Hard Money vs Private Money?

[Ben Scarborough]

Curious the difference between hard money vs private money lenders? Could someone please explain to me and let me know the pros and cons of each?

Thank You!
Ben Scarborough

[Jay Hinrichs]

private money is individuals who are not in the business of making loans..  generally make a few  a year out of their IRA etc.

HML are in the business of making loans.. Many HML like to say they are private money as a marketing ploy.. but they are in business to make loans and as such they are HML as what most people would think and describe them as.

[Jeremy Kitchen]

Hard Money Lenders are folks like me who do this as a business and career. We're typically good at analyzing actual deals, helping you come up with a game plan, and following guidelines, and securing our investments. We do this by taking 1st lien position, (asset based lending) on the property we lend on, making sure the LTV is good, and having our clients provide a down payment/cross collateral to have skin in the game. That way if the deal goes south(which we really don't want to happen), my investors can secure their investments. We have a lot of flexibility when it comes to putting together loans, including building interest reserves into the loan, helping with other costs as the project continues on and much more.

My understanding about private money lenders is they can be a friend/family member/coworker who provides a down payment/whole loan amount, including someone who wants to lend out of their IRA. It can be tricky using a friend or family member for these things if they're not understanding of how it works and the risks. If anything happens in the loan that makes it not preform, or your PML wants their money back faster than you anticipated, you're jeopardizing your relationship with that individual/entity.

Private Money Lenders typically have less strict terms.  Typically.

The benefits of Hard Money Lenders is quick closing time, boots on the ground with someone like me to help you through the process, flexibility to add rehab/build costs into your loan, interest reserves, straightforward fees and rates, and more.  

If you have any other questions on it, I'd love to answer them!

[Will Barnard]

These terms are very often co-mingled as if they were the same. THEY ARE NOT. Hard money lenders are licensed lenders in the state or states they lend in, they are exempt from state usury laws and they typically take investments from investors and lend their money out to rehabbers and buy and hold investors. They typically charge points, appraisal fees, and sometimes loan fees and their interest rates are typically above usury limits. Most HML's require significant down payments 20%+, proof of capital reserves of 6 months, and they have extensive loan docs to be signed. Most will take at least 10 days to fund from loan app to fund date. The benefit is that they typically will not loan to you if the deal is bad keeping you more safe as the borrower, the down side is the time, the loan docs, the higher rates, the fees, etc.

Private money lenders are private individuals who are not typically licensed to do real estate loans, they are friends, family, co workers, or people you come into contact with who have interest in investing in real estate passively but do not have the knowledge or expertise to be active in said business. Some are new and have never loaned on RE before while others have and are more seasoned. PML's do not charge points, loan fees, hold a license, and the loan docs are much more simple. They can often loan much quicker if the borrower has experience and has all their ducks in a row. Some may be willing to provide you with a POF to be used for your all cash offers as well, where as HML's will not (other than providing a loan approval which is NOT all cash). The down side to PML's is that in almost all cases, you have a personal relationship with them and as such, if your deal goes wrong and you do not pay them back in full, you can easily ruin that relationship and your own credibility in the industry.

[Nate Marshall]

This is a current article by John Beachem of Toorak Capital though. One I agree with. 

Scotsman Guide: Trusted Mortgage Connections, Trends & News | Scotsman Guide

[Jay Hinrichs]

Quote from @Nate Marshall:

This is a current article by John Beachem of Toorak Capital though. One I agree with. 

Scotsman Guide: Trusted Mortgage Connections, Trends & News | Scotsman Guide

should just be non owner occ commercial purpose loans which of course in 12 states if the property is a 1 to 4 unit said lender must be state licensed MLO and NMLS registered the rest of the country its wide open.. so until they get to the point that all states have to adhere to the same rules like there are for FHA VA government backed loans where every single lender doing those in every single state must be licensed .

aapl is just a private association with no standing other than networking with other members etc.. there is no accreditation etc with it.. but I get it with many who have gone to the events sat through the few class's they do ( I did) and then you can say our AAPL accredited LOL

[H. Jack Miller]

Its the same thing, some call it private lending some call it hard money lending, the names change every few years, it used to be sub prime and before that non conforming lending. Bottom line its the same thing what ever you call it, 

[Ben Scarborough]

@Jay Hinrichs thank you!

