The evolution of private mortgage lending in the past 15 years has certainly changed the landscape for real estate investors. The truth is that this world is very much like the Wild West. Hard money, also known as private money, simply doesn’t have the same rules as conventional lending.
Some states do require licenses for this type of lending, but even those do not have strict guidelines, like they do for conventional bank loans on owner-occupied properties. Once you enter the hard money investment world, the rules are almost purely dictated by the lender.
Many new investors, or people unfamiliar with hard money, think the term is given its name because it is difficult funding to get. There has been a push in the industry to change the hard money terminology, and to assuage the false assumption that these funds are overly expensive and locked behind mountains of paperwork. This marketing move to private money vocabulary won’t make much of a difference to seasoned investors and mortgage brokers, but it may be of use to newer borrowers and originators.
Hard money benefits
Due to the hard money moniker, many clients believe that they need to have a well-developed paper resume to obtain funding, and that the funding is very expensive. In reality, it is significantly easier to receive a hard money loan than a conventional bank loan. You don’t need an extensive resume and “expensive” is a relative term.
Compared to the 17% mortgage rates of the 1980s, hard money today at 12% is cheap. Of course, compared to the 7% consumer mortgage rates of today, 12% for hard money may seem expensive. But there are benefits to hard money that a conventional bank lender just can’t provide.
A bank can’t close in two weeks or, in some cases, as quickly as 24 hours. If your client wants renovation funds from a conventional bank, it can take a long time. These lenders need months to process and verify paperwork. Hard money lenders have operations that may be able to get you the funds required in one day. So, while you do pay a higher interest rate, a hard money lender operates at a much faster speed than the conventional bank lending model.
How it works
Every hard money lender is different and their parameters are determined by their source of funding. Many hard money lenders are brokers who either refer clients to investors who can fund the deal, or they underwrite and present the package to a bank, which accepts or declines the loan.
These are often referred to as secondary market funds. Sometimes banks will offer a portion of the financing to a brokerage, which deploys the capital for them, but they still have requirements that must be met. Clients are still getting bank or hedge fund money in the end, but these lenders only trust a broker to properly underwrite commercial real estate deals for them.
True private capital in hard money lending also can be found. With these lenders, the person you are speaking to is the person who will fund the deal with their own money. Friends and family are the ones backing these deals, so there are no approvals or paperwork involved outside of the partners who speak to you directly. For the borrower, the main difference between the two types of hard money lenders is in the paperwork requirements.
In hard money deals, funding is provided using a physical asset as collateral. This can be a home, a car, a watch or anything else that physically exists. This makes the lending process different than a conventional bank loan or an unsecured business loan. Hard money lenders in real estate are experts in underwriting the asset itself and determining its value to protect their money, rather than underwriting and determining the risk of the client. This is how hard money can provide faster and easier funding, because it uses the asset as the primary piece of collateral.
Because true private lenders do their own underwriting and approvals, they can give clients an answer in the first five minutes of a meeting. Tax returns aren’t required and credit isn’t important, although better credit does help to secure more funds. These private lenders don’t require many of the documents that other hard money lenders ask for because they are simply underwriting the real estate asset and making sure the client can successfully perform on the project.
Changing the name
These “hard” real estate assets give hard money its name, but this etymology has mostly been lost. So, what about the push to change the industry nomenclature of “hard money” to “private money”? The short answer is that it doesn’t matter to some industry veterans.
At this point, private money is mostly a marketing term. For years, true private lenders have used the “private” terminology because they exclusively use personal money, or funds from friends and family, with no bank or hedge fund money. This has served to separate these lenders from others that receive their funds from banks, or those that simply sell the notes and never provide their own funds.
From the real estate investor perspective, it often doesn’t matter if the lenders that focus on providing project funds label themselves as hard money or private money. It is the process of getting the loan that matters, and this process differs for every lender. A seasoned investor wouldn’t even care if it was called “Monopoly money,” because they know what they need and where to find it.
For newer borrowers, the naming change could make this funding avenue more approachable and appealing. Using the “hard money” moniker could potentially cause a lender to miss out on leads that believe hard money is not as good as private money. For lenders just starting out, “private money” may be the safer bet. But with either choice of name, the most important thing is the education and service provided to the client.
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For established private lenders, much of their business is by referral and comes from experts who are already in the field, so it doesn’t matter what the industry as a whole calls its products. Although the push to use “private money” may seem like it removes a marketing advantage for established lenders that use “hard money” in their company name, it won’t have a deep impact.
The naming change is aimed at investors who are new to the industry. Veterans of the business will always know what “hard money” is and where to seek it. And if changing the term to “private money” makes it less intimidating for new clients looking for loans, this change will help seasoned professionals as well. ●
Ryan Walsh is a managing partner at the Greater New York City-based Hard Money Bankers and is an entrepreneur of multiple successful companies. He originally used private money to expand his own enterprise, then realized the importance of private money for growing businesses more quickly and easily.
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