOANS ASSIGNED YEAR

ORIGINATIONS ASSIGNED

2021

18%

2022

25%

2023

34%

2024

37%

Forecasa is aware that some note buyers do not record their purchases. Metric is based off all reported transactions. Private loans are being sold to institutional aggregators, individuals, banks, and insurance companies (money managers).

FIGURE 7. PRIVATE LOAN BUYERS TO PRIVATE LENDERS SELLING LOANS YEAR

LOAN BUYERS

LENDERS SELLING LOANS

2021

1,839

1,552

2022

2,274

1,757

2023

2,219

1,983

2024

2,110

1,956

private lending loans bought has increased

More private lenders were selling their

for the last three years. This percentage

loans. Although some lenders choose

has increased each year since 2021.

to balance sheet their loans, more

The increase in private loan origination to private loans assigned percentage took place despite a consistent number of private loan buyers during that time.

are choosing to originate to sell.

Although the number of buyers has remained steady, the demand for buying private loans has increased (see Fig. 7).

SPRING 2025

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Market

NON-QM DSCR ACTIVITY A significant increase in volume from 2023 to 2024 was driven by more lenders participating in the space, prompted by a lack of conventional refinancing options and new investors purchasing DSCR loans (see Fig. 8).

There has also been an increase in overlap between non-QM and private lending DSCR origination volumes. In some cases, the non-QM lenders are buying DSCR loans originated by the private lenders. United Wholesale, one of the biggest conventional

residential lenders, increased their presence in the DSCR market (see Fig. 9).

INDIVIDUAL LENDER/FAMILY TRUST ANALYSIS Figure 10 shows the total origination volume of individual lenders and family trusts. The total origination volume has increased every year since 2021.

lenders overall, borrowers are motivated to seek out new lenders, other types of lenders (non-QM, individuals, family trusts) are offering competing products, and loan buyers are showing more demand to buy private loans.

MICHAEL FOGLIANO

SUMMARY Overall the market became more competitive in 2024. There are more private

FIGURE 8. NON-QM DSCR MORTGAGES YEAR

UNITS

VOLUME

2023

59,365

$26,467,027,623

2024

80,461

$37,071,133,979

This figure only displays originations of non-QM lenders such as Deephaven Mortgage, Acra

Michael Fogliano is a product manager at Forecasa, responsible for product development and data analysis. After studying mathematics, Fogliano gained experience in several industries, always working with complex data.

Lending, Logan Finance, etc. It does not include non-QM loans originated by conventional lenders (e.g., banks and credit unions).

SEAN MORGAN

FIGURE 9. UNITED WHOLESALE MORTGAGE DSCR ORIGINATIONS YEAR

UNITS

VOLUME

2023

201,453

$74,808,105,016

2024

221,858

$84,838,620,149 Sean Morgan is the founder and CEO of Forecasa, where his primary focus is product and business development.

FIGURE 10. INDIVIDUAL LENDER AND FAMILY TRUST ORIGINATIONS

44

With a background in oil and gas intelligence, Morgan and his team

YEAR

MORTGAGES

2021

$766,075,329

2022

$1,647,322,632

the energy sector, Morgan began his

2023

$1,893,345,152

career as a CPA for PwC, cultivating

2024

$2,495,125,303

PRIVATE LENDER BY AAPL

achieved a successful exit several years ago, before entering the lending analytics space. Before his tenure in

a strong foundation in data interpretation and strategic insights.

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Strategy

Rate Model Strategy: Mind Your P’s Return to the basics of price, product, place, and promotion to set rates that balance your operations against a competitive market.

JOHN V. SANTILLI, REHAB FINANCIAL GROUP

F

or more than three years, mortgage rates have remained above 6.5%, inverted yield curves threaten the economy, and a lack of housing availability challenge real estate investors and lenders in ways the private lending space has never experienced. You may have watched some of your peers change their business strategies—or exit the business altogether. To survive, you need a plan, solid discipline, and a bit of luck.

Warren Buffet’s No. 1 rule is “never lose money.” Rule No. 2 is “never forget rule No. 1.” Certainly, Buffet has made his share of mistakes, and so will you. But with discipline and at least a strategy, you may be able to build something sustainable that has the potential for significant growth.

As you develop your strategy, you must consider the 4 Ps of business marketing: price, product, place, and promotion.

These four principles are interconnected and relevant, no matter a company’s size.

PRICING Begin by analyzing and forecasting key financial elements such as the cost of your capital, operational costs, loan losses, 46

PRIVATE LENDER BY AAPL

desired profit margins, and the maximum price customers are willing to pay.

Regardless of your role—whether it involves capital markets, raising capital, selling loans, managing rate swings, or a combination of these tasks—the function is essential. Options such as securitizations, gains on sale, and fragmented loan investments may vary, but there is one commonality: managing the spread between customer pricing, payments to investors, and your bottom line (net profit).

A real estate investor’s willingness to meet your asking price suggests they recognize the value of your company, account executives, and products equivalent to the financial outlay you are asking them to make. If they do not see this value, you will be forced to compete solely on price, a practice that is typically not sustainable for long-term business success.

Larger private lending companies have already done the work. Ultimately, you are pricing for risk. The big-time analysts, rating agencies, and your peers in larger companies continually help investors in real estate securities make better decisions faster. Those with more than three years

of real estate investment experience, a FICO score credit above 700, properties in the most desirable geography, and low lowest leverage are your best customers.

Roll out the red carpet for these prospects. Everyone behind them is a notch higher in the risk category and should be priced accordingly.

For example, you will often see bumps in pricing for those requesting new construction loans versus fix-and-flip/ hold types of loans. Why? Because the cleanest and easiest loans to process, originate, and get paid off in the shortest amount of time are the best customers.

An important aspect of pricing strategy is knowing the strengths and limitations of your competitors. Armed with this knowledge, you can effectively showcase your team’s value while setting prices that meet both your financial requirements and your customers’ desires.

Ask yourself: “What is your USP (Unique Selling Proposition)?” Many of your responses will be along the lines of “I am a direct lender” or “We have tons of capital to deploy.”

Although those features are advantageous and can help you carve out a niche, it’s important to consider how they compare to your competitors’ offerings or the actual benefits they provide to customers.

Simply having abundant capital or being a direct lender doesn’t translate to a true benefit for your customer if it’s just a “me too” feature among peers.

Where do you outshine your peers?

Consider some of the following as you determine your USP:

» SPEED TO CLOSE » FICO BANDS SPRING 2025

47

Strategy

» CUSTOMER SERVICE (FRONT

PRODUCTS

» PRODUCT TYPES » DISTRIBUTION CHANNELS (E.G.,

What product(s) do you offer?

Are you knowledgeable about them, and can you sell them?

FACING & BACKEND)

RETAIL, BROKER, CORRESPONDENT)

» PRICING: RATE, POINTS, OTHER MONETARY ASPECTS

» TECHNOLOGY » LOAN AMOUNTS » TERMS » DUTCH VS. NON-DUTCH INTEREST ACCRUAL » LEVERAGE/LTC/LTV » DOCUMENTATION REQUIREMENTS » PROPERTY TYPES » DRAW PROCESS » VALUATION & INSPECTION PROCESS … the list can go on and on!

48

PRIVATE LENDER BY AAPL

It sounds basic, but with private lending becoming a larger part of real estate capital, it is easy to fall into the trap of trying to be everything to everyone—but being good at nothing. Private lending has historically been the Wild West when it comes to the creative ways loans can be structured.

The securitization market is forcing many lenders to at least consider offering products that conform to the defined credit boxes rating agencies are comfortable with taking to market. Still, the products you

offer must reflect the resources you have and what you are good at providing.

How has your product offering changed during the past three years? Many lenders have shifted toward stabilized bridge loans because “there’s no way rates will stay this high, this long.” Or was it DSCR loans? Or was it ground up? Did you run away from Airbnb? Or was it mixed use? Or multifamily?

Being nimble and meeting market demands is prudent, but never forget your niche and which products you are best at originating. Sticking with the products you excel at can become part of your company’s brand. Developing a great product brand offers customers value beyond just the monetary price alone.

PLACE

INTERCONNECTEDNESS

Place is where and how your customers can obtain financing from you. Will you offer a more personal approach with a boots-on-theground sales force? Maintain a call center?

Or will you offer a hybrid? Will you use brokers or operate directly with investors?

Developing the right pricing model involves more than just the economics.

Sure, the financial aspects are important, but everything starts with having enough sales to sustain an ongoing lending business—no matter your company’s size.

Your decisions about distribution channels and your marketing strategies for reaching borrowers help you determine how and where to prioritize offering your product. Smaller private lenders lend within their local areas and then expand their footprint once they’ve seen predictable results. Larger lenders leverage internal and external business analysts to identify the loans performing the best geographically, making the most revenue, and offering the widest pricing spread.

The source and cost of your capital can significantly influence both opportunities and constraints. Your choice of product, along with its features and benefits, help determine your company’s scalability.

Your growth potential or limitations will depend on the channels and locations where you choose to market and distribute your product. Selecting the right promotional strategies and distribution channels can increase your chances of winning more “yeses” from customers.

MARKETING & SALES

For all private lenders, maintaining discipline and taking time to develop and monitor a pricing strategy is considered best practice.

You must align marketing and sales for better closing results. Promotional efforts assist with building recognition, action, and acceptance of your product. When you promote your product well, you build loyalty, a competitive edge, and value—all of which make your pricing more acceptable.

Sometimes, for example, you may use promotional pricing discounts to enter a market, gain market share, and obtain customer satisfaction to scale the company.

Your decisions about where and how to sell your products—and at what price— depend heavily on the consumer’s behavior, thinking, and decision-making process.

Every customer typically evaluates the quality of the product and justifies the cost.

They need evidence your company and account executive are trustworthy before agreeing to a purchase. Leveraging the right promotional strategies and establishing a USP that highlights your competitive advantages helps support the buying process.

JOHN V. SANTILLI

John V. Santilli is the chief revenue officer at Rehab Financial Group.

He covers new business sales, client retention, operations, and marketing. In addition, Santilli works to expand sales channels and maximize opportunities that drive growth. Before joining RFG, Santilli acquired 25 years of lending and marketing executive leadership experience across multiple private and public marketing-dependent companies.

SPRING 2025

49

Committee Appointments

AAPL Launches ‘25-‘26 Committees Every two years, the we appoint members to seats on the Education, Ethics, Government Relations, and newlyestablished Fraud Steering Committees.

COMMITTEE Q/A WHAT IS ONE ACTION ITEM YOU WOULD LIKE TO HAVE AN IMPACT ON?

Together these committees provide direction for initiatives that shape the private lending industry, its best practices, and future growth.

WHAT IS THE BIGGEST HURDLE OUR INDUSTRY FACES?

EDUCATION COMMITTEE These members keep us up to date on the guidance our constituents need to navigate current market conditions..

ARTHUR BUDIMIR Constructive Capital

Biggest Challenge: There is no standardization in our industry; there is no textbook way to do it right and succeed. Everyone has a different technique or approach to obstacles, so there is a lot of nuance when it comes to this type of education. And since this is a very competitive industry, not everyone wants to share their best tips for maintaining competitive advantage, which stunts educational growth.

MATT BURK Verivest

New Initiative: I would like to provide more education on the importance of accurate and quality accounting and administration of pooled investment funds. I see widespread misunderstanding from both private lending pooled fund managers and LPs about how their funds and investments 50

PRIVATE LENDER BY AAPL

are structured and treated. Clearer definitions and meaning of terms and more accurate applications of them will help managers and investors have better communication and mutual expectations with fewer downstream challenges.

SARAH DOWNEY Loanbidz.com

New Initiative: I would love to explore expanding lenders’ ability to offer online notary services to borrowers. Having recently experienced a seamless remote closing, I saw firsthand how convenient and efficient this process can be. For real estate investors working across different markets or with partners in various locations, this could be a gamechanger. By researching legal requirements and partnering with industry experts, we can assess how conventional lenders have navigated this space. Implementing online notarization would enhance accessibility, streamline transactions, and ultimately improve the borrower experience.

JESSE GOLDBERG CV3 Financial Services

New Initiative: I’d like to address the impacts of utilizing AI in the private money space.

As the finance industry and the wider corporate world continue to adopt emerging technologies and develop their own automation processes, it’s essential to recognize both the potential benefits and the risks. To navigate this shift effectively, we must prioritize educating on how to responsibly implement these tools. Together we can mitigate risks, enhance security, and ensure a more stable, ethical approach.

RACHAEL HOLLADAY Hornet Capital

New Initiative: The need for better education around risk mitigation has become increasingly critical. One effective solution could be the creation of platforms dedicated to sharing real-time examples of fraud and

other risks. By fostering a communitydriven space for education, we equip professionals with valuable insights, best practices, and real-world case studies to stay ahead of emerging threats.

JONATHAN JANIKIES Spindrift Investments

New Initiative: I would like to see a broader understanding of the “do’s and don’ts” of private lending. I started my business in 2008 with a single loan. It was difficult to make sure I was abiding by every law in every state.

EJ PAUL

SHAYE WALI

Eagle Commercial

Baseline

Funding Capital Corporation

New Initiative: Mastering due diligence—every lending decision hinges on accurately assessing risk, verifying asset value, and ensuring borrower credibility. Without rigorous due diligence, lenders expose themselves to defaults, legal issues, and financial losses. No other skill is as essential to protecting investments and maintaining a sustainable lending business.

1912 Capital

New Initiative: The key to education is having a reliable and reputable source, so the most important initiative is the creation of a core curriculum and certification that AAPL develops as the goal for all private lenders to attain.

JOHN V. SANTILLI New Initiative: Regular state of the union updates from our peer group—working in a vacuum stinks. We are better with high-level overviews without giving away anyone’s special sauce. I really believe we should strive to have a brief quarterly update as a team.

GREG STANLEY NICHOLE MOORE, ESQ. Geraci LLP

Biggest Challenge: One of the biggest challenges is ensuring all stakeholders have a clear understanding of financial products, risk management, and regulatory considerations. Private lending involves complex strategies where theory and practice don’t always align. Navigating topics like lending structures or compliance requires thoughtful education tailored to real-world applications.

SCOTT WARD Pacific Private Money

Rehab Financial Group

COURT KOSHAR, MD

Biggest Challenge: The so-called experts who have never made a loan yet push bad advice.

It creates noise and misinformation, often misleading and discouraging new lenders. Quality education should come from people with actual experience.

Simple Funding

Biggest Challenge: People in our industry can’t come together frequently for classes—education and training is mostly online, which is more difficult than face-to-face learning. Adult learning works best when the information is practical, the learner chooses the subject matter and, most importantly, the learning is experiential. These elements require special efforts in designing the curriculum.

The highest satisfaction for online learners is instruction that blends the virtual environment with live interaction.

New Initiative: One initiative that must be addressed is solid and legitimate mentorship. AAPL leads the way with the Private Lender Associate Certification and its groundbreaking Fund Manager Certification. That said, other areas must be covered. Honest and productive mentorship needs to be fostered and grown to ensure not only the highest level of professionalism but also that the next generation can provide best practices and ethics for the industry’s future. Old school mentorship is a lost art that needs to reignited.

RUDY ZABRAN Consolidated Analytics

Biggest Challenge: Technology adoption and slow adoption of automation and AI-driven underwriting compared to traditional lenders is an issue.

SPRING 2025

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Committee Appointments

ETHICS COMMITTEE These members review Code of Ethics complaints and advise on outcomes and consequences for members who break our standards.

JOHN BEACHAM

MARK FILLER

TONY PISTILLI

Toorak Capital Partners

Asset Based Lending

Restb

Biggest Challenge: Strengthening ethical standards amid the continuing institutionalization. Historically stigmatized as “hard money,” we continue to face scrutiny from legislators and regulators.

