Private lending, hard money lending, License requirement in NJ

[Raj G.]

Hi,

if I want to lend money to my friends who are investors/flippers. do I need license in NJ?

What is difference between private lending and Hard lending?

is there any terms and conditions like up to this amount no license need, or up to these number of loans no license need etc.

Thanks

[Doug Smith]

Different states interpret Federal Law differently and have their own state laws. Here's a link to the NJ licensing page on the NMLS website. It should be able to provide you with answers to your questions: https://mortgage.nationwidelicensingsystem.org/slr/Pages/Dyn...

Regarding the difference between Private Lending and Hard Money lending, Private simply means it's coming from an individual or small group. Hard Money means the loan is primarily based on the collateral without much regard for other factors. Regardless of what you do, I would be sure to 1) only make loans to entities (LLCs, S-Corps), 2) make sure you're only lending on properties that are used for investment/business purposes (no owner-occupied or 2nd homes), and 3) make sure your documents are in order...get an attorney to at least draft the boiler plate. 

Good luck to you!

[Mike Klarman]

Well, if you are lending your personal money then you can do what you want.  If I'm a millionaire and i want to lend someone 100k to buy and rehab a house I can, we cam have a private agreement drawn up with terms and parties sign it.

If you are going to be lending institutional money or fund money from investors then that's when regulations and guidelines apply.  Anytime there is fiduciary duty involved things get more heavily scrutinized.

[David M.]

@Raj G.

I have started looking into this but haven't gotten that far..

First, hard money and private lending is becoming synonmous.  As mentioned, its just somewhat more if you are more of an institution lending money or lending other people's money and acting as a broker.  Many lenders are actually owned by REITs or funding my big equity firms like Blackrock/Blackstone, etc.

One thing to do is make sure you lend on an owner-UNoccupied.  You want to be making "business purpose loans."  Otherwise, you are making residential loans that are regulated requiring State licensure and governed by Federal regulation as well.  I know in many western states its pretty unregulated as long as you stay with business purpose loans which is why many of the private lenders are based out there that I've found.

I'm still not clear, however, if you are lending out your own money if there is any regulation.  Usually, the regulation is for when you are brokering.  Even Federal regulation for loaning on a residential properties allows for up to three personal transactions a year.

https://www.privatelenderlaw.com/ is a law firm based in NJ that I haven't called yet that specialized in private lending.  Hopefully they would know these details.

Hope that helps.  Be happy to chat if you like.  Good luck.

[Jeff S.]

If you are required to be licensed, it won’t matter what you call yourself, @Raj G.  Private money and hard money are terms of convenience since they don’t represent any legal definition. Call yourself what you want, once you comply with all licensing restrictions.

An NMLS registration will always be required if you are making consumer-purpose loans. These are loans made for personal, family, or household use. Loans to buy a personal residence are one example of a consumer-purpose loan. Your friends, presumably, intend to sell immediately upon completion for a profit (i.e. flipping). This is a business-purpose loan.

With the exception of the few states that don’t recognize a difference between a business purpose loan and a consumer purpose loan, such as Nevada, you will not need an NMLS registration to loan on a flip. I’ll add as an aside that if the loan is for a business purpose, it doesn’t have to be made to an entity. Also, with very little exception, owner occupancy is irrelevant. What matters is the use of the money. It must be for a business purpose. None of this means you won’t be required to obtain a lending license of some sort, however. It’s state-specific.

California, for example, does not require an NMLS registration to make a business-purpose loan. However, you must still be licensed to lend here. In this case, it means either a CA Real Estate Broker license from the BRE or CA Finance Lender license from the DFPI. Of course, there could be exceptions if you are really not in the business, because you only make a few loans each year.

My point is that licensing rules are state-specific and can be arcane. You won’t get a safe answer to your question unless you speak to a lending attorney. This is also where you will get your loan docs so you might as well find one. Note, that a lending attorney is not the same as a real estate attorney. I suggest you ask some of the larger hard money lenders in your state for a reference. Alternatively, you can go to the AAPL website, or call them, for some local recommendations.

[Jayson Cain]

1. Licensing in NJ: In New Jersey, if you want to lend money to friends who are real estate investors/flippers, you typically don't need a license. Private individuals can often lend to others without requiring a license. However, there are some nuances and potential exceptions to consider.

2. Private Lending vs. Hard Money Lending:

• Private Lending: This usually involves lending your own money or funds from a private network of individuals to real estate investors. It's often more flexible in terms of rates, terms, and conditions. You set the terms based on mutual agreements.
• Hard Money Lending: Hard money lenders are typically organizations or individuals who lend money specifically for real estate investments. They have defined terms, interest rates, and lending criteria. It's more structured but can be a valuable resource for investors who may not qualify for traditional bank loans. (ie. Lower FICO, no W2 income, etc)

[Ryan Davies]

It really depends on the state on whether you need a license or not. You also have to be careful with securities laws if you're trying to find people to lend their money out. Sometimes you need to be investing some of your money in the deal to make it legal. I'd meet with an attorney if you want to do it the right way.