Mortgages & Creative Financing

Hard Money vs. Private Money: What’s the Difference?

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The topics of hard money and private money can be pretty convoluted. It’s even difficult to nail down the definitions.

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Throughout the BiggerPockets forums, several posts address hard versus private money. Countless perspectives have been presented.

The reality is there are no hard and fast rules about how the terminology is used. There are popular views that have been proclaimed loudly and repeatedly, making them appear to be the actual answer; however, nothing’s been officially agreed upon.

The fact of the matter is the term “hard money” is simply a naming convention.

I've been a hard money lender for 12 years, and I've spoken to many borrowers and lenders. I've compiled a few guidelines to help improve your understanding of hard money—at least as it exists in my region.

Much about real estate is local, and since hard money is essentially a loan on a hard asset, it follows that hard money practices vary by region, as well. (It's something to keep in mind at least.)

What Is Hard Money?

A hard money loan is a loan collateralized by a hard asset (often real estate). Therefore, a hard money lender is a lender who uses the value of the underlying real estate to determine the loan amount and rate.

There are very few true hard money lenders left. Most of them ask for FICO scores, tax returns, or other indicators traditionally used by conventional lenders.

What Is Private Money?

Private money is what it sounds like. It’s money lent by a private person or organization. As such, terms vary widely. A private lender can use whatever criteria he or she is comfortable with when “qualifying” the person or entity to which they lend. It can be as basic as, “I’ve known you since you were in diapers, so I trust you.”

Close up view of bookkeeper or financial inspector hands making report, calculating or checking balance. Home finances, investment, economy, saving money or insurance concept

Related: The Ultimate Guide to Hard Money Loans

What Do Hard Money and Private Money Share in Common?

Neither hard money nor private lenders are restricted by banking regulations. They are non-institutional.

But both institutional and non-institutional lenders must comply with all lending laws, so there is no free pass for hard money or private lenders.

Extreme Examples of Private Money vs. Hard Money

Let’s consider two clear cut cases.

Case #1: Your grandma believes in you and wants to lend you money for the down payment. She would never lend to anyone else and won’t charge you much. She’s clearly a private lender.

Case #2: A company or person advertising as a hard money lender is pretty clearly a hard money lender. There shouldn't be any confusion.

Tricky Examples of Private Money vs. Hard Money

Here are two not-so-clear-cut examples.

Case #1: Your dentist has known you for years and has several real estate investments himself. He has lent money to one other client, also a real estate investor, and is willing to fund your deal.

He doesn’t want you advertising his services to others though. He’s a private lender—not available to the general public.

Case #2: Take that same dentist, but now his real estate attorney brokers lending deals to him. He wants more clients and wants you to spread the word.

He would be considered a hard money lender since his pool of borrowers could be anyone who meets his criteria, not just friends and family.

money-matters

Related: 8 Ways to Find Your Next Hard Money Lender

Other Determining Factors: Is It Hard Money or Private Money?

Rates and Terms

If rates and terms are similar to other hard money lenders, consider them a hard money lender.

Advertising

If they advertise, or stand up at a real estate group and announce they lend, consider them a hard money lender.

Summary

There is no hard and fast definition of a private lender versus a hard money lender. In fact, any non-institutional lender can call themselves a "private lender"—that is if they choose to be defined as "non-institutional."

But in today's common usage, a hard money lender advertises his services, has a process for qualifying loan applicants, and is available to any borrower meeting the established criteria.

A private lender is someone you know, who doesn’t lend to the general public, and may charge less than the local going rate.

Don’t be misled by hard money lenders calling themselves private lenders just to sound cheaper or less scary. I can call myself President of the United States, but that doesn’t make it so.

Evaluate each lender based on your needs, their reputation, and their ability to deliver what they say.

hard-money-lenders

Can I provide any further clarification about either type of loan? What’s been your experience with hard money? Private money?

Let me know in the comment section!

 

 

Ann Bellamy has been a hard money lender in Massachusetts and New Hampshire since 2006 at Buy Now, LLC and has been investing part time in rental properties in New Hampshire since 1996, holding 23 units and an office building. She has built two modular spec houses and bought a portfolio of MA tax liens, and has been in a leadership role in 3 real estate investing groups in New England. She and her partners have managed Black Diamond Real Estate Investors for 6 1/2 years, serving all levels of investors in Massachusetts and surrounding states. Ann has been a Bigger Pockets member since 2009, and enthusiastically recommends it to all investors she meets.

    Clint Weir investor from Schertz, TX
    Replied 7 months ago
    Can I get a loan?
    Ann Bellamy lender from Tyngsboro, MA
    Replied 7 months ago
    Clint, it looks like you are in Texas, and we work in NH and MA only, but if you have a project in that area, by all means, reach out!
    Dean Thiel
    Replied 7 months ago
    This was a great explication, I’m new to the site and this was helpful, thanks for writing
    Ann Bellamy lender from Tyngsboro, MA
    Replied 7 months ago
    Glad it was helpful, Dean.
    Crystal Hogsed
    Replied 6 months ago
    I’m brand new to real estate and this was very helpful! Thank you!
    Account Closed attorney from Na
    Replied 3 months ago
    Thanks for sharing!
    David Mock from Somerville, MA
    Replied about 2 months ago
    Very helpful article, as a new investor in the area i hopefully will cross paths with you soon!