[Ben Scarborough]

@Jeremy Kitchen thank you! So my wife and I just closed on a couple deals recently and used up a lot of our free cash to fund those deals through traditional financing… so I guess the next question is, if I am looking to get into a deal soon with low or no money down, my most realistic bet is finding a private money lender?

[Jeff S.]

Your question, @Ben Scarborough, is sort of an inkblot test for lending. Many have their own made-up definitions. These are often inconsistent and completely non-sensical. For some reason, it’s a topic many here feel strongly about and are emotionally tied. Others write long magazine articles torturing their definitions.  If you can't explain something simply ...

Private lenders are your friends and family. Hard money lenders are in the lending business.  (If a professional lender loans to his mom, is it a private loan or a hard money loan?)

Private lenders don’t charge points or interest. Hard money lenders charge these.  (If your mom makes a loan to you and charges points, is she now a hard money lender?)

Hard Money lenders are licensed. Private lenders are not.   (So, I guess you can’t call yourself a private lender in a state that requires a license?)

If your terms are strict, you’re a hard money lender. If they are less strict, you’re a private lender.  (?????)

These are distinctions with no difference. In fact, though “Lender” (and “Broker”) are legal terms, there are no legal definitions for hard money or private money. They are both marketing terms. Marketing is not always a ploy.

Normally, who cares? Except the made-up definitions get dangerous when those who define themselves or their lender as “private,” believe it’s, therefore, ok to skimp on origination. I see this here all the time. “All your mom needs are a note and a deed of trust.” “Get your loan docs from a title company.” “Why do I have to spend $1000 for title insurance?” “Where on the web can I get my note?” Who’s willing to share their note?”

Your mom might want to sell her loan one day. Or, unfortunately, it could be contested by a disgruntled borrower. Just watch what happens, as we see property prices start to fall again. Try foreclosing with bad paper.  A note buyer or a judge won’t care what your mom calls herself.

Don’t get hung up on the title.

[Kenneth Garrett]

@Ben Scarborough

I've used private lending for years. Typically people I have met and built a relationship at REIA meetings. Always use an attorney to draw up the documents. Most private lenders should use there own attorney, but many prefer to use my attorney. I always send a 3-4 page description of the investment with all of the numbers I.e., purchase price, rehab costs, holding costs, interest rate, etc. is it a flip or buy n hold or brrrr. Typically I do the brrrr method. There is no one system for all. Some PML do charge points. Typically rate in my area is 12% plus 2 points, but it does vary. Treat your PML like it's your grandmothers money and you will have access to money forever. Even if your project is a loss make good on your PML and it will benefit you in the long run as a credible investor. You're reputation is everything.

[Will Barnard]

Quote from @H. Jack Miller:

Its the same thing, some call it private lending some call it hard money lending, the names change every few years, it used to be sub prime and before that non conforming lending. Bottom line its the same thing what ever you call it, 

 This is just blatantly wrong. Private money and hard money are not the same and neither used to be called "sub prime". A sub prime lender is one that lends to borrowers with low credit scores who often are high risk to not perform. Certainly a private or hard money lender could lend to a low credit score borrower as some look at the collateral rather than the credit, none the less, your definitions are wrong.

[Jeremy Kitchen]

Quote from @Ben Scarborough:

@Jeremy Kitchen thank you! So my wife and I just closed on a couple deals recently and used up a lot of our free cash to fund those deals through traditional financing… so I guess the next question is, if I am looking to get into a deal soon with low or no money down, my most realistic bet is finding a private money lender?

 I'd definitely look into it!  Especially if you can properly leverage yourself so you're using other peoples money, and still winning in your numbers.