Ensuring fair lending practices, transparency in borrower communications, and responsible underwriting are critical to improving our reputation. As private lending expands, the risk of bad actors exploiting the market grows, threatening the industry’s credibility.

Biggest Challenge: Many lenders don’t follow all of the Code of Ethics and don’t belong to AAPL. So, it’s still too much the Wild West, giving the industry a less-than-ideal reputation that could increase the likelihood of additional regulation. Additional regulation increases lenders’ expenses, negatively impacting profit margins that are already lower than historical levels.

SAM KADDAH DAMON CUZICK 1912 Capital

Biggest Challenge: Lack of transparency.

Some lenders obscure key loan terms, bury hidden fees in fine print, or fail to disclose prepayment penalties and balloon payments. Often borrowers are moving quickly to get their deals done and may not fully understand the true cost of their loans until it’s too late. Without standardized regulations, unethical lenders can and sometimes do exploit these gaps.

STEVE ERNEST, ESQ. Geraci LLP

Biggest Challenge: Short-term players in the space and those who are willing to make inappropriate sacrifices to gain competitive (or pecuniary) advantages.

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PRIVATE LENDER BY AAPL

Liquid Logics

New Initiative: Issuing guidance on relevant topics.

A current hot topic is lender and broker fraud and vendor-lender collusion.

These insights tend to be lost or forgotten if there are no active reminders!

New Initiative: Being new to the committee, I am probably not fully aware of the opportunities. It appears a regular review of Code of Ethics is appropriate.

DAVID ROSENBERG Futures Financial

Biggest Challenge: Fraud. Every aspect of loan origination, closing, and servicing are opportunities for people to misrepresent or intentionally miscommunicate facts. There is a lack of accountability and responsibility being trumped by greed. A transactional mindset and borrower desperation sometimes take priority over what is ethical.

JACOB THERRIEN KEMRA NORSWORTHY Bull Funding

Biggest Challenge: I have been on this committee for a few years now and every year we make a bigger impact on the industry. We take concerns and complaints seriously, and listen, to then investigate and build trust. This results in fewer false lenders (bad apples) accepted as the “norm” for our profession.

Among our biggest challenges are charging high up-front points and lending to own.

BLN Software

Biggest Challenge: Fraud is the number one concern related to ethics. The bad actors, fraudsters, and criminals are always changing their tactics, so our industry must also continue to evolve our methods for combating such behavior. AAPL and its committee members work hard to self-govern and set standards to deter government regulation; therefore, it is important we continue to provide the industry with the knowledge and tools to combat all versions of fraud.

GOVERNMENT RELATIONS COMMITTEE These members guide advocacy efforts by providing feedback for legistlative responses, driving grassroots campaigns, and coordinating with allied groups.

GENE BUCCOLA

BILL FAIRMAN

MATTHEW GUNTER, ESQ.

High Plateau LLC

Carolina Capital

Lightning Docs

Biggest Challenge: There are several challenges real estate investors should be addressing with our legislators. In nearly every community, providing affordable housing is a prime concern. Zoning, rent control, and investor returns always seem to be at odds. Striking a balance is foremost.

Environmental sustainability programs that governments add to building codes with no uniform application contribute to added costs that affect returns.

Consumer protection laws make it more difficult for owners to evict non-paying tenants, placing restrictions on the amount and use of security deposits.

Management

Biggest Challenge: The biggest challenge we face as it pertains to legislative advocacy is scale. As a small, fragmented industry, federal and state governments don’t take us as seriously as we would like because we don’t speak for a large industry. We can overcome that by making sure we provide consequences for the overall market if legislators take adverse actions through their bills. It helps that Wall Street, with its larger voice, is finding our industry more attractive.

Caballero Lender Services

Biggest Challenge: The threat of regulating business-purpose lenders as if they are consumer lenders. Many legislatures (and judges in foreclosure actions) do not understand the difference between a business-purpose loan to a corporate borrower and a consumer loan to a person. As a result, they try to restrict lenders as if the borrower is unsophisticated and needs business protection. Since most laws regulating the industry are individual state laws, the upheaval at the CFPB will not stop legislatures from being confused.

BEETA LECHA REIL Fund Services

MIKE FALLOT MM Lending

GEORGE CABALLERO

New Initiative: Preservation of the rule of law. All matters of real estate depend on a stable and predictable legal system for lenders and borrowers as well as brokers and agents.

We should encourage state legislatures and even Congress to not rock the boat. Policy decisions should be carefully considered and made in moderation. Having a voice at the table will be trickier than ever, but we must push to make it heard.

Biggest Challenge: The private lending industry’s leading issue regarding legislative advocacy is educating legislators about the critical role private lenders play in providing capital to the housing market.

New Initiative: We should prioritize advancing uniform, clear regulations for private lending at both state and federal levels. Establishing consistent regulatory frameworks will foster industry growth while safeguarding the interests of both borrowers and investors.

JEFF LEVIN LARRY GILMORE ClearBlu Capital Group Inc

New Initiative: We’re moving to a general environment that will support selfregulation, providing an opportunity for our group to lead in establishing more “best practices,” seals of approval, education/ awareness, disclosure standards, etc.

Pinewood Financial

New Initiative: I live on Capitol Hill in Washington, DC, and see every day how proximity and presence matter in advocacy. The GRC should focus more on in-person engagement, meetings, roundtables, and regular face time with lawmakers. When we show up with a clear, unified message, we have a better shot at shaping the conversation.

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Committee Appointments

JOHN LITTON JGL Capital LLC

Biggest Challenge: Our industry often reacts rather than proactively shapes policy. With so many moving parts, it’s tough to stay ahead of regulations buried in broader financial bills. Meanwhile, larger banking lobbies have a stronger influence, which can lead to policies that unintentionally hurt brokers and lenders. We need a more structured approach to early detection

and a stronger, unified voice to ensure lawmakers understand our industry’s role.

JEFFREY SPIEGEL Cathedral CPAs & Advisors

ALEX OFFUTT Business Purpose Capital

Biggest Challenge: State-level restrictions on business-purpose lending that are inadvertently attached to legislation directed towards conventional or owner-occupied properties.

Biggest Challenge: A big challenge may result from the shuttering of the CFPB by the new presidential administration, resulting in less regulation of the industry. This could result in bad actors entering the industry as well as potential for abuse to consumers. Our challenge will be to work to maintain integrity for the private lending industry.

FRAUD STEERING COMMITTEE This subject-specific task force will help set priorities, guide education, and lead resource circulation among our constiuency.

MEGAN CASTLETON

JUSTIN HARRISON

KYLE SHEA

Constructive Capital

Futures Financial

Stormfield Capital

New Initiative: I would like to see the Fraud Steering Committee implement an advanced digital verification and monitoring system across all commercial real estate transactions. This proactive measure would enhance due diligence, detect anomalies early, and improve overall risk management, ultimately safeguarding investor confidence.

STEVE ERNEST, ESQ. Geraci LLP

Biggest Challenge: Identity fraud involving loan proceeds that are wired to phantoms who then disappear.

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PRIVATE LENDER BY AAPL

New Initiative: We should develop a standardized prevention framework, integrating best practices and incorporating AI-driven risk analysis. This enhances due diligence, strengthens transparency, and protects lenders and investors, fostering a more secure, credible, and sustainable industry.

New Initiative: With limited formal governmental oversight, fraud is widespread. Establishing a standardized guidebook for lenders would provide significant benefits. Our fiduciary responsibility is to protect our investors’ capital, and raising underwriting standards would help fulfill that commitment.

ALESONDRA MORA

TESS SIWA

FlipCo Financial

Constructive Capital

New Initiative: Direct borrowers are often the main focus of fraudulent fundings, but there are usually several bad actors involved. Our industry has more data now than it ever has, so how can we leverage it without hitting legal red tape of data sharing in a way that impacts credit decisions?

Biggest Challenge: There are so many tools available today to bad actors, which makes it easy for them to alter documents that are challenging to detect. Bad actors have also found many ways to circumvent the system because generally business-purpose loans are not reported and, therefore, not always visible. Fraud

in any form leads to significant financial loss that may potentially destabilize the industry if we do not get ahead of this risk.

JEFF SMALLOWITZ

replicate borrower communication, making social engineering scams—from simple interview scams to more complex schemes— even harder to detect. These advancements are resulting in financial losses and increased costs for both lenders and insurers.

Private Lending Direct

Biggest Challenge: AI has significantly heightened fraud.

Deepfake technology enables near-perfect duplication of voice, video, and documents, allowing fraudsters to impersonate borrowers, forge identity documents, fabricate credit reports, and even create nonexistent properties. Advanced chatbots can now

BROCK VANDENBERG TaliMar Financial

New Initiative: I would like to focus on how to spot mortgage fraud and mitigate associated risks.

A key initiative could be the development of an educational video that highlights

common types of fraud, such as straw buyers, fake owners, wire fraud, and falsified documentation. Providing clear examples and best practices for detecting these activities would help protect lenders.

DARREN WEAVER Renovo

New Initiative: Socializing a fraud standard and reporting framework that all member lenders and capital providers could have access to, which would help them know the accounts to stay away from.

AAPL membership is the standard of excellence among private lenders and the foundation supporting the industry’s viability and growth.

Join the oldest and largest association providing for private lender education, ethics, and advocacy at aaplonline.com/join.

SPRING 2025

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YOUR CommitteeAppointments

LENDER For aspirational leaders who want to scale their business,

like you!

(855) 459-3138 www.CV3financial.com/AAPL-Unconventional

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NMLS ID #2478266. For more licensing information visit https://nmlsconsumeraccess.org. Loans made or arranged pursuant to California Finance Lenders Law License 60DBO-183355. AZ Mortgage Banker License #1047792, FL Mortgage Banker License #MLD2457, Idaho MBL-2082478266, MN license #MN-MO-2478266, NV Mortgage Company License #5858, OR Mortgage License #2478266, UT Mortgage Entity License #13576219. This is not a commitment to lend. All offers of credit are subject to due diligence, underwriting and approval. Not all borrowers will qualify and not all borrowers that qualify will receive the lowest rate or best terms. Actual rates and terms depend on a variety of factors and restrictions may apply. CV3 Financial Services, LLC reserves the right to amend rates and guidelines without notice.

PRIVATE LENDER BY AAPL

CV3 Financial delivers financing beyond the conventional DSCR and fix-and-flip options.

We offer tailored real estate financing solutions designed to meet the real-world challenges of today’s market.

Partnering with CV3 gives you access to a wealth of resources and expertise that can transform your business. Let’s work together so you can offer the best possible solutions to your real estate investor clients: EQUITY Give your clients up to 80% cash out on the established equity of their investment properties.

CONSTRUCTION COMPLETION Enable your developers to access the funds they need to bring their projects across the finish line.

PORTFOLIO REFINANCE Help your clients refinance their portfolio under one loan to improve cash flow and free up capital for new investments.

FIX AND FLIP Leverage short-term financing to help your clients turn undervalued properties into profitable sales.

DSCR Choose short-term interest-only ARM or 30-year principal and interest rental property financing.

JUMBO LOANS With loan amounts up to $5,000,000 - give your clients access to more funds without conventional barriers.

SPRING 2025

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LENDER LIMELIGHT

WITH KEMRA NORSWORTHY

ONE FINAL DETOUR

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PRIVATE LENDER BY AAPL

K

emra Norsworthy isn’t supposed

I’m going to make money. Being the

to be here. Not in the male-

bill collector with my own company?

dominated private lending

I’m going to make more money.”

industry. Not in business ownership, given a childhood that began in poverty and could have defined her future. And not in this life, where a brutal diagnosis should have ended everything.

BUMP Her path roughened when her third pregnancy put her on bedrest. Unable to directly manage her employees—

No, Norsworthy’s path has never been

essential in collections—she sold the

smooth. But that’s never stopped her.

company in 2000 but found herself at loose ends following the birth of her son.

CLEAR ROADS AHEAD

“It’s hard for me to not work. I wasn’t

A fearless approach coupled with resiliency

providing for myself … So I got into

has been the foundation for Norsworthy’s

selling cars,” Norsworthy said.

success, from her early days in collections

While it’s yet another traditionally

to more than a decade in private lending.

male-dominated field (especially in

After graduating from college (the first in her family), her work in the finance industry began with a job at a Washingtonbased collection agency. Learning firsthand the art of negotiation, the subtleties of risk—and the realities of human nature— she found herself dissatisfied with the process. “It’s not that the people don’t owe the money … I wanted to get the money [the right way],” she said. “You get more bees with honey than you do vinegar.”

Arlington, Washington, which leans heavily toward dually trucks), Norsworthy found immediate success selling Dodge/ Chrysler/Jeep by leaning into perceptions.

She credits her number one standing at the dealership to both her associates and clients overlooking her skill as a negotiator.

She earned top billing at the dealership for three years before life again derailed her plans, stepping away to care for the grandfather who raised her until he passed a few months later. When

In 1995, she decided to buy a collection

the dealership tried to bring her back,

agency so she could do things her way,

she refused, saying simply, “They

saying, “Working for a collection agency,

wouldn’t give me family leave.”

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From there, she landed in the mortgage industry, first working at a net branch for Select Mortgage and later Bank of America—and then as an underwriter for Bank of America. Then in 2014 she moved to originating commercial loans for Bank of America and Wells Fargo.

“I used to ask my underwriter at one of those banks, ‘Do you get paid on no’s?’” she recalls, referring to her deals being turned down. “He was taken aback, but I explained that I was just curious because he was saying ‘no’ to my deals.”

Her next not-question to the underwriter: “I want you to tell me how to get the ‘yes’ so it’s not your decision or my decision to say ‘no.’ It’s up to the borrower.”

His return: The bank was simply not going to approve the fix-and-flip loans coming across her desk. But she still wanted that “yes,” and found a way to get it.

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PRIVATE LENDER BY AAPL

LENDER LIMELIGHT

WITH KEMRA NORSWORTHY

DO YOU GET PAID ON ‘NO’S?’ “The deals weren’t bad—they ended up being done by someone else who was willing to restructure them,” she recalled. “So long as [the bank] denied them, I could then do a private loan … I’d do the takeout with that loan through the big bank, so then I wasn’t in direct competition.”

However, when she became the banks’ number one originator for her region, they changed the terms: She now had to be in the office five days a week. Norsworthy, a wanderer who loved to travel with her kids and who still managed that top originator rank despite frequent excursions, had other life priorities. She left her national bank relationships for a familiar outfit: Our industry’s Builders Capital.

Her start date as their newest sales executive? February 2020.

CURFEW (TEMPORARILY) IN EFFECT While on pandemic unemployment and never a stranger to starting from scratch, she resolved to turn her old private lending side gig into a real business.

“I went with the name Bull Funding because you have bull and bear markets, and bull is always what an investor wants,” she explained.

At Bull Funding, Norsworthy and her team provide real estate investors with financing for fix-and-flip loans, ground-up construction, commercial property financing, and more.

(As you may guess, her “yes” mantra means she also dabbles in everything from SBA loans to HUD ground-up construction.)

The Seattle-based business grew quickly, funding deals across the country and standing out for its directness in a field that often moves too opaquely for investors’ needs.

FAVORITES COLOR? Burnt orange

MUSICAL GENRE? Smooth jazz

FAVORITE PLACE FOR A VACATION GETAWAY? The ocean

SEASON OF THE YEAR? Fall

FAVORITE BOOK? Not How But Who

RELAXING WEEKEND ACTIVITY? Long drive to hike

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LENDER LIMELIGHT

WITH KEMRA NORSWORTHY

NO OUTLET In 2023 and after weeks of severe pain, Norsworthy was diagnosed with uterine cancer. Post-hysterectomy, doctors found it was instead advanced ovarian cancer.

