Pterodactyls, Dodo Birds, & Hard Money Lenders

Is the hard money lender (HML) extinct? At the height of the boom they were everywhere and they couldn’t give away money fast enough. We know what happened to conventional lenders, they tightened their credit standards to the point that it can be almost impossible for even qualified borrowers to obtain financing. Wouldn’t this make HMLs even more valuable? Couldn’t they command even better terms for their loans?

They certainly are more valuable and could command better terms if they had money to lend. Just who are these HMLs and where are they hiding? The majority of these lenders are no longer in business. They had companies with fancy sounding names and nice websites, but many of them were no more sophisticated than the novice investors they were lending to.

Credit Squeeze

While they may have given the impression that they were lenders with deep pockets, many of the HMLs were just individuals with credit lines. Some may have been using personal credit lines to loan small amounts of money and many others were individuals with fairly large commercial credit lines. The business model was simple, borrow money at low rates and lend it out at significantly higher rates with points and fees attached. Limit the amount loaned to any one borrower to a small percentage of the credit line and there should be few, if any, problems. What could go wrong?

In a normal real estate market a lender who did his homework could limit his risk pretty easily. However, the real estate collapse resulted in a tidal wave of defaults. Even the smartest lenders were caught up in this. There was a double whammy when the banks started cutting the credit lines or, in many cases, eliminating them all together. Even HMLs who didn’t have a wave of defaults were forced out of business because they no longer had money to lend.

Changing Environment

I had a conversation with a friend of mine a few days ago. She is an experienced rehabber who has the itch to do a deal. There are opportunities all around her but she has no way to get a deal funded. This is not some newbie or wanna-be, this is an experienced investor who knows what she’s doing. A real estate recovery would happen a lot faster if smaller, but experienced, investors had better access to funding.

The solution is private money. It is important to understand what private money really means, it is not some wealthy individual who just wants to throw money around. It is much more likely to be a close friend or relative who has some sort of nest egg. Perhaps they have a retirement plan that isn’t getting a great return right now or some other assets that could be put to use. Maybe they want to be involved in real estate but don’t have the desire to do the actual investing.

Where To Find Private Lenders?

Outside of your family and immediate circle of friends you can best find private lenders through networking. Much like letting people know that you are an investor looking for deals, you can also let people know that you are in search of money partners. Don’t just look at your real estate club, network everywhere you go. There is a lot of power in networking (article) and it can be a key to your business.

Before approaching someone about loaning you money have a plan. You know why you want the money, but why would they want to loan it to you? How do they benefit? If you can truly put yourself in their shoes you have a better shot of putting a proposal together that makes sense. Any proposal that makes sense for both parties has a much better chance of succeeding.

A bank is a place that will lend you money if you can prove that you don’t need it. – Bob Hope

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.