[Will Barnard]

Quote from @Jeff S.:

Your question, @Ben Scarborough, is sort of an inkblot test for lending. Many have their own made-up definitions. These are often inconsistent and completely non-sensical. For some reason, it’s a topic many here feel strongly about and are emotionally tied. Others write long magazine articles torturing their definitions.  If you can't explain something simply ...

Private lenders are your friends and family. Hard money lenders are in the lending business.  (If a professional lender loans to his mom, is it a private loan or a hard money loan?)

Private lenders don’t charge points or interest. Hard money lenders charge these.  (If your mom makes a loan to you and charges points, is she now a hard money lender?)

Hard Money lenders are licensed. Private lenders are not.   (So, I guess you can’t call yourself a private lender in a state that requires a license?)

If your terms are strict, you’re a hard money lender. If they are less strict, you’re a private lender.  (?????)

These are distinctions with no difference. In fact, though “Lender” (and “Broker”) are legal terms, there are no legal definitions for hard money or private money. They are both marketing terms. Marketing is not always a ploy.

Normally, who cares? Except the made-up definitions get dangerous when those who define themselves or their lender as “private,” believe it’s, therefore, ok to skimp on origination. I see this here all the time. “All your mom needs are a note and a deed of trust.” “Get your loan docs from a title company.” “Why do I have to spend $1000 for title insurance?” “Where on the web can I get my note?” Who’s willing to share their note?”

Your mom might want to sell her loan one day. Or, unfortunately, it could be contested by a disgruntled borrower. Just watch what happens, as we see property prices start to fall again. Try foreclosing with bad paper.  A note buyer or a judge won’t care what your mom calls herself.

Don’t get hung up on the title.

Not everything can be explained simply. There is no legal term for BRRRR or househacking either but anyone with any experience in the RE investing industry knows their definitions regardless if they appear in a dictionary or not, so this argument does not hold water. It appears you have taken much of what I stated in my previous post well out of context. Note that I used the word "typically" on multiple occasions.

"Private lenders are your friends and family. Hard money lenders are in the lending business. (If a professional lender loans to his mom, is it a private loan or a hard money loan?)" - Taken out of context. To answer your question, did MOM use her lending license and all the docs used for any other hard money loan she typically uses and more importantly, was it all her money or that of OPM? If the license was used and the money came from investors, she was brokering and as such, the license was required in all states and therefore, it was a hard money loan.

"Private lenders don’t charge points or interest. Hard money lenders charge these. (If your mom makes a loan to you and charges points, is she now a hard money lender?)" - charging points is not a defining issue to private or hard money. On this topic, if the interest rate plus points is in excess of the state usury limits, then a lending license would be required and as such, a hard money lender would need to be used.

"Hard Money lenders are licensed. Private lenders are not. (So, I guess you can’t call yourself a private lender in a state that requires a license?)" - NOT what I said, I said "typically". No state requires a lending license to make a personal loan secured by real estate so long as it is within the usury limits of that state (although some states may restrict the amount of loans of this type you could make in a year before requiring a license).

"If your terms are strict, you’re a hard money lender. If they are less strict, you’re a private lender. (?????)" - That is sad if this is what you ascertained from my post. You are poorly paraphrasing here.

While I agree one should not get "hung up" on a title, there is a distinct difference between hard and private money lenders and investors should know the difference. If you preaching they are one and the same, you are wrong and are doing a disservice to other readers claiming that. There are a lot of terms in our industry which have been made up and will not appear in dictionaries or law books, that does not change the fact that they have specific definitions that the majority consensus uses to define the term, BRRRR or househacking as perfect examples.

[H. Jack Miller]

Quote from @Will Barnard:

Quote from @H. Jack Miller:

Its the same thing, some call it private lending some call it hard money lending, the names change every few years, it used to be sub prime and before that non conforming lending. Bottom line its the same thing what ever you call it, 

 This is just blatantly wrong. Private money and hard money are not the same and neither used to be called "sub prime". A sub prime lender is one that lends to borrowers with low credit scores who often are high risk to not perform. Certainly a private or hard money lender could lend to a low credit score borrower as some look at the collateral rather than the credit, none the less, your definitions are wrong.

 Please explain the difference then to me between them all?