Then, another hit—a tumor the size of a

… go take my last vacation. I refused

she said. “You can’t. Psychologically,

chemo because the prognosis was

you begin the process of dying.”

three months. Three months of being sick from chemo just to live for three months more? No, I wanted to live and do whatever I possibly could … I had

So with her trademark drive—dare we say, bullheadedness—Norsworthy prepared for the end. She made sure nothing was left unsaid with family

grapefruit in her liver, metastasized from

my kids here, and friends and family.

a rare kidney tumor the Mayo Clinic

“But when a doctor tells you that

structured her company for transition,

noted was only the 21st case in 60 years.

you’re going to die, it is nearly

took care of all the things she said

“They told me I was going to die,” she

impossible to live your life to the

should have done before—and faced

said bluntly. “And to get my stuff in order

fullest like people say that you can,”

the reality that her time was up: “I was

and friends, got her finances in order,

I WAS PREPARED TO DIE. I WAS READY TO DIE. I HAD ACCEPTED IT. AND THEN … I DIDN’T. I LIVED. 62

PRIVATE LENDER BY AAPL

prepared to die. I was ready to die. I had accepted it. And then … I didn’t. I lived.”

ONE FINAL DETOUR Between one screening and the next, Norsworthy received staggering news the cancer had disappeared. Every subsequent scan has received the all-clear, and she’s currently just over a year in remission.

Which begs the question: When you, your family, your friends, and your employees have truly accepted the end of something, planned for it, said your goodbyes, and quite literally wrapped up all the loose ends—then it doesn’t happen—then what?

“I had comes to terms with it. I had cleared everything,” she said. “You know, when you tell everyone you’re going to die, and you live like you’re going to die, and then you just live. That is the worst humility I think I could have ever gone through my whole life.

“And then there’s … my friends, my family; there’s a process as they’re already grieving this death, and then you don’t die. We’re not as close as we used to be, because I think there’s a part of them that had let go.”

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LENDER LIMELIGHT

WITH KEMRA NORSWORTHY

THIS OR THAT

INTERSECTION AHEAD The experience fundamentally changed her, not just physically but, she feels,

CITY OR COUNTRYSIDE?

the core of who she is as a person.

“I have more humility now—in every

PEN OR PENCIL?

part of my life,” she admits. “Before, I had an ego. Now, I’m more patient.

“I used to say that I would have to get

ICE CREAM OR CAKE?

hit with a two by four,” Norsworthy added. “And I still wouldn’t listen. So then, God would give me a six by six

COMEDY OR MYSTERY?

CROSSWORD OR SUDOKU?

HOMECOOKED MEAL OR TAKEOUT?

and slap me up side the head, and that would get my attention. That’s

READ OR PLAY A GAME?

SALTY OR SWEET SNACKS?

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PRIVATE LENDER BY AAPL

have a good reputation,” she said. “I don’t have self-doubt. I don’t think it’s going to take me very long, because I’m in a different place mentally.”

Something else that has changed since the days before Norsworthy’s diagnosis?

“I’m not so interested in trying to reinvent the wheel now,” she said. “The wheel has been invented. Sometimes I just need to change a tread. It’s taken me a long time to figure that out.”

not what’s happening anymore.”

WORK ZONE

For two years while she battled her

In 2021 and before her diagnosis,

illness through multiple surgeries (or

Norsworthy moved to Utah after

as Norsworthy candidly puts it, “while

attending a mastermind event.

I was busy dying”), the company she

“The area is beautiful, and I thought it

built was in limbo. Her youngest son had stepped in to run it but ultimately decided not to continue.

NIGHT OWL OR EARLY BIRD?

exactly where I was before because I

would be easier to create a fund here. Utah is corporation-friendly,” she said. The expansion beyond Seattle was a strategic

When Norsworthy unexpectedly found

move to position Bull Funding for growth.

life ahead of her, she was left with a

Now, the company provides private loans

decision: Walk away or rebuild Bull

across the nation, allowing Norsworthy

Funding? She chose to rebuild.

and her team to fund more deals and

“I’ve had relationships with other

support a wider range of investors.

companies to do loans as a correspondent

With Bull Funding operating in multiple

or table funder. … I’m able to rebuild

states, Norsworthy has had to ensure her

those relationships and step back in

team stays aligned, despite being spread out.

MONEY COMES FROM THE SAME PLACE … THE DIFFERENCE IS WHO TRUSTS YOU TO HANDLE IT. “Communication, availability, and

trends and connect with fellow lenders. She’s

“I’m not a pillar, you know? I need all

team-building experiences here in

served on AAPL’s Ethics Committee since

the legs on the chair to do it,” she says

Utah keep us connected,” she said.

2021, encouraging industry professionals

of her goal. “I used to think I had to do

That clarity and accessibility have

to adhere to high standards of practice.

everything myself. Now, I know I don’t. I

helped her business maintain the strong client relationships that set it apart. In an industry where trust is everything, being responsive and straightforward has been her greatest asset.

“Money comes from the same place … The difference is who trusts you to handle it,” she said, noting that opportunities are plentiful.

One strategy Norsworthy claims is critical is her ability to network and reach out to her

need a team, all the legs on the chair.”

SPEED LIMIT: UNKNOWN

Her latest flurry of activity isn’t just

Norsworthy’s next move is even bigger.

about business growth; it’s a statement.

She is in the process of raising $50 million

She built this business once. She lost

for a new fund, a major step in expanding

it. And now she is building it again,

Bull Funding’s reach and influence.

stronger—and on her terms.

“I’ve been an AAPL Certified Fund Manager

While some may call Norsworthy’s story

for years, but now it’s official,” she said.

one of survival, she has a different take.

“This year, I will have my own fund.”

“I don’t think I’m a survivor, as if my life has been tragic. I think it’s tenacity

peers. She leans on her membership in the

Before her diagnosis, Norsworthy

American Association of Private Lenders—

wanted to create a fund on her own—

calling it “one of the best investments I

and said she knew she still could. But

She was never supposed to be here. But

have made”—to stay up to date on industry

she’s discovered she doesn’t want to.

she is. And she’s making sure she stays.

to make it through. That’s different.”

SPRING 2025

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Fraud

Spot (and Stop!)

Real Estate Fraud From subtle name alterations to false ownership claims, train (and re-train ... then train again) your team on the biggest bottom-line-busting misrepresentations.

MEGAN CASTLETON, CONSTRUCTIVE CAPITAL

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PRIVATE LENDER BY AAPL

application for a transaction for 33 Center Street, LLC is submitted to a lender.

At first glance, the lender may not catch the difference in names because it is so trivial, or the lender might assume it’s a simple human error and continue to process the paperwork. But upon closer inspection, the lender realizes the person attempting to submit the loan paperwork is not the rightful owner of the correct legal entity, revealing a deliberate attempt to mislead or defraud the lender and other parties.

Another variation of this tactic, known as the “straw borrower” scheme, occurs when a property owner arranges for someone else—often a relative—to create a similarly named entity. The goal is to deceive the lender into approving the loan without realizing the entity is fraudulent.

Upon closer inspection of the name variance, the lender would realize the underlying party is not the original owner of the similarly named entity. The scheme has been perpetuated to mask underlying negative credit data that would have caused the lender to turn the loan down had the true and original owner applied.

This slight alteration in the entity’s name could result in significant financial losses.

I

n the labyrinthine world of investment real estate, the complexities of transactions provide fertile ground for sophisticated forms of fraud.

Cybercrimes (phishing, wire fraud, etc.), flipping/equity stripping schemes, identity fraud, appraisal/valuation fraud schemes, and title fraud are common.

TWO REAL-WORLD EXAMPLES

One form of identity fraud involves individuals creating fake borrowing entities with names that closely resemble those of legitimate property owners, making it difficult to detect and posing a significant

Let’s assume you are the legitimate owner of a property, according to title documents and appraisal reports. and your company name and owner is listed as “33 Center Place, LLC.” A loan

risk. In the real estate sector, this deceptive strategy is often referred to as “entity and title fraud.” This type of fraud can often be overlooked until it unravels into a costly mistake that can significantly impact lenders, investors, and other stakeholders.

RED FLAGS To consistently identify red flags in transactions involving entity names, you must be vigilant and understand common fraudulent tactics. You and everyone involved in the process must be aware of the following indicators that can suggest foul play.

INCONSISTENCIES IN DOCUMENTATION. The

entity’s name should be the same across all submitted documentation. Discrepancies between the entity names on different documents (e.g., title, loan application, appraisal or other official correspondence) SPRING 2025

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Fraud

may indicate fraud and should always be checked directly with your known contact at the firm or verifiable third-party diligence information providers. Inconsistencies should be called out and guidance by a manager should be requested.

UNVERIFIED CHANGES IN OWNERSHIP.

If paperwork is submitted with recent amendments to the entity’s name or structure shortly before the transaction without clear justification or corroborating legal documentation, go directly to the source.

Find the appropriate legal documentation directly through the filing entity on the state or local level. Verify continuity of ownership in refinance transactions, and request all legal documents to validate any changes.

LACK OF A PHYSICAL PRESENCE. The

borrowing entity may not have a physical office, or its address might not correspond to any legitimate commercial operations.

Individual investors may not have a unique office space, but every investor should have a legal mailing address that stays consistent over time. If paperwork is submitted with a new or unknown address, you should review and document all changes in the loan file.

UNUSUAL RUSH DURING TRANSACTIONS.

A push for unusually quick decisions or the bypassing of standard verification processes can sometimes indicate fraudulent activities. Investors know the general time for closing, and most of them also know the general process. Speed is of the essence but not at the risk of hasty mistakes.

NEW OR UNKNOWN CONTACT. You may

encounter instances where scammers have stolen personal information and attempt to act as a contact for an entity.

Always confirm directly with the person or contact you have on file that they are the person initiating or finalizing the transaction you are currently working.

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PRIVATE LENDER BY AAPL

REQUEST FOR FUNDS VIA WIRE TRANSFER.

Your team should always personally verify wiring instructions on both sides of the transaction to ensure any request for funds is legitimate and going to the proper entity.

Your team should also implement two-factor authentication for sending wires and require extra scrutiny for international transfers.

Because wire transfers include sensitive information (e.g., bank account numbers), never send wire instructions via a typical email to confirm receipt. Finally, any wire should follow all standard procedures, and no member of your team should feel pressured to get a wire done without all the appropriate checks and balances completed.

MITIGATING RISKS For every transaction, take these due diligence steps designed to uncover discrepancies and validate the legitimacy of the entities involved in every transaction.

REVIEW ENTITY DOCUMENTS CAREFULLY.

Your team should diligently compare the entity documents with public records and the current name of the owning entity.

This involves reviewing the articles of incorporation, registration documents, and any recent amendments filed with state agencies. Your team should also verify the identity of the entity’s officers and their authority to conduct transactions on behalf of the entity. For refinance transactions, compare the current ownership listed on the appraisal, title, and entity documentation carefully for any discrepancies.

UTILIZE ONLINE TOOLS FOR DILIGENCE. A

team member should conduct simple online searches to validate physical addresses, track the historical mentions of the entity, and assess the consistency of the entity’s presence in business registries or commercial databases.

Tools like Google Maps can help verify the physical location of any business. Often, fraudulent entities claim addresses that are nonexistent or residential. You might also check the Better Business Bureau website. Even if the company does not have a rating, they may still be listed.

Also consider using AI software to review documents for inconsistencies. AI can spot things our human eyes might miss (e.g., signatures that are slightly different), and it can help identify areas that just don’t fit together across the hundreds of pieces of paper necessary for one deal to close.

Likewise, third-party vendor reports often provide cost and time-effective solutions to vet and verify public records information, relationships that may exist between people or parties in the transaction.

CLOSING ATTORNEYS AND TITLE/ESCROW AGENTS. Establish working relationships

with a group of closing attorneys and title/escrow agents that you trust to independently verify the authenticity of the entity involved. These professionals should cross-check entity names and details against multiple sources of information.

Your closing attorneys can be a critical partner in scrutinizing the legal paperwork and ensuring the entity that appears at the closing table matches the one in the property title and other relevant documents.

MITIGATING LOSS/INITIATING RECOVERY When you or your firm find entity and title fraud after you’ve completed a transaction, a shift of focus to mitigating losses and recovering diverted funds may include the following: TITLE INSURANCE CLAIMS. You may

be entitled to file a claim with your

title insurance company. Your title insurance company is equipped to handle legal battles that may arise from title disputes and fraud.

LEGAL ACTION. Engage legal counsel to pursue recovery through the courts.

This might involve suing for damages if fraudulent activities are proved or initiating steps to unwind the fraudulent transactions. Your legal team will advise on necessary steps and will help in tracking down and organizing your action plan for recovery.

ENHANCED DUE DILIGENCE FOR FUTURE TRANSACTIONS. Audit and discover where

and how processes failed. Educate your entire team, and incorporate

lessons learned from the fraud event into future due diligence processes.

Communication and continued training across all your teams is critical to ensure fraud instances decrease over time.

You may enhance checks and balances and use advanced fraud detection software as part of your efforts.

As an investor or lender, you understand that fraud in this industry is a real threat.

Lenders, investors, and legal professionals must work together closely to verify the authenticity of every entity. Leveraging both traditional and innovative tools helps safeguard your firm, financial interests, and the overall integrity of the real estate market.

MEGAN CASTLETON

Megan Castleton has more than two decades of mortgage lending experience in building mortgage operations for commercial and residential markets. Her expertise includes credit, risk management, program development, and loan servicing. She’s scaled multiple startups, focusing on private money, fix-andflip, DSCR, bridge, and GUC loans.

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How to Combat Social Engineering Using deceptive practices to strike the weakest point of your operations—you and your team—attackers gain unauthorized access to sensitive financial data.

FAHEEM INAYAT, NUMERICAL STUDIO

S

ocial engineering is a manipulation technique attackers use to exploit human psychology and trust. It differs from traditional hacking methods by bypassing technical barriers.

It poses substantial risks for private lenders, including unauthorized access to customer data , fraudulent transactions (e.g., scammers posing as borrowers or investors), reputational damage due to security breaches, and regulatory and legal consequences for mishandling sensitive financial information.

COMMON SOCIAL ENGINEERING TACTICS Fraudsters use various methods to manipulate employees into disclosing sensitive information or executing unauthorized transactions.

In phishing schemes, attackers send fraudulent emails disguised as legitimate entities (e.g., a borrower, lender, or internal employee) to obtain login credentials or financial data.

For instance, an employee may receive a text message purportedly from a “trusted financial institution,” stating, “Urgent! Your loan application has been processed. Please click this link to confirm your bank details and finalize your approval” followed by a malicious link. The employee, trusting the source, clicks the link, which leads to 70

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a phishing website designed to steal their login credentials for internal systems.

Vishing (voice phishing) is similar to phishing, except scammers make phone calls, pretending to be clients, executives, or bank representatives, tricking employees into providing sensitive details.

Smishing (SMS phishing) involves attackers sending fraudulent messages via SMS, disguised as legitimate entities, to deceive employees into disclosing information.

A borrower might receive a smishing message congratulating them on loan approval. The message instructs them to reply with their Social Security number and date of birth to confirm their details and set up payment. The borrower succumbs to the ploy and provides sensitive information, which is subsequently used for fraudulent activities.

Pretexting is a tactic attackers use to establish trust. They fabricate scenarios, perhaps posing as IT support personnel, to request login credentials. A fraudster may contact a private lending company employee, impersonating a third-party verification service for an investor. They request verification of a borrower’s details prior to approving a loan, even though such verification is unnecessary. The employee, believing the request is legitimate, provides sensitive borrower information.

Fraudsters employ baiting tactics to entice employees into downloading malware disguised as legitimate software, USB drives, or fraudulent loan documents.

