Which is Better, Hard Money Lending vs Private Lending?

Question

Hi BP Fam,

Hope y’all are doing well. So here’s the situation: there’s an upcoming foreclosure coming up in about 3 weeks. I would like to participate in it so as to have an investment opportunity. There’s a particular property I may be interested in, the issue is I don’t have the funds for it if at all I was to win the bidding war (hoping there will be none finger crossed 😬).

Nonetheless, I was wondering, based on the described situation, which would be better to work with for a better ROI: hard money lending or private lending? Thank you kindly for your attention and prompt feedback.

Best Regards,

Ndi.

Chris Mason · Answer

No, they all have completely horrible interest rates, and ridiculous fees to boot, that's why it's "hard" money, think of hard booze as opposed to a decent glass of wine. Ouch, that cuts.

Dave DeMarinis · Answer

If you look at rates only, conventional will be best and should always be used if possible. That won't work in this case, so you move down the line. Private vs. Hard - generally, rate and term will be friendlier with Private vs. Hard but it depends on the project, market, etc. If those don't work, the most expensive money is an equity partner. To Taylor's point and especially in the foreclosure situation - you need to perform. Private lenders can be flakey, get second thoughts, change their mind, not have the money available after all and/or take more hand holding. With Private Money, you need to have your primary focus on protecting them and their investment. With Hard Money, the lender will protect themselves and you will get additional protections which are more valuable the less experienced you are. As an example, a Hard Money Lender is going to check if the property is in a flood plain and force you to get the correct insurance. If the property is vacant, they'll make sure your policy allows that and still provides coverage. Most Private Lenders won't know about those things so it is up to you to make sure they are accounted for.

The real difference to me is Private Money is lent based primarily on the relationship between borrower and lender. Hard Money is lent primarily on the security of the underlying asset.

I would line up a Hard Money Lender now as well as seeking possible Private Money Lenders. Then, hopefully you have options and you mitigate your risk of not being able to close.

Ndifreke Amama · Answer

@Chris Mason: Thanks for the clarification between the two. Any recommendation on a decent hard money lending company with decent interest rate?

@Taylor L.: Thanks for your input on the subject. I haven’t done any search to make comparisons. Notwithstanding, now that I know the difference, I will be on the lookout. Thanks again!

Chris Mason · Answer

I mean, a private loan is your buddy Jimmy, your cousin Sally, your co-worker John, who has a hole being burnt in their pocket  by having too much money sitting around earning very little in a savings account or money market account. If such a person exists, they will typically be able (& willing) to offer a much better deal than a hard money lender.

HML are arm's length, they do this for a living. Ignore the marketing BS where they pretend to be "private money," that's the same as the guy at the car dealership pretending to be your friend.

TLDR: A private lender is someone you already know and will generally beat a HML, who in turn is someone you don't know that is out to maximize profit and minimize risk.

Taylor L. · Answer

Do you have specific lenders lined up for this deal which you've discussed it with? It seems a better comparison if you have a couple of specific term sheets from lenders which you can compare. A more savvy, experienced lender might be able to give you terms. A less experienced lender may not be able to, but they're also more likely to fall through.

Which is Better, Hard Money Lending vs Private Lending?

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