Mortgages & Creative Financing

Borrower Beware: Not All ‘Private Money Lenders’ Are Created Equal

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Prior to the 2007-2008 global financial crisis, local community banks and larger regional banks had loan products for foreclosure buyers and home flippers.

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Post-crisis, most of these institutions took those products away, never to see the light of day again—at least for everyone except their top-tier clients who had significant net worth, cash, and experience (in addition to a long-standing deposit relationship).

A Brief History of Hard Money Lending

Hard money lending existed in the market for decades prior to the flipping craze. Many hard money lenders did what was called an 80-10-10 for owner-occupant homebuyers. This was especially common in the 50s, 60s, and into the 70s. Banks would not extend loans of more than 80 percent for owner occ, so buyers had to have 10 percent cash and then the hard money lender would do a 10 percent second. Therefore, there were millions of small seconds created by hard money lenders in those years.

Once the lending laws changed for owner occupant loans, hard money lenders started to concentrate on more commercial-type and larger transactions all across the real estate spectrum—from land loans to heavy rehab loans and some new construction.

Related: 4 Ways to Use Hard Money & Private Financing for Your Rental Business

Then, in the mid-80s, thrifts or small regional commercial banks started to enter the high-yield, short-term lending market. And they stayed there for many years, refining their product. What this did was foster competition among the hard money lending companies and increase their willingness to take on higher-risk borrowers. So, if you look back 20 years ago, there were nowhere near the amount of hard money lenders there are today.

caution spray painted in yellow on cement

Hard Money Lending Today

Now, fast forward to today. Wall Street has entered the industry. There are now very large (basically national) hard money lenders, plus a large amount of smaller, local companies that have entered the business. This came in the wake of the banks vacating this product, which left a HUGE opportunity for those who understand the loan product and have the ability to raise capital.

In addition to that, today we’re living in an age of mass information. So much of real estate now is being done through social media, etc., that the borrower is just overwhelmed.

There is also an illusion that there is a difference in a private money lender and a hard money lender. Many smaller hard money lenders rebranded as private money lenders to feed into the illusion that their rates would be lower. (And we are all looking for lower rates, right?)

So, anyone who advertises is a hard money lender, even if they call themselves a private money lender. A true private money lender is one that you meet at an REIA. They are not in the business of loaning money and will usually use their IRA or solo 401(k) to make a few loans a year.

Where do hard/private money lending companies get the money to lend to the end borrower?

  1. They will broker loans to investors one-off.
  2. They create a PPM and pay investors a rate of return.
  3. They can get a facility from a bank as a wholesale line and then re-lend those funds. (This is how I ran my company.)
  4. They can crowdfund, raising investor capital to put into loans.

The cost of these funds ranges from bank rates at about 5.5 to 7 percent to investor rates at 7 to 12 percent. Most larger hard/private money lending companies will also have 10 to 20 percent of their own cash in the business, as required by the wholesale lenders/banks.

So, when their cost of capital plus running the business is higher than what these FAUX lenders are advertising (i.e., 5 percent or so), it’s simply not real.

There are 12 states in the U.S. where ANY loan on a one- to four-unit property, regardless of purpose (i.e., commercial or owner occupied), requires NMLS registration and the state's RMLO license to legally make these loans. This catches many hard money lenders by surprise—especially those that are from areas where no license is required.

For instance, no license is required in Washington, but in Oregon, one is. Same with California—you need a license to make loans on those assets. This is why you rarely see any company that actually lends in all 50 states.

Phony Lenders Exist—Here’s What to Look Out For

Enter into our business the faux lender—or what we call advanced fee lender. I like to call them pump and dump lenders, personally. Their targets generally are anyone on social media who mentions needing or wanting a loan.

These predators hide behind their computer, usually have a very basic website, and talk a great game. The lead-in is very low rates—right now, most like to quote 5 percent!

Spoiler: There is no 5 percent hard money lender in the country.

Close up customer hand choose sad face and blurred smiley face i

So, what these predators do is engage in an easy banter—talk enough about the business to give you the illusion they are lenders that can perform. However, as the transaction progresses, they then will ask for some sort of good faith deposit or money up front to draw the docs, etc.

Once they have hooked their victim and collected the first deposit, they keep coming back for more. One expense is pitched as the so-called insurance premium. Since they are loaning you money at 5 percent with nothing down, you must take out this insurance to protect them.

Seems logical—everyone has heard of PMI. But realistically, this is fraud. There is no insurance for hard money loans or private money loans. It’s a made-up fee. ­­­­­­­­

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

Some of these predators are very good at what they do and will get thousands out of a client before finally going dark and never funding.

Following are some red flags to look for when vetting hard/private money lenders.