An employee may receive an email with a subject line such as “Urgent: Loan Documents for Review” and containing an attachment with a malicious link disguised as a document. When the employee opens the attachment, malware is installed on the employee’s system, granting the attacker unauthorized access to sensitive data, including borrower applications.

Impersonation involves criminals physically or digitally impersonating customers, executives, or regulatory officials to deceive employees into compromising security.

For instance, a fraudster may impersonate a borrower requesting a change of bank account details for loan disbursement. Using stolen personal information, they persuade the employee to update the payment details without proper verification, resulting in the funds being transferred to the attacker’s account rather than the borrower’s.

Another instance of impersonation involves a fraudster impersonating a company executive via email, urgently requesting the transfer of a substantial sum of money for a business transaction. The email is meticulously crafted to appear as if it does originate from the CEO. The employee, without verifying the request, authorizes

the wire transfer. Similarly, attackers may claim to be from the company’s IT department and request log in credentials to “fix an issue” or implement a “security update.”

In private lending, fraudsters may impersonate third-party service providers (e.g., law firms, title companies, appraisal services) to request wire transfers or sensitive documents.

Impersonation has many variants, all involving fraudsters who exploit trust, urgency, fear, or authority, to manipulate employees into disclosing sensitive information. In a private lending environment, they employ various tactics: Tailgating and piggybacking are unauthorized access methods individuals employ to enter restricted office areas.

For instance, an attacker may arrive at the company’s office and wait outside the secured entrance. They follow an employee into the building, claiming to have forgotten their access card and needing to meet with the loan processing team. The employee allows them into a restricted area containing sensitive financial documents and data.

Another example involves an attacker dressing as an office technician and following a colleague into a secure section of the building. Once inside, they attempt to access loan files or financial records that are left unattended.

DETECTING SUSPICIOUS ACTIVITY Remember, we’re all prone to falling for scam tactics, especially if they target our emotions. Your first line of defense is to learn how to spot red flags.

SUSPICIOUS SENDER ADDRESS. Verify the email address’s authenticity. Alterations or discrepancies from the sender’s usual domain should raise suspicion.

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URGENT OR UNUSUAL REQUESTS. Be

cautious of emails that pressure you to act promptly (e.g., “Send this wire transfer immediately, or we’ll lose the deal!”).

GENERIC OR UNUSUAL GREETINGS. Phishing

emails frequently employ generic greetings like “Dear Customer” or “Dear Valued Employee” instead of your name. They may also incorporate unusual phrases or language. If a colleague’s greeting deviates from their customary style, it could be a potential indicator of a phishing attempt.

UNEXPECTED ATTACHMENTS OR LINKS.

Attachments may be labeled vaguely (e.g., invoice.pdf or urgent.docx) and lack relevance to your work. Links may also not correspond to the actual URL. Hover over links to see if they redirect to a different domain.

POOR GRAMMAR OR FORMATTING ERRORS.

Legitimate lenders, investors, and executives typically maintain a professional tone. Phishing emails often contain poor grammar and formatting errors.

MISMATCHED CONTACT INFORMATION. The

sender’s phone number or signature may not correspond to company records, or the reply-to address may differ from the sender’s displayed email address.

REQUESTS TO BYPASS SECURITY PROTOCOLS.

Emails may instruct you to disable multifactor authentication (MFA), override internal controls, or modify bank details without proper verification.

REFUSAL TO PROVIDE VERIFICATION.

They avoid answering identity verification questions or claim they “don’t have time” for security steps.

UNMONITORED DEVICES. Be aware

of individuals who insist on using unmonitored devices without proper authorization.

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PROTECTING AGAINST ATTACKS Verification can protect you from most attacks. To ensure the identity of a borrower, investor, or third party before sharing information, follow these best practices: USE MULTISTEP AUTHENTICATION. Add an

extra layer of security by requiring multiple forms of verification (e.g., a code sent to a registered phone number or a password entered through a secure portal).

VERIFY DETAILS KNOWN ONLY TO THE GENUINE BORROWER OR INVESTOR. Ask

for details such as their loan number or application ID, the last four digits of their Social Security number (SSN) or tax identification number (TIN), their registered email address or phone number, and recent transaction details.

VERIFY PHONE CALLS. Don’t rely solely on

caller ID. Scammers can spoof numbers.

Hang up and call back using an official number from company records.

VERIFY EMAILS. Check for misspelled

domains or unusual formatting (e.g., @privatelend1ng.com instead of @privatelending.com). Avoid clicking links or opening attachments without verifying the sender’s email address.

USE SECURE COMMUNICATION CHANNELS.

Never share sensitive data over unsecured emails, texts, or phone calls without proper verification. Instead, direct clients to log into their secure online portal to access documents or make changes.

CONFIRM REQUESTS VIA A SEPARATE CHANNEL.

If an investor, borrower, or partner requests sensitive information or a transaction change, verify their request using an independent contact method (e.g., calling a known number instead of the one provided in the request). Cross-check the request with internal records or a second employee.

If someone pressures you to share confidential data, follow a structured response to prevent a potential security breach.”

FOLLOW SECURITY PROTOCOLS If someone pressures you to share confidential data, follow a structured response to prevent a potential security breach. In addition to resisting the urge to act quickly and verifying the person’s identity using a separate channel, check company records to confirm the validity of the request.

Refer to your company’s security guidelines on handling requests for sensitive data.

If you’re unsure, escalate the request to a manager, IT, or security team for verification. Do not make exceptions to standard security procedures, even if the request appears legitimate.

Do not share credentials or bypass security steps. Fraudsters may attempt to obtain passwords or other authentication information. Always maintain multifactor authentication (MFA) and adhere to company-provided security measures. Never share your password, PIN, or other sensitive access information with anyone, even if they claim to be from IT or a higher-up.

Report any suspicious requests to your supervisor, security, or IT team immediately.

Document the incident and provide details such as the phone number, email address, and content of the request. If the request was made via email or phone, flag it for investigation and possible follow up with law enforcement.

Trust your instincts if something doesn’t feel right. It’s better to be cautious than to risk compromising sensitive information.

INFORMATION SECURITY GUIDELINES In a private lending company, employees must be extremely cautious when sharing information. Fraudsters often pose as borrowers, investors, or colleagues to extract sensitive data.

Information you can share, with proper verification:

» NON-SENSITIVE, PUBLICLY AVAILABLE INFORMATION, WHEN NECESSARY

» GENERAL COMPANY DETAILS (E.G., OFFICE HOURS, PUBLICLY AVAILABLE SERVICES)

» BASIC LOAN APPLICATION PROCESS INFORMATION (BUT NEVER

PERSONAL BORROWER DETAILS)

» INVESTOR RELATIONS CONTACT

INFORMATION (IF PUBLICLY LISTED)

» COMPANY POLICIES (IF THEY ARE NOT INTERNAL OR PROPRIETARY)

Information you should never share without verification:

» PERSONAL BORROWER INFORMATION (E.G., SSN, CREDIT REPORTS, LOAN BALANCES, PAYMENT HISTORY)

» BANK ACCOUNT DETAILS (YOURS OR A CLIENT’S)

» WIRE TRANSFER OR PAYMENT

INSTRUCTIONS (ALWAYS VERIFY REQUESTS INDEPENDENTLY)

» LOGIN CREDENTIALS OR

AUTHENTICATION CODES (EVEN IT SHOULD NEVER ASK FOR THIS)

» INTERNAL FINANCIAL DOCUMENTS (E.G., LOAN AGREEMENTS, UNDERWRITING REPORTS, INVESTOR AGREEMENTS)

»

EMPLOYEE DETAILS (E.G., DIRECT PHONE NUMBERS, HOME ADDRESSES, PERSONAL EMAILS)

ACCESS CONTROL AND DATA PROTECTION GUIDELINES The following are some of the best practices to ensure data protection: Use strong, unique passwords. Create strong, complex passwords that are at least 12-16 characters long and include a mix of uppercase, lowercase letters, numbers, and special characters. Avoid using common phrases or personal information that can be easily guessed. Never reuse passwords across different accounts or services, especially between personal and work-related accounts.

Enable multifactor authentication (MFA) on all work-related accounts, including email, loan management systems, and other internal platforms. MFA adds an additional layer of protection by requiring a second form of verification, such as a one-time passcode sent via text or an authentication app, in addition to your password. Consider using an authentication app like Google Authenticator or Authy instead of SMS for enhanced security.

Avoid sharing your credentials with anyone, including colleagues, IT support, or supervisors.

Safely handling loan applications and borrower details is paramount to maintaining client trust and adhering to privacy laws.

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Here are some measures to protect sensitive information: Use secure systems for storing and transmitting data. Ensure that loan applications and borrower information are stored in encrypted systems that conform to industry standards (e.g., PCI DSS, GDPR).

Do not store sensitive information on unprotected devices like personal computers, USB drives, or emails. Instead, use secure file-sharing platforms like encrypted cloud storage or company-approved apps when transmitting documents or data.

Implement role-based access controls (RBAC) to restrict access to specific borrower details or loan applications to authorized

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employees only. Regularly review and update access permissions to ensure that only those who need access to sensitive data have it.

Enable multifactor authentication (MFA) on any system or application that houses loan or borrower information to add an extra layer of security. MFA should be mandatory for accessing sensitive documents or performing actions like approving loans or transferring funds.

Avoid sharing sensitive borrower details via unencrypted email or using unsecured communication channels like text messages or social media. Never discuss borrower details over the phone unless it’s done in a secure, verified manner.

When dealing with paper documents containing personal borrower data, shred them or securely delete them when no longer needed. If you must store paper documents, ensure they are locked in a secure area with restricted access.

Be cautious of third-party access to borrower data, especially if third-party vendors or service providers are involved (e.g., appraisers, title companies).

Verify they have the necessary security measures in place and sign data protection agreements. Periodically audit thirdparty access to ensure compliance with your company’s security protocols.

Stay updated with the latest data protection regulations, such as the

Gramm-Leach-Bliley Act for financial institutions, and ensure your company complies with them. Regularly review and update your security policies to maintain the highest level of protection.

Additionally, here are some key best practices for managing financial transactions to prevent fraud: Verify transaction details thoroughly before processing. Always double-check recipient information, amounts, and payment instructions. Ensure that wire transfer requests and loan disbursements are properly verified through a second communication method (e.g., phone call to the borrower or investor) to confirm the transaction’s legitimacy.

Utilize secure payment systems and financial platforms that comply with industry standards for secure transactions (e.g., ACH, SWIFT). Implement two-factor authentication for online transactions to enhance security.

Establish transaction limits and flags for loan disbursements or payments that require extra verification for larger amounts. Implement automatic fraud detection systems that flag unusual transactions (e.g., out-of-pattern payments or changes to bank details).

For larger payments or wire transfers, require dual approval from two different employees to ensure no single person can authorize highrisk transactions independently. This step serves as a safeguard against internal fraud and mistakes.

Implement robust anti-money laundering (AML) practices to effectively combat money laundering activities.

Conduct regular Know Your Customer (KYC) checks to verify the legitimacy of

borrowers and investors. Implement AML monitoring systems to track transactions and flag any suspicious activities that may indicate money laundering or fraud.

Regularly audit all financial transactions to ensure compliance with internal policies and regulatory requirements.

Monitor transaction logs closely for any discrepancies or signs of manipulation. Periodically reconcile accounts to detect unauthorized withdrawals, deposits, or transactions.

Provide employees with comprehensive training on fraud prevention, including recognizing fraudulent transactions, suspicious payment requests, and common tactics like social engineering.

Emphasize the importance of adhering to standard procedures when processing financial transactions.

Establish clear, written procedures for handling loan applications, disbursements, and other financial transactions to maintain consistency and accountability.

Ensure that all employees are wellinformed and adhere to these protocols, particularly when verifying payment details and confirming changes.

Monitor for breaches or unauthorized access by implementing real-time monitoring systems that alert security teams if someone attempts unauthorized access or downloads borrower data. Regularly audit and log access to loan application data for any suspicious activities.

Besides verification and using multifactor authentication, here are several additional steps to take.

Stop all communication with the suspected scammer, regardless of the medium.

Refrain from responding to emails or phone calls from suspicious sources to prevent further manipulation or fraud.

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Report the incident to the appropriate authorities or internal security team.

Change your compromised login credentials (e.g., email, internal systems, or banking accounts.

Be prepared to share any evidence you have of the scam. Document the incident by writing down a detailed account, including any emails, phone numbers, or documents involved. If you received fraudulent emails or attachments, save the originals so your security team can investigate.

Monitor your accounts for unusual transactions or changes to account information.

Contact your bank or payment processor to freeze accounts or take additional security measures.

Cooperate with your IT and security teams to understand how the breach occurred and how to prevent future incidents.

If the incident involves significant fraud, especially with financial transactions or sensitive customer data, report the breach to the appropriate legal authorities or regulatory bodies.

After the incident is resolved, review the company’s security policies to ensure you and your colleagues are updated on best practices for recognizing and responding to social engineering threats.

Conduct additional training if necessary.

INCIDENT REPORTING CHAIN GUIDELINES

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In private lending, trust is currency—and social engineering attacks aim to exploit it.” the situation, determine if further action is required, and escalate the issue to the appropriate departments.

If suspicious activity involves compromised systems, phishing attempts, or unauthorized access to company data, report it to your IT or cybersecurity team. They possess the expertise and tools to investigate potential breaches, secure systems, and mitigate risks. Additionally, they should be notified if there are signs of malware, unusual network traffic, or compromised devices.

For incidents related to regulatory violations, fraud, or potential money laundering, notify the compliance or risk management team. They ensure compliance with legal and regulatory protocols and collaborate with external regulators.

Remember, it’s essential to report any suspicious activity promptly.

Even if you’re uncertain about the appropriate reporting mechanism, it’s better to err on the side of caution.

In private lending, trust is currency—and social engineering attacks aim to exploit it.

By fostering a culture of skepticism, implementing layered security measures, and prioritizing continuous training, organizations can protect their assets, clients, and reputation. Remember, verification is your strongest defense.

FAHEEM INAYAT

If there’s a possibility of legal consequences or if you believe sensitive data has been breached, escalate the issue to the legal department. They handle the legal implications of the breach, including potential lawsuits, data breach notifications, and regulatory penalties.

Reporting suspicious activity promptly is essential to safeguard the company from security breaches, financial fraud, and reputational damage.

If you suspect an employee is involved in suspicious activity, involve HR to assist in conducting internal investigations, interviewing employees, and ensuring compliance with company policies.

The first point of contact for reporting suspicious activity is your immediate supervisor or manager. They can assess

Many companies provide dedicated reporting channels or systems (e.g., a secure hotline or incident-reporting

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portal) for individuals who wish to report suspicious activity anonymously.

Faheem Inayat is a seasoned software engineer with 27 years of experience that includes cybersecurity, automation, performance optimization, scalability, infrastructure management, observability, monitoring, and compliance.

He currently focuses on engineering solutions addressing business problems in the private investment domain.

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Define Your Culture, Attract Top Talent Good candidates don’t just want a paycheck—they want to belong.

PHILIP FEIGENBAUM, HUFFMAN ASSOCIATES LLC

F

inding elite talent in private lending is no easy feat. The candidate pool is small, dispersed, and not often actively job-seeking. To secure the right person for your team, you need a compelling answer to one crucial question: Why should a top-tier professional choose your company?

If your best pitch is a better paycheck, you’re already losing. The highestperforming candidates don’t just chase money. They want career growth,

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work-life balance, stability, and—most importantly—an authentic cultural fit.

