Difference between Private Lender and HML (Hard Money Lender)

15 Replies

Can anyone explain me the difference between Private Lender and Hard Money Lender ?

What are the Pros and Cons of each ?

Usually, what will be difference in terms and conditions between them ?

When do you chose Private lenders vs Hard-Money Lenders ?

Any feedback and insight is appreciated.

Thanks

--uday

Often times a private lender is somebody who knows and loves YOU.

As I talked about in Bigger Pockets #82, I bought my first property with a loan from my parents.  In fact I bought the first 11 properties with 100% financing.

Private lenders typically charge much less interest, often times for longer terms.

Hard money lenders typically charge higher interest, around here 12% interest with 5 points is typical. And the typical term is balloon in 6-12 months. HML works well if you are wholesaling or flipping the property and only keeping the property for a short term. But HML doesn't work as well if you are buy and hold investor, since you will have to re-finance before the HML come due.

@Udaya P. ,

You may get differing opinions, but much like @David Krulac said..

I CONSIDER PRIVATE MONEY AS SOMEONE WHO DOESN'T LEND ON REAL ESTATE AS A BUSINESS.

WHEREAS A HARD MONEY LENDER LENDS MONEY  ON RE AS A BUSINESS.

Some other differences may be that you're more likely to know the private money lender personally, the rate is usually lower, they're just trying to earn a higher yield than they get elsewhere, and are funding the money themselves from their personal funds.

Whereas you may not know the hard money lender, they are probably an llc/business, they are often funded specifically to make these returns, they typically have investors funding the deals looking for specific returns, etc..

Good question and one it will be easy to see the first hard money deal you do.  

Private money is the money hard money lenders barrow to lend to you as hard money. There is a real benifit in finding a private money source and just fund your own deals. I have seen others become a hard money lender and lend private money they gain access too, cut the investment performance aspect out of your payday.... make that someone else's responsibility.

I do Private money but I am not an HML. To me that means that I lend to just a small number of people I know and have history with. I do not have the infrastructure to do the typical lender due diligence. I am mostly lending on the basis of the relationship and the confidence in the person I am lending to. Typical HML are business and will lend to any deal that meets their screening like a bank would. If I want to do HML, I invest in a HML fund and let the managers do the heavy lifting. But I am certainly not taking the risks for private lending for small premiums over CD's. I expect solid returns similar to that of HML (about 16-18% annualized). I also take the same security that a HML would do (i.e. first position on the lien, insurance beneficiary etc). Otherwise I would rather just place the money in funds that reliably return 12-14%.

A follow up question.

How can verify that a private lender is "legitimate" ?

I am trying to deal with private lender, met through e-mail

and he is remote.

Private lenders is asking for upfront fees of approx. $2500.

I would like to verify the private lender, before paying the fees.

Is there a foolproof way to verify the legitimacy of private lender ?

Thanks

--uday

I don't have experience with HML or Private (other than family) but...

That sounds SKETCHY AS HELL. Please don't send any money until you find out a lot more. Dont want to see you get scammed!

Originally posted by @Udaya P. :

A follow up question.

How can verify that a private lender is "legitimate" ?

I am trying to deal with private lender, met through e-mail

and he is remote.

Private lenders is asking for upfront fees of approx. $2500.

I would like to verify the private lender, before paying the fees.

Is there a foolproof way to verify the legitimacy of private lender ?

Thanks

--uday

And, most likely, not a private lender, if they advertised or solicited the loan they are NOT private lenders but a HML and another issue, likely unregistered calling themselves a private lender.

Do not pay fees up front, except for an appraisal and credit report, before a loan is funded. Many out there simply make their meat off of fees and never or rarely make a loan.....indication of a scam. :)

Don't pay upfront fees.  These fees should be paid out of proceeds at settlement.

If they are wanting up front fees this would be a SCAM. Steer clear of anyone that wants up front fees.

Hard money = hard asset loan. You don't matter, only the lien position and LTV. Short-term, high fees, high interest rate.

Private money = you matter more.  Your credit, your character, your relationship with the lender.  There still has to be good collateral.  Longer-term, usually no origination points, lower rates.  

Thanks for all of your advice.

Thanks

--uday

Yep, $2500 up front is almost surely a scam. I do some brokering and we do a $199 (refundable) app fee to weed out the tire kickers that's applied to closing and covers the BPO and a few other fixed costs, so a small amount up front isn't necessarily a bad thing, but $2500 is crazy.

As has been stated, a private lender is just that, someone you know that will lend you money. I pay mine 2pts and 12%. I don't pay payments on his, just get $ to do deals, and pay him off out of closing. I've borrowed a lot privately over the years, from employees, relatives, my agent, friends of other investors, etc.

My last HML (for myself) was at 2.5% and 8.25%. I have to make interest payments on it, but that's real cheap money for Hard Money, it's usually 4-5 pts and 13-15%.

You won't get the cheap money starting out, of course, the more risk they take, the more the money costs.

@Frank Szabo most Hard money lenders get investors and they pool the money into private placement funds that accredited investors can invest in. There funds have fairly large minimum investments over $50k typically. The fund manager makes the loans and disperses the proceeds periodically. If you google search you can finds many in different parts of the country

@Anish Tolia, just out of curiosity how did you get approached to be a private lender. I am looking for one down here in Florida for flipping homes without all the hassle and fees of HML. My LTV's are 60 percent or less, credit is good and I have experience in re-habbing for quick turnarounds. I fund all of my re-hab costs in addition to cash up front. The title could be the collateral for the loan and by paying the property off in full the closing costs should be minimal. Any thoughts? I am considering a mailing to friends, family, attorney and others at my local REIA club as well. It would make the whole process flow and the cost would be less. Win-win. Ty for your advise.

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