Red flags:

  1. No license in states where licenses are required.
  2. English is off a little.
  3. They reach out to you. Very few—if any—lenders solicit for business in this manner. (Ninety-nine percent of the time, the borrower makes first contact with a legitimate lender.)
  4. Basic website with no real information and no mention of the actual principles.
  5. Again, terms that are too good to be true. (Once you realize there is NO 5 percent money, you should just move on.)
  6. Too quick to approve you and your deal with minimal information. (Remember, their goal is speed—getting some money out of you as quickly as possible.
  7. Any lender that says they make loans for $20K to $20 million, this simply is not real. (They do this to catch all the fish in the sea.)

There are a lot of great hard money and private money lending companies in the U.S.—stand-up lenders that do a wonderful job. Current rates for the top-tier borrowers are going to be 8 to 9 percent APR. Beginners or limited experience investors, you can figure about a 10 to 15 percent APR, with the West Coast having the lowest cost of capital.


Do you have any additional questions for me about hard money lending? 

Ask me in the comment section below. 

Jay Hinrichs started his hard money lending career in the later half of the 1980s and was president of Langer Mortgage in Oakland, Calif., with a $50 million book and 250 investors. This company matched investors to loans and fractionalized loans were the norm. The company was sold in 1992 to a larger firm. In 2002, Jay started another hard money lending company in Oregon—this time using bank wholesale lines for their fundings and internal cash. He grew that company to $30 million.

    Ann Bellamy Lender from Tyngsboro, MA
    Replied about 2 months ago
    Great article, Jay. And really good background on the hard money lending progression. One additional source of capital for hard money lenders is their own funds. Most of us that use our own funds are smaller and stay uber local. Which is not a bad thing for a borrower, as it is another source of eyes on the deal from someone in the areal.
    Adam Schneider Flipper/Rehabber from Raleigh, NC
    Replied about 2 months ago
    Fantastic history lesson, Jay.
    Mark Stern
    Replied about 1 month ago
    Very informative. Mark Stern
    Mark Stern
    Replied about 1 month ago
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied about 1 month ago
    Thank you Ann..
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied about 1 month ago
    Thank you Adam
    DeAndrea Douglas New to Real Estate from Cypress, TX
    Replied about 1 month ago
    Thanks for the info! I feel like I have a much better understanding of hard money now. Forgive me if this is an obvious question, but if I were to get an FHA loan to get a duplex or triplex would it be a good idea to use a hard money loan for renovating?
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied about 1 month ago
    I think you would need one or the other.. the best bet is to talk to a really good mortgage broker in your market..
    John Koster Investor from Valley Village, California
    Replied about 1 month ago
    Good article. I have seen more than one "5,000 to 5 Million" loan pitch. It's hard to believe people get away with these practices. You would think that the digital trail left behind would lead to their eventual incarceration.
    Mike Justice Rental Property Investor from Location Kentucky and USA
    Replied about 1 month ago
    I was just reading a DOJ article, All the new laws such as Safe Act , Dodd Frank etc. We're put in place to combat money laundering. And FYI: According to The Feds A lot of launders have shifted in REI and money lending ?
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied about 1 month ago
    the difference here is the money goes only one way.. their way and the victim is out with no recourse.
    Shane Melanson Developer from Calgary AB
    Replied about 1 month ago
    So true- there are no 5% hard money lenders! Great article Jay
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied about 1 month ago
    thank you
    Shellie H.
    Replied about 1 month ago
    Excellent article... very timely and informative! Thank you for the insights.
    Jay Hinrichs Real Estate Broker from Lake Oswego OR Summerlin, NV
    Replied about 1 month ago
    thank you and your welcome !!!
    Jeff Rabinowitz Investor/Landlord from Farmington Hills, Michigan
    Replied about 1 month ago
    There is so much misinformation posted about lending, and the differences between private and hard money (as you point out, the differences are small). Hopefully, this well written piece will help add clarity to those who are confused. Please consider writing articles that explore some of the creative deals you funded, how you screened your borrowers, and what criteria were most important to you in approving loans. Such articles might benefit borrowers and those who are considering becoming private lenders.
    Scott Donahue Rental Property Investor from Indianapolis, IN
    Replied about 1 month ago
    Great article, Jay. As always, your time tested wisdom and experience has enriched my own real estate knowledge. Keep being the voice of reason in the forums.
    Jacob D Cockerell from Leitchfield, Ky
    Replied 22 days ago
    Great insight and to be spelled out so clearly. I've been approached by a few of those shady "lenders" and I'm glad I had the wisdom to stay away. It is tempting when you want to get started and need capital. However that is what they prey on and take advantage of. It is better to save your money and find a reputable lender to work with, even if it takes more time. I have to admit Jay Hinrich's input in the BP forums has really helped me stay away from some of these guys. So thank you for that Jay.