WHAT YOU SAY VS. HOW THEY FEEL A strong employer value proposition isn’t what you say; it’s what candidates experience. An example is a top five national credit union that has an incredibly strong identity. The company doesn’t just know who they are; they embody it. Their mission is clear: to serve current, past, and family members

of military personnel. This call to serve isn’t just a tagline—it runs through the entire organization. Employees who work there aren’t just earning a paycheck; they’re on a mission. Service isn’t a corporate buzzword—it’s at the core of everything each employee does.

The company’s sense of purpose shapes their hiring strategy. They never have to “sell” candidates on their culture because candidates feel it from the first interaction. Unlike companies

that simply claim to value service, this credit union lives it. Candidates join the team because they want to be part of something bigger than themselves: a team that gives back rather than one that simply maximizes profit. Employees who don’t embrace this mission don’t last.

The company’s hiring process goes beyond résumés and technical qualifications.

During interviews, they ask about past roles, volunteer work, community involvement, and moments of service.

They want to understand not only what a candidate has done, but who they are. In this organization, success isn’t just about hitting numbers—it’s about taking care of their members and staying true to their mission.

Compare the company in this example to companies that struggle to articulate their culture. If you have to explain the culture in interviews, it’s not strong enough. Candidates should feel it through how leadership conveys the vision, how

employees talk about their work, and how the hiring process is structured.

Your culture doesn’t need to be glamorous or aspirational. If your company thrives on disruption, show candidates how you’re shaking up the market. If you’re grinding hard to gain market share, be up-front about that energy—some candidates want to be in a fastpaced, high-pressure environment where they can outwork the competition. If you’re a tightknit, family-owned business that values loyalty and tradition, emphasize the stability and long-term commitment you offer employees.

If you’re a cutting-edge tech startup that rewards innovation and risk-taking, highlight how employees are encouraged to experiment, fail fast, and push boundaries.

If your firm is built on a mission of service, make sure every aspect of your hiring process reflects that, because the best employees are looking for a purpose, not just a job.

Whether your culture is about speed, creativity, stability, collaboration, or service, the key is to be unapologetically clear about

who you are. The right candidates will be drawn to your authenticity, and the wrong ones will filter themselves out—saving you time, energy, and costly hiring mistakes.

STUCK IN YOUR BUBBLE? If you’re only searching within private lending’s small talent pool, you’re restricting your options and likely missing out on exceptional candidates. Although some roles demand deep industry expertise, many—especially in finance, marketing, legal, sales, operations, and credit—can be filled by professionals from adjacent industries with transferable skills.

One national private lender needed a credit executive with experience in DSCR and SFR products. The problem? The number of executives who had led large underwriting teams and had formal experience in business-purpose lending was limited. Instead of waiting indefinitely for the perfect BPL candidate, the lender broadened its search to include professionals SPRING 2025

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from the non-QM sector, where there was considerable product overlap.

Suddenly, the lender had multiple strong contenders rather than just one. And guess what? They didn’t hire the BPL candidate. Instead, they chose a non-QM credit executive who was a much stronger cultural fit. The BPL candidate had all the technical qualifications, but the right hire was the one who aligned with the company’s leadership and long-term vision.

This principle applies across departments.

Don’t get stuck in an industry-specific mindset. Look for professionals who can quickly adapt to your business. The broader your search, the more choices you have. And

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in hiring, choice reigns supreme. You don’t want to hire the only available candidate— you want to hire the best candidate.

To do that, start by identifying the core competencies the role truly requires. Instead of focusing on industry experience, ask: What are this role’s key responsibilities and challenges? What skills are essential, and which can be taught? What traits do our top performers share?

Consider industries with overlapping skill sets, ones in which professionals face similar challenges, use comparable technologies, or work in parallel business models. Evaluate how quickly a candidate can adapt to industry-specific nuances.

merchantsmtg.com

Talk to your current team to pinpoint gaps a fresh perspective could fill.

Most important, separate must-have competencies from “nice-to-haves” to avoid disqualifying exceptional talent over noncritical industry knowledge. By shifting your focus from where a candidate has worked to what they can do, you expand your talent pool and position your company to hire stronger, more innovative professionals.

REFUSING REMOTE WORK HANDCUFFS GROWTH Location plays a critical role in recruitment, especially in niche industries like private lending. Many top candidates

are deeply rooted in their communities due to family commitments, lifestyle preferences, or even cost-of-living issues.

No offer, no matter how enticing, will convince these people to relocate.

Still, many companies stubbornly insist on a 100% in-office policy, drastically limiting their talent pool. One lender’s corporate headquarters was in a city that once enjoyed a strong talent base.

The bank needed a CFO; however, within a 50-mile radius, there wasn’t a single qualified candidate with experience at a lender of their size.

Initially, the bank was adamant about hiring someone local, including pursuing candidates who could potentially commute.

But none were truly qualified. Eventually, the bank opened the search to include remote candidates and hired a CFO who lived across the country—someone who was not only a perfect fit but also brought in key team members remotely.

As the bank embraced remote hiring, it expanded its executive team with an industry-recognized CIO, head of compliance, and director of capital markets.

The results? In a tough economic climate, the bank grew originations from $2.5 billion to more than $4 billion in a single year. The parent company’s leadership took notice, praising the quality of their executive hires. These remote leaders, in turn, recruited top talent faster, strengthening the company’s competitive edge.

This is today’s reality. If you cling to outdated in-office mandates, you’re shutting yourself off from the best talent. Hybrid models, remote work, and even flexible commuting arrangements let you hire the best person for the job—not just the closest one.

The data backs this up. A staggering 98% of workers want remote work options.

...Seventy percent of the global workforce consists of passive talent—professionals who aren’t searching for a job but are open to new opportunities if approached correctly.”

Companies that embrace flexibility don’t just hire faster; they attract high-caliber talent that would otherwise be out of reach.

THE BEST CANDIDATES AREN’T LOOKING The best candidates in private lending are often not actively job-hunting.

According to LinkedIn, 70% of the global workforce consists of passive talent—professionals who aren’t searching for a job but are open to new opportunities if approached correctly.

When companies post job openings, they primarily attract active candidates; in other words, those looking for their next role, often as a result of layoffs or job dissatisfaction. Great candidates can exist in this pool, but the timing has to be perfect.

But what about high performers who aren’t scrolling job boards? They’re the ones making real impact elsewhere.

Some executive search firms specialize in identifying and engaging these passive candidates, reaching out with personalized, one-to-one messaging that speaks directly to their needs, showcasing opportunities they may not have potentially considered otherwise.

Companies relying solely on applications from job postings end up sifting through hundreds of irrelevant resumes, with only a handful of qualified applicants. By

targeting passive candidates, you can gain access to a wider, stronger talent pool.

The numbers prove their value. Research shows passive candidates are 17% less likely to require skill development than active job seekers. They come in ready to make an impact!

IS YOUR HIRING PROCESS PUSHING TOP TALENT AWAY? Hiring delays kill deals. When too many stakeholders are involved— dragging out interviews and adding unnecessary steps—top candidates lose interest or accept other offers.

Even major corporations get this wrong.

Google, for example, once had a hiring process that stretched over months, requiring candidates to go through more than 12 interviews. They assumed more interviews meant better hiring decisions.

But when they analyzed five years of data, they found something surprising: Four interviews with four interviewers predicted a hire’s success with 86% accuracy.

Adding more interviews barely moved the needle. Google slashed its hiring timeline, saving thousands of hours—and improving the candidate’s experience.

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in back-to-back interviews, meeting with seven or more people (many of whom weren’t even in the candidate’s direct reporting line).

By the time video interviews were added, candidates had met with 10 to 15 people.

The result? Candidates walked away exhausted, frustrated, and often unsure of what the role even entailed.

Companies that streamline their hiring process by limiting interviews to key

decision-makers and making every conversation count win the best talent.

VACANCY-ONLY HIRING LIMITS YOUR GROWTH Hiring doesn’t end when a candidate accepts the offer. Rather, it is an ongoing process of relationship-building and talent management. Stay connected with high performers, even those you

don’t hire. They could be your next key hire when the right role opens up.

In private lending, your people are your competitive advantage. Define a compelling value proposition, embrace flexibility, expand your search, engage passive talent, and streamline your hiring process. The cost of hiring an amateur is far greater than investing in a professional.

Be smart. Be strategic. And win.

PHILIP FEIGENBAUM

Phil Feigenbaum is the senior vice president at Huffman Associates LLC, specializing in executive search for the banking and private lending sectors.

With more than 21 years at Huffman, Feigenbaum has excelled in leading high-level search projects, particularly in director, managing director, and C-suite placements, demonstrating a profound understanding of client needs and industry demands. He has expertly managed teams executing comprehensive search assignments across mortgage banking, consumer lending, private lending, and traditional banking.

Feigenbaum has a bachelor’s degree in political science from Roanoke College and resides in Richmond, Virginia, where he continues to lead with a strong commitment to performance and results.

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Build HR Systems for Stability Private lenders who invest in strong HR foundations improve hiring, ensure regulatory compliance, and create a competitive workforce.

ELIZABETH MORALES, APPLIED BUSINESS SOFTWARE

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our business is growing. Now what?

Managing human resources can be overwhelming, especially for smaller private lending firms. Between hiring, compliance, payroll, and employee relations, there are many moving parts.

Keep in mind, however, that a wellstructured HR strategy doesn’t just keep you compliant; it also helps you build a thriving workplace that attracts and retains top talent.

Here are some of the most important considerations to keep in mind as you develop your HR strategy.

HIRE SMART One of the most critical aspects of HR is hiring the right people. The success of your business depends on building a team that aligns with your goals and culture.

Hiring professionals with underwriting experience, risk analysis skills, and familiarity with regulatory compliance specific to private lending is crucial.

Underwriters, loan processors, and asset managers with direct experience in private lending ensure the team understands the nuances of risk management and loan structuring. A well-rounded team should also include compliance officers who stay ahead of licensing and lending regulations.

USE OFFER LETTERS & CONTRACTS. Clearly

outline employment terms, compensation, and expectations in writing. » TIP. Use an Applicant Tracking System

(ATS) to streamline your hiring efforts and to keep records organized. At a minimum, keep a list of everyone who applies for each position. You will be growing your company and will want to know “Bob” applied a couple years ago for X or Y position. Include details such as their name, the position they applied for, when they applied, and the steps you went through with them. You can include observations such as whether they were rude on the phone or whether they showed up to the interview—you get the idea.

A structured onboarding process helps new employees integrate into the company smoothly, boosting retention and productivity.

Provide clear expectations, training, and resources during the first 90 days.

Make sure your employee handbook outlines your policies about behavior, attendance, benefits, and company values.

Standardizing interview questions helps reduce bias and ensures fair evaluations.

CONDUCT BACKGROUND CHECKS. Verifying

» TIP. Schedule regular check-ins during an

employment history and credentials minimizes hiring risks. Also be sure to request references and contact them.

employee’s first three months to ensure a smooth transition. Small gestures such as saying, “You made it through the first day/

role’s responsibilities, expectations, and qualifications to attract the right candidates.

FOLLOW A STRUCTURED INTERVIEW PROCESS.

Start with these improvements.

1

CLARIFY YOUR VALUES. Define and communicate your mission, vision, and core values to employees.

2 IMPROVE EMPLOYEE FEEDBACK. Implement regular one-onone meetings or pulse surveys to check in on satisfaction.

3 ENHANCE ONBOARDING. Make the first 90 days structured and engaging to improve retention.

4 SIMPLIFY COMPLIANCE. Use an HR checklist to ensure you’re following employment laws.

SET EMPLOYEES UP FOR SUCCESS

Ongoing training is critical. Investing in skill development and compliance training (e.g., harassment prevention) leads to a stronger workforce. For private lending companies, training should include industry-specific topics such as borrower due diligence, fraud detection, asset-based lending principles, and federal and state lending regulations.

Private lenders should ensure loan officers understand financial modeling, credit risk assessment, and the legal framework surrounding secured and unsecured loans.

CRAFT CLEAR JOB DESCRIPTIONS. Define the

OVERWHELMED? DON’T BE.

5 LEVERAGE HR TECH. Automate payroll, benefits, and time tracking to reduce administrative work.

6 ENCOURAGE DEVELOPMENT. Offer learning resources or mentorship programs to help employees grow.

7 STRENGTHEN CULTURE. Celebrate small wins, recognize achievements, and promote team collaboration.

week!” go a long way to make people feel welcome. Send an email companywide introducing the new employee. No one likes being the new kid on the block.

OFFER COMPETITIVE PAYROLL AND BENEFITS Ensuring employees are paid correctly and have access to benefits is crucial for both compliance and retention.

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compliance. There are plenty of reputable and affordable platforms available. If it makes sense, consider outsourcing your payroll.

Performance-based compensation models such as commission structures for loan originators, bonus incentives for portfolio managers, or profit-sharing for executive teams can be effective in private lending firms. Additionally, retention programs like continued education stipends for financial certification (e.g., CFA, CML) can enhance employee engagement and expertise.

Although health insurance isn’t required for businesses with fewer than 50 employees, offering benefits can enhance retention. HRAs (Health Reimbursement

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Arrangements) and stipends are viable alternatives to a traditional health care plan. HRAs are a group health plan that an employer funds. Employees who are enrolled in individual health care plans can use the money to pay for qualifying medical expenses throughout the year, helping to offset deductibles and other expenses.

Paid time off is important to employees.

Be sure to clearly define sick leave, vacation days, and unpaid leave policies. » TIP. Non-traditional benefits like flexible

schedules or professional development stipends can set you apart. You can also keep a kitchen stocked with healthy choices: fruit, pistachios, and bars low on sugar and

fat. Employees also appreciate a “grab-andgo” opportunity such as bread, ham, and cheese to make a quick sandwich, especially those who are in and out seeing clients.

AVOID COSTLY MISTAKES Employment laws can be complex, and failure to comply can result in lawsuits or fines. Following are the most critical laws small business owners should be aware of. Keep in mind this list is not exhaustive.

Be sure to consult with an employment attorney or HR consultant to minimize noncompliance and manage your risk.

The Fair Labor Standards Act (FLSA) sets minimum wage and overtime rules. It’s

important to ensure employees are classified correctly as either exempt or non-exempt.

The Family and Medical Leave Act (FMLA) requires businesses with more than 50 employees to offer up to 12 weeks of unpaid leave. Even if FMLA doesn’t apply to your business, be sure to check state-specific leave laws.

The Occupational Safety and Health Act (OSHA) requires employers to provide a safe work environment.

You should conduct regular safety training and maintain an injury log.

The Equal Employment Opportunity (EEO) laws prohibit discrimination based on race, gender, age, disability, and more.

Establish clear anti-discrimination policies and apply them consistently.

Workers’ Compensation laws provide benefits to employees injured on the job. Ensure you have the insurance required in your state.

Immigration Reform and Control Act (IRCA) requires employers to verify employees’ work eligibility with Form I-9. » TIP. Conduct regular HR compliance

audits to identify potential risks before they become legal issues. Of course, you can ask OpenAI anything these days, but just as businesses are cautioned about using generic HR templates available online, be careful about relying solely on these sources. State and local nuances can still trip you up. Get to know a labor law attorney you can have on speed dial for those moments where you are not sure how to proceed.

Besides adhering to employment laws and regulations, private lenders must ensure strict adherence to financial industry regulations such as fair lending laws, anti-money laundering (AML) requirements, etc. HR teams should

Every employee represents your company, from their interactions with customers to their social media presence. Ensure they act as brand ambassadors who align with your company’s values and strengthen your brand.” work closely with compliance officers to monitor adherence to lending laws, ensuring all employees are properly trained in consumer protection regulations.

CREATE A POSITIVE WORKPLACE CULTURE Strong employee relations lead to better engagement, performance, and retention. More than just avoiding conflict, creating a workplace where employees feel valued and connected to the company’s mission is essential.

A lending firm’s culture should emphasize trust, integrity, and financial responsibility.

Encouraging collaboration among loan officers, underwriters, and risk analysts helps ensure a thorough loan assessment process. Establishing clear ethical lending guidelines reinforces your firm’s reputation in the industry.

Also important? Establish a structured process for handling disputes. It should include acknowledgement of the issue, procedures for investigating the issue, a plan to resolve it, and monitoring progress.

No matter how high-functioning and coalesced your team is, conflicts will arise.

Addressing conflicts, grievances, and complaints promptly, fairly and uniformly acknowledges employees, demonstrates they are taken seriously, and shows commitment to listening to employees’ concerns. If necessary, call in an outside HR resource to help you handle these types of issues.

Start by fostering open communication.

Doing so creates an environment where employees feel heard and valued.

If you have not already done so, define your company mission, vision, and values.

Ideally, include employees in this process so they feel ownership of the process and outcome. At the very least, employees should understand what your business stands for and how their role contributes to the bigger picture. Importantly, include how your company’s mission, vision, and values will be demonstrated every day. This should not be an exercise that results in an archived computer file.

Rather than relying solely on annual performance reviews, provide consistent real-time feedback and development opportunities.

Keep in mind that every employee represents your company, from their interactions with customers to their social media presence. Ensure

So, how do you create such an environment?

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they act as brand ambassadors who align with your company’s values and strengthen your brand. » TIP. Employee engagement surveys can

reveal valuable insights into workplace morale and how connected employees feel to your company’s mission. The Gallup 12 is a great place to start. It’s a 12-question survey Gallup came up with after conducting surveys with millions of employees across thousands of companies around the world. They determined those are the best 12 questions to measure the key factors that have been consistently found to influence employee engagement and organizational performance.

Many business owners see HR as merely administrative, but it plays a crucial role in shaping company culture, enhancing productivity, and ensuring long-term sustainability.” tools helps HR monitor employee performance and workload balance.

ELIZABETH MORALES

HR IS A BUSINESS GROWTH TOOL AUTOMATE FOR EFFICIENCY HR technology can save time and reduce paperwork while improving accuracy.

There are many software platforms that can assist your private lending firm with payroll and benefits. Look for the one that fits your needs in terms of number of employees and your budget.

Importantly, choose a platform that offers scalability as your company grows.

Likewise, investigate digital tools that can help you with time tracking and scheduling. Implementing these tools into your workflows helps prevent time theft and ensures compliance.

Finaly, investigate portals that allow employees to update their own information, reducing administrative burdens. » TIP. Automating HR functions with

industry-specific tools can improve efficiency. Loan origination systems (LOS) that integrate with payroll software can streamline commission-based pay structures for loan officers. Additionally, implementing AI-driven risk assessment 88

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HR is more than just hiring and compliance—it’s a strategic function that can drive business success. Many business owners see HR as merely administrative, but it plays a crucial role in shaping company culture, enhancing productivity, and ensuring long-term sustainability.

Businesses that view HR as a growth tool rather than just a compliance function gain a significant competitive advantage.

When employees are connected to a company’s mission, vision, and values, they become stronger advocates for your business, ensuring a consistent and positive brand presence in every customer interaction. Investing in HR is investing in your company’s future.

In private lending, HR plays a critical role in fostering a risk-aware, compliancedriven culture. By hiring professionals with lending expertise, implementing thorough training, and leveraging technology to streamline processes, private lenders can build a team that not only meets regulatory requirements but also drives business growth.

Elizabeth Morales is the chief people and communications officer at Applied Business Software, makers of The Mortgage Office, a loan management software. She drives people strategy, organizational culture, and internal communications to foster engagement and business success. With a passion for building high-performing teams and shaping workplaces where people thrive, she aligns talent development with business goals to create lasting impact.

Morales has a track record of transforming workplace culture, fostering inclusion, and implementing initiatives that enhance leadership development, change management, and employee experience. Her approach combines strategic insight with people commitment, ensuring organizations grow from the inside out. Morales is also a singer, poet, storyteller, and professional translator.

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Demystify Bank LOC Due Diligence A strong financial profile, clear reporting, and market expertise are key to securing—and keeping—a bank line of credit.

MARK JURY, ENTERPRISE BANK & TRUST

B

ank lines of credit (LOCs) can benefit private lenders in numerous ways, ranging from larger balance sheet capacity to cheaper cost of capital to a cash management line that can be used to bridge gaps in cash flow. Qualifying for these lines can be a lengthy and costly endeavor, so private lenders should have a basic understanding of the due diligence requirements, red and green flags that banks look for, covenants, and closing timelines to manage your expectations and maximize your chance of success.

DUE DILIGENCE REQUIREMENTS VARY Banks often have slightly different due diligence processes. They can be influenced by myriad factors, including loan committee members’ differing experiences with deals that have gone wrong in the past, overall concentrations within a bank’s portfolio, senior management’s 90

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economic outlook (including the future risk profile of specific industries), and how regulators have reacted and imposed changes on a bank’s lending practices.

It is important to note requirements and processes may change, so staying in contact with banks over time could help you gauge the direction a bank’s preferences are trending.

Here are several notable areas where banks’ differences in processes and requirements may impact a private lender and your ability to qualify for a bank LOC. DUE DILIGENCE AND SCREENING. The

amount of due diligence conducted and the initial screening with the loan committee before issuing a term sheet may vary. More work up-front generally decreases the deviations from a term sheet—and the number of surprises during loan document negotiations.

FEE STRUCTURES. The primary fees will always be the origination fee, the interest rate, and often some version of a nonuse fee since banks must pay for committed capital lines. Ancillary fees may also be significant (e.g., boarding fees, minimum interest fees, deboarding fees, etc.).

VALUATION REQUIREMENTS. Banks are required to adhere to the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and the Interagency Appraisal and Evaluation Guidelines, so there generally is not much variance in valuation requirements.

Still, each bank may interpret these regulations slightly differently.

DEPOSIT MINIMUMS. Most banks still

require a commercial banking relationship, but the minimum amount of deposits required in these accounts and the source of those deposits can vary.

Banks typically prefer to work with established private lenders who understand how to hold loans on their balance sheet and work through problem loans and assets. ” COLLATERAL SHIPPING. Most banks

require the shipping of original loan files to the bank or a designated custodian, but a small number allow for digital files when pledging loans.

DRAW PROCESS AND RE-UNDERWRITING.

Ease of use of the line can be the most important factor for a private lender. But it may vary the most across banks and be the most difficult to assess up-front, so inquire about this process in detail and perhaps even speak to existing clients as references.

UNDERSTANDING OF THE PRIVATE LENDING INDUSTRY. Several banks are consistently

active in lending to private lenders, but a number of others have very few relationships in the industry, which can impact how reliable they may be as a partner and how creative they may be.

On the flip side, there are several areas where banks align. Banks typically prefer to work with established private lenders who understand how to hold loans on their balance sheet and work through problem loans and assets. Most also have a lengthy due diligence process (three to nine months) that involves thorough underwriting of your lending business, policies and procedures, current portfolio, and at least one approval from the loan committee. Monthly

borrower bases and quarterly and annual financial reporting for the borrowing entity, the manager, and owners is also necessary as are financial covenants and periodic covenant compliance reporting.

BEST PRACTICES FOR QUALIFYING Aside from the hard numbers that comprise the financial covenants and compliance certificate, banks consider many other factors when evaluating whether to extend a line of credit to a private lender. Similar to due diligence requirements and processes, there may be some variance between banks.

As noted, banks strongly prefer experienced private lenders that can hold loans on their balance sheet and work through issues. Aside from the tangible net-worthrelated covenants mentioned on the next page, brokers or lenders that rely heavily on white labeling may be great at sourcing and originating loans but may not have the same level of experience managing balance sheet liquidity and working through challenged loans.

Local market expertise is also important.

Although many banks work with private lenders throughout the country, they generally want to see originators that are experts in a few markets. Having boots on SPRING 2025

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the ground where the properties are located can be important in establishing a loyal borrower base and solving problems quickly.

In addition to having geographical focus, offering consistent loan products and focusing on specific asset classes show discipline and expertise.

Finally, possessing the ability to convey and document these practices in formal underwriting guidelines, policies, and procedures not only helps private lenders qualify for bank lines of credit but also aids in capital raising from investors.

The bank underwriting process is very thorough. Lines of credit are almost always supported by fraud/”bad boy” personal

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guarantees, which are terms included in an agreement to provide recourse if a borrower’s poor or noncompliant conduct jeopardizes the investment. All private lenders have experienced some difficult situations, so the best approach is to be up-front about what your issues are, before you spend a lot of time and money on the due diligence process.

A thoughtful bank will consider the entire story and package for a prospective private lending client, but be prepared to spend extra time discussing and documenting any of the following potential red flags: SUBSTANTIAL HISTORICAL PRINCIPAL LOSSES.

Be prepared to explain their causes and

the changes you have made to prevent these situations from reoccurring.

INABILITY TO PROVIDE CONSISTENT REPORTING. This can include financial statements, loan tapes, or other relevant information related to your lending business. Banks require a fair amount of ongoing reporting, so being able to automatically produce customized reports is important.

CONFLICTS OF INTEREST OR LACK OF CHECKS AND BALANCES. Even relatively

common practices like lending to related parties, determining your own valuations, or conducting draw inspections and distributions internally

can open the door for potential risks that a bank may not want to take.

CURRENT AND HISTORICAL DELINQUENCY RATES. Typically, banks do not like elevated

default rates, so if more than 5-10% of your current portfolio or historical originations have defaulted, plan to detail the likely exit strategy, timing, and associated P&L for active delinquencies and share your yields on previously liquidated defaulted loans. There is a growing understanding that the combination of low loan-tovalue (LTV) lending with high default interest rates can result in higher returns if a loan does not perform, but it is not the ideal portfolio strategy for a bank.

Other areas that may not necessarily be viewed positively or negatively but are worth discussing early in the conversation with a potential bank lender include entity structure (fund or not), method of raising capital (equity, unsecured debt, secured debt), core products you lend against, and whether you outsource to third-party servicers.

TYPICAL BANK COVENANTS You can view bank underwriting as similar to how a private lender underwrites a loan for a mortgagor. There are many factors to consider, including specific ratios that are calculated for every loan opportunity. Banks have similar quantitative measures, typically known as covenants.

Tangible Net Worth (TNW) minimums, or a related calculation such as Total Liabilities/TNW (often referred to as the debt to equity or D: E ratio) are perhaps the most important covenant and easiest to understand. There are some nuances to calculating TNW, but it effectively means how much equity capital is on your private lender’s balance sheet. If you raise

...The best approach is to be up-front about what your issues are, before you spend a lot of time and money on the due diligence process.” capital through debt rather than equity, a related calculation, Tangible Net Capital (TNC), may be used so long as the debt is unsecured or explicitly subordinated.

For new relationships, banks generally like to see TNW or TNC balances near or in excess of the size of the line of credit being requested (near or below a 1:1 D:E ratio). Some banks will go higher than this, but banks generally do not like lending to highly leveraged businesses. Some banks forego the ratio and simply require a minimum TNW or TNC balance that is below, but usually near your current amount, and in a similar relation to the proposed total debt commitment.

Debt Service Coverage Ratio (DSCR) is a common abbreviation that private lenders use when referring to long maturity rental loans. For banks, it is similar and measures the private lender’s EBITDA divided by the interest expense. This helps the bank assess whether the private lender is generating enough income to pay its debts.

Portfolio delinquency is the “canary in the coal mine” covenant some banks use to anticipate upcoming portfolio degradation.

Most banks prohibit delinquent assets in their borrowing bases but typically do not impose requirements on anything outside of the line of credit. However, portfolio delinquency is an exception—

banks need to assess overall portfolio performance and may halt lending if the default rate becomes too high.

Private lenders often raise questions about the prohibition of new debt as it is defined in loan agreements, but it is a common covenant that limits the private lender from adding other debt facilities without the knowledge and approval of the incumbent bank. Additional debt can lead not only to the violation of Total Liabilities/TNW ratios or DSCR minimums but also complicate any default scenario in which multiple creditors are involved.

In practice, a bank would prefer to upsize its own commitment amount rather than allow another bank to provide credit.

However, if the desired debt capacity of the private lender exceeds the amount the bank is comfortable lending or requires a structure the bank does not offer (while still complying with all covenants), adding another bank is common. The relationship between the banks is often documented by an intercreditor agreement, and typically each bank must hold their pledged loans in a special purpose entity (SPE) to clearly define their respective collateral positions.

To avoid a messy negotiation if a default should occur, it is important the banks operate similarly when it comes to default events.

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THE DUE DILIGENCE PROCESS It is important to understand the standard due diligence materials any bank prospect will be asked for and to have a basic understanding of the underwriting and closing processes. Again, there is likely to be some variance between banks, but a standard list typically includes: COMPANY OVERVIEW/INVESTOR PITCH DECK. Include info on your

business, history, loan products, geographies, management bios, etc.

LOAN TAPE OF CURRENT PORTFOLIO OR RECENT LOAN PRODUCTION. Provide

whatever will be representative of what you intend to pledge to the bank.

FINANCIALS. You’ll need the last three

years’ year-end financials and most recent quarter-end year-to-date internal financials with comparable quarter-end year-to-date financials for prior year (both for the fund and management company if applicable). Audited or CPA-prepared financials are preferable for year ends.

OTHER APPLICABLE INFORMATION. You may need to provide personal financial statements for guarantors/owners, entity and personnel organizational charts, complete underwriting guidelines for your various loan products, private placement memorandum or investor promissory note and security agreement, and bank questionnaire or other bank-specific forms.

These materials and corresponding follow-ups, potentially along with a loan committee prescreen, are typically sufficient to issue a term sheet.

The term sheet is typically where most of the terms are negotiated. The more comprehensive the term sheet, the longer it can take to reach agreement 94

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and execute the term sheet. But it also means fewrer surprises when loan document drafts are available.

UNDERWRITING AND CLOSING After you provide the signed term sheet and associated due diligence deposit, the process moves into full underwriting.

Banks typically have dedicated credit analysts independent from the main banker you primarily communicate with. This is intentional to maintain independence during the review; you will never interact with the underwriter.

During the underwriting phase, additional materials will be requested, including bank-specific forms. The process may include items like entity formation documents, principal background checks and credit pulls, mortgage loan file and collateral review, UCC checks, additional financial info, principal driver’s license, SSN, tax returns, any trust information, bank statement review, beneficial ownership forms, certificates of good standing, and proof of insurance.

In parallel with underwriting, loan documents are typically drafted and distributed and any potential pre-closing on-site field exams are conducted. Loan document negotiations are common and can be more involved if the term sheet is high level and not highly customized.

The private lender is required to pay both their own and the bank’s legal bills, so be sure to negotiate only where necessary.

As underwriting is completed and these other items proceed, the opportunity is presented to final loan committee.

Depending on whether there was a prescreen and what information was discovered during underwriting, changes to the terms and structure may result. With

good communication from the beginning, any changes should be relatively minor.

After final loan committee approves the deal, it moves toward closing. The timeline can vary significantly, depending on whether there are incumbent banks that may require an intercreditor agreement or a bank being paid off and any remaining negotiations on the loan documents. Preparing the first borrowing base in the bank’s format is also required if any draws are to be made at closing—a process that can have a steep learning curve depending on the number of loans being pledged initially.

Once the line of credit is closed, the private lender and bank must continue to work closely together to acclimate to the loan pledging and draw process. It may take a quarter or two to eliminate the delays that can stem from incomplete data, lack of understanding of the process, or delays in required reporting. Only once the relationship has found an efficient rhythm for monthly borrowing base pledging, draws, quarterly and annual covenant compliance, and financial reporting can both sides realize the full potential of a line of credit relationship.

MARK JURY

Mark Jury is senior vice president of private lender finance in Enterprise Bank & Trust’s Los Angeles region, servicing clients and providing lines of credit to private lenders nationwide.

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Mid-Construction Loans: A Different Due Diligence Assess key elements across legal, financial, and market risk to prevent costly disruptions on this high-demand but challenging product.

JILL DUKE AND KEITH TIBBLES, LEVEL CAPITAL LLC

M

id-construction financing presents significant risks and opportunities for lenders, borrowers, and investors. Conducting thorough due diligence and feasibility analysis is one strategy for reducing the risks.

Due diligence is crucial to understanding project risks, ensuring legal compliance, and assessing the financial viability of a project before committing capital.

Insurance and risk transfer mechanisms also provide a critical safety net for mitigating financial losses.

Without a thorough assessment, lenders and investors expose themselves

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to unnecessary financial and legal risks that could derail a mid-stream construction project. Due diligence involves investigating all aspects of the project to identify potential obstacles and evaluate its financial soundness.

LEGAL ASSESSMENTS Legal compliance is a foundational element of due diligence. Ensuring that all legal requirements are met protects lenders and investors from potential liabilities, project delays, or unforeseen financial obligations.

From permit compliance to contractual obligations and regulatory oversight,

verifying these legal factors early can prevent costly disputes and interruptions.

PERMIT AND ZONING COMPLIANCE. Ensure all necessary permits are active and up to date. If any have expired, determine the process and time frame for renewal.

CONTRACTUAL OBLIGATIONS. Review existing contracts with general contractors, subcontractors, and suppliers. Identify any pending disputes or claims that could impact project completion. Validate that contractors’ licenses are active, if applicable.

TITLE SEARCH AND LIENS. Conduct a thorough title search to identify any encumbrances, including

tax liens or mechanic’s liens, that could complicate refinancing.

REGULATORY COMPLIANCE. Changes in local and federal regulations can impact the continuation of the project. Assess how evolving legal requirements affect construction timelines and financing obligations. Investigate state and local real estate law. Explore loan default and lender remedies, such as foreclosure and receivership laws for that specific area.

ENVIRONMENTAL AND SAFETY REGULATIONS.

Determine whether the site complies with current environmental and occupational safety standards. Violations could cause costly delays or legal action.

MARKET EVALUATIONS Understanding local market conditions is critical for assessing the long-term success of a construction project. A misalignment between supply and demand can result in unsold inventory, price declines, or extended timeframes to secure tenants or buyers. By analyzing market trends, lenders and investors can determine whether the project is positioned for profitability or faces potential headwinds.

MARKET ANALYSIS. This is typically

done at the regional level. Review real estate data points, which will allow you to determine long-term trends of inventory, sales, and pricing.

SUPPLY DYNAMICS. Assess the level

of competition for both upcoming and newly completed projects.

DEMAND DYNAMICS. Review sales history

and create an average absorption rate.

This will allow for a “Months of Supply” to be calculated. This should be done for both existing and new construction to determine the risk of declining price points.

RISK OF MARKET SATURATION. Overbuilt

markets may lead to reduced property values and lower rental rates, ultimately impacting the investments potential return.

LONG-TERM VIABILITY. Consider geographical

projections such as large employers moving into or out of the area that may impact demand for the finished property.

to funding a new project: Who are the buyers or renters? Are they in the area of the subject site and does the product match the needs of the demographic?

PHYSICAL INSPECTIONS AND ENGINEERING ASSESSMENTS A physical review of the construction project ensures the structural integrity and quality of work align with industry standards and project specifications.

Unexpected deficiencies or poor workmanship can lead to budget overruns, extended timelines, or project failure.

Conducting a comprehensive engineering assessment reduces these risks and ensures the project remains on track.

STRUCTURAL INTEGRITY. Conduct

engineering inspections to assess the quality of completed work and identify any defects that need rectification.

ENVIRONMENTAL COMPLIANCE. Ensure

ECONOMIC CONDITIONS. Analyze economic indicators such as employment rates, labor force shifts, and interest rates.

compliance with local and federal environmental regulations to avoid costly legal repercussions.

DEMOGRAPHICS. This is one of the most

MATERIAL AND WORKMANSHIP EVALUATION.

overlooked data series when it comes

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quality standards and that construction methods are consistent with project plans.

INSPECTION OF UTILITIES AND INFRASTRUCTURE. Ensure that water, electricity, gas, and sewage systems meet project specifications and regulations.

QUALITY OF PREVIOUS CONSTRUCTION WORK. Examine construction

progress to ensure previous work was completed to industry standards.

FINANCIAL ANALYSIS A strong financial foundation is crucial for any mid-construction project. Lenders and investors need to assess cost projections,

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revenue expectations, and the overall financial stability of the borrower. Without a proper financial analysis, unexpected costs or cash flow disruptions could derail the project before completion.

COST-TO-COMPLETE PROJECTIONS. Use

updated cost estimates to determine the funds needed to finish the project.

REVENUE PROJECTIONS. Evaluate anticipated

rental or sales revenue against market rates to ensure financial viability.

CASH-FLOW ANALYSIS. Ensure that

financing solutions align with the borrower’s ability to service debt while maintaining adequate liquidity.

CONTINGENCY FUND PLANNING. Establish

a financial buffer for unforeseen costs or project overruns.

ASSESSMENT OF BORROWER FINANCIAL STABILITY. Analyze the borrower’s

financial position, creditworthiness, and repayment ability.

INSURANCE Securing appropriate insurance coverage is essential to protect lenders and investors from unforeseen losses. Specialized insurance policies provide financial protection against construction delays, property damage, and liability risks.

BUILDER’S RISK INSURANCE. Builder’s risk

insurance is one of the most critical policies for midconstruction financing. It provides coverage for damage to construction projects due to fire, theft, vandalism, and natural disasters. Validate that insurance premiums are paid in full up front and monitor those policies throughout the project time frame.

Make sure coverage includes buildings under construction, materials, fixtures, and temporary structures. Further, ensure the policy covers the full construction period, including any anticipated delays.

Understand the policy’s limitations, such as exclusions for design defects or contractor negligence. Finally, policies may

Specialized insurance policies provide financial protection against construction delays, property damage, and liability risks.” need adjustments for partially completed structures, ensuring adequate protection.

LIABILITY AND PERFORMANCE BONDS. Even

with proper due diligence, construction projects can face unexpected issues.

Liability insurance and performance bonds provide essential protection against these risks by ensuring financial recourse for

lenders and investors. These measures help mitigate losses and prevent disruptions that could derail project completion.

General liability insurance covers legal costs arising from accidents, injuries, or property damage caused by construction activities. Performance bonds ensure contractors complete their work as

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Operations

agreed, providing financial recourse if they default. Subcontractor default insurance protects against financial losses if a subcontractor fails to meet contractual obligations. Payment bonds guarantee subcontractors and suppliers are paid, reducing the risk of construction stoppages due to nonpayment disputes.

Completion guarantees protect investors and lenders by ensuring the project will be completed, even if the contractor fails.

PROFESSIONAL LIABILITY INSURANCE.

Errors and miscalculations in design and engineering can lead to costly delays, structural issues, and legal disputes. Professional liability insurance protects against damages caused by design flaws or negligent project management. By ensuring coverage for architectural and engineering work, lenders and investors can mitigate risks associated with professional errors.

Coverage for design defects protects against damage resulting from errors in architectural or engineering work.

Legal protection provides financial coverage for lawsuits arising from design flaws. Consultant liability protection covers mistakes made by architects, engineers, or project managers.

BUSINESS INTERRUPTION INSURANCE.

Construction delays can significantly impact a project’s financial viability.

Business interruption insurance provides crucial protection against income loss due to construction stoppages, helping borrowers and lenders maintain financial stability. This type of insurance ensures that fixed operational costs, such as loan payments and salaries, are covered during unexpected disruptions.

For example, revenue protection covers lost revenue if construction halts 100

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due to covered events. Operational cost coverage helps cover fixed costs such as loan payments, salaries, and taxes during disruptions. Some policies offer extended coverage beyond construction delays, protecting against loss of revenue post-completion.

financing becomes increasingly complex, leveraging technology and industry best practices will be an essential component for navigating mid-construction refinancing successfully.

JILL DUKE

RISK MITIGATION STRATEGIES Beyond due diligence and insurance, lenders and investors can take additional proactive steps to reduce risks associated with mid-construction refinancing.

Working with experienced developers and contractors, for example, ensures the project team has a successful track record with similar projects.

Additional tools include leveraging AI-powered risk analysis tools to predict financial risks and track project progress, setting up regular progress audits that include frequent site visits and financial reviews, establishing contingency funds to manage unforeseen expenses and ensure project completion, and using performancebased financing which ties release of funds to achieving project milestones.

Conducting thorough due diligence and feasibility analysis ensures that lenders and investors make informed decisions when refinancing mid-construction projects. By assessing legal compliance, financial, and market factors up front, stakeholders can identify potential risks and develop strategies to mitigate them.

Additionally, securing the right insurance coverage provides a financial safety net, reducing exposure to unforeseen liabilities.

These proactive measures enhance the likelihood of project success while safeguarding investments. As construction

Jill Duke is the chief operating officer at Level Capital LLC. She has more than 20 years of experience in mortgage and construction lending, including correspondent, wholesale, and retail channels.

Throughout her career, Duke has led teams in operations, risk, quality control, post-closing, and product development for regional and national banks as well as national non-bank mortgage lenders.

KEITH TIBBLES

Keith Tibbles is a co-founder and partner at Level Capital LLC. He has more than 30 years of experience in mortgage and construction lending, serving as a director of Pacifica Bank, president of Washington Mortgage Lenders Association, and as an advisory board member for Fannie Mae. Tibbles also served on several task forces for the Mortgage Bankers Association.

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Case Study

Fraud Unravels Property Rehab Crook contractor circumvents checks and balances to bilk borrower out of full funds disbursement.

SUSAN NAFTULIN, REHAB FINANCIAL GROUP

T

he borrower in this case was a police officer in a city about 150 miles from the subject property. He was brought to Rehab Financial Group by an existing customer who also owned a contracting business with her husband. They had worked with each other on two prior projects RFG was not involved in. The borrower was qualified, and even though he was remote from the property, both the borrower and RFG relied on the contractor and their experience, given she was local to the project.

At the beginning of the project, the contractor’s husband convinced the borrower to open a joint bank account with him so all rehab funds RFG sent would go to this account. He claimed this was necessary to eliminate delays in any transfer of funds that could slow the project down. RFG was not aware the account information it was given was for a joint account with the contractor.

After closing, RFG began receiving inspection reports from an inspector it had used for several years who was local to the area. Based on these reports, RFG released funds for work completed at the collateral property, as evidenced by the inspection reports. In all, the full rehab amount of $122,000 was disbursed and an inspection report and pictures

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were sent showing the finished property with a “For Rent” sign in the window.

PROBLEMS Shortly after, the borrower called RFG in a panic. He went to the property for the first time in six months and discovered absolutely no work had been done. The contractor could no longer be reached at any number and did not respond to emails, texts, or phone messages. As a last resort, the phone number on the “For Rent” sign pictured in the last inspection report was called. It turned out the pictures were of a different house with the exact same appearance as the collateral property. This identical property was in an adjacent town and had recently been fully rehabbed. The contractor for both properties was the same.

The inspector admitted to RFG that despite affirming in his reports that he had personally visited the property, he had not.

He relied on the contractor to take pictures and send them to him; then he would then generate the report. RFG’s disbursements based on these reports were sent to the joint account the borrower had set up and subsequently stolen by the contractor.

The borrower was left with a house for which no work had been completed,

LOAN DETAILS Property Type // Triplex Loan Type // Purchase and rehab Purchase Price // $102,000 Rehab Amount // $122,000 ARV // $320,000 Loan Amount // $224,000 Loan Term // 12 months Interest Rate // 11.24% Lender Points // 2.75 Interest Reserve // 3 months LTC // 100% purchase, 100% rehab ARLTV // 70% Cash to Close // $28,356 Exit Strategy // Refi and rent

but all the rehab funds were disbursed.

RFG did an analysis to see if it was worth investing more funds to finish the property or sell it in its current state. In the end, it was determined that there was nothing to gain by spending the money to fix it.

OUTCOME The borrower stopped paying and a foreclosure referral was made. Fortunately, the borrower was somewhat cooperative and was able to sell the property for slightly more than he had paid before the foreclosure process got very far. RFG and the borrower agreed to split the loss, with the borrower making monthly payments to pay back his share of the loss. By handling it this way, RFG was able to recover more than if it had spent

the money needed for a foreclosure and sold the property in its “as is” condition.

SUSAN NAFTULIN

Disappointingly, the inspector had no insurance for his fraudulent activities despite being HUD-approved.

RFG began litigation against the contracting business and the individual, as well as the inspector, for fraud. The case is still pending in the appropriate state court.

Since this event, RFG is very wary of doing loans with borrowers who are more than 60 miles away from the collateral property due to concern the borrower will not regularly visit to confirm what their contractor says is being done is actually being completed. In RFG’s opinion, the borrower is partially to blame for his failure to visit the property and being convinced to open a joint bank account with the contractor.

Susan Naftulin is co-founder of Rehab Financial Group, LP, currently holding the title of President and Managing Member. Before forming RFG, Naftulin held several senior management positions in the mortgage industry, including general counsel, managing attorney, chief operating officer, and senior vice president for both privately and publicly held mortgage lenders.

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Case Study

Development Loan Sprouts Nature Lovers’ RV Park Borrower’s first RV park endeavor integrates luxury with nature in Port Angeles.

CHARLES FARNSWORTH, 1892 CAPITAL PARTNERS

F

irm Ridge Real Estate Partners, an experienced developer but new to transient RV parks, faced significant difficulty locating capital to fund their newest project in Port Angeles, Washington.

They found 1892 Capital Partners, a Seattlebased boutique direct private money lending firm, through a combination of word of mouth and social media marketing. 1892 has carved out a niche by positioning itself as the go-to lender for deals others might shy away from (especially in unique and unconventional asset classes). They saw opportunity in the location and RV@Olympic concept; it was poised to become a premier destination for outdoor enthusiasts seeking to explore the stunning Olympic National Park.

RV@Olympic will offer the ultimate RVing experience, combining modern conveniences with the beauty of nature. The development will feature 98 RV sites, a 24-hour cashierless store, a main building with check-in, laundry, bathrooms, an indoor community center, a dog park, a dog wash station, a community shower/bathhouse building with private showers and bathrooms, a hot

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tub area, a kids’ playground, a large outdoor community space with firepits and outdoor games, and fiber optic and 5G internet.

Nearby outdoor recreational attractions include Olympic National Park, which offers hiking trails, wildlife viewing, and diverse landscapes; Lake Crescent, known for boating, fishing, and swimming; and the Elwha River Valley, recognized for its restored river ecosystem and activities such as kayaking and fishing.

The project is expected to open in mid-to-late April 2025.

OPPORTUNITY The project offered a strategic lending opportunity toward alternative assets with intelligent and able operators. The loan had a low Loan-to-Value (LTV) and Loan-toCost (LTC) ratios, and the clients offered strong intelligence, market research focus, and solid experience in underwriting and risk assessment. Despite this being Firm Ridge’s first real estate project in a unique asset class, 1892 saw an opportunity to mitigate the risks and support them in

successfully launching the project with a $4.195 million development loan at a loanto-value of 50% and a loan-to-cost of 65%.

EXIT STRATEGY The strategy is to refinance and hold.

SOLUTIONS & OUTCOMES/RESULTS OF LOAN The loan closed in December 2024. The client has been a stellar performer, with the first draw going smoothly and the project progressing exactly as planned. To manage draw requests and project milestones, 1892 uses an online draw system integrated with inspectors experienced in RV development.

Additionally, 1892 conducts site inspections themselves since this is their first project with the client. To mitigate risk and manage potential overages, 1892 required sizeable front-loaded draws upfront.

CHARLES FARNSWORTH

Charles Farnsworth has more than 30 years in real estate investment, finance, and banking. He currently manages 1892 Capital Partners’ private lending.

LOAN DETAILS Location // 191 Old Deer Park Road, Port Angeles, WA 98362

Loan Term // 1 year with two ninemonth extensions if needed

Loan Type // Development

LTV // 50%

served as vice president in corporate

Acreage // 8.78

LTC // 65%

banking and private wealth manage-

Loan Amount // $4.195 million

Interest Rate // 12%

Anticipated Rehab // $6.5 million

Exit Strategy // Refi and hold

After graduating from the University of Puget Sound, he founded a finance company, raised private capital, and

ment. In 2008, he returned to private capital, managing secured debt portfolios and real estate investments.

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Case Study

Ghosts Haunt Lending Deals Use these communication strategies based on real-world scenarios to prevent borrowers from unexpectedly disappearing.

ALEX BURIAK, JET LENDING

F

ew things are as frustrating in private lending as a borrower who suddenly stops responding.

Whether it’s at the beginning of the loan, mid-project, or right before closing, a communication breakdown can spell trouble.

Instead of throwing up your hands, you can turn these setbacks into wins.

Here’s how to keep borrowers engaged, prevent ghosting, and turn radio silence into productive conversations.

BORROWERS DISAPPEAR AFTER INITIAL CONTACT You’ve had the first call. The borrower seems interested. Then—nothing. Silence.

Did they find another lender? Change their mind? Get abducted by aliens?

(Hey, it happens.) Here’s how to avoid this problem—and solve it if it does happen. » PREVENT GET MICRO-COMMITMENTS—SMALL “YESES”— TO KEEP PEOPLE ENGAGED. “If I can get you what you need today, are you ready to move forward?” is a big one. Establishing this series of yeses is important initially so you can affirm that you and the potential borrower are on the same page.

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PRE-FRAME THE NEXT STEP. On your first call, set clear next steps. People are less likely to ghost when they know what’s expected.

“Great chat today! I’ll send over the next steps, and let’s check in on Friday at 10 a.m. to go over any questions. Sound good?”

Getting the borrower to verbally commit makes them more likely to follow through.

But you need to go a bit deeper. Look for the borrower’s “nos.” Although it’s not what a salesperson wants to hear, getting to “no” is the best form of negotiation in the initial stages. It helps unveil what the real problems are. Once your team can define the problem(s), all you have to do is work the solution. » RESOLVE ESTABLISH A PATTERN OF YESES, BUT LEARN THE ART OF NO. During your first contact, establish the relationship. Use the direct approach. First ask: “What would you say your biggest problem is to closing this loan with a lender today?”

This is the moment to stay quiet. The hardest thing for your sales staff to learn is that you are really a late-night talk show host and your job is to keep the conversation going, not monopolize the show.

ASK SOME QUESTIONS TO SEE IF YOU CAN GET A NO. This includes questions

about the borrower, the project, and your own underwriting guidelines.

“Is getting funding for this deal not a priority right now?” If the borrower says, “No, it is a priority,” they’ll often explain why, giving insight into their urgency and concerns.

“Have you decided against using hard money for this project?” If they say, “No, I just have some concerns,” you have a window to address those concerns directly.

“Would it be ridiculous to say you’re unsure about how this process works?” If they say, “No, I actually don’t know much about it,” you have permission to educate them without making them feel embarrassed.

“Do you feel like this loan might not be the best fit for your goals?” If they say, “No, I just need to understand a few things,” they’ll tell you exactly what they need to move forward.

“Is it too early to talk about how we can structure this loan to meet your needs?”

If they say, “No, I’m ready to talk about it now,” they’ll engage more openly in structuring a deal. » GO ON THE OFFENSE

Here are some problem-solving answers you can provide as they open up and elaborate on those “nos”: “I’m worried about the interest rate.” Answer: “It makes sense to be concerned about costs. Would it help if I showed you how investors structure deals, so the financing costs don’t eat into their profits?”

“I’ve heard hard money is too expensive.”

Answer: “That’s fair. Would it surprise you to learn that many investors use hard money because speed and leverage make them more money than they’d save with a cheaper loan?”

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Case Study

“I don’t think I qualify.” Answer: “That’s understandable. Would it help to walk through what we really look for? You might be in a better position than you think.”

“I’m not sure how the loan process works.”

Answer: “Would it make sense to walk you through it step by step? It’s actually simpler than most people think.”

“I don’t know if I can get the rehab done on time.” Answer: “That’s a smart concern. Would it be helpful if I connect you with a few contractors who specialize in investor rehabs?”

“I’m afraid of overleveraging.” Answer: “That’s a great concern. Would it help

to structure the deal so your cash flow stays strong and your risk stays low?”

» PREVENT

BORROWERS GO DARK

regularly scheduled and unscheduled check-ins at the beginning.

“Whew…. Glad that’s over, right? I did everything right during the initial contact, so now I don’t have to worry.” Nope. Now it’s like the initial relationship-building never even happened. Your team is hearing everything: “I’m on vacation” or “I’m just so busy.” Or, the worst … nothing—no responses to phone calls, texts, emails, carrier pigeons, candygrams. You got the loan estimates and you’re just waiting on docs, paperwork, payment of the appraisal—anything to get the deal moving out of the parking lot and into the autobahn.

BUILD CHECKPOINTS INTO THE LOAN. Set

“Every other day, let’s have a quick 10-minute touchpoint so we stay ahead of any potential hiccups.”

If your borrower expects scheduled conversations, they’re less likely to disappear. » RESOLVE EMPLOY TACTICAL EMPATHY AND LABELING.

Emotions are key to getting a borrower to reengage. Instead of accusing or demanding, use labeling to acknowledge their situation and the fear of losing out.

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“[Name], I imagine managing everything I’m asking for while juggling everything else must be overwhelming. It seems like there might be some challenges getting this information over.

No worries, it’s very common. Let me help you quarterback this so I can get you your time back. Let me know how I can help.”

This nonthreatening approach makes them more likely to respond. They feel understood, not attacked. » GO ON THE OFFENSE IN THIS CASE, THE BORROWER ISN’T RESPONDING TO ANYTHING. Play into their fear of losing out. You must understand people will take more risks to avoid a loss

than to realize a gain. This principle is rooted in behavioral economics and is a powerful tool to reengage borrowers.

If a borrower has gone dark, you can pose no-oriented questions: “Have you decided to walk away from this opportunity?”

“Would it be unfair to say that you’re OK with letting this deal slip through?”

“Is securing funding for this deal no longer a priority for you?”

These questions trigger the borrower’s fear of missing out and make them more likely to reengage without feeling pressured.

FUTURE BUSINESS WITH A NEW PROPERTY In this scenario, you want another loan out of a previous borrower, but they’re not responding. Let’s look at what you can do.

USE A NO-ORIENTED QUESTION TO REENGAGE.

Instead of saying, “Are you ready for another deal?” (which invites an easy “no” and ghosting), frame the question in a way that triggers fear of missing out.

“Have you decided to stop growing your portfolio?”

“Is it crazy to think you might have another deal coming up soon?”

“Are you comfortable letting other investors get funding faster while you wait?”

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Case Study

These questions make the borrower feel like they could miss an opportunity, prompting them to respond.

REMIND THEM OF THEIR PAST SUCCESS WITH YOU. People don’t want to feel

like they’re walking away from a good thing. Use loss aversion by highlighting their previous win with you. “[Name], I was just reviewing our last deal, and I have to say—you nailed that project!

I’d hate to see you miss out on your next big opportunity. Have you decided to pause investing, or do you have something coming up that we can get preapproved for?”

This reminds them of their success, making them want to repeat it.

OFFER A SOFT EXIT (REVERSE PSYCHOLOGY).

When borrowers feel pushed, they pull away. Instead, give them an easy “out” to subconsciously pull them back in.

“Would it be ridiculous to say you’re done using hard money for your deals?”

“Is it fair to assume you won’t need fast funding anytime soon?”

Most investors will instinctively disagree with these statements, leading them to reengage.

CREATE A SENSE OF URGENCY WITHOUT PRESSURE. Instead of pushing the

borrower to act, use time-sensitive language that triggers loss aversion. “[Name], I just helped another investor lock in funding before the market shifts again. Have you decided against getting preapproved before rates or terms change?”

This is a subtle reminder that waiting could cost them.

GIVE THEM A REASON TO TALK TO YOU.

Offer something of value without asking for anything in return.

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We don’t have to accept radio silence as defeat. Instead of chasing dead leads, we strategically reengage, uncover objections, and guide borrowers back to the table.” “[Name], I just put together a quick breakdown of what’s working for investors in [their market].

Would it be crazy to send it your way?”

ALEX BURIAK

If they say “No, that’s not crazy,” they’ve just agreed to reengage.

MAKE IT EASY FOR THEM TO SAY “YES.”

Sometimes, past borrowers don’t reach out because they assume they have to start over.

“I already have most of your info from your last deal. Want me to update your preapproval so you’re ready for your next opportunity?”

Now they see reengaging as easy.

Alex Buriak, senior vice president of Jet Lending has a long history in the investment and real estate industry.

After graduating from the University of Pittsburgh and National University of

KEEP IT CASUAL AND CONVERSATIONAL.

Health Sciences, he spent three years

The best way to reengage a past borrower is to not sound desperate. Use humor, reverse psychology, and loss aversion to make them feel in control while reminding them of the value you bring.

running multiple clinics. His search for

Final Takeaway: Borrowers ghost for all kinds of reasons—fear, being overwhelmed, distractions. As lenders, we don’t have to accept radio silence as defeat. Instead of chasing dead leads, we strategically reengage, uncover objections, and guide borrowers back to the table.

states and has solidified and modern-

By applying tactical empathy, loss aversion, and no-oriented questions, you can turn setbacks into opportunities and ghosts into repeat borrowers.

gency medicine and natural sciences

a better avenue to raise capital to start another practice led him to real estate.

Buriak has helped expand real estate companies to other markets and ized operations to achieve efficiency and ease of business. He regularly speaks on panels, addressing lending, business, and underwriting operations and strategies.

Buriak has bachelor’s degrees in emer(focus in medical sciences) and a doctorate degree in chiropractic, rehabilitation, and natural medicine.

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Vendor Guide

SPRING GUIDE If you’re looking for a service provider with real experience working with private lenders, this guide is your starting point.

In each issue, we publish a cross section of specialties. These providers do not pay for inclusion. Instead, we vet them by reviewing their product offerings and talking to private lender references.

AAPL members can access all vendors online at aaplonline.com/vendors.

WINTER

SPRING // THIS ISSUE!

SUMMER

FALL

» ACCOUNTING » BUSINESS CONSULTANTS » DEFAULT & LOSS MITIGATION » LEGAL SERVICES » WAREHOUSE LENDERS

» APPRAISERS & VALUATIONS » CAPITAL PROVIDERS » DATA » ENVIRONMENTAL SERVICES » LEAD GENERATION » NOTE BUYING/SELLING

» BROKERS » FUNDS CONTROL » LOAN ORIGINATION SERVICES » LOAN SERVICING

» DEVELOPMENT COST ESTIMATES » EDUCATION » FUND ADMINISTRATION » INSURANCE » MARKETING » RECRUITMENT & HEADHUNTING

APPRAISALS & VALUATIONS

APPRAISALS & VALUATIONS (CONTINUED)

APPRAISALS & VALUATIONS (CONTINUED)

Appraisal Nation

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» COMMERCIAL EVALUATIONS » RESTRICTED APPRAISALS » PROPERTY AND ENVIRONMENTAL INSPECTIONS FOR MOST CRE

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Rice Park Capital

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Private Lender Link

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lenderconsulting.com

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Products & Services

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Vista Capital

Western Technologies Group, LLC

website

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forgetrust.com/alternative-assets (415) 480-9741

Investor Funding Network investorfunding.org

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DATA ProDeal prodeal360.com (646) 387-4047

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Zelman & Associates zelmanassociates.com

InvesTechs

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RESIDENTIAL SHORT-TERM AND COMMERCIAL FINANCING COMPANIES

Products & Services

» COMMERCIAL, RESIDENTIAL EVALUATIONS » APPRAISAL, DESKTOP REVIEWS

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» PRIVATE LENDER DIRECTORY FOR

investechs.com (503) 539-8014 Secondary Specialty Marketing Products & Services

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Scotsman Guide scotsmanguide.com (800) 297-6061 Products & Services RANKED MORTGAGE ORIGINATORS AND LENDERS FOR:

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SPRING 2025

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Last Call

Mindset Fuels Resilience Navigating deployment and a pandemic reinforced the power of optimism, consistency, and community.

SARAH DOWNEY, LOANBIDZ.COM

A

fter my husband transitioned out of active duty, we decided to invest in real estate. In 2016, we purchased our first rental property, laying the foundation for what we hoped would be a growing portfolio. This journey led me to an incredible opportunity: joining LoanBidz to help fellow investors connect with top private lending partners.

My role at LoanBidz focused on developing processes to streamline lending access for real estate investors while minimizing paperwork through technology. Each lender’s unique requirements made it a complex but rewarding challenge.

DEPLOYMENT AND A PANDEMIC Just as I was settling into my role, life threw a major curveball. In July 2019, my husband, who was also my colleague and LoanBidz’s top producer, was deployed with the Navy Reserves for most of 2020—a huge blow to both our family and the company.

We prepared for the changes ahead, unaware the world was about to face an even greater upheaval. My husband deployed in January 2020; by March, the COVID-19 pandemic hit, freezing capital markets and halting most loans 114

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in our pipeline. A few lenders remained operational, but shifting guidelines made the process difficult. We pivoted to originating PPP loans, but constant updates made this equally challenging.

At home, I balanced working remotely while caring for three young children, missing my husband, and managing the uncertainties of the pandemic.

me to prioritize my mental, physical, and spiritual health and, ultimately, kept me grounded. The final principle, joy, was a reminder to find small moments of happiness. Doing so helped me recharge.

GROWTH

Through these challenges, I leaned on five key principles that helped me persevere.

As 2020 ended, LoanBidz emerged stronger. In 2021, we strengthened partnerships, expanded our team, and refined our processes. Year after year, we’ve continued to grow, adapting to industry shifts and new opportunities.

The first was optimism. Maintaining a hopeful outlook kept me moving forward.

The second was consistency. I discovered that sticking to daily rhythms provided stability. The third, community, was crucial.

It provided me with a much-needed support system. Finding balance, the fourth, allowed

The mindset I developed during that time continues to guide me. Challenges will always exist, but it’s up to each of us to decide whether they define us or propel us forward. Growth is always on the other side of adversity—you just have to take the journey.

MINDSET IS EVERYTHING

We prepared for the changes ahead, unaware the world was about to face an even greater upheaval.”

Geraci LLP is a full-service law firm and conference line specializing in the private lending industry.

OUR SERVICES CORPORATE & SECURITIES • Securities Offerings and Compliance • Entity Formation and Governance • Corporate Transactions and Combinations • Mortgage Licensing

BANKING & FINANCE • Nationwide Loan Document Preparation • Foreclosure and Loss Mitigation • Nationwide Lending Compliance • Capital Markets Agreements and Negotiation

LITIGATION & BANKRUPTCY • Foreclosure Related Litigation • General Business Litigation (Partnership, Investor, and Vendor Disputes) • Creditor Representation in Bankruptcy • Other Mortgage Loan Litigation • Collection